NetApp Stock

Good afternoon, everyone. Asiya Merchant. Day 1 of Citi's conference, just after lunch, midafternoon. Actually, there's been a couple of sessions after lunch. But the afternoon of day 1 Citi's tech conference. Asiya Merchant here. I lead the tech sector on the hardware and tech supply chain. Really happy here to have NetApp's CFO, with Wissam Jabre as well as IR, VP of IR, Kris Newton here. We have a bunch of questions. We're going to be doing this fireside. If you have any questions at the end, we're going to leave a few minutes here for investors to ask questions, please do raise your hand so we can bring the mic to you. All right. Well, thank you for coming. I'm going to first give it over to Kris. She has a few comments.

All right. Thanks for having us. Today's discussion may include forward-looking statements regarding NetApp's future performance, which are subject to risk and uncertainty. Actual results may differ materially from the statements made today for a variety of reasons described in our most recent 10-K and 10-Q filed with the SEC and available on our website at netapp.com. We disclaim any obligation to update information in any forward-looking statement for any reason.

All right. Well, Wissam, Kris, you guys just reported earnings. It was not even a week ago, right? And you took your -- you had very strong results for fiscal 1Q coming out and then you did raise your whole fiscal year outlook as well, almost 2x, right? I think one of the questions that investors here were asking and have been asking is something I've been asking all my companies, especially on the enterprise OEM side of things, like what gives you confidence that this is not -- this is durable, right? I mean you still have three quarters to go, and it's not just customers double ordering, you guys have backlog demand outlooks, like it's not just customers double ordering and trying to get a secure spot in place given the constraints that are out there.

Thanks, Asiya. First, happy to be here. Thank you for having us. Look, we had a stellar start to the year, as you mentioned, we reported last week. And when it comes to Q1, we saw some really good broad-based strength in demand driven by AI adoption and infrastructure modernization. There's also many ways that we typically monitor our business. We look at pipeline, we look at orders, we look at backlog and we monitor it that way. And so far, we haven't seen anything out of the ordinary. And so we do think that -- we do see an underlying strength in demand that basically also gave us enough confidence to increase the guidance for the fiscal year.

As you noted, we basically increased the guidance for fiscal year '27, doubling roughly the growth rate year-on-year relative to where the guidance was 90 days ago, and that also goes to EPS more than doubling that. And so there's other -- the last point I would say in terms of our business, we don't have -- our business goes directly to sort of -- it's linked to end customer demand. And so we don't -- there is no stocking the channel for this type of dynamics that works in it.

Okay. And then while we're on the topic of demand, maybe just because you're pretty well exposed, you have exposure to commercial, of course, enterprise, also government. Maybe if you can talk a little bit about demand? Was it a pretty broad-based that was underpinning your revenue outlook, was it pretty broad-based? And then you also have first-party services on cloud as well.

Yes. So we -- in Q1, we experienced broad-based demand. We saw growth across various geographic regions, and we saw growth across the various types of customers and across types -- various types of industries. And when it comes to our public cloud business, which is where really the three top hyperscalers are our customers, and they offer our software as a native storage software solution. We've also experienced some really nice growth. We had -- we reported around 28%. But then when we adjust to -- for the extra week that we had in Q1, it was around 19%. And so the growth was fairly broad-based.

Okay. And then given that supply -- you guys have to have supply in order to underpin your demand outlook. I think at the start of the year, a lot of questions were around supply, do the OEMs have the supply in order to underpin the demand outlook here, you guys are doubling your demand outlook. So what's changed on the supply side? Have you signed LTAs that gives you access to supply? Just help us on the supply side.

Yes, we've always worked very closely with our suppliers on not only understanding what the supply situation is, but also sharing with them what our outlook looks like. And so that sort of has been our mode of operation for quite some time. Where we are now, we basically have -- I mean, at this time, we have -- we feel comfortable about the supply we have to be able to deliver the outlook we guided. We have different types of arrangements with different types of suppliers. In some cases, we have LTAs, in others, we basically have agreed upon sort of commitments and so on, but we feel comfortable from a supply perspective at this time to be able to deliver our outlook.

Okay. And outside of supply, Wissam, are there things? I mean you have a range, right, when you provide the outlook as well, both for the quarter and for the year. Like what would it take for -- what are -- outside of supply, are there other gating factors that we should think or other factors that could cause you to upside on that side? And maybe we can also talk about the risks maybe towards the lower end of your guide then?

Yes. I mean when you look at the guide, we basically take into account all the information we have at the time when we build our outlook on which the guidance is based. And so we're one quarter in the year, and so we'll wait until the end of this quarter, and we'll be able to provide a better update for the rest of the year.

Okay. And what about pricing? Because I know people often do the P times Q. I know I bugged Kris during the quarter to talk about this, P times Q, when people look at the bids that you're shipping, but of course, pricing has gone up quite meaningfully for -- not just for yourself, for your entire OEM space. So how much is pricing factored into that outlook? I mean how -- and if we do continue to see uptick in pricing, is that upside to your guide? Is that how we should think about it?

So it's pretty normal and understandable and inflationary environment for pricing to be a factor. But what's most important is that what's underlying the growth and the outlook is more of a strength in the business driven by what I mentioned earlier with respect to AI adoption in the enterprise as well as infrastructure modernization.

Okay. And then your growth rate, though, obviously, you had a pretty meaningful growth in fiscal 1Q. You're guiding for strength in fiscal 2Q. And then there was the extra week in 1Q, I get that. But then your -- the implied guide at least was a little bit of deceleration here as we get into the back half of your fiscal year. What's underpinning that? Is it just you're just being very prudent, given you're just one quarter into the fiscal year? Are there other factors that we should think about, maybe supply, et cetera, that's kind of baked into a deceleration in growth rates in the back half?

Yes. So when you look at the guidance, it is important to note that the guidance for the full year relative to 90 days ago is higher and the guidance for the second half also is higher than what we had 90 days ago. So when we looked at the full year guidance, we basically updated the guidance in total and both the first and the second half year sort of are incrementally better than what we thought they would be 90 days ago. Now when you look at the seasonality of the business and you factor in the extra week in Q1, it looks like roughly the revenue -- at the midpoint, roughly the revenue is split almost 50-50, 50% first half, 50% second half. Now it's slightly -- in fact, it's slightly less than 50%, if you sort of want to go to the first decimal point, but it is, let's call it 50-50, which is not necessarily far from the area -- sort of the split that we've had for multiple years.

Okay. All right. Okay. And then a little bit on margins because, obviously, product gross margins, you talked about component inflation here. They are expected to moderate in 2Q, and I think you said about towards the low 50s, if I'm not mistaken, for the product gross margins. I mean can you talk a little bit about what's -- well, how should investors think about that? I mean components typically are pass-through for you guys. At what point do you see component inflation sort of moderating here maybe even reversing?

So look, we are operating in a tight supply chain environment. So it's too early to sort of make a call on the component pricing. But when it comes to product gross margin, it is the -- what we guided for Q2 and for the rest of the year, so think of Q2 to Q4, it's slightly better product gross margin than we had expected 90 days ago. Now when it comes to the full year gross margin, the number is -- the guide is slightly lower, but that's solely driven by the richer product revenue mix. All the margin lines are either similar to what we thought they would be 90 days ago or better.

Right. Okay. But on the product gross margin side, you are seeing more mix towards flash, right? In general, the product is mixing more towards flash. Your flash revenues are very strong year-on-year. Typically, those associated with higher-margin product margins because there's more software component in there. So just walk us through sort of what -- that puts and takes to product gross margins as you continue to maybe see more demand mixing towards flash, which carry typically higher software components.

Yes. I think your comment is accurate for Q1, Asiya. We did see a higher flash mix in the overall revenue relative to the hybrid flash side. For the forward-looking numbers, we typically don't break it out as such. I mean to the extent it happens, maybe, but it's too early to tell.

We did call out strength in the hybrid flash business, so as we look forward, that could come through. And I wouldn't necessarily assume that the historical kind of relative margin performance of different product classes stand in this current environment.

And then to mitigate the cost headwinds, right? I mean we've talked -- what are additional tools? Some of it just pass-through of pricing. What other tools would you have to mitigate some of the costs?

Yes. So the first one is, as you mentioned, we tend to focus on -- and it's very customary in our space to pass through the component cost inflation, which we've done for now a couple of quarters. We've sort of built also certain agility in the business to enable us to do that in a faster way, meaning sort of the -- whether it's the duration of our quotes, et cetera, to enable us to be -- to react faster in the event we have to -- we are encountering component cost increases, and we have to increase our prices. We also have many other ways to -- where we work with our suppliers. So for most of the commodities we purchase, we have more than one supplier and so that helps us work on securing the supply but in some cases, also it helps a little bit on the cost side.

But in -- from the business itself, when you look at our portfolio, we have a very broad portfolio, so we don't only necessarily carry only all-flash. We have all-flash, we have hybrid flash, we have Keystone and we have the public cloud business. And so we're happy to help our customers solve their problem regardless which service we offer. And so for customers that tend to really want to focus on very high performance, for instance, they may want to choose an all-flash array solution where capacity is probably more important or maybe they're much more cost sensitive and capacity is more important then we're happy to offer a hybrid flash, which is hard disk type based.

For customers who want to sort of -- who have limited budgets and prefer to split their spending over multi-years, we could offer Keystone, which is our Storage-as-a-Service solution. And for customers who are comfortable doing a consumption approach, we're happy to offer our public cloud business. So there are some ways we address it through the supply side, through the cost side. There's other ways we address it also by offering different solutions. And as Kris mentioned, now from a hybrid flash versus all-flash, we don't have much of a differential on the margin side as well.

Okay. All right. Good to know. And then AI wins, I know NetApp often talks about the AI wins per quarter, and people track, that's a KPI that you shared on the call. Fiscal 1Q number showed a little bit of deceleration, but I think the size of these deals are getting larger. Just help investors understand like are you seeing as these AI wins are coming through and we talk about it, even that's one of the focus at this conference as well about enterprise adoption. Are you seeing much more storage being attached to all these AI wins as you're talking to your customers, what kind of storage? Just help us understand what you're seeing as your customers are talking about these AI wins that you're then communicating to the investor base.

Yes. I mean what we disclosed for Q1 was much higher than what Q1 '26 was in terms of the number of AI wins, that's what we disclosed. What we've noticed in Q1 also is that the average size of the deal is now bigger than before, and so for some of the proof-of-concept type of deals that we had, let's say, a year ago, we're starting to see more of a production type of deals now. And that sort of helps explain that larger average size deal. This just basically demonstrates that our customers, once they put -- once they test the product, they're happy. In terms of the AI workloads, they're happy with it and they come back for larger deployments.

Okay. And then when you think about some of your compute vendors or competitors, for example, in the ecosystem, they're talking about very, very strong, a lot of strength in the traditional servers versus CPU-based servers, AI workloads. As you're thinking about storage attach, like you said, it's being reflected in the size of these deals, like are you seeing that inflection where compute and storage may be more closely aligned versus compute, which is obviously, first, we had a lot of GPU spend, now we're seeing a lot of CPU spend. Are you starting to see storage being more and more attached to these agentic AI workloads? How meaningful could it be in the next couple of years?

I mean there is, as I mentioned earlier, certain broad-based strength in demand. And so some of it, I would imagine has to do with some of the CPU server deployment because ultimately, after all these servers are deployed, they will need to have some form of storage attached to them. It's a bit too early to tell the magnitude, but it is -- I would imagine that typically, it would be a tailwind to our business.

Okay. I know you said it's difficult to size it right now, but any -- like when you talk about these deals that you're winning and tracking, like is there any way to carve out how big it could be over the next 2 or 3 years, like in terms of percentage of revenues that have come from just these AI wins?

I mean, look, we know that AI is giving us a tailwind on the top line, right? And the one thing to note is there's the AI sort of workloads, but there's also other types of infrastructure modernization that could be related to or associated with AI workloads that are also happening at the same time since AI could generate other types of applications and infrastructure needs. And so I think over time, the line between AI and non-AI could become blurry like if you think of -- you mentioned 2, 3, 4 years down the road, that could become a little bit of a blurry line.

Right. On the other hand, if you look at sort of the industry -- let's just talk about the broader industry TAM, right? As you think about the AI, whether it's data modernization, whether it's this incremental workloads, is there any way the way you guys think about the TAM? Like how big could enterprise storage become over the next 2 to 3 years as we're starting to see AI workloads now?

I mean it's clear that we're -- at least today, based on what we reported and what we're seeing in the market. It's clear that we're experiencing a certain TAM growth. And so -- it is too early for us to tell where this could be 2 to 3 years from now, but what's clear is that there's certain underlying demand that's driven from the AI adoption and from infrastructure modernization.

Okay. And then just your own competitive dynamics here, like how do you think like you could grow share within this expanding TAM? And where do you feel most comfortable? Is it on the flash side? Is it on the hybrid side? Is it on cloud storage, Keystone, which is Storage-as-a-Service? Where do you feel like you have the biggest opportunity to gain share in a growing TAM?

When we look at our numbers and how we're looking at sort of the next few quarters, they -- basically all parts of the business are doing well. In Q1, for instance, the all-flash array business grew by 47%. And in Q1 also, we saw a small uptick in the hybrid flash revenue year-on-year, which is the second quarter in a row we see that after several quarters of -- like many quarters of decline.

We also saw some nice uptick on the public cloud business, as I mentioned earlier. The business, excluding the extra week, was up 19%, if you sort of dissect that and look at the first party and marketplace within that revenue, it grew at a much faster pace than this. Just for reference, the first party and marketplace portion of the public cloud business last year grew at around 31%, so there's really high growth there. And when you look at the Keystone Storage-as-a-Service, in Q1, we experienced similar types of year-on-year growth as we've seen in Q4. It's still growing rapidly and expanding.

You guys made a couple of acquisitions during the quarter, I think, DataPelago and JetStream. I hope I'm pronouncing that correctly. Just -- I think they're tuck-in acquisitions more than transformational. So just help us understand like what's the reasoning for these acquisitions? How do you think it's going to change? What attracted you to these acquisitions, two in a quarter, is that -- could it be greater looking forward? Like where are you guys focused on in terms of technology acquisitions?

Yes. As you noted, both our tuck-in acquisitions, the technology acquisitions to complement our portfolio. So when you look at DataPelago, DataPelago is basically an extremely high-performance data processing software engine that's capable of processing compute and the CPU and GPU environments for -- while basically keeping the data where it resides. Meaning processing data at the storage layer at a very high speed and high performance, which provides typically lower cost and better performance for the customers.

And when you're able to process data where it resides, it also enhances security and data protection because you don't have to sort of move the data from one place to where the AI -- to sort of other AI systems, basically other compute clusters for AI systems. So that's the DataPelago which is pretty much, think of it as an enhancement to potentially AIDE.

On the JetStream side, JetStream is very much a disaster recovery type of solution for VMware environment. And so that combines well with our public cloud business where we could also be used for disaster recovery as a retention type of storage on the public cloud business. So it gives us basically additional capability for the public cloud business. So both of these are small tuck-ins that are more technology oriented to help us complement our portfolio and basically be more competitive.

Okay. And then on the AI side, I know at the INSIGHTS last year and you have an INSIGHT day coming up again. AFX, AIDE, you talked a lot about that. I mean, just help us understand how is that differentiating you from some of your other competitors, whether the compute and storage vendors who are selling full stack solutions or maybe just the only storage competitors that are out there and especially we also have the neocloud storage providers, whether it's Vast or WEKA. So how does -- where are you with your AFX, AIDE offerings? And how does that differentiate you relatively?

Yes. I mean we have some customers that are in certification phase on AFX. AFX is our disaggregated architecture solution where customers can choose either to focus on performance or on capacity. And when you think of AFX and AIDE, basically, they're part of the NetApp platform, which is really the key differentiator for us because we provide unified solution, which would include things like AI data services and so on for our customers. And so it helps us be more competitive in terms of our portfolio offering as well.

Okay. Let's see, I'm going to just ask if there's any questions here in the audience. If you do, please raise your hand. Public cloud -- sorry, did I miss any? Public cloud grew, you just talked about it, 19% ex the extra week, which is pretty -- and the first party obviously grew much faster than that. That's a pretty nice growth relative to what you guys were experiencing. How sustainable is that? And what should -- what could maybe drive further growth in that? Do you think this 19%, 20% growth is pretty sustainable? What should investors be looking for to see if that growth could accelerate here, especially as we are hearing about overall cloud growing pretty rapidly?

Yes. Look, the public cloud business is a very nice high-growth business for us, and the high teens growth rates are sustainable. This is a business that is very differentiated. We continue to make investments in it and adding capabilities and features to ensure that it stays differentiated and it stays in sort of leadership place where it is. Overall, the first party marketplace is growing at a much faster pace as you noted. And so over time, that will continue to sort of also drive a nice growth as you think of the sort of mix within the public cloud business. So the high-teens percentage is a sustainable number for us.

Okay. And I know you guys are exposed across various hyperscalers for their first party. Was the growth pretty unanimous across or I mean similar across all the other hypers? Or were there ones which were doing a little bit better?

They're all growing at a nice pace. Obviously, they're not all of equal size, but they're all growing at a very nice pace, contributing to that high growth in the business.

Okay. And is there any way to carve out how much AI is contributing to that growth in the public cloud that you're experiencing?

Well, the way to think of our public cloud segment is that really our customers are really the three hyperscalers, so Microsoft, Google and AWS. And then obviously, we serve end customers. We know that there are AI workloads that happen within our public cloud environment. But we don't necessarily -- the visibility isn't as great since obviously, they're our customers' customer. We get quite a bit of visibility, but it's not necessarily as good. But what we know is that there are AI workloads that are basically taking place on that or run on those in that environment.

And have you had to like make investments or change some of those product offerings? And is that how you kind of, I guess, get to some understanding that, okay, this could be AI-driven?

We continue to evolve the product offering. We continue to add capabilities to it and we continue to enable sort of -- and be able to sort of plug into the various AI capabilities that are offered by our partners.

Okay. Public cloud margins, I mean, they have continued to go higher. The past, I think, a target range that was shared at your last investor event. At what point do you consider revisiting that margin framework for your public cloud?

So public cloud margins, to be precise in Q1 were at 86-plus percent. The long-term range for us is 80% to 85%. We've been operating at that level for, I think, three -- actually slightly higher than this for the last three quarters. We're comfortable with the range where it is now. We think there's potentially some upward bias, but we're comfortable with the range that it is now because we want to allow to continue to invest in the business and drive growth. And so that's really why I think at this point, we'll keep the range where it is.

Okay. And the upside for this quarter, is it just a scaling thing as you start to see more growth? Obviously, you're scaling and so you should drive better margins.

Well, the one thing to keep in mind, Asiya, is that in Q1 we had an extra week, so that helped a little bit the margin, but it still would have rounded to 86 anyway.

Okay. Keystone again, grew significantly last year. Where do you think Keystone could be for your business, like over the long term?

So Keystone is another offering from our portfolio where we -- this is our Storage-as-a-Service. It's been growing at a really nice pace. In Q1 it grew at the same pace as we saw more or less in Q4. So really high growth. It has really nice margins. It's accretive to our overall gross margin and operating margins. It is one of those elements of the business that we offer to our customers who are interested in basically doing Storage-as-a-Service. It is by itself, what we focus on with respect to working with our customers is to provide the best solution for them.

And so we don't necessarily push Storage-as-a-Service solution versus an on-prem. We work with the customer to determine what is best for them in terms of what they're trying -- the problem they're trying to solve and what the infrastructure they're putting in place. I expect the business to continue to grow at a nice pace, continue to be as profitable and drive good profit growth for the company.

Is it a totally different set of customers that choose one, like public cloud versus Keystone? Or do you see some customers may be having both, but just different workloads or...

I mean it could be -- yes, we see customers who could have the on-prem, for instance, solution and Keystone is not necessarily a specific type of customer. Sometimes it depends on their workloads. Sometimes it depends on if they have any migration projects. It varies on their requirements. And so this is why what I mentioned earlier, we work with the customer to try to figure out what solution or what the problem they're trying to solve, and we address it in the best way possible for them.

Okay. And Keystone margins, public cloud margins, given -- I mean, obviously, your our public cloud business is bigger. The margin is fairly similar?

I think the public cloud margin has really phenomenal margins. I mean when you get to that sort of 86%.

Okay. All right. Operating income guidance. You guys continue to manage OpEx extremely well. I think now the last few years, you guys have shown that you can manage OpEx at, is it what, half the growth rates versus the revenue? And so how we should think about that going forward given complexity of offerings, AI, obviously, you're making some technology acquisition, how does that kind of overall play into kind of your OpEx guide?

Yes. I mean when you look at our operating margin guide, the latest we shared for the year with the increased guidance on the top line, we also increased the operating margin guidance at the midpoint by around 120 basis points, and so this shows the operating leverage that exists in the business and sort of demonstrates the earnings power there. Our focus is to balance between growth and margin. And so we grow the top line, we grow the gross profit, but also we want to continue to see that operating margin leverage to some extent.

And so when we -- so having said that, we also want to invest in the business. We want to invest in growth. And so our approach is typically not to invest or not to have OpEx grow faster than half of the growth rate of the revenue. And if you sort of look at what -- where we are for the fiscal '27 guide, it sort of gives you a good idea that we're pretty much still living within that framework. But we still want to invest in the growth of the business. We think there's a lot of opportunities for us ahead, especially in AI data solutions. And so that's something we continue to focus on as well as, of course, driving their revenue growth and operating margin.

And so Wissam, as you think about -- I mean, obviously, you guys generate quite a lot of cash. When you're thinking about deploying cash, you have these technology tuck-in acquisitions, you have capital returns, you obviously have to lock in supply to some -- like you're sitting back here, how are you thinking about as -- have my objectives for deploying cash change?

Our capital allocation approach has not changed. We still intend to return up to 100% of our free cash flow to our shareholders, either through dividends and buybacks, that hasn't changed. On the M&A side, you saw us do a couple of tuck-in acquisitions. We're a technology business. We want to make sure that we have a competitive portfolio that's second to none and so we will continue to complement our portfolio as needed with these types of investments.

All right. Any questions here from the audience? With the rising component prices and obviously, it's reflecting through, as you guys are passing through that, what are your customers saying? I know you talked a little bit about you have a full stack offering. You can do anything, you can do it as a service, you can do public cloud, you can do hybrids. But at the end of the day, how are customers sort of adjusting their budgets? And where are they getting the incremental -- given that storage is growing, where are they getting the incremental budgets to support compute spending going up, PC spending going up, storage spending going up? What are you hearing from your customers as they're adjusting their budgets to allow for the higher pricing that's flowing through?

I mean look, customers budget based on their business priorities. And so -- and they also spend based on their budgets. And so in many cases, if they need to reprioritize what they buy, they would adjust it based on what the prices are and what they need to buy. But what's most important is they do budget based on their business priorities. And if we fit within those priorities, obviously, that's great for us. And obviously, we're seeing some of that probably happening over the last quarter for this year, so that's a positive.

All right. As my -- one of my last questions always is what do you think investors are missing about the NetApp story?

Well, look, we've had a stellar start of the year. We had many records in Q1. We did exceed our guidance on all metrics. We did increase the outlook for the fiscal year for both -- actually, for all the revenue as well as operating margin and EPS. We continue to invest in the innovation and maintain that sort of innovative approach to the technology and driving this very strong portfolio.

And later this month, we have INSIGHT, which is our customer conference where we also showcase some of the great innovations that the team at NetApp has developed and is developing, so I encourage you to listen to that. We think we are in a nice period of growth that would help us to continue to drive sustainable growth, sustainable profitability and cash flow and drive value for our shareholders.

Thank you, Kris. Thank you, Wissam. I appreciate it, and I'll see you at INSIGHT.

Thank you for having us.

Hi, everybody. Welcome to the NetApp fireside chat at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of having CEO, George Kurian, here with us today. My name is Kat Murphy. I cover NetApp and IT hardware here at Goldman Sachs. We have about 35 minutes for today's discussion, inclusive of audience Q&A.

Before I begin, I'll read a quick safe harbor. NetApp asked you to read their safe harbor disclosure. Today's discussion may include forward-looking statements regarding NetApp's future performance, which is subject to the risks and uncertainties. Actual results may materially differ from the statements made today for a variety of reasons described in NetApp's most recent 10-K and 10-Q filed with the SEC and available on their website at netapp.com. NetApp disclaims any obligation to update information in the forward-looking statements for any reason.

So with that, thank you, everyone, for being here. George, thank you for your time. It's a privilege to have you here on stage.

To kick it off, NetApp reported earnings last week where you raised your fiscal 2027 guidance for 17% revenue growth and 22% EPS growth at the midpoint. Before we dig into some more strategic questions here today, can you talk us through a brief recap of the quarter and what gave you confidence this early in the year to raise your full year fiscal '27 guidance? And highlight anything that you think is important for this audience.

Thank you for having me. Thank you for joining us. It was a super strong start to the quarter, to the year. Pretty much every product line, every district, every industry, every country was well ahead of plan. We had record revenue, earnings per share. Billings was in record territory. All-flash array revenue was a record, up 47% year-on-year. Cloud continues to grow in the high teens, adjusted for the extra week. And so we feel really, really positive about the momentum in the business.

Great. One of the central questions investors are looking to understand is how agentic AI adoption may create a TAM uplift for the enterprise storage opportunity, much in the same way we've seen in traditional compute and in networking.

What we are seeing is the broad-based pattern of demand that we're seeing, which gave us confidence to raise the full year, and the outlook provides real confidence in the durability, is this idea that to use AI models effectively, you need robust data infrastructure because the output that these models and agents generate are only as valuable as well-curated, high-quality data.

So we saw wins in our AI-specific configurations that were up materially year-on-year. But we also saw a broad-based kind of upgrade of databases and lakehouses and streaming engines and all of the other associated applications that go alongside AI. And so, broad-based demand from a customer standpoint. And this is driven by the fact that as we have seen customers deploy these AI use cases, they need better and better storage and data infrastructure.

And as a part of that, you've talked in the past about a significant share of AI projects being abandoned because of a lack of AI-ready data or data readiness issues. Can you talk about why a unified platform like ONTAP, in particular, helps address some of those data readiness challenges and how you're assisting your customers in preparing for that broader adoption trend?

Yes. To get -- AI models are essentially probabilistic engines. And to get accurate results from those models, you need to apply them and use your enterprise data against those models. That enterprise data is typically smeared across cloud, across a variety of applications and across a variety of different storage environments and customers. Our view has always been that it's important to unify all of these landscapes so that you can bring different data types, different data applications under one common rubric so that the model gets the best output. And so our long-term thesis that hybrid multi-cloud needs to be unified across site, media, and applications is coming through.

Thank you. You recorded more than 1,100 AI deals in fiscal '26. You talked about 350 more last quarter, at increasing deal sizes as well. As this infrastructure spend evolves from pilots into more full-scale production, how should we think about measuring or quantifying the impact on NetApp's results specifically? And if you could talk to how some of these AI-specific configurations may look from a margin contribution perspective relative to the rest of your product portfolio?

I think, first of all, the size of the AI deals, which are really specifically tied to unique AI configurations that we can track, has -- the number of deals has grown materially, as you noted, year-on-year, and the size of those deals has also grown. We have seen customers who deployed proof of concepts with us a year ago or 6 months ago come back and say, "Yes, the proof of concept worked. I want to expand the footprint."

That being said, the impact of AI in our business is much broader. I think people are upgrading a lot of other storage and applications to work alongside the AI-specific configurations. And so we see the demand picture being really strong across a broad book of business. I think with regard to the margin profile, there's no material difference between our sort of broad-based enterprise business and the AI-specific environments.

To maybe dial into that AI-specific environment and the configurations there, I want to ask about the AFX platform, which you launched last fall. How should we think about the opportunity that the AFX platform goes after and how those types of customers, that you've talked about this being more of a neocloud-based product, have different needs from your core enterprise customer?

Yes. I think we introduced the AFX platform for customers who want the flexibility to gang up different sizes of compute instances with storage in really, really flexible ways. Those are typically large enterprises and some of the neoclouds. We have seen good uptake. They go through a certification process, but we've disclosed on the calls momentum and progress with the AFX platform, which is good. We are going to be announcing even more advancements for the really high end of the neocloud for training and sort of this frontier models use cases coming up at INSIGHT. Super excited about that announcement.

Can you talk about what NetApp's right to win is with this neocloud opportunity? Obviously, have strength and leadership on the enterprise, but what about that translates to the neocloud as well?

Yes. I think 2 or 3 things. I think one is we have proven to have been able to deploy hyperscale-level data management, data infrastructure because we are embedded in all of the big hyperscale providers. So we know how to -- the technology from a scalability, from a provisioning -- ease of provisioning from a cloud-native operating paradigm is super proven. We also have go-to-market models that allows the neoclouds and our sales teams to work together on opportunities where we are more partner than vendor.

And then, of course, as the neoclouds have gone or want to move from just sort of training or what you call stateless, meaning workloads that are very temporal, to more enduring workloads, data management, security, sovereignty, all of the controls we provide as well as hybrid use cases become more important. So our opportunity there is growing, and we see broader engagements from all of them.

Great. More on the sovereignty point. You've talked about your expanded relationship with Google Distributed Cloud to extend the company's reach into sovereign and some of these highly secure environments. As governments and enterprises increasingly prioritize this concept of data sovereignty, what is NetApp's right to win there? Is it different than the neocloud story? Or how can you frame NetApp's opportunity in that customer set?

We have been strong in sovereign for a long time. I think that, for example, 6 of the 8 largest cloud providers in France have NetApp as their infrastructure, right? This is domestic cloud providers. We see the push on sovereign growing around the world because AI is seen as a national security priority in most countries. And so we have been working with both the national cloud providers as well as the hyperscalers to build sovereign environments.

Those sovereign environments have -- our differentiation is that you can take advantage of all of the innovations, for example, in the hyperscalers, all of their advanced AI platforms, but use private data storage and private data management with our solutions. For example, in the Google Distributed Cloud architecture, they're bringing the Google AI stack with NetApp storage to a private disconnected environment in customers. And so we see more and more of those use cases as opportunities for us, not only with Google, but in other cloud providers as well.

Shifting gears here, I want to touch on how NetApp is helping its customers navigate input cost increase. Specifically, how does the breadth of NetApp portfolio across all-flash, hybrid, spinning disk, how does that help your customers navigate these input costs? And how should we think about the demand in this environment of increasing ASPs for some of the non-mission-critical storage projects that your customers are looking to undertake?

Yes. We've always believed that you want to bring your data estate under one management framework and orchestration framework, whether that is media type or whether that's location, your data center, cloud providers' data center, hyperscaler data center, so that it gives you flexibility to navigate these landscapes. We are working with our customers on 2 fronts around the commodity situation. On one front is to give them the tools to optimize the use of high-cost flash for only the part of the data that really requires high-cost flash and to automate movement of colder data out of those flash-based systems into cheaper disk-based configurations. We hinted at the fact that our disk-based systems have started to show growth, and we see strong uptake through the rest of the year as the cost of flash becomes 15 to 20x the cost of disk, right? And so that's one.

And I would tell you what's interesting is that data in an all-flash system, a large part of that data is actually cold. It started out hot, but like a Hollywood movie star, faded over the life of the use of data. And so you want to move it off of that hot system. And so that's giving us competitive position. The second is for compute access, we are working with several clients on hybrid compute landscapes where they want to provision compute in the cloud as a risk mitigation strategy for not having access to supply chain components for their own data centers. And so we're seeing more and more pickup of that as well. Both of those are parts of our solutions.

Can you talk about how consumption models change as well, whether it's the capital purchase or consumption-based models like Keystone, how that has changed in the last 9 months as prices on memory and hard disk has risen significantly?

Keystone has done well. Our performance for Keystone, which is our Storage-as-a-Service business, in Q1 was roughly similar to our results in Q4 and were above our internal targets. I think that we want to give customers the broadest range of procurement choices so that they can use the right tools for the right use case. And for several examples, like, "Hey, I want to stand up a pilot environment. I'm not sure it's going to be a long-standing commitment, but I want to experiment." We suggest Keystone or cloud as a better alternative than paying an upfront CapEx purchase.

I'll have one explicit memory question. But in terms of fiscal 2027 guidance, how should we think about how much of that outlook is supported by NAND and hard disk that NetApp already has under contracts through LTAs versus volumes that might need to be procured at more floating prices in the future? And anything you could share just on pricing assumptions on these components embedded into your full year outlook?

Yes. I think, obviously, when we provide guidance, especially the guidance that had a significant uplift, you want to make sure you have good visibility into demand, which we do, as well as to work with suppliers a priori to ensure that you have access to supply. And we feel good about both sides of that equation.

With regard to the work we do with suppliers, we work with them on a broad range of commercial vehicles, including buying in the open market as well as through long-term agreements to assure access to available supply at competitive cost structures, and they prefer a range of tools that we work with. I think if you look at our balance sheet for the quarter, inventory was up because we want to make sure we have adequate inventory on hand to be able to meet demand. And so -- yes.

Product gross margins performed better than investors were expecting and better than guidance in the most recent quarter. And as we think about the broadening demand that you've talked about across flash, across hybrid, across disk, how should investors think about this balance of mix, pricing actions, and then some of your cost recovery efforts and the impact on the margin profile for your product margins going forward?

Yes. I think ultimately, product gross margins are a balance of kind of having raised prices to meet the increases in costs. We don't always -- we can't match them always one for one and the ability to recover those price increases through discipline and the value that we offer customers. We feel good about our execution in Q1. Obviously, every quarter, you got to go execute and match price with cost. I think if you look at the full year outlook on product gross margins, it's incrementally up every quarter relative to what we had laid out when we guided the full year at the start of the year, which is a reflection both of better visibility into cost as well as more confidence in our ability to recover pricing in the market.

I think with regard to kind of our view of the full year, product gross margins are a component of overall company gross margin. Company gross margin is really determined by the mix of product and service. And I think if you look at the outlook for the year, product is growing much faster than service, which affects the corporate gross margin rate, even though the underlying rates for all of the components are the same as what we thought. And then in the case of product gross margins, better than we thought 90 days ago.

I want to shift gears to the Public Cloud segment. You posted 28% growth in the quarter, 19% when you exclude the extra week, operating at very attractive gross margins, as you mentioned. What is driving that momentum? And why are you confident that the public cloud business can continue to grow at this elevated rate as we look into the back half of fiscal '27?

Yes. I think public cloud has grown in the high teens, low 20s for a long period of time as we have scaled that business. And so we feel good about it. Would I like it to grow a little bit faster? Sure. I think our sales teams know that I'm pushing for faster growth.

I think the picture is driven by 3 trends. I think first is sort of secular growth in the hyperscalers. They're growing at very high rates, and we are a small part of the overall storage market, so we can grow more without any real encumbrance. The second is broader product offerings that allow us to deliver more value to customers as well as the confidence driven by strong net customer retention and expansion numbers. We see really good numbers there.

And then the third is better kind of execution, kind of distribution. We see good returns from investments we're making around go-to-market to expand the range of account types we can penetrate, the range of channel partners we can engage. So super bullish about our cloud business. We are extraordinarily well positioned not only in public cloud, but as they build private environments, right? So in sovereign, we are part of several of the build-outs in Europe in distributed and kind of disconnected cloud. You saw the work that we did with Google, and we are working on others like that. So really been a good strategic bet for the company that gives us a really strong competitive position and growth engine going forward.

On the more offerings point that you mentioned is part of those 3 drivers of public cloud. Can you talk about how AI scaling or enterprises adopting -- increasing their adoption of AI could drive incremental demand in this category in particular? And how do you envision an enterprise using the public cloud and NetApp services through the public cloud to kind of go after this opportunity?

Yes. I think we see that we have made investments and continue to do more innovation work to connect our offerings in the public cloud with the hyperscalers' AI platforms like Bedrock from Amazon or Vertex from Google or Azure Studio from Microsoft. And what we are seeing is AI is truly a hybrid use case, right? Most clients have data in one place and want to use tools in another place. And because we make it so frictionless for them to use those tools, they kind of are putting more and more use cases on NetApp storage.

We saw, for example, in the quarter, innovations that we introduced a couple of quarters ago with Amazon see super strong uptake, life sciences companies using some of the tool chains in the cloud for molecular analysis or for diagnostics, use cases that we would not have won on-prem. We are seeing them use serverless functions, LLM tools with the data infrastructure solutions we have. And then just as I walked in this morning, we actually moved a large competitive customer to the public cloud for their AI data lake, right? It's just one of many. We've been working on it for a while, and they just kind of went live with us. So gives us more wallet, more value, the ability to not only compete in cloud, but also on-prem for the full estate.

Maybe sticking on that point of competitive wins. How is NetApp seeing the competitive environment or some market share dynamics evolve as you compete with vendors who might be taking a more full solution approach where they're bundling storage with the sale of compute or networking? And how does NetApp's kind of best-in-breed independent storage vendor status compete against some of those more bundled offerings?

Yes. We've always had to compete with people who have tried to build full stack solutions, bundling all of the offerings together. And I think we've held our own. We've gained share over many years against those providers. I think 2 or 3 things there. I think one is we have innovation advantages over full stack vendors. And today, when we talk about full stack to clients, we say, "Hey, your stack is not just on-prem compute, network, storage. You want to think about hyperscale compute, network, storage. You want to think about neocloud compute, network, storage. And the real kind of full stack is an integrated hybrid cloud stack." And so we feel good about our position.

No fundamental changes from 6 months ago. I think if you look at the overall share metrics, there are several players in the market who are losing share. And it's probably us, Pure and Dell that are the kind of focused players, either gaining share or holding share.

Very helpful. I want to return to a comment you made earlier around ONTAP and talk about how the positioning of ONTAP as a software layer across on-prem, cloud and AI environments is a competitive advantage or a competitive moat for NetApp. Can you talk about how that's helping your competitive positioning in the increasingly complex configurations of your clients? And maybe for the purposes of this audience, why is this something that NetApp is able to do and your peers aren't or your enterprise customers aren't able to build in-house?

Yes. I think the core value proposition, ONTAP is our operating system. And we have been the pioneer in the industry that said it's better to unify your data estate under one operating framework rather than to have custom siloed environments for every use case. The benefits of that accrue over time. And now you can see that becoming even more apparent to clients, right?

I think the benefits accrue from, hey, much simpler operations. I don't have to patch 1,000 different environments. I don't have a huge amount of technical training that I need to have for my staff. I can learn one thing, I can use it in a much broader set of things. The second benefit has been, hey, we have taken our clients to places that no other vendor has taken their clients. We've taken them into public cloud environments. We've taken them into national cloud environments that gives them strategic flexibility and return on that investment in a way that nobody else has.

I think with regard to kind of the benefit to NetApp is we make one operating system investment, and we can recover that across a much wider range of customer types and use cases than anybody else in the industry. So there's benefits to customers that accrue at an advancing rate over time, and there's benefits to NetApp from having one platform investment that we accrue across a huge amount of use cases.

Maybe I'll ask a few more, and then I'll turn it over to the audience to see if they have any questions.

Sure.

But I do want to ask about the U.S. public sector. It has -- there's been a lot of disruption and budget uncertainty in the U.S. public sector, but we saw some nice growth in the most recent quarter. What are you seeing in the federal demand environment today? And how should we think about AI factoring into growth and recovery in that part of your business?

Yes. I think, first and most importantly, the disruption from a procurement side has mitigated. The government was operating under a continuing resolution. There was a lot of uncertainty from DoD and other disruptions in the public sector in the federal government a year ago. I think those have largely abated. There's been a funding bill that's been passed, the One Big Beautiful Bill. So we are optimistic. I think with regard to our position in the public sector market, listen, it's a 2-horse race between us and Dell. We feel strong about our position.

And I think with regard to AI, certainly, there's national security use cases, there's broad-based public interest use cases in public health or weather forecasting or resource management use cases and of course, in sort of warfighter and national defense. And so we feel excited about the opportunity to serve our government in ways that would protect American and advance American interests.

We've talked a lot about how you're helping your enterprise customers deploy AI, but you are a large enterprise yourself. Are there any examples you can share about how internally you're adopting agentic AI for operating efficiencies or other ways in which it's added value within NetApp today?

Yes. I think, first of all, we believe that whenever there's a disruption, you've got to lean into it so that you can learn it and you can really get the texture of is it really disruptive and valuable in X use cases or Y use case. So we've been sort of using AI in our business aggressively. I think from a broad basis, we had about, say, 400 sort of bottoms-up projects, we sort of narrowed that down to 140, sort of real proof of concepts to 40 projects, that have been pipelined to 13, that are contributing to positive returns in the P&L. In those, the big ones are really in product development and in customer life cycle and customer support.

In product development, it's classic, "Hey, can you deliver more innovation to market faster? Can you improve the security of your products? Can you make your products more self-healing?" In customer support, it's "Hey, can you make your knowledge bases, which our customers love, searchable using conversational AI?" It's reducing the number of inbound customer calls, which nobody likes to make, right? They want to self-service themselves and to make the user experience much, much richer. We have also been able to look at forecasting, for example, on demand or supply at a much more granular level using AI tools in ways that humans just could not do, right? You can forecast now at a subcomponent level, you can run really complex simulations across the scenarios.

And I think the 3 or 4 things I would say is, one is you want a center of excellence and control of your AI platform. We are using more open source and open-weight models to manage costs. We are building our own infrastructure to manage token costs. That AI center of excellence gives you reusable patterns, and we match that with business unit sponsorship because the business units have to fund and to make -- take responsibility for the AI use cases. And then ultimately, it's the people process change as well. You can't get AI adopted widely if you don't embrace the human change element of it.

Very helpful. Let's see if there's any questions in the audience. If we could get a microphone over here.

Can you just explain to us, if you look between cloud adoption, the public cloud and enterprise adoption and training and inference, what is sort of the sweet spot for you in terms of where these vectors are headed towards? In other words, is there a point in which you might see sort of a greater inflection point in your business as we have a greater mix of inference or as enterprises adopt more AI? Just sort of give us a sense of how that plays out.

Yes. I think from our exposure and for the longer term, inference really is the important element. I think it's true not only for our business but for the industry at large, right? Inference has to deliver value for continued investments in AI technology. For data storage and data infrastructure, inference is the much bigger part of the overall business than training.

I think we have seen more projects becoming successful in inference. You can see that from the engagements we have with customers where a year ago, they were in pilot mode in a lot of them. Now they're putting it into production. I think with regard to the growth in our public cloud business, these are production use cases. They're not training, or they're not proof of concepts. They've run the proof of concept a year ago, and now they are really doing scale production.

So as inference grows, who's likely to be your biggest customers? Is it the enterprise themselves, the cloud customers, content aggregators? Who's likely to emerge as sort of the largest incremental buyer for your solutions?

I think we do not sell to the hyperscalers. We sell through them to the enterprise. That has always been our business model, right? And so we think that the -- there's a set of digital natives and AI-native companies that are not the hyperscalers, but people that are actually building applications using AI on behalf of others, maybe, or Software-as-a-Service companies as well as enterprises. We are making some product announcements at INSIGHT for super, super high-scale frontier lab kind of training environments. And so from -- if those innovations are successful, which we expect them to be, they will also bring us a new class of customers.

And as the price of components and memory has increased, storage as a percentage of the overall solution, as the cost has also increased, are you seeing some kind of a pushback from end users? What is sort of the conversations as you have to raise your prices to maintain margins?

I think we have had to be responsible about making sure that you optimize the customers' estate. So on the things that we can control, we make sure that they're using high-priced flash, for example, only for the data that deserves to need that level of performance. We are actively engaged in helping customers reduce or reuse equipment in more sort of to help them reduce the impact of the price increases.

I think with regard to what we have seen, which is countercyclical, is usually when prices go up, the amount of new equipment purchases are constrained because customers budget in dollars. So we went into the year, we said, "Hey, typical pattern says X amount of new use cases, Y decrease in the amount of refresh of infrastructure upgrades." We are seeing infrastructure upgrades way above normal pattern. We are seeing new use cases also way above normal pattern, which says that there is a secular spending shift towards our category. And that is why we are so far ahead.

I do think we're out of time, unfortunately. I want to keep everyone on schedule this early in the day. But George, it's been a privilege to have you here. Everyone, I hope you have a successful and fruitful conference. Thank you.

Thank you for having me. Thank you.

Thank you.

Good day, and welcome to the NetApp First Quarter of Fiscal Year 2027 Earnings Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Kris Newton, Vice President, Investor Relations. Please go ahead.

Hi, everyone. Thanks for joining our Q1 FY '27 earnings call. With me today are our CEO, George Kurian; and CFO, was Wissam Jabre. This call is being webcast 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 2027, our expectations regarding future revenue, profitability and shareholder returns, the expected benefits from our acquisitions and partnerships, and other growth initiatives and strategies. 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 website, including our most recent Form 10-K 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 measures are available on our website.

I'll now turn the call over to George.

Thanks, Kris. Good afternoon, everyone. Thank you for joining us today. We delivered a stellar start to the year, exceeding our Q1 guidance on every metric and delivering a record-setting first quarter. Revenue increased 30% year-over-year to $2.03 billion. Our disciplined approach converted robust top line growth into significant profitability even in a challenging component cost environment with gross profit growing 29% to a record $1.43 billion, operating margin reaching 31.9% and EPS up 66% from Q1 a year ago. Adjusting for the additional week in Q1, our performance still stands as 1 of the best in the company's history.

This quarter's achievements reflect more than just strong execution. They underscore NetApp's growing leadership in a rapidly evolving environment. Our broad-based success expand industries and geographies with multiyear agreements, expansion into new workloads and deeper customer engagement, all strong leading indicators of durable growth.

While we're seeing some accelerated purchase decisions and pricing benefits, we are also seeing a clear structural improvement in the underlying demand environment all of which contributed to Q1 strong results and are fueling our momentum. This exceptional quarter is both a testament to our execution and a clear signal of the expanding opportunities ahead.

Given our strong start and the success we're seeing across our business, we are materially raising our outlook for the year.

AI is no longer a future aspiration. It's a business imperative. As organizations move to operationalize AI, the challenge is not just compute but data readiness. NetApp is a key partner for companies making this shift, eliminating complexity and accelerating time to value at scale. The NetApp platform enables customers to make all data AI-ready in place, providing unified storage, robust security and a single control plane across hybrid multi-cloud environments, delivering capabilities that redefine expectations in the industry.

By removing the need for data movement, we empower enterprises to accelerate AI and analytics while maintaining governance and control, enabling them to transition from AI experimentation to production with confidence.

The strength of our platform is fueling both deeper relationships with existing customers and new customer acquisition. A recent win highlights this momentum in a highly competitive evaluation, a major U.S. utility chose NetApp over both legacy and flash-only competitors, displacing the incumbent and standardizing on our unified AI-ready data infrastructure. Wins like this where a customer and trust their most demanding workloads to NetApp are leading indicators of our expanding role in the market and set the stage for long-term growth.

Our record Q1 was fueled by robust growth in public cloud, all flash and keystone revenues, reflecting the momentum in our business and validating our strategy as we deliver meaningful results for customers.

Driven by strong adoption of our first-party and marketplace storage services, Q1 public cloud revenue grew to $206 million, up 28% year-over-year and up 19% adjusting for the extra week.

Customers choose NetApp for our secure, scalable, cloud-native storage services as they migrate workloads to the cloud. VMware workloads in particular, are among those increasingly being moved to the cloud, opening significant opportunities for NetApp. In Q1, a U.S. hospitality company adopted NetApp technology for the first time through Amazon FSX for NetApp on Tap, supporting its large-scale VMware migration to AWS. FSXN delivered superior performance lower cost and versatile workload support. Similarly, a U.S. public sector organization selected Azure NetApp Files as a part of its data modernization efforts. A&F overcame technical barriers found in other cloud services and enabled substantial cost savings. These wins highlight how NetApp's differentiated cloud storage solutions facilitate seamless, efficient VMware migrations, reinforcing our ability to drive sustained growth as organizations accelerate their cloud adoption. All-flash array revenue reached $1.31 billion in Q1, up 47% year-over-year. Customers are standardizing our NetApp for their most mission-critical workloads, including GPU-intensive AI pipelines that demand high performance, low latency and built-in cyber resilience. Our innovation and go-to-market execution continue to drive share gains in this part of the market.

In today's challenging cost environment, the breadth and flexibility of the NetApp platform stand as strategic advantages. We empower customers to optimize performance, capacity and budget requirements without compromising cyber resilience or operational simplicity. This value proposition is driving strong customer demand across our portfolio. And notably, we are seeing accelerating interest in our hybrid flash solutions.

Let me share recent examples of how the breadth of our portfolio has enabled us to displace competitors and win new customers. In its first engagement with NetApp, a European IT service provider for pension insurance, selected our unified storage to meet stringent security and resilience requirements for critical infrastructure. Our flexible architecture not only supports the availability and integrity of highly sensitive data today, but also provides a secure, efficient and sustainable foundation for future AI workloads. NetApp recently displaced a competitor at a leading transportation agency. Our solution combined all-flash arrays for high-performance processing of massive video files with hybrid flash arrays for reliable, cost-effective long-term retention. Our ability to deliver the scalability reliability and performance required for advanced analytics and ongoing infrastructure maintenance was key to the win.

AI is powering a new wave of growth for NetApp, momentum that has been building and continues to accelerate. In Q1, we won approximately 350 AI and data lake modernization deals, up significantly from a year ago. Importantly, deal sizes are increasing as customers move from proof of concept to production. Initial wins in prior years are expanding into production-level workloads, reflecting confidence in NetApp's ability to support large-scale AI environments. Our solutions are enabling customers to activate data in place for AI, accelerate time to insight and achieve real business outcomes, putting NetApp at the center of their journeys.

Here are a few examples from Q1. We signed a significant agreement with Samsung Electronics to support its EDA environment and AI Center of Excellence. A public sector organization awarded NetApp a strategic deal to modernize and expand its intelligence capabilities and deliver real-time analytics, leveraging NetApp AFX integrated with NVIDIA Superpod. AFX's disaggregated architecture provides the flexibility and performance required for advanced AI workloads and provides a future-ready foundation, delivering the power and scalability needed to meet evolving requirements as data demands grow. NetApp secured a significant win with an Asian neo cloud provider, supplying high availability, secure and scalable storage for new customer-facing AI services. Our robust multi-tenancy and deep expertise in large-scale Kubernetes and OpenStack environments set us apart, helping the provider to modernize its infrastructure and support demanding AI inference workloads. This win displaced existing vendors and established a strong foundation for NetApp in 1 of the providers' most strategic AI initiatives.

We are strengthening our leadership through strategic acquisitions that expand the capabilities of the NetApp platform and broaden our addressable market. These investments position us to stay ahead as customer needs evolve, deepening our differentiation in cloud and AI.

In Q1, we acquired DataPelago, a recognized innovator in AI data infrastructure. Their nucleus software engine enables high-performance in-place data processing, eliminating costly data movement and streamlining AI readiness. With this technology, we believe we can unlock additional value from the vast unstructured data already managed on our platform, giving customers fresh opportunities to accelerate their AI initiatives and maximize the potential of their existing data assets. This positions NetApp as the company that makes zero-copy activation of enterprise data for AI real, helping customers drive AI initiatives improve efficiency and unlock more value from their data.

At the start of Q2, we acquired JetStream, a leader in cloud native disaster recovery for VMware environments. JetStream enables continuous protection and recovery of VMware workloads across diverse storage environments with seamless replication to NetApp cloud offerings like Azure NetApp Files. This acquisition will allow us to offer a simpler, more flexible path to cloud modernization and positions NetApp as the recovery destination of choice for VMware deployments, even when production data originates from competitors' infrastructure.

NetApp's strong Q1 results underscore our leadership in a transformative era shaped by accelerating AI and cloud adoption. The strength and flexibility of the NetApp platform allow us to support a diverse and growing customer base. By winning new business, deepening partnerships and investing in innovation, we are building a durable foundation for continued leadership and long-term growth. We are executing with discipline and vision and building on our leadership to deliver sustained value for our customers and shareholders.

We are excited to host our annual customer conference, NetApp Insight in September. We will showcase substantial innovation throughout the NetApp platform, delivering new value for AI and addressing the unique needs of high-growth markets like neo and sovereign clouds. We also will host an investor session to provide more detail on our strategy and solutions, and we hope you will join us.

In closing, I want to thank our employees for their dedication and focus. Our record start to the year is a testament to our team's commitment to our customers and to driving NetApp's continued success.

I'll now turn it over to Wissam.

Thanks, George, and good afternoon, everyone. In the fiscal first quarter, we delivered exceptional results exceeding the high end of all our guidance ranges. Revenue for the quarter was $2.03 billion, up 30% year-over-year and 4% sequentially. Non-GAAP earnings per share was $2.58, up 66% year-over-year. Revenue growth was driven by broad-based momentum across the business, highlighting the strength of our portfolio. This quarter's results reflect a healthier demand environment as customers invest in AI and modernization as well as some accelerated purchases and pricing benefits. As a reminder, Q1 included an additional week. Revenue was up 26% year-over-year, excluding the effect of the extra week, which contributed approximately $65 million to revenue, primarily in support and public cloud.

Looking at revenue by segment. Hybrid cloud revenue of $1.82 billion was up 30% year-over-year and 27% adjusting for the additional week. Product revenue of $987 million was up 51% year-over-year. Support revenue of $720 million was up 11% year-over-year and up 4%, excluding the extra week, which contributed approximately $50 million. Professional Services revenue of $112 million was up 15% year-over-year, mainly driven by continued robust growth in Keystone, our Storage-as-a-Service offering. Q1 public cloud revenue of $206 million was up 28% year-over-year and up 19% adjusting for the extra week, reflecting strong demand for first-party and marketplace storage services. The additional week contributed approximately $15 million to public cloud. We exited Q1 with $4.85 billion in deferred revenue, an increase of 7% year-over-year. Remaining performance obligations were $5.65 billion, up 14% year-over-year.

Moving to the rest of the income statement. Please note, my comments will be related to non-GAAP results unless stated otherwise. Q1 gross margin was 70.6%, exceeding the high end of our guidance and down 50 basis points year-over-year driven by greater product revenue mix compared to a year ago. Product revenue in the quarter was 49% of total revenue compared to 42% in the same period last year. The headwind from revenue mix was partially offset by year-over-year gross margin expansion across product, support, professional services and public cloud. Gross profit was $1.43 billion, up 29% compared to Q1 2026. Hybrid Cloud gross margin was 68.8%, down 20 basis points sequentially and reflecting lower product gross margin and partially offset by improvement in support and professional services gross margin. Product gross margin was 54.6%, down 150 basis points sequentially, mainly driven by higher component costs and partially offset by better pricing. Our recurring support business continues to be highly profitable with gross margin of 93.2%. Professional Services gross margin was 36.6%, improving 4.5 percentage points sequentially. Public cloud gross margin was 86.4%, up 70 basis points sequentially and over 6 percentage points year-over-year benefiting slightly from the additional week. The public cloud business has operated above the high end of the 80% to 85% long-term target range in the past 3 quarters. Operating expenses of $784 million were up 11% year-over-year and 5% sequentially, driven primarily by variable compensation and the impact of the additional week, which added approximately $22 million. Operating income was $645 million, up 61% compared to Q1 2026, and operating margin was 31.9%, up 6.1 percentage points year-over-year.

Earnings per share exceeded the high end of the guidance range at $2.58, up 66% year-over-year, more than double the growth rate of revenue, highlighting the operating leverage and our ability to translate that into earnings power.

In Q1, cash flow from operations was $503 million and free cash flow was $401 million. During the first quarter, we returned $302 million of capital to our shareholders with $200 million in share repurchases and $102 million paid in dividends of $0.52 per share. Q1 diluted share count of 200 million decreased by 3 million shares or 1.5% year-over-year.

Our balance sheet remains very healthy. We closed the quarter with $3.6 billion in cash and short-term investments and $2.5 billion in gross debt outstanding, resulting in a net cash position of $1.1 billion. Inventory expanded both year-over-year and quarter-over-quarter as we manage supply and inventory levels to support growing demand. Inventory turns were 6 down sequentially.

Overall, Q1 was an excellent start to the fiscal year, highlighted by strong revenue growth amid heightened AI and cloud-driven storage solutions demand. Combined with our disciplined execution, our revenue growth drove meaningful operating margin and EPS outperformance and robust cash flow generation.

Now turning to non-GAAP guidance, starting with Q2. We expect revenue to be $2.1 billion, plus or minus $75 million. At the midpoint, this implies 23% year-over-year growth. We expect gross margin to be in the range of 67% to 68%, sequentially lower, primarily driven by higher product revenue mix as a percentage of total revenue. We expect operating margin to be in the range of 30.9% to 31.9%. We expect earnings per share to be in the range of $2.54 and $2.64 with a midpoint of $2.59.

Turning now to full year fiscal 2027. We remain confident in the strength of our portfolio and our ability to execute in the current environment. Strong demand and continued business momentum reinforce that confidence and support our increased outlook for the year. We are raising our fiscal year revenue and EPS guidance. We now expect fiscal year 2027 revenue to be in the range of $7.975 billion to $8.225 billion. At the $8.1 billion midpoint, this represents 17% year-over-year growth and an increase of $650 million compared to our prior guidance. We expect gross margin to be in the range of 68.1% to 69.1%. The revised range primarily reflects a higher expected mix of product revenue compared with our prior guidance. At the same time, our fiscal year 2027 product gross margin expectations have improved slightly, while the underlying gross margin outlook for the rest of the business remains largely unchanged. We are raising operating margin to be in the range of 30.3% to 31.3%. We are raising earnings per share to be in the range of $9.73 to $10.03. At the $9.88 midpoint, this represents 22% year-over-year growth.

In closing, as we look ahead to the rest of fiscal year 2027, we remain confident in our strategy and disciplined execution. Our focus stays firmly on delivering strong revenue growth and profitability strengthening free cash flow and building long-term value for our customers and shareholders.

With that, I'll now turn the call over to Kris for Q&A.

Thanks, Wissam. Operator, let's begin the Q&A.

[Operator Instructions] Your first question comes from the line of Joseph Cardoso with JPMorgan.

Maybe for my first, if I could. George, you called out accelerating purchase decision and pricing benefits as well as structural improvement in underlying demand at the same time. Can you maybe just help us through the key drivers that is helping to distinguish between those dynamics? And what drives your confidence around maybe the more durable demand part of that? And just particularly in the context of the outlook, which implies at the time heading into the second half of fiscal year? And then I have a follow-up.

Thank you for the question. We had an exceptional start to the year. The demand profile was broad-based and we saw strength across every customer type, by size, medium, small public sector. We saw it across all the geographies, and we saw it across industry verticals, workload solutions, on-prem, Keystone, cloud. So super strong broad-based portfolio strength. I think when we distinguish the 3 buckets, clearly, what we saw in the quarter was counter to what we see typically when prices of silicon and commodity costs go up dramatically, customers generally lean into tech refresh. We saw into maintenance and non-refresh. We saw the opposite. We saw much higher than the anticipated strength across all classes of customers. Within the largest customers we saw some pockets of accelerated purchasing. But in many of those customers, we also saw them for less priority workloads and use cases be more moderated in their buying behavior as is typical. And then we saw clearly as commodity prices have gone up, we have adjusted our pricing, and you could see that in the outperformance in our product gross margin relative to our guidance, which is reflected in our ability to capture higher pricing.

No. Got it. George, I appreciate the color there. And maybe just a quick follow-up on the last comments you made. I just wanted to get a update or a clarification on how you're thinking about. I think you believe -- I believe you guys called out product gross margins troughing in the first quarter itself. Is that playing out? And then maybe more specifically, are you realizing the full benefits of the flow-through of the pricing actions you've taken and whether that's already played now in 2Q? Or should we expect that to there will be a tailwind going out into the 3Q or 1 of the subsequent quarters?

Yes, great question. And so in Q1, we did outperform our expectations with respect to the product gross margin, as George mentioned. We did have a bit of a favorable product mix associated with the various customer types and the geos that we serve. And so it did help us a little bit.

As we think and we look forward to Q2 and the rest of the year, the outlook very much on product margin has improved slightly relative to our prior guidance that we've provided 90 days ago. And so that's sort of an incremental positive, which basically says we have a bit more confidence in our ability to recoup the incremental costs that we're paying albeit probably won't be at the same levels we saw in Q1, but I would stress that it would be -- we're anticipating or -- and projecting it to be better than we thought it would be 90 days ago for the rest of the year.

Your next question comes from the line of Mehdi Hosseini with Susquehanna Financial Group.

Yes. I also have a question with 2 parts. Georgia, help me understand how would you break up your customers' investment and splitting modernization, upgrade of existing installed base of storage from incremental capacity added due to AI inferencing?

And my second question is for Wissam. I'm a little bit confused with the product gross margin trajectory. I think expectation was for gross margin -- private gross margin to be ramping in the mid-50% and improve from there. But your Q2 guide implies that we actually may see a Q-over-Q decline. If you could clarify, it would be appreciated.

With regard to your first question, Mehdi, we have seen super strong growth in our product portfolio as well as offerings like our all-flash array, Keystone and our cloud storage. Pretty much across the board, we were well ahead of our expectations. And we continue to see that strength durable for multiple quarters, which is why 1 quarter into the year, we have raised the full year materially, including the second half, right? So really, really strong momentum in the business.

With regard to what we saw, there are AI-specific build-outs, which are, for example, GPU as a service cloud, GPU environment within enterprises and data lakes and modern data lake type environment being built, particularly for GPU usage and for AI analytics. There is, however, also as other people have noted, including the hyperscalers, a broad-based modernization of a variety of adjacent workloads and infrastructures, right? So when you use AI, you also want to modernize your databases, you also want to modernize your unstructured data environment to get them ready, and we saw that happening pretty much across all the industries and all the customer segments. So really strong momentum. We're excited for the year, super confident about our position in the market and the alignment to where customers are prioritizing spending.

And to the second part of the question, Mehdi. Look, we did anticipate -- so maybe I'll explain how we anticipated the product gross margin to be shaped throughout the year, 90 days ago. We said that we would see a trough in Q1, and we anticipate a slight improvement for the rest of the year or gradual improvement for the rest of the year.

Now fast forward to today, we did manage Q1 product gross margin in a really great way. I think we did a great job in execution and we outperformed our expectations for Q1. So that's sort of the first point I want to make.

The second point is when we compare now Q2 to Q4 for the rest of the year to where it was 90 days ago, we're now expecting it to be slightly better. So if you think of the prior guidance had product gross margin in sort of the low 50% range if you sort of -- even though we don't guide every number, but that's why I was implied in the guidance, what's implied now in the updated guidance for the rest of the year in product gross margin is slightly better than that. That's really the -- hopefully, that clarifies and answer to your question.

Your next question comes from the line of Amit Daryanani with Evercore.

I guess just 2 questions from my side as well. I think 1 of the big things that investors are trying to figure out is just the durability of growth that you and everyone also seeing. And if I think about your fiscal year guide, you're also going to do a 26% growth in Q1, ex extra week, you're going to 23% in Q2. And I think it's like 9% or 10% in the back half of the year. Can you just talk like what is driving that sort of deceleration? And is that exit rate in the back half of 9%, 10%, sort of a wide way to think about what the long-term growth should be for the company?

And then George, you sort of talked about you're seeing clear structural improvement in the underlying demand environment. Can you maybe just help us appreciate like what metrics are you looking at or tracking to give you confidence that this is a structural shift versus perhaps prebuying given all the price increases?

I think, first of all, we are 1 quarter into our fiscal year and our approach has been to provide guidance that we feel confident about. We have raised the year materially to reflect the strength of our position and have raised the second half of the year right at the start of the year, right? And so I would not say that we are being cautious about the year. We feel really strongly about the performance. I think as I noted, with regard to what gives us confidence, it is the fact that all of our product lines, all of our customer segments by size, all of the types of commercial vehicles we use multiyear agreements, storage as a service, traditional CapEx transactions as well as the performance through all of our routes to market have outperformed materially and the outlook for the year is very strong. So we feel really, really good about our position both in terms of alignment to customer spend, the overall customer discussions we're having and the expanding opportunities we see across all kinds of customers.

Your next question comes from the line of Krish Sankar with TD Cowen.

Congrats with good results. George, my first question is that you kind of closed like 350 AI and data lake deals this quarter. Last quarter is more like 500. I understand the deal sizes are getting bigger. Is there a way you can quantify how much was the deal size of revenue dollars in the July versus April quarter? And from a bigger picture perspective, how much of your revenues is driven by AI? And then I had a quick follow-up for Wissam after that.

I think it's hard to quantify specifically what percentage of the revenue is driven by AI for 2 reasons. One is there are customer specific AI-specific environment, right, which is what the 350 deals that we said count toward, these are typically GPU connected AI stack connected deals.

That being said, as we and others have noted, AI is now driving a broad-based modernization and replatforming of the data infrastructure stack, so that you can support the needs of high-performance, inferencing use cases, the ability to build cross-application kind of data infrastructure and that is reflected across the strength of our business. So 350 were AI stack specific use cases, but the overall performance of the business reflects the influence of to modernize the entire data infrastructure. And we had since many years ago that we had started to see that momentum acceleration. We saw that in Q4. We are off to a super start in Q1. Our outlook for the year is very positive, and we see really good momentum across our entire portfolio.

Got it. And then Wissam, a quick question. Your component costs are going up. So is your inventory levels. I'm just wondering, when you look at your products, you kind of spoke about the product gross margin, what is the equation you're solving for? Is it managing product mix or price capture to generate more gross profit dollars? And where are most of the inventory dollars spent on?

Yes. So Krish, we did exit Q1 with a slightly higher inventory, but that's because, obviously, we continue to manage our supply and secure supply to be able to secure product for the demand growth that we're seeing. What we're basically focused on is the total gross profit for the company. We managed the total gross margin, but also the total gross profit dollars. And as you can see, as the top line grows, we're seeing gross profit dollars growing almost a similar pace. That's because this is what drives really the earnings power of the business. The -- I think this is best demonstrated when you also sort of take it down to the operating margin line. And you can see how basically any time where we upsided gross profit and gross margin, we tend to generate quite a bit of operating margin leverage. So I hope, this answers your question.

I think 1 of the things we have also -- one of the things we worked on to provide customers with the right solution for their use cases, I think we have started to see again the resurgence of hybrid flash in our portfolio and we anticipate a much stronger contribution from hybrid flash. So we're, as Wissam said, we're trying to solve as many customer problems with the right mix of portfolio and manage the overall business for gross profit dollar growth.

Your next question comes from the line of Asiya Merchant with Citigroup.

It's Mike Cadiz for Asiya Merchant at Citi. So my first question is regarding pricing. So as pricing actions begin to flow through and materialize in the quarter -- in quarters, how much of the expected pricing benefit do you think has been realized? And are you seeing any change in demand elasticity albeit early on?

I think with -- I'll take the demand question and Wissam can address the pricing capture. I think with regard to demand, listen, we have always believed and continue to believe that customers budget in dollars. What we are seeing reflected in the market is that the overall budget priority for data infrastructure and storage has gone up significantly in our customers. Within customers, for example, there are use cases where even at a higher price, they will be prioritizing spending on that. But within the same customer, they may defer until a future quarter a less priority use case. And we have seen that in our customer base. In some of those customers, they have also decided to go from a flash-based solution to a hybrid flash-based solution for the lower value use case, right? And so I would say that the most important thing that we have seen is unlike in prior cycles with the significant increase in pricing, we are actually seeing broad-based infrastructure spending, and we believe that it is correlated with and the modernization requirements of AI.

Yes. And with respect to the delay between the pricing actions and when we start seeing it. Look, we've taken actions to be more agile in this environment. So the impact of price increases should materialize sooner than in the past. In the past, for instance, it would take probably 2 to 3 quarters to start seeing it. But now we're seeing it much earlier.

Your next question comes from the line of Erik Woodring with Morgan Stanley.

George, I just want to maybe press you as a follow-up to Amit's question earlier, which is I realize we're just 1 quarter into the year, it's early, but your second half revenue is usually like high single digits versus your first half. And you're guiding it down. And so I understand the desire to remain conservative and provide a guide that you can hit. But given your qualitative commentary about demand, like why couldn't you beat those expectations by 10%, 20%? I just want to make sure we're not missing anything, just as we think about seasonality from the first half to the second half and anything that could be maybe an offset to way that -- to a way that we're thinking about normal seasonality? And then a quick follow-up, please.

Yes. So Erik, this is Visa. When we think of the seasonality, if you adjust for the extra week in Q1, we are now roughly seeing -- looking at 50-50, maybe a little bit -- when we're talking around in here, a little bit more than 50% in the second half, a little bit less than 50% in the first half. I mean you can do the math. But that's just basically based on our visibility at this time. We do, however, see as George mentioned in his prepared remarks, a really strong structural improvements in the demand. It's broad-based. It's driven by AI workloads. It's driven by modernization, and we basically are looking at that being the driver of revenue for the rest of the year.

We have 1 quarter in, Erik. We feel really good on our business. We've raised Q2 guidance. We've raised the full year guide. We'll tell you more as we play through the year. We are super confident about our position in the market, and we'll get more as we play through the year.

Awesome. Thank you, George. I can hear it in your voice. So I appreciate that, guys. And then Wissam, just 1 clarification point. The comments that you make about product gross margins and your ability to maybe get a little bit better capture here in the first quarter, is that purely a function of pricing and pricing confidence and kind of confidence in the demand in elasticity response there? I just want to make sure that we think about your ability to maybe capture slightly better product gross margins, it's because it's a function of price and not necessarily the other side, obviously being the [ bomb ] inflation.

Yes. Look, I mean, my comment is based on everything we see. As we look at -- as we form our outlook and we look and we project the business, we put everything that we know in our numbers. And that's really what my comment is about. It has to do with pricing. It has to do with [ banks ]. It has to do with multiple factors that basically go -- and of course, the cost side of the equation, that basically goes into forming the funnel, basically product margin.

Your next question comes from the line of Param Singh with Oppenheimer Inc.

So you've done a couple of acquisitions -- niche acquisitions recently. And I wanted to understand where do you see gaps in your technology portfolio today? And where does this make sense to buy versus build? And then I had a follow-up.

I think we are disciplined in our approach to acquisitions. The 2 that we have talked about are tied to cloud and AI. And they provide us with differentiated offerings to accelerate our position in each of those use cases.

With regard to DataPelago it is really about AI-driven analytics and the inferencing where we can accelerate the application processing adjacent to storage providing customers a better inferencing solution top to bottom.

With regard to JetStream, which we acquired at the start of Q2, it really strengthens our already strong position in VMware migrations to the cloud. We have really good solutions for customers that want to use NetApp to migrate. But for customers that are non-NetApp on-prem, we have a really good starting point with a DR in the cloud solution. So those are the 2 areas, AI and cloud that we're focused on, and we feel good about the technology portfolio that we have and we are doing tough ins to enhance the overall solution value to customers.

Understood, George. And then as my follow-up, your guidance implies that OpEx would go up as a percentage of revenue from the Q2 level in the back half. So I want to understand why there is an increase in investment in the back half? And then where would that actually go with it, is it R&D or sales and marketing? So if you could give some color on the investments that you're thinking about for the rest of the year, that would be great.

Yes, Param, this is Wissam. So the increase is driven really by a couple of areas. One, as we outperform, we're getting -- we have a slightly higher variable compensation accruals. And then the second is really continuing to invest in our AI solutions. But when you look at the overall OpEx for the year and you sort of look what is implied in the guidance, year-over-year is still a -- year-over-year increase for the full year, it still shows basically that the increase is less -- much less than the half of the revenue -- projected revenue growth. So we continue to be very disciplined in how we invest and how we look at our OpEx. That's, of course, because operating leverage and driving operating margin is a key element of our business model.

Your next question comes from the line of Wamsi Mohan with BofA.

I have a couple of clarifying questions. I think as you sort of think about the full year, a, would you say that your expectation of hybrid versus all-flash is similar versus your prior expectations? Would you say that given what you're seeing with supply that the upside that you're guiding to would be more driven by 1 versus other? And I have a quick follow-up, too.

Listen, I think that if you look at the overall business, all-flash performed exceptionally strongly in Q1, right? It was up 47% year-on-year. So when we look at the overall year, all-flash still blows out our prior expectations. Hybrid flash, when we had planned the year, we were cautious about customers' spending on non-mission-critical workloads. That is typically what they do, right? When you see price increases, customers pull back on capital equipment spending, we are seeing broad-based acceleration in capital spending across the board. And we are -- which is a sign of the AI super cycle, but then we are also seeing customers buying more hybrid flash. I would say if you look at the relative comparison. Listen, all-flash is super strong and will still be the predominant part of the acceleration in our business.

Okay. And as my follow-up, just is there any way you could give us some sense of this magnitude of these accelerated purchases. Going back to Erik's question on half over half seasonality, you guys obviously sound very confident on the outlook over here. But could you just help us through -- think through mathematically, how large was the accelerated purchases or the contribution there, which we should factor in as pull forward? Or is that just acceleration of demand that is coming not necessarily from the second half?

I think first of all, we're not going to break it out, right? I think what I would tell you is the number of customers and the percentage of our customer base that have the financial flexibility to do accelerated spending is very small, right? These are very large private companies usually, not even public sector organizations have the flexibility to do accelerated purchasing. So it is a much smaller percentage of customers than you would imagine, right? Very small percentage. What we saw in the results in Q1 was certain transactions that we expected to be built out over multiple quarters happening within a quarter. That doesn't mean that those same customers didn't defer other projects to accommodate these projects, right? And so I would tell you that it's a percentage of our business, we did not see it in Q4, but we saw it in Q1, and we felt like it was appropriate for us to acknowledge it. But it is not a material part of the overall business. In certain clients, as we talk about they are kitting out multiple data centers. They wanted to kit out -- they said, let's do 2 of the 4 that we want to do faster this calendar year and we'll come back for the other 2. We had expected kind of a more gradual build out of those. That is not common and widespread across the customer base.

Your next question comes from the line of Steven Fox with Fox Advisors.

I was curious if you could talk a little bit more about new customer wins. You mentioned that, that was also contributed to growth this quarter. I was curious from the standpoint of what maybe you're leading with and whether it's what kind of products, et cetera, and whether you're having success in certain verticals that we should be aware of?

Thank you for your question. We saw strength, as we said in our prepared remarks, in new customer acquisition, a new workload expansion within existing customers and stronger-than-expected tech refresh in our business. With new customers, we typically attack from 2 different vectors. Ones are kind of cloud-based solutions or our purpose-built block optimized solutions for the corporate and mid-market customers and with our unified sort of simplify your infrastructure, unify it on 1 platform solution for the enterprise. And we feel really good about our position with both new customer counts, new customer dollars as well as expansion within existing customers we're all as well ahead of our internal forecast.

Your next question comes from the line of Katherine Murphy with Goldman Sachs.

In lines with the following question regarding new customer acquisition through new workloads and new product categories, can you talk more about the success you're seeing in the AFX platform? I know you highlighted a public sector win in the quarter, but anything to share just on the momentum there and how that may be contributing to outlook for the full year?

AFX is built for the very high end of the performance and scale environment. So the number of transactions are not as many but the size of the transactions are material. We have really focused it on the AI GPU as a service category, and we're seeing good progress. We talked about neo clouds. We talked about the government agency that's building a private AI cloud. And so good progress. It is being certified across a large number of customers, and we're excited to continue to make progress on the solution.

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

Yes, maybe a follow-on, and then the second one. On the public cloud business, 19% growth ex the extra week is still very good growth rate. We've seen it kind of around that number for the last 1.5 years or so. So just curious, is there anything in the pipeline or new solutions or customer bases or anything that could maybe accelerate that number?

And then second, on Keystone, I did want to touch on that, you talked about growth and strength there. Looking at the professional services line and backing out an extra week, it doesn't look like it grew that much and we're kind of seeing or hearing about more as-a-service purchases in that area instead of paying up for more expensive hardware-based solutions because of the NAND price increases. So just talk about what you're seeing with those as-a-service solutions surprised we're not seeing a little bit more acceleration in that.

I think with regard to the public cloud business, listen, it stayed in the high teens as we have scaled the business. So I'm encouraged by the sustained momentum of the business. Obviously, the cloud storage business performs at a much higher level than that. And so we continue to see strengthen the [ 1P ] or the first-party end marketplace storage services.

With regard to the things that we're bringing out, please come to Insight. We have more AI solutions with the hyperscalers. We have more use cases combining data on-prem with hyperscale cloud and we have brought block storage and lower cost price points in multiple clouds, including Google and Amazon. So really good progress across the portfolio in cloud.

With regard to Keystone, without giving you a specific number, I will just say our Keystone business grew roughly in the same ballpark as prior quarters and in the same ballpark as our overall flash business, which is a really strong number. So we're excited about the progress of the business. We are seeing more new customers that we are targeting with Keystone, and we are bringing more capabilities to that part of our portfolio.

And Tim, just to add to what George said on Keystone, keep in mind, Keystone didn't really benefit much from the extra week, it benefited a very, very minimal amount.

Your next question comes from the line of Victor Chiu with Raymond James.

So inventory nearly doubled sequentially. Just kind of wondering, is that a function of trying to secure NAND and other components against expected demand? And maybe how much you have the inventory increases earmarked to specific customer orders and backlog. And a follow-up there, does the inventory buildup kind of give you better visibility into the remaining year and into next year?

Yes. I didn't get the second part of the question. But on the first part of the question, most of the inventory [ with that ] some strategic purchases and basically us managing inventory to be able to ship to our customers based on the strength of demand. So I wouldn't say -- in my mind, this is a positive. We're really making sure that we have the supply to continue to drive the growth in the business. I'm sorry, could you please repeat the second part of the question?

Yes. Does the inventory buildup kind of give you better supply and cost visibility, I guess, throughout this year and into next year?

Yes, typically...

You know, pricing is going to be less of a function in healthy growth, I guess.

You're correct. Typically done.

Your final question today comes from the line of David Vogt with UBS.

Great. So I'm going to keep it brief words. You've answered a lot of questions. But just a question on demand as we think about the next couple of quarters, is there any sort of seasonality that you saw in the most recent quarter, particularly as we go into subsequent quarters from industry verticals? I know if we go into the October quarter, obviously, there are customers that have different fiscal year-end. Did you see any sort of demand maybe slightly different seasonal demand patterns in the quarter? Because I know I think Wissam mentioned that there was a little bit of a pull in. I'm just trying to get a sense for how do we think about sort of the normal seasonality? Maybe this isn't normal, but how do we think about the seasonality of demand as we move through the back half of this year? .

Listen, I think our outlook, if you adjust for the extra week in Q1 is roughly in line with typical seasonality. And as Wissam mentioned, second half and first half are within spitting distance of our typical seasonality, right? I think we have a really broad book of business, David. And so the movement of any 1 customer is not going to affect the broad book of business. I think the 1 exception to that is typical U.S. public sector seasonality, right? And that you are quite aware of. So we feel really good about the momentum in the business. Listen, as we said, exceptional start to the year, we had strength across pretty much every part of our portfolio across every customer type, on-prem and cloud, every geography, we've raised the full year guide. We've raised Q2 guide. We feel really good about the momentum of the business, and we'll tell you more as we get through the year. So super excited.

Thank you, David. I'll pass it over to George for closing comments.

Thanks, Kris. With broad-based momentum, we delivered an exceptional start to fiscal year '27, exceeding our guidance on every metric, strengthening our conviction in the durability of demand and underpinning our confidence in our materially higher expectations for the year. The NetApp platform addresses a wide range of customer requirements, helping to operationalize AI workflow and accelerating cloud journey, driving new customer wins and deepening existing relationships. Our ongoing innovation continues to strengthen the value of the NetApp platform and at our upcoming Insight conference we'll showcase new solutions that unlock value for AI and in high-growth markets. We're building a durable foundation for long-term success, delivering sustained value for our customers and shareholders.

This concludes today's call. Thank you for attending. You may now disconnect.

All right. Good afternoon, everyone. Really it had with us with Sam Jabra, CFO of NetApp. Sam, thanks a lot for your time. Before I get into all the questions that I have, I'm just going to read the Safe statements for NetApp. .

Today's discussions may include forward-looking statements regarding Net's future performance, which are subject to risk and uncertainty. Actual results may differ materially from the statements made today for a variety of reasons described in our most recent 10-K and 10-Q filed with the SEC and available on our investors website at www.netapp.com. We disclaim any obligation to of information in any forward-looking statement for any reason. That out of the way. Sam, thank you very much. Always appreciate your time.

Maybe before I kick into all the questions that I have and there's a lot going on, you folks reported earnings a week ago or so. Maybe just spend a couple of time to use a quick recap on the saw in April quarter, you obviously gave a full year -- just spend a couple of minutes on just recapping the audience and we'll take some questions from there.

Let's -- first, thank you so much for having me. Happy to be here. So yes, we did report last week. We basically reported revenue uptick relative to last year as well as sequential. We did see some nice broad-based strength in demand throughout the quarter. granted. We have also seen some commodity price increases. And so when you look at it, there's -- there were some accelerated demand as well.

However, our Q4 numbers did not reflect the -- who had minimal impact in them from those. We are seeing some good momentum in the business with the enterprise IT spending improving as well as enterprise AI activity as well improving. And so this is what we -- when we looked at the trends going into fiscal '27, we basically put all of this information together so that we can provide the best outlook, and that's what our guidance reflects. .

Got it. And before I get into all the questions around your guide, maybe the 1 thing that did come up a bit is just the Google relationship. I know you folks obviously had a press release on this on April 16. You called it out a couple of times around the ELA.

Can you just talk about what is this relationship with the Google Distributor cloud really entail? How long is the ELA and kind of what goes into it?

Yes, of course. And so -- this -- the nice thing about the Google agreement, it's in the -- it is in the hybrid cloud segment. This is the way to think of it. It's -- we had -- so we started with enterprise agreement with Google back in October 2024. And so what we announced in Q4 is an expansion in price agreement. It is for Google distributed cloud environments that are more secure environments addressing sovereign and highly secured type of use cases, think of things like more of a public sector type applications or more highly secure as well as potentially in national security type of applications.

The nice thing about this agreement is it pretty much gave us a couple of things, some TAM expansion because this is an area that we haven't necessarily basically expanded where we -- our footprint there. In addition, in that show our capabilities in terms of security and the ability to sort of provide data infrastructure for very highly secure environment. We did call it out in the quarter, it had a nice impact to our product revenue as well as our product across a -- as we think through it going forward, it is a 4.5-year type of agreement. And so going forward, it will have the typical type of hybrid cloud agreement where we have hardware, software and support. And so there will be some support revenue attached to it.

There will be some product revenue in the future as when we sort of put more deployment. But we -- but those would be part of the normal course of business. And as we think of the economics over the duration of the agreement, it's a typical hybrid cloud type of agreement economics.

Got it. Perfect. One of the topics that's been coming up a fair amount, especially after your earnings call, but also a bunch of other earnings call has been this consumer how much is the contribution that you're focusing is down by pole lines versus truly good end demand, right?

And I think you folks had like 12% growth in Q4. I think Q1 was guided for 17%. There's an extra week over there. But demand is much better that I think folks thought. How do you kind of think about end demand trends versus potential pull-ins that could be helping you? Just talk about how do you segregate those a bit?

So when we think of the business dynamics, we did we're seeing broad-based strength in demand. And now any time price increases, there could be different behaviors in the market by customers. some customers could accelerate their demand, but others may not have the same flexibility could put some of the purchases on hold.

So it's a mixed bag in terms of impact to the business. But when we look at really what's the underlying drivers, we think it's -- we think we're seeing some improvement in enterprise IT spending partly driven by enterprise AI spend as well. Now when you put it all together and they look at Q1 and the fiscal guide. Obviously, we are also aware of potential accelerated demand pull forward. And all of this is reflected in how we guided our business.

Got it. Memory is other topic that obviously has been kind of front and center for you and I'm sure for everyone else. Just talk about what are you seeing from a memory environment right now? Do you sort of expect this to be a multiyear issue? Or how do you kind of think about navigating this, and if it is a long-term issue, how is NetApp preparing in terms of supply commitments and agreements and maybe a drive on the you obviously gave a fiscal '27 guide. Do you have the bids, the LTs in place to ensure you get the capacity you need.

So when you look at sort of what happened over the last couple of quarters, we saw commodity prices increase at a very fast pace. In parallel, obviously, we had -- we implemented price increases last quarter to protect our profitability. And really, the way it works is we pass the commodities to our customers as is customary in the business we operate in or the industry we operate in.

As we think through fiscal year 2027, we look at this basically impacting mostly our product gross margin. And we think Q1 could be the trough, and we may see some we should see some gradual improvements from there for the rest of the year. And by gradual improvement, I don't mean step function improvement. I mean, sort of a bit of improvement as the year progresses. If we continue to see commodity price increases, we will be taking additional pricing actions to protect the profitability of our business.

The way we look at it is, obviously, we look at the over portfolio, and we adjust our crisis, depending on where we see cost increases. With respect to the supply environment. Look, we've -- we're operating -- we're clearly operating in a supply-constrained environment. There are certain shortages that show up every now and then, but we've been navigating it so far successfully. We -- when we look -- when we -- the way we operate with our partners and our suppliers is we work with them on our outlook, and we understand what their supply availability is, in some cases, we have commitments in terms of deliveries for quite some time. At this time, we believe we can secure the supply needed for us to drive our outlook for fiscal '27.

Got it. every company has their own kind of set of ways that they're going through memory mitigation efforts, I would say, pricing recently, 1 of the tools, but I think there's other tools that folks have talked about, you some beyond the price increase, which I'm sure everyone is saying. What are the other options or vectors you have in terms of managing the memory headwinds? And how are you mitigating it beyond the price increase? .

I mean, we're -- we -- of course, I mean, you mentioned price increases, and that's something we look at. But we also have a very broad portfolio, which offers us and gives us opportunities to serve our customers in many different ways. When you look where the increases happen, the most -- they happen mostly on the all-flash side portfolio simply because this is where the commodity prices increased the most. But we saw some increases on the hybrid hybrid flash side of the portfolio, but not to the same effect. And so where customers are -- or maybe cost sensitive depending on the workloads, we're happy to offer hybrid flash solutions for their data infrastructure. .

But we also are happy to work with them on a consumption model, if they so choose or subscription model. We have Keystone, our Storage as a Service there, it is sort of -- the spend is spread over a few years, and that basically provides a different model for customers who want to sort of not put up the cash outlay upfront. In addition, we have our public cloud segment, which is a great business that's on the hyperscaler side, where we're happy to also offer that. And for customers who use multi-cloud strategy, and they have -- they use NetApp on their hybrid cloud as well as on the public cloud. This is sort of -- it basically gives them a whole suite of options to choose from, and they can across the whole, basically, a gamut, they can use also ONTAP, which is our data management operating system.

Got it. From your perspective, how are customers contending with this memory issue, right? Are they looking at hybrid or HDD or in saying it's slower, but a better alternative for me, maybe given what's happened in the pricing right now there saying, we'll just buy storage or less bits in our box. I'm just talk customers dealing with this because it's a quite a bit of inflationary pressure for them as well.

It's -- I would say we're seeing various approaches. It depends on the type of customer, the size of their business, the workloads, what they're trying to really achieve and what their goals are. For some of the customers who have already a hybrid flash estate, and they don't necessarily need to go to all flash. That could be an option. It could still -- we could still upgrade or extend their data infrastructure using hybrid cloud for other customers who want to be sort of on the forefront of enterprise AI, they may want to go with more of a high-performance type of all-flash or high capacity type of all flash.

So I would say it all depends. Now in Q4, for instance, we didn't see much demand elasticity. We've always thought and we've always said that our customers budget in dollars, and this is how they basically deploy their budgets and to basically buy data infrastructure. Some of them may see the need to upsize depending on their business priorities because at the end of the day, they would reallocate their budgets based on business priorities. Others could choose to make different decisions, either sort of downsize or choose to delay their purchases. It all depends on their financial flexibility as well.

Fair enough. I think you folks disclosed this kind of AI demand number, which is like some of the AI deals you signed, I think, every quarter, and it was like 500-plus deals on the last call, which is pretty big step up from the prior quarter is like 300, I think, right?

So when you think of these AI deals that are going up dramatically, what is it that these enterprise customers is in the most enterprise -- what is the bottleneck they're trying to solve with storage when it comes to AI training because they do think storage is a pretty big bottleneck for them to deploy it in-house? And where does NetApp fit into that narrative?

So we do break out the various types of engagements when it comes to enterprise Half of the engagements that we saw in Q4 were on data preparation and data lake modernization. The other half was split in 2 categories. somewhat for inferencing and some on model fine tuning. The -- so when you think of data lake modernization or data preparation, it could be situations where some of the customers have their data siloed into various silos, and they want to sort of have a unified view of it and they basically are modernizing their infrastructure to enable them to have access to their overall data estate wherever it resides in the world and -- or in their sites.

So that's sort of 1 of the potential use cases. It could be that customers are utilizing AI much more from a day-to-day perspective in their activities or they're starting to do that, and that's sort of where inferencing comes in, they want to be able to utilize their proprietary data that sits on their own storage devices, and so they want to upgrade that to be able to utilize it more for AI use cases. There's multiple reasons why and how they could be using -- they could be needing higher performance or high capacity data infrastructure. that we offer.

Is the way to think about how big is the potential when it comes to these AI-related revenue opportunities? Or how big could AI revenues get for NetApp over time? .

Look, if the -- almost every -- I mean I went from experimentation to almost becoming a top priority across the board. And so we view it as incremental opportunity for us. It will be a nice tailwind as more and more enterprises sort of implement AI. It's, I would say, a bit early to quantify -- but it does feel like there's a certain momentum that we're feeling in the business. Yes, it's -- the way we think of it is -- it would present potentially a tailwind. How much of that is quantified today, it's probably too early to talk One of the products that you folks have, the AI data engine, which was, I think, GA recently as last quarter at fiscal Q4 for you folks.

How should we think about what does AI data engine really do for customers? Is it more for a brownfield way to get more of the wallet share? Just talk a little bit about what's the intent of this, what the monetization does this look like over time?

I mean the way we think of data is that it has certain gravity, and we would like to bring AI to the data as opposed to bring data to the -- and so this is the purpose of IDE. It's enabling our customers to understand much more about their data to provide more data about their data for them so that they can 1 improve the lit of the data that they have on their data states but also be able to utilize data more effectively for AI use cases. And so initial indications are very positive from AIDE.

We see really a couple of areas for us here and how this could work, at least based on the initial views -- on 1 side, we're -- when we engage with customers who are already on existing customers who are already on NetApp infrastructure they basically, that could potentially create some additional software or could be some software subscription model, where we could help them improve the quality of their data, their visibility into the data and potentially also attach that to storage. And there's also some nice uptick of interest from new customers who are wanting to have a better understanding of what AI does -- and that could present opportunities for us where we could basically not only delivery IDE, but also store storage solutions for that. So it's -- it's an exciting area of opportunity for us. .

Your public cloud business has been doing extremely well. I think it was up like high teens, 17%, 18%, excluding the divestiture dynamics, right? Just talk about like what's sort of driving the growth rates on the public cloud side? And then I think you always said that, hey, there's a healthy mix of new customers and existing customers. Where is that SKU going? And what's really driving the strength there? .

Yes. So as you noted, public cloud for us grew around 17%, 18% in fiscal '26 when we exclude spot from the previous year numbers. At the core of that first party and marketplace, which is really the drive -- the growing -- the growth engine of the public cloud business grew at around 30% year-on-year. As we go forward, we anticipate to see similar type of dynamics. And now that the first party and marketplace is it's become even a bigger portion of the business that should drive really a nice growth profile going forward. It is also a very highly profitable business for us. I mean, we -- our target -- gross margin target range is 80% to 85%, and we've been operating at the high end of that range for a few quarters now. When you think of the customer mix, yes, it is a mix of existing and new customers. .

It does also offer us the opportunity to attract customers that typically aren't necessarily serviced through the on-prem business. customers who are cloud native or basically started on the cloud that typically wouldn't have -- I wouldn't want to sort of -- wouldn't have NetApp on their on-premises are exposed to NetApp and to ONTAP. And so it does sort of track a new set of customers. It's a wide range of sizes, wide range of type of customers, I would say. But -- the nice thing is it's growing at a nice pace, and it is a highly profitable business for us.

And just on the margin side, right, I mean, I think it was like north of 85%, I'm not receiving last quarter. It was better than what you folks had thought. But is that the right -- I mean, is that the right margin framework to think about? Or what are the puts and things that drive the margins, like first body versus not, it appears like what drives the puts and takes around it. .

The long-term range we published is 80% to 85%. And as you correctly noted, we've operated slightly higher than that. We were like 85.7% in the last quarter. It's too early for us to really revisit our range. We think that the range is still valid for the next -- for some time. because the way to think of it is there's a mix of things. Obviously, it's a highly -- it's growing at a nice pace. And so -- and if we need to, for example, the -- in a portion of it, we do have some some assets associated with the capacity.

And so if we do need to refresh some of those assets, we have enough -- we think within the range where it is appropriate for us to refresh as well as continue that growth going forward? Could it be -- could it move in a different direction? Potentially, I'm not going to say no, but it's a bit too early for me to update the range. .

Got it. Keystone is something you talked about a little bit earlier, too, but it's certainly a part of the toolkit customers have to navigate with these memory challenges. From your perspective, are you seeing customers willing to say, in, I don't want to do a CapEx model. I'll do an OpEx model and go with Keystone or are they sort of different tracks that it's harder to get them to convert to Keystone versus CapEx? .

Keystone has been growing at a D&I space. I mean fiscal Keystone revenue was up around 65%. So it is a nice -- a smaller portion of our business, but it's growing at a nice pace. I mean, yes, our Keystone Storage as a Service has done really well. It continues to build momentum. And it is an alternative or a potential alternative for customers who don't want to put the cash outlay or put in place a bigger CapEx upfront.

I don't think we've seen so far a real trend in that month, but we obviously are ready for it. If our customers really want to sort of opt for storage as a service type of model as opposed to a CapEx model. And this is -- in some ways, this is the nice advantage, the breadth of our portfolio offers. We're able to do all flash, HDD Keystone, public computing, many options. As long as we're able to sort of serve our customers and maintain that sort of customer life cycle revenue.

Fair. Is there a way to think about on Keystone, like what's sort of the unit economic profile for a Keystone engagement versus a kind of a traditional engagement on a product base over 3 years of how long you want to think about like what are the unit economics of that in Keystone versus on a traditional sale?

I mean the way to think of it, I would say probably over a 3-year period, the economics are more or less equivalent. Longer than that, probably Keystone has a nice advantage because obviously, you extend that sort of revenue stream. But the -- but for us, what matters really is what solutions are we solving for our customers and how we solve is the best way possible, right? .

That's fair. Your fiscal '27 guide, right? Obviously, you got for revenue growth to be in the higher single-digit range on a top line basis. EPS, I think closer to $9 number, right, essentially. But to me was notable as it was like, hey, you folks talked about gross margins being down 220, 230 basis points year-over-year. But operating margins, I think we got it down like 50 basis points. So clearly, you're doing a lot on the OpEx side.

So let me just spend a little bit of time on what are the OpEx controls you're executing on to shield your bottom line so your free cash flow? And then are these durable savings? Are these transient savings? How do we think about that?

I think it's -- the outcome of that. I mean when you look at the transition year-on-year and how sort of the top line at the midpoint is guided versus where the operating margin is guided. The outcome is a combination of both some nice uptick on the revenue as well as basically disciplined management of OpEx or at least how we think of we project our OpEx and execute our business, generally speaking, when we look at our OpEx in the future, we plan OpEx growing at less than half of the growth of the revenue growth. .

And that's sort of done in a way to allow us to maintain certain operating leverage in the business. And so fiscal '27 is pretty much following the same type of approach. When we look at the OpEx itself, we're looking at it obviously as an investment. We continue to invest in our sales capacity and our go-to-market capabilities. Would it make some nice investment in fiscal '26 where we did say at the beginning of the year, we were adding some sales capacity. We did some of that.

We continue to think that the opportunity for us is there to drive top line growth, and so we'll continue to do some of that in fiscal '27. And on the R&D side, we want to continue to invest in the technological capabilities that we have, the differentiation, the AI data solutions. But we do that based on going after the highest ROI type of projects. And in parallel to look at the rest of our investments and we deemphasize areas that we think are not -- are either not driving the growth we want to see or they're not necessarily expected to deliver on the return. And so we do that on a regular basis.

When you sort of then combine the top line growth with really driving OpEx at a much lower growth relative to the revenue growth, that gives us some operating leverage, and that's how we plan the business.

Got it. beyond the whole AI investments that all the hyperscalers is doing in more, a recent thing has been like you're seeing a lot of uptick in spend for x86 servers for general purpose service right now. For inferencing deployment, the general there's a lot of demand for x86. I think a lot of enterprise comments are to like Dell, HP and so on.

I guess, maybe the question for you is that historically, when you see this big uptick in compute spend, especially as enterprises storage tends to follow at some point soon after that. Do you expect that kind of historical correlation to hold up? Or think there's something different in inferencing that maybe the lag is longer? Or how do you kind of look at all the server spend and say, we'll get it on the store side at some point.

I think we should -- I mean, when you deploy such an amount of compute. Do you want to make sure that it's run in the most efficient way possible for whatever purpose we're trying to use it for. And so to me, it feels rational that it is rational to see storage capacity follow, because you want to -- not only are you sort of wanting to make sure that they're operating very efficiently. There's going to be some data generated when you start thinking of agenting AI or inferencing.

There will be data generated as part of, obviously, all this process and the data has to reside somewhere. And so naturally speaking, I would expect to see some storage follow-through there. I think it's a bit too early for me to quantify or to even sort of define the time lag. But we're rationally speaking, we should see some of that happening.

Got it. What are your worriers that's been a bit more challenging as being the public federal government, the public vertical, if you may. It's been weak for several quarters for a lot of companies, not just in fairness. Can you just maybe just talk about how big is the federal business for you today? And then what are you sort of expecting from that business in the construct of your fiscal '27 guide that's out there? .

So for us, the U.S. public sector business, which includes the federal business is approximately 10% to 11% of our revenue. This is where it sort of has run for quite some time. Would it see subseasonal sort of movements throughout fiscal '26, except for the fourth quarter where we started to see some really nice uptick. In Q4, U.S. public sector was up almost 20% year-on-year. So there was some nice recovery that we experienced there.

Now that we think there's already sort of the budget passed and there's a little bit more clarity. We think this business should more or less return to a normal type of seasonality for the U.S. public sector. So that's what we should end -- at least that's what we're anticipating going forward.

Got it. you touched a little bit on capital allocation. You folks exited with a very strong balance sheet in Q4, $1.4 billion, if I'm not missing on net cash. Just talk about how do you think about the free cash flow generation for the business and then extend that a bit? And how do we think about our capital allocation as well over time? .

Yes. So when we started talking about the Q4 execution in fiscal '26. We should have actually mentioned how well we did on the cash flow generation. We did really phenomenally well in 2026. The business generated quite a bit of cash and we also obviously continue to do our typical capital return through dividends and through buybacks.

And so going forward, we expect to maintain a similar type of capital allocation where we want to return up to 100% of our free cash flow to our shareholders through dividends as well as buybacks.

The way to think of our cash flow, I would probably -- it should be -- it should follow similar type of dynamics that we've seen in the last couple of years. Our operating cash flow typically tracks our non-GAAP net income and that this coming year should be no different. And so we anticipate to still be highly cash generative.

M&A? Where does that sort of fit into the top process so it's more bolt-on.

Yes. I mean we're a technology business, right? We want to make sure we maintain our technological [indiscernible] advantages. And so if there's a need for us to do anything on it from a tuck-in perspective, we won't hesitate to M&A. That's -- I mean just -- you'd expect that from a technology business like ours. .

Fair enough. And those are all the questions I have some. So maybe I'll turn it back to you any closing comments, anything I did not touch on that we should be aware about as we think about NetApp going forward?

I think we've covered a lot of ground.

Hi, everyone. Thank you for joining us here on day 1 of BofA's Global Tech Conference. Delighted you could all join us here today. I'm Wamsi Mohan. I cover the IT hardware and supply chain space here for Bank of America. Thank you all for coming.

I'm delighted to welcome Wissam Jabre, who is the CFO of NetApp. And I have to be careful because I've known him in other roles prior to that. So well, welcome Wissam, a pleasure to have you over here and excited to hear for the next 30 minutes that we've got with a short amount of time about your outlook on NetApp story.

Thanks so much, Wamsi, and happy to be here and excited to share more.

Yes. And we have Jeriel from IR as well. Oh yes, sure. We'll make sure that we have -- you want to go ahead and cover the disclosure or I can do it, too, if you'd like me to.

That's fine. I'll go ahead and do it. So hey, today's discussion may include forward-looking statements regarding NetApp's future performance, which are subject to risk and uncertainty. Actual results may differ materially from the statements made today for a variety of reasons described in NetApp's most recent 10-K and 10-Q filed with the SEC and available on our website at netapp.com. NetApp disclaims any obligation to update information in any forward-looking statement for any reason.

Excellent. Okay. With that out of the way, maybe I just want to point out Jeriel from IR is here, too, if you have any follow-up questions afterwards.

So what an exciting time to be in hardware, right? And I know you spent a lot of time on software resources within NetApp, and that's a differentiating viewpoint. But for infrastructure, maybe is the right word to use as opposed to hardware, but it is an exciting time to be in infrastructure. So maybe you can talk to our audience here a little bit about how is NetApp participating in this growth in infrastructure that is driven by AI?

So look, we've been sort of looking at and tracking our AI wins for quite some time. And as we disclosed most recently for Q4, we had around 500 of them. And what matters here is really the trend that this has followed. It's more than doubled year-on-year and continues to grow on a sequential basis. So it is a sign that there's more and more activity that is increasing in the enterprise AI space. And for us, this is very exciting because, obviously, it does, in some ways, lead to some of the improvement in IT or enterprise IT spending.

As we look at the infrastructure or the offerings that we have, we do have basically high-performance all-flash solutions that -- where we could participate on the AI side. And we also have our new offering, AFX, which is our disaggregated architecture in combination with AIDE that could also be a good offering for the AI space.

So maybe to step back for a second, right, like you're involved in the domain of data storage, data protection, making sure that the infrastructure runs seamlessly based off all this data growth that's happening around -- we were talking earlier with some companies where we're talking about data growth that's maybe 25% to 30% off of very large numbers. So now we're talking about like some big deployments.

So as you think about the market and your opportunity for growth, what should investors sort of think about in terms of the incremental maybe growth from baseline, growth that's provided by AI? And then where are we within sort of a more general replacement cycle for storage assets? It feels like a lot of the hardware assets are -- have been sweated for some time, and now it feels like they are ripe for a refresh. So I would love to get your thoughts on that.

I mean, look, we've been on that journey of moving towards the all-flash upgrades, if you like, from the 10K hard disk drive for quite some time. And we've seen our installed base basically as of almost churning approximately around 1% a quarter. We're now at around 48%. And so that sort of gave us a nice growth vector over the last few years.

Now when you look at where AI comes in is I think we should expect to see that all-flash transition continue, even though now with the current prices on all-flash and the dynamics that could have a little bit of an impact given the increase in prices. But we have a very broad portfolio that -- where we could offer our customers many alternatives as well. But in addition to sort of that transition, we think that all-flash -- sorry, AI or adoption of AI in the enterprise, especially in the inferencing space and the data preparation, data lake modernization space could provide some nice tailwind in addition to what the industry has been experiencing so far.

Okay. So as we think about this memory pricing, right, and this has been sort of front and central for a lot of customers and organizations to deal with, how are you tackling the memory pricing issue?

I mean, for us, it's an input cost. And what we've done is we've basically had adjusted our prices. We increased our prices in the past quarter to pass the commodity costs as is customary in our space to our customers. And so we look at it from a portfolio perspective, and we adjust our prices depending on the various impact from an input cost.

Okay. And what has been the receptivity to that sort of price increases from your customer base? Are you seeing any change in the customer behavior in terms of maybe trying to accelerate some purchases, maybe pulling forward anything? Like what are you seeing in the behavior of your customer base as you're pushing together some fairly significant price increases, multiple price increases through the course of the quarter?

Yes. I mean in the past quarter, I would say we haven't necessarily seen much demand elasticity. And when you look at the way customers budget, they do budget in terms of dollars. So -- and they do spend their budgets based on dollars. Having said that, any time you have price movements or larger price movements, you'd expect some different behaviors in terms of some accelerated purchasing, for instance, and so on. But for us, in Q4, we really saw a minimal impact to our P&L from any of that accelerated demand. And then when you think of it, not all customers have the financial flexibility to do that.

Yes. Yes. No, that's fair. In your last earnings, you noted like that some large deals came through. I think you press released a relationship with Google that basically was multiyear. So how should we think about that relationship? And what is the way in which it flows into your P&L over a longer period of time?

Yes. So we did note the agreement with Google, which is on the Google Distributed Cloud side that gave us a bit of benefit in product revenue and product gross margin in the fourth quarter. That was really an expansion of an agreement in place that has been with Google since October 2024. And so the way to think of it is it does basically serve the Google Distributed Clouds in the sovereign and secure type of environments. And in Q4, we had some revenue associated with it. And as we think through -- it's a 4.5-year agreement. And so over the next 4.5 years, we will be recognizing some support revenue as we typically do in those types of engagements. And also, we would be recognizing product revenue when we ship the product associated with it. And so that's -- it is included in our Hybrid Cloud segment.

Yes. I can't hurt to see Google raising $80 billion overnight to put in AI infrastructure. So that's kind of nice. Maybe, Wissam, just to like now talk about product gross margins, right? So I think you guys spoke about this on the call that Q1, you see the lowest product gross margins that you expect for your next fiscal year and then it should improve from there. So can you talk about why that will be the case? And what are some of the things that give you the confidence that, that trajectory is the right trajectory?

Yes. Look, at this time, this is what we see. We see Q1 being the trough, and we expect gradual improvements for the rest of the year. And it's sort of -- again, I'm not expecting necessarily a step function improvements. I think gradual improvement. That's because as we progress through the quarter and as we get into the next quarter and beyond, we start seeing more and more of the effect of the price increases that we implemented in the past quarter take effect and flow through our P&L. It does take a bit of time lag typically. We -- historically, it's taken sometimes up to 3 quarters, but we've tightened a little bit our contracts to start seeing the effect a little bit earlier.

Okay. There's been some of these memory suppliers or basically every memory suppliers talking about longer-term agreements and the potential to sort of fix some level of both pricing and capacity out in time. Is that something that NetApp would be interested in undertaking? I know like typically, this is more hyperscale domain like to do larger deals that look out like over a longer period of time. Is that something that you would entertain? How are you thinking about supply, your ability to get capacity as you need it?

Yes. I mean we're in continuous discussions with our partners and suppliers to be able to secure the various parts of the components that go into our products. There's no doubt we're in a constrained supply environment. And there are -- and there's -- over the last couple of quarters, there's -- sometimes we experienced shortage in some areas, but also lead times are also extending. But we work very closely with our suppliers. And we're -- we engage with them depending on the different needs that we have, the horizon that we have and our volumes as well as the costs. And so we're open to various arrangements as long as it helps us sort of secure the supply we need for our products.

Now when you look at where we are today at this time, we believe we have -- we can secure the adequate supply we need for our -- for the outlook we have for this fiscal year.

So as you think about this fiscal year, right, you have sort of an extra week dynamic in your fiscal 1Q and you have pricing flowing through as well at maybe a higher pace than what you already realized. So as you think about both of those and think about the seasonality of how this year plays out, how should investors calibrate to that?

So when you look at sort of our guide for Q1 and the guide for the fiscal year, yes, as you noted, Q1 has an extra week, which we've quantified to approximately $65 million. But then when you sort of factor that out and you look at the seasonality with respect to first half versus second half, we are anticipating a typical sort of historical pattern with respect to seasonality for first half versus second half.

And then when you look at our Q2 to Q4, taking into account the midpoint of the FY '27 guide, you compare Q2 to Q4 FY '27 to the same period in FY '26, that basically implies around mid-single-digit percentage growth. So that captures what we see today with respect to how FY '27 and Q1 will shape up.

Okay. That's helpful. So why should -- so maybe conversely, right, like why should that be the right seasonality, especially as you're driving pricing increases? What's your underlying assumption about pricing as you go through the course of the year? Is there incremental price increases that are baked into that guide? Or is it something that you're only thinking about Q1 where those pricing impacts are taking place? And then as the market evolves, you will decide? How should we think about that?

So within sort of the fourth quarter, we saw some really good broad-based strength in demand. We did obviously talk about our price increases, but we also have seen some nice uptick in enterprise IT spending, part of it driven by added increased activity in the enterprise AI space. And when we look at the fiscal year '27 guide, it comprehend all of these various pieces that I just mentioned. In addition, the way to think of it is if we continue to see commodity costs increase, obviously, we won't hesitate to take pricing actions to mitigate the impact to our P&L and protect our profitability. But so all of this basically is how we think of the fiscal '27.

Okay. And just to be clear, like I mean, as you think about the environment, I mean, would you say that we're still expecting an inflationary environment for the rest of your fiscal year in terms of commodity pricing? And are there things that I know like 6 months ago, you were in a favorable inventory position, for example. Is there any opportunity for that at all? Are you leveraging your balance sheet in any way to take advantage of any maybe circumstances that might show up?

As I mentioned, we work very closely with various parts of our supply chain and our suppliers. And if there's a need for us to do things like that, we won't hesitate. At the end of the day, what we -- in terms of priorities, our first priority is to secure our supply. Of course, we work on balancing supply with cost and other types of activities as we think of our business. But yes, we won't hesitate if we need to.

When you think about -- you mentioned earlier like the breadth of the portfolio. And you have the opportunity to maybe shape demand a little bit with do you -- what are the configurations where you put people with an all-flash versus what you're putting in hybrid versus what you're putting in cloud? What are customers doing with respect to each of these at the moment given that flash pricing has increased so much? Are they making other choices? Are they making adjustments? What are your salespeople telling your customers to do here?

It's -- thanks for talking about our broad portfolio. It is really exciting to see the various options that we can offer our customers in this environment, right? In addition to all-flash, we have hybrid flash, which is based on basically hard disk drive as a media. In addition, we have Keystone Storage as-a-Service and our Public Cloud business that has done really great also over the last few years.

And so when you look at Q4, we did see some nice increase in our all-flash business. But we also saw an uptick in the hybrid flash business, which is the -- based on other types of media like the hard disk drive, which is interesting because in the prior several quarters, we have seen sort of more or less a steady decline. And so that could be potentially driven by what the all-flash prices have done. But it's a little bit too early to tell. What's important, though, is our ability to serve our customers wherever they need to be. And so if they want to upgrade their hybrid flash data sort of infrastructure, we're happy to help there. And if they sort of don't want to do a big upfront CapEx investment and prefer to do more of a consumption-based approach, then we can offer Keystone Storage as-a-Service. And in some cases, if they also want to use ONTAP in the multi-cloud, Hybrid Cloud and Public Cloud environment, obviously, we can offer our Public Cloud solutions.

You've seen real strong growth on the Public Cloud side. I know the reported numbers were impacted by the spot divestiture for some period of time. You have lapped that now, like your growth looks very solid. The incremental profitability looks extremely strong. So -- and you've been moving up your profit targets, gross margin targets on the public cloud side. So can you just talk to us a little bit about what is the right growth trajectory to think about in this kind of a constrained environment, should we be expecting some kind of acceleration that can come in Public Cloud?

And secondarily, like what is enabling such high gross margins and continued increases in those gross margin rates?

Yes. So the Public Cloud business has done really great. I mean when you look at fiscal '26, it grew 17%, 18% when you account for the Spot divestiture on a year-over-year basis. Within that, the first-party and marketplace, which is really the core growth of that business grew at around 30%. And so it's growing at a really fast pace. It did deliver in the last couple of quarters, slightly more than 85% gross margin. And our target gross margin for that business is 80% to 85%. So it's operating at sort of that high end of the target range and a little bit exceeding it.

The outlook going forward is sort of a similar set of growth. I mean the growth is still sort of healthy. We expect it to continue to grow, especially in the first-party and marketplace. And sort of when you look at that it should help provide also a nice tailwind to the corporate gross margin given that, obviously, it is operating at a much higher gross margin than the corporate gross margin.

With respect to what's driving some of the dynamics in the margin itself, there's really a couple of things. We had a bit of depreciation roll-off from the initial hardware that was installed over time. But also there's more software content as we continue to improve on the offering and make it more and more competitive. Obviously, some -- basically, there's more software content with that. And that shouldn't -- basically that type of dynamic should continue in the future.

Okay. And just on the Public Cloud side, right, your implementation across the various public clouds is slightly different. And I think you originally started off with NetApp Azure Files, which was like a fairly large part of that Public Cloud business. As you think about the -- maybe how much have we diversified today in terms of the various Public Clouds? And what is sort of like your expectation of which Public Cloud might be able to contribute the most in NetApp's growth if you look over the next, call it, 2 years?

Look, all 3 are doing great. I mean we have partnerships with all the top 3 hyperscalers where they offer our ONTAP software as a native software store software solution. And we see good traction in all 3 of them. And so the size, I would say, also depends on, obviously, where -- when the business started, but we see good growth in all 3 of them. And in terms of profitability, as I mentioned earlier, this business has been operating at really the upper end of the long-term target range for quite some time.

Yes. You guys have had a very consistent history of managing your OpEx really well. And in times where your revenue starts to accelerate, like you really get a lot of leverage in the model. And kind of as you look over the next couple of years based on your top line sort of growth expectations and maybe there's more upside with pricing. How should we think about the margin flow-through? How should we think about OpEx rates in general relative to the revenue growth rates?

Yes. I mean, look, we've made a concerted effort to maintain that operating leverage in our business. And you can see as we project revenue growth, we typically grow our OpEx at less than half of the revenue growth rate. Having said that, obviously, within that, we continue to invest in our sales capacity. We did add sales capacity in fiscal '26. We plan to do more in fiscal '27 as we see good momentum in the business. We continue to invest in our research and development. Obviously, we're investing in AI data solutions.

But as we do this, we also deemphasize some areas. And so we look at focusing on the higher return areas and sort of deemphasizing lower return areas or areas we're not necessarily as focused on. And so overall, when you look at the -- how we think and how we execute our investments from an OpEx perspective, it still keeps a certain leverage in the model where basically every dollar of revenue should add a little bit more to the bottom line.

Yes. I mean, obviously, NetApp's had a fairly long history now as a public company. So when you talk about incremental sales resources, like what are the areas that you're targeting for incremental sales opportunities that were maybe not already exploited by the company?

I mean there's -- as you said, we have quite a bit of presence globally in the various markets, but there's always a need for us to rebalance resources sometimes or there's areas, for instance, where we're seeing faster growth where we sort of want to put more. For example, in the AI front, we're putting a little bit more AI specialists that would help push that and become much more sort of focused on growing that side of the business. We continue to invest in areas like Public Cloud, for example, to continue to sort of drive that nice growth that's very highly profitable for the company. And we balance different geographic areas as well depending on the needs. So these are some of the few examples.

Okay. Okay. That's helpful. Maybe just talking a little bit about cash generation, right? Like you guys have done an amazing job with free cash flow and free cash flow margins. As you think about the potential growth here, especially with enterprises potentially having to do a big storage refresh down the road with AI you could have much better economics flowing through to cash. So how are you thinking about potentially deploying that cash? How much focus, if any, is needed on M&A? And how are you thinking about overall shareholder returns?

Yes. We've had really a great free cash flow generation in fiscal '26. So we anticipate similar type of trends into fiscal '27. We -- and as you noted, I mean, if the refresh really happens, that should give us a very nice tailwind from a top line perspective. And so the way we look at our capital allocation is very much consistent with last year where we want to return up to 100% of our free cash flow to our shareholders through dividends plus share buybacks.

And from -- we're also a technology company. And so we focus on making sure that we have a competitive portfolio. And if there's a need for us to do any tuck-ins or basically enhance our portfolio and that's a good use of our capital, we also look at these types of opportunities.

Okay. Well, we're coming up on time. We've only got a couple of minutes left. So maybe, Wissam, just to wrap. What do you think investors should be most focused on with respect to NetApp? Why do you think this might be a good time to invest in the company?

I mean, look, the -- we're seeing really broad-based strength in demand. Yes, we obviously recognize and acknowledge the potential risk of some of the accelerated orders. But essentially, we're seeing an underlying broad-based demand in our business driven by increased enterprise IT spending and partly driven by increased activity on the enterprise AI front. And so as we obviously progress throughout the year, we'll be updating more based on what we see.

Excellent. Well, thank you so much for being here. Really appreciate it, Wissam, and thank you all for joining us here today.

Thanks for having me. And excited to be here.

Thank you.

Thank you.

Good day, and welcome to the NetApp Fourth Quarter and Fiscal Year 2026 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Kris Newton, Vice President, Investor Relations. Please go ahead.

Hi, everyone. Thanks for joining our Q4 and fiscal year 2026 earnings call. With me today are our CEO, George Kurian; and CFO, Wissam Jabra. This call is being webcast 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 first quarter and fiscal year 2027, our expectations regarding future revenue, profitability and shareholder returns and other growth initiatives and strategies. .

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 website including our most recent Form 10-K 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 measures are available on our website. I'll now turn the call over to George.

Good afternoon, everyone. Thank you for joining us. FY '26 was a landmark year for NetApp with record results across revenue, gross profit, operating income, cash flow for operations and free cash flow supported by strong customer demand in the fourth quarter.

Our performance demonstrates our ability to capitalize on the accelerating adoption of enterprise AI and cloud. with our differentiated hybrid cloud, intelligent data infrastructure platform trusted by the world's leading enterprises and cloud providers NetApp is increasingly at the center of our customers' data-driven AI transformations.

Achieving our full year target of a 30% operating margin, underscores our commitment to profitable growth and ongoing innovation. NetApp stands at the forefront of a transformative era driven by rapid AI adoption and explosive cloud growth. Enterprises are reimagining how they operate and compete and only NetApp delivers truly hybrid intelligent data infrastructure on-premises and in the cloud, all-flash and hybrid flash to seamlessly protect, secure, govern and activate the entire data estate for AI.

Our 30 years of innovation and leadership in hybrid multi-cloud environments are more relevant than ever as our vision of a hybrid world is realized. As enterprise AI adoption scales, the primary challenge is not compute but activating large volumes of unstructured data, a significant share of the world's enterprise unstructured data resides on NetApp solutions and our ability to activate securely and efficiently across hybrid and multi-cloud environments gives us a powerful competitive advantage.

As the only true hybrid cloud platform, unifying data governance across on-premises and cloud environments, we enable zero-copy data activation. Eliminating the cost and risk of moving data and transforming fragmented infrastructure into a secure launch pad for real-time AI and automation. Our value proposition is resonating strongly with customers and the industry.

Our storage services on AWS, Azure and Google Cloud empower customers to protect, mobilize and govern their data with unmatched flexibility and consistency regardless of location. This capability is increasingly critical as customers launch and scale their AI initiatives by integrating our data infrastructure platform with the AI and analytics offerings of leading cloud providers customers can activate their data for AI workloads in place where it is created without costly or time-consuming migration or duplication.

Making NetApp the secure zero-copy foundation enterprises need to move from fragmented infrastructure to real-time AI at scale. We fueled nearly 50 partner AI factories and labs as they build out their real world test beds to accelerate AI deployment. A recent example of this is that worldwide technologies live AI proving ground, where NetApp AFX all-flash storage is featured, allowing customers to test architectures validate performance and quickly move from experimentation to deployment.

This collaboration highlights the large opportunity ahead as enterprises look for trusted partners to operationalize AI confidently. We see growing opportunity and success with Neo and sovereign cloud providers who recognize the strength of our differentiated solutions and our joint go-to-market initiatives with leading hyperscalers. These partnerships reinforce our position as a trusted collaborator in the evolving cloud ecosystem.

A leading Neo cloud turn to NetApp for intelligent all-flash storage infrastructure, eliminating complexity and powering orchestration at cloud scale. The new deployments will help accelerate AI onboarding and time to value. With this win, we can begin to expand into other workloads to become the foundational data layer.

Another significant achievement is our expanded partnership with Google Cloud for Google Distributor Cloud, which underscores both the growing opportunity in AI and sovereign cloud environments and the strength of our technology. This collaboration enables government agencies and regulated enterprises to leverage advanced AI capabilities from Google and NetApp secure by design data infrastructure platform to modernize operations and accelerate AI-driven insights even in the most sensitive environments.

We achieved record revenue in Q4 and FY '26, driven by public cloud, all-flash and Keystone, which all reached all-time highs reflecting strong demand from customers modernizing infrastructure and scaling AI workloads. Public cloud revenue grew to $68 million in FY '26, up 18% year-over-year, normalized for the divestiture of the Spot by NetApp business in March 2025.

This growth was driven by first-party and marketplace cloud services, which increased 30% in FY '26. We are seeing growing demand from both new and existing customers to extend NetApp's capabilities deeper into their cloud environments. Customer's are increasingly choosing net adds to simplify and scale their hybrid and multi-cloud environments, leveraging our unified data management capabilities for operational consistency and agility.

Our expanding cloud portfolio is unlocking new use cases and verticals, including AI, fueling growth and expanding our addressable market. For example, a leading insurance company accelerated financial risk modeling and data science by connecting Azure Databricks directly to their data in Azure NetApp files, ensuring security, governance and performance.

Similarly, an Asian engineering company streamlined its Gen AI chatbot deployment on AWS by leveraging FSX for NetApp on TAP, allowing secure permission aware access to data in place and reducing operational overhead. Across these wins, the common thread is NetApp's ability to deliver secure governed, high-performance data access for AI workloads, enabling customers to innovate faster and operate more efficiently, all while maintaining control and compliance.

FY '26 all-flash revenue was $4.2 billion, an increase of 11% from last year, propelled by robust Q4 performance with revenue of $1.2 billion, up 18% year-over-year. Customers are choosing NetApp to power their most mission-critical workloads and our momentum in this segment is a testament to the strength of our innovation and go-to-market execution.

A prime example of this is the European aerospace company that shows NetApp displacing competitors in a greenfield win. The data management capabilities of NetApp, all Flash arrays stood out for their high performance, cyber resilience and ransomware protection as well as seamless integration with a broad ecosystem of partners.

Our comprehensive solution delivered the security, simplicity and strategic value needed to support critical initiatives. Revenue from our Keystone Storage as a Service offering grew approximately 65% from FY '25 and as more customers embrace the flexibility and simplicity of a cloud-like experience for their on-premises data. This momentum reflects the broader shift towards consumption-based IT models and our ability to meet customers wherever they are on their transformation journeys.

A leading manufacturer chose NetApp Keystone with all-flash and storage grid to support its AI strategy requiring a secure, flexible platform for massive data sets. Keystone delivers secure, governed self-service at scale enabling rapid collaboration and predictable on-demand performance. Our unified platform streamlines data management with multi-protocol support native S3 tiering and cloud integration for maximum efficiency.

AI was a clear growth engine for us in FY '26. We had approximately 500 AI and data preparation wins in Q4 alone, bringing the FY '26 total to over 1,100, our ability to help customers operationalize AI at scale, accelerate time to insight and drive real business outcomes is putting us increasingly at the center of our customers' AI journeys.

In FY '26, we furthered our AI innovation, launching next-generation solutions, including AFX and AI data engine, which are seeing strong early momentum and positive feedback from customers and partners. Additionally, we announced enhancements to the performance and capabilities of our all-flash arrays and expanded our converged AI solutions.

These offerings help organizations simplify their AI infrastructure, eliminate silos and accelerate their data pipelines. Reinforcing NetApp's role as the data infrastructure platform for AI. Let me walk through a couple of additional customer wins that Spotlight NetApp's competitive advantages.

A European government agency required real-time situational awareness with ultrafast latency-free data processing. NetApp's disaggregated AFX solution for their NVIDIA superpad environment, enabled independent scaling of compute and storage, delivering flexible future-proof infrastructure. Our rapid execution and expertise empowered a robust mission-critical AI platform to meet evolving operational demands.

A global financial leader signed a $20 million deal with NetApp to accelerate its AI-driven fraud detection and customer personalization. NetApp's GPU ready low latency data lake platform delivers high performance access to multi-petabyte data sets, enabling global real-time fraud scoring continuous model retraining and robust enterprise governance and resiliency.

Its high impact wins like these that helped us achieve record-setting results while navigating a dynamic macro environment. We're managing rising memory and component costs by working closely with our supply chain partners and adjusting pricing to balance growth and margins. Data generation continues unabated, and customers need solutions that best optimize performance and cost.

Our ability to offer a broad range of solutions with flexible purchasing options, including cloud, Keystone and hybrid flash strengthens our competitive position, resilience and flexibility. FY '26 also set a new bar for cash generation. Our strong free cash flow enables us to invest in innovation while returning value to shareholders through dividends and share repurchases.

We remain committed to disciplined capital allocation and long-term value creation. I want to thank the entire NetApp team for their customer-centric focus and hard work in FY '26. It was a year of strong execution, innovation and accelerating growth.

Clear proof that our strategy is working and our portfolio is resonating in the market. The investments we made this year have expanded our opportunities and set a solid foundation for future growth. Looking ahead, we are encouraged by the robust demand signals we're seeing and are confident in our ability to maintain this momentum as reflected in our fiscal year 2017 outlook.

Our hybrid multi-cloud leadership, differentiated AI offerings and flexible storage and consumption offerings position NetApp for continued success as customers accelerate their data-driven AI transformation. With that, I'll turn the call over to Wissam.

Thanks, George, and good afternoon, everyone. In the fiscal fourth quarter, we delivered strong results exceeding the high end of both the revenue and EPS guidance ranges. Revenue for the quarter was $1.95 billion, up 12% year-over-year and 14% sequentially. Non-GAAP earnings per share was $2.43, up 26% year-over-year.

Excluding the divested spot business, which generated $9 million of revenue in the fourth quarter of the prior year. Revenue grew 13% year-over-year. Revenue was up 10% year-over-year, excluding the effect of foreign currency exchange rates which had little impact relative to guidance.

This marks our tenth consecutive quarter of year-over-year revenue growth. Looking at revenue by segment. Hybrid cloud revenue of $1.77 billion was up 13% year-over-year. Product revenue of $966 million was up 14% year-over-year driven by the execution of a multiyear agreement with Google Cloud to deliver secure AI-ready data infrastructure to Google distributed cloud environments.

In prior quarters, we mentioned the potential for large deals to materialize in the second half of fiscal year 2026, and this came to fruition in Q4. Support revenue of $688 million was up 10% year-over-year, partly driven by a onetime item. Professional Services revenue of $112 million was up 14% year-over-year, mainly driven by growth in Keystone, our Storage as a Service offering which continues to build momentum.

Q4 public cloud revenue of $182 million was up 11% year-over-year. Excluding spot, public cloud revenue grew 18% year-over-year driven by a strong demand for first-party and marketplace storage services. We exited fiscal year 2026 with $4.85 billion in deferred revenue, an increase of 7% year-over-year and 6% year-over-year in constant currency.

Remaining performance obligations were $5.65 billion, up 14% year-over-year. unbilled remaining performance obligations, a key indicator of future Keystone Storage as a Service revenue growth were $807 million, up 88% year-over-year. This outperformance was driven by an increase in support performance obligations associated with the Google agreement as well as Keystone unbilled RPO, which grew at a similar rate to the prior quarters on a year-over-year basis.

Moving to the rest of the income statement. Please note, my comments will be related to non-GAAP results unless stated otherwise. Q4 gross margin was 70.5% and up 100 basis points year-over-year, driven by public cloud gross margin expansion. Gross profit was $1.37 billion, up 14% compared to Q4 2025. Hybrid cloud gross margin was 69%, down 60 basis points sequentially due to higher product revenue in the quarter. Product gross margin was 56.1%, and up 80 basis points sequentially due to the benefit from the Google Cloud Enterprise Agreement offsetting higher component costs.

Our recurring support business continues to be highly profitable with gross margin of 93%. Professional Services gross margin was 32.1%, improving 80 basis points sequentially. We Public cloud gross margin was 85.7%, up 60 basis points sequentially and over 6 percentage points year-over-year.

The public cloud business has operated within the 80% to 85% long-term target range in the first half of the fiscal year and above the high end of that range in the last 2 quarters. Operating expenses of $750 million were up 6% year-over-year and 9% sequentially.

Operating income was $624 million up 26% compared to Q4 2025 and operating margin was 32%, up 340 basis points year-over-year, both all-time records, driven by higher revenue. Earnings per share was $2.43, up 26% year-over-year and exceeding the high end of the guidance range. Our results demonstrate strong execution on key revenue growth opportunities in all-flash public cloud and AI, along with a continued focus on operational discipline, resulting in record highs for quarterly operating income and EPS.

In Q4, cash flow from operations was $950 million and free cash flow was $900 million, both up over 40% year-over-year and all-time records. These strong cash flow metrics were driven by increased collections from higher billings. During the fourth quarter, we returned $303 million of capital to our shareholders with $200 million in share repurchases and $103 million paid in dividends or $0.52 per share.

Q4 diluted share count of $199 million decreased by 7 million shares or 3% year-over-year. At the end of the fiscal year 2026, there was approximately $500 million remaining from our current share repurchase authorization -- and today, we are announcing an increase in debt authorization by $1 billion.

Moving to a review of our results for the full fiscal year 2026. Revenue of $6.93 billion was up 5% year-over-year, exceeding the high end of our guidance range. Excluding the divested spot business, revenue was up 7% year-over-year and in line with our long-term target model. Our strict focus on operating leverage allowed us to drive bottom line profitability at a faster pace, all contributing to record highs in operating margin, EPS and cash flow.

Gross margin was 71.3%, up 20 basis points year-over-year, driven by public cloud and professional services gross margin expansion and partially offset by lower product gross margin. Operating margin was 30.2%, up 190 basis points year-over-year, driven by 1% year-over-year growth in operating expenses relative to 5% year-over-year revenue growth.

Full year EPS was $8.13, up 12% year-over-year, more than double the rate of revenue growth. Operating cash flow was $2.07 billion, and free cash flow generation was $1.87 billion, up close to 40% year-over-year primarily due to stronger cash collections and net working capital benefits.

Our balance sheet remains very healthy as we returned a total of $1.36 billion in value to our shareholders through share repurchases and cash dividends. all as we continue to invest in the next generation of AI data solutions. We closed the year with $358 billion in cash and short-term investments, and $2.49 billion in gross debt outstanding, resulting in a net cash position of $1.1 billion. Inventories expanded both year-over-year and quarter-over-quarter.

Inventory turns decreased sequentially to 12%. Now turning to non-GAAP guidance, starting with fiscal year 2027. Let me begin by underscoring the confidence in our strategy and in the strength of our position as we address key customer priorities. Our guidance reflects a solid underlying enterprise IT demand environment with enterprise AI activity increasing relative to fiscal year 2026.

At the same time, we recognize the potential for pockets of demand driven by accelerated purchasing. We also remain focused on adjusting prices as needed to track any material movements in memory and component costs, while maintaining a disciplined balance between growth and margin.

On that basis, we expect fiscal year 2027 revenue to be in the range of $7.325 billion to 7.575 billion. At the $7.45 billion midpoint, this implies 8% year-over-year growth, representing an acceleration from the 5% growth we successfully delivered in fiscal year 2026.

We expect gross margin to be in the range of 68.5% to 69.5%. We expect operating margin to be in the range of 29.1% to 30.1%. For the full year, we expect the effective tax rate to be in the range of 20% to 21%. We expect EPS to be in the range of $8.70 to $9 an at the $8.85 midpoint, this represents 9% year-over-year growth.

In fiscal year 2027, we intend to return up to 100% of free cash flow to shareholders through cash dividends and share repurchases. We also expect to reduce share count by low single-digit percentage points year-over-year. Now turning to Q1 guidance. As a reminder, Q1 includes an extra week, which is expected to contribute approximately $65 million of revenue, primarily in support and cloud. with a minimal impact on product and to add $21 million of operating expenses.

We expect revenue to be in the range of $1.75 billion to $1.9 billion. At the $1.825 billion midpoint, this implies 17% year-over-year growth. We expect gross margin to be in the range of 69.1% to 70.1% and operating margin to be in the range of 28.4% to 29.4%.

We expect EPS to be in the range of $2.05 and $2.15 and with a midpoint of $2.10. In closing, as we look ahead to fiscal year 2027, we are confident in our strategy and execution capabilities. We remain focused on delivering revenue growth and profitability, increasing free cash flow and creating sustainable long-term value for shareholders.

With that, I'll turn the call over to Kris for Q&A.

Thanks, with. Operator, let's begin the Q&A. .

[Operator Instructions] And your first question comes from David Vogt with UBS.

Maybe George, for you. Can you touch on sort of the demand strength again. I appreciate all the color you provided in the call, but all-flash was exceptionally strong in the quarter. And just we're going to get a lot of questions on sort of the cadence of that demand.

How was it from a linearity perspective? Did the price changes in the industry have an impact on demand? Anything that you can provide from a color perspective or granularity would be helpful in how we think about the demand drivers, particularly as we move into the subsequent quarters for the full year, that would be helpful as well. And then I have a follow-up. .

Thank you for your question. Momentum in the business was very, very strong. IT spending is forecasted to be up strongly, driven by enterprises ready for AI and we are seeing that across all segments of our business: cloud, flash, AI and Keystone.

And it shows the differentiation in our offering as well as solid execution by our customer-facing teams. We have seen some accelerated decision-making -- but we also know that most customers do not have the flexibility to do so.

On the face of the Q4 P&L, the impact of pull forward or accelerated decision-making was minimal. Our Q4 results were tied to the big deals we told you to expect when we guided the fiscal year. And we see really strong outlook for this coming year powered by our confidence in our position and what we see as growing evidence that enterprise AI is happening in front of our eyes.

Great. And maybe one for Wissam on product gross margin. Obviously, it's a very challenging component backdrop, DRAM and NAND and other issues. If I just kind of take your public cloud business and I kind of strip out support as well, it kind of looks like product gross margin could be near a trough in the July quarter and kind of stay relatively stable from a product perspective as we move through the year. Is that kind of what you're suggesting based on sort of the outlook for the year? .

Yes. Thanks, David. I think you got it right. For us, July quarter is more or less the trough. And from there on, we're anticipating gradual improvements. Really, we've been taking a lot of actions in terms of price adjustments as we see component costs increase. And so those price adjustments will start seeing more and more effect as the year progresses. And so that's really the dynamic driving the product gross margin. .

Your next question comes from the line of Amit Daryanani Evercore ISI.

Maybe just ask on the all-flash array side. Revenue obviously accelerated pretty well at 18% growth. George, I heard you on the limited pull-in dynamic. But I was wondering is there a way to think about in ASP was a bit of a tailwind versus unit growth is the way to think about that?

And then how do you think of AFA growth broadly into fiscal '27. Maybe I'll ask my follow-up as well, which is we are starting to see a fairly strong growth, I think, from the traditional service side driven by enterprise and starting to get more and more AI ready.

How should investors think about the attach rate and opportunity between AI compute deployments that are happening at a big rate right now? And that attached rate to the high-performance storage that you folks sell .

Thank you for your question. Our AI business performed really strongly in the quarter. we noted about 500 AI wins in the quarter, 1,100 for the full year, those compared to roughly 400 for the whole of the prior fiscal year. So you are seeing strong uptick in enterprise AI.

In enterprise AI configuration the -- all elements of our flash portfolio performed strongly, high performance flash capacity flash and block storage. And so we see customers deploying these high-performance compute and storage environments to make sure that the GPUs are fully used their expensive GPUs, they need to be fed with a lot of data.

What we also saw was that in the non-demanding AI environment customers are starting to buy more of hybrid flash, which we are uniquely positioned to deliver under a single operating system. So both like all-flash and hybrid flash grew and all-flash grew particularly in the AI use case the Summit.

Your next question comes from the line of Erik Woodring with Morgan Stanley.

George, you called out the 50-day wins in 4Q is certainly that you can help us think about how much of your fiscal '27 revenue guide is driven by some of these secured and anticipated AI wins and just curious on those AI wins, if there's a way that you can kind of parse out what is part of kind of public cloud versus kind of what is on-prem solutions? And then a quick follow-up, please.

All of the 500 AI wins are on-prem wins and they combine a mix of enterprise as well as Neo Cloud. I think if you look at the mix of the use cases, they are roughly the same pattern as we saw before. Half of them are really tied to data preparation, large-scale analytic environment that are now being operated under GPU compute.

And then the remainder are roughly half and half between training and fine-tuning large language model and inferencing. So it's roughly 50%, 25%, 25%, roughly speaking. That pattern has stayed pretty similar through all of the year. In terms of the -- how we see that play into our business next year in fiscal year '27, listen, this is what gives us confidence to show an acceleration in our business.

We think that the strength is broad-based across segments and verticals and geographies -- we think that we are very well positioned because of our installed base of data, a hybrid cloud data infrastructure pipelines that make it much easier for customers to use AI and the fact that we can offer our customers life cycle cost management from super high performance to exceptionally cost-effective disk-based environment.

So we're optimistic -- we see the demand. We see the momentum in our business, and we are investing some additional sales resources just like we did last year to support our outlook.

Okay. Amazing. And just a quick follow-up for you is -- some of your peers are kind of messaging expanding storage gross margins this year. I'm wondering, as we think about your gross margin guide, is there a degree of kind of prudence or conservatism that you're trying to embed there just given we're kind of an unprecedented pricing territory.

Or is there kind of enough component cost pressure that you see today that regardless, it would be challenging to expand margins. I would just love to know maybe the conservatism that you're thinking about as you think about your gross margin guide for the full year.

Yes. Thanks, Eric. So look, the guide is based on the information we have at this time. And so we look at what -- how the business developed through the next few quarters and based on what we know from a component cost perspective.

Now granted, if component costs vary moving forward, we will continue to take action to make sure we mitigate the impact to margins. And of course, we will do whatever we can to improve from that. When you look at -- so this is really the comment around the product gross margin.

I do have to just saying a reminder here that we're not really moving from our long-term goal or target from a product gross margin, which is really is -- still is the mid-50s to high 50%. So that's still in our long-term target, and we will -- we will still strive to get there in the future. What we also are looking at, we look overall at the total gross margin for the company.

And when you look at the total gross margin for the company, the public cloud business has seen some really nice uptick in fiscal '26. And as that business grows, it does give us a bit of a nice tailwind to the margin line.

And the same thing for the Keystone business that continues to grow at a nice pace and build momentum, and that has a little bit of a tailwind as well. Then maybe the last few comments I'll make here on margin. It's -- we also are targeting gross profit because, obviously, that's what drives our earnings power. And so we look at gross profit growth year-over-year as well as something that we continue to make sure we improve

Your next question comes from the line of Wamsi Mohan with Bank of America.

George, can you talk about your -- or how you're seeing your large deal pipeline evolve? You obviously saw strength in the quarter that you had messaged previously. But is that strength something that we expect that we should expect will sustain? And what's baked into guidance? And I have a follow-up. .

I think what we saw in the large steel pipelines were some related to infrastructure modernization that you could say could be people bringing forward spending. But a very large part of the pipeline were related to AI wins. And those were projects that we had worked on and some that we saw accelerate as the business needs came on.

What I feel really, really good about is the fact that especially in our AI business, the number of customers who we are able to win in accounts that are not traditionally NetApp large installed base accounts have been super strong. And so what that gives me confidence is we are winning on customers' business priorities, which are durable even in the face of commodity price variations.

Okay. And maybe just on the pull forward, like it sounds like you really didn't see more evidence of forward and large deals drove the upside in the quarter. But as we talk to like resellers, it seems like a lot of the annual budget is being spent in the first half of the calendar year.

We're hearing about a scramble for securing supply from customers. So just curious why would you not have seen that customer behavior of trying to accelerate purchases in the first half ahead of price increases?

And maybe some sense of how you're thinking about the cadence of price increases from here. You've already instituted some, but how are you thinking about the cadence of price increases on a go-forward basis.

Thanks for your question, Juan. What I said was that on the face of the Q4 P&L, the impact of pull-forward demand was minimal. Our Q4 results from a revenue standpoint were tied to big deals that we told you about when we guided the fiscal year.

We are seeing some accelerated decision-making and we also know that many customers cannot -- don't have the flexibility to do so. And so our goal is to make sure that we can meet customer demand we can balance cost and availability of supply and that we can maintain lead times within customers' normal expectations.

We feel really good about the momentum in our business, and we'll tell you more about our business through the course of the year. what I feel confident about is that we have factored in to the best of our knowledge, the risks of pull-ins and the dynamics it creates through the fiscal year, and we'll tell you more about it. As part of our go-forward plan.

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

Thank you. One and a follow-up, if I could. First, maybe just talking about the public cloud revenues. I think you've talked about 18% growth at spot and 30% on the first-party storage.

As we head into next year with no spot -- just curious how you're thinking about sustainability of the growth rate there? And does the Google deal in the quarter impact that at all? And then on the follow-up, on Keystone, it sounds like really good growth again.

Do you think this is simply just wanting to find other ways to deal with higher NAND pricing -- or is this more durable than just a pricing or payment mechanism. So we love your views on both of those.

Yes. Thank you for your question. On public cloud, we continue to see super strong demand for our cloud storage services, both first party and marketplace. They are -- they grew 30% year-on-year. And given their growth rate relative to the rest of the cloud portfolio, they are, as you can imagine, the predominant part of the cloud business overall.

We see continued momentum in that part of our business, which should cause cloud to grow faster next year than it did the prior year at really strong gross margin. super excited about the cloud. We did a lot of innovations through the course of the year.

We are, as I said in my comments, starting to see some of the AI use cases also show up in the cloud and customers starting to use our tools in the cloud for AI use cases. With regard to Keystone, we see a broad-based shift in the market towards consumption-based offerings like Keystone.

Some of that is driven by customers having used public cloud and now getting confident about how to operate their own environments like the public cloud. There was possibly some customers who bought Keystone because they felt that it would be a more optimal way to balance cost and use in a time of inflationary costs.

But in general, a Storage as a Service business should grow faster than our traditional business. And Tim, just to clarify, I think part of your question on public cloud included the Google agreement. I just want to clarify that the agreement is more in the hybrid cloud segment. So this is, of course, independent of all the comments that George just made. It helps our hybrid cloud business, which is what to help us in Q4.

And we'll -- just like any hybrid cloud agreement business, it will help us also going forward on the support revenue as well.

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

George, maybe just to go back to your response earlier to Wamsi's question about you are seeing some accelerated decisions from customers, although some of them cannot really change those decisions right now.

And you also have this impact of 1 extra week in 1Q, like typically, you've ended up with, I think, 48% of your revenue in the first half of the year. Do you expect like the yield look very different from maybe some of your prior years because of the dynamics going on right now?

We think, as we said, we think that we have broad-based durable demand in our business, driven by customers prioritizing data infrastructure for AI -- and you saw that in our Q4 print, which did not benefit the results in the quarter on the P&L did not benefit from any pull forward. .

We see the same, roughly speaking, demand pattern at the start of the new fiscal year, which is the first half and the second half, like you said, Samik, roughly in the same kind of percentages, adjusting, of course, for the extra week in the first quarter. So it's early in the year. We feel really good about the momentum in our business. We acknowledge that there are probably some amounts of pull forward, but the demand is broad-based, and we'll provide you updates as we go through the year.

Got it. Got it. And then maybe just help me think through -- sorry, for my follow-up, the Google, the agreement that you had with Google relative to the hybrid cloud business. Trying to think around sort of what opportunity that creates for you? Is it in specific customer verticals? Trying to frame around sort of what the size of that opportunity would lead to. .

Yes, Google distributed cloud is where Google brings its advanced technology stack to a disconnected or likely connected data center. It could be for regulated industries.

It could be for public sector environment, it could be for national security environment and NetApp was chosen by Google to be a large chunk of the data infrastructure within the Google distributed cloud architecture. So there are 2 benefits to NetApp. One, of course, it allows us to broaden our reach into sovereign and your environments that are incrementally TAM expanding for NetApp.

And second, it allows us to build these really secure differentiated hybrid infrastructures across on-premises and public cloud and secure cloud for these clients. This is the expansion of the Google distributed cloud deal that we have worked on for quite a while. And so there's -- since 2024 -- we have been working with them on various different opportunities, and then we have expanded our franchise with them quite substantially with this Google distributed cloud relationship.

Our next question comes from the line of Steven Fox with Fox Advisors.

I had a couple of questions I think are related. One is I'm trying to understand in the full year margin guidance at the corporate level, how we think about sort of the mix effect of higher NAND prices? Obviously, there could be puts and takes, whether we're looking at product versus public cloud or Keystone?

And then related to that, how much can you give us a sense on how much revenue growth in the quarter and going forward is related to just higher ASPs and passing through higher NAND prices.

So the quick answer on the first part of the question, the NAND prices would manifest themselves in the product gross margin. that's where basically the main impact is. The rest of the margin line shouldn't be as affected. I mean there's a bit Keystone, but it shouldn't be as affected given that it's recognized over time.

And when it comes to the second part of the question, look, obviously, we talked about raising prices to offset component cost inflation. Our goal is to protect the profitability of our business, and we will continue to do so if needed. And so more than those qualitative comments, do then not get into the -- quantifying it because it's really too early in the year. And so let's wait until we see how Q1 develops, and maybe we can talk about that in the next quarters.

Yes, just maybe to add, historically, customers' budget in dollars and there has been little elasticity of demand just because of price increases. I think, of course, as Wissam mentioned, we are in a unique territory -- it's hard for us to tell you exactly. So we'll give you updates as we go through the year.

Your next question comes from the line of Aaron Rakers with Wells Fargo.

This is Jake on for Aaron. Congrats on the great quarter. Just wondering if you could just give some color on the early feedback you're seeing on AFX and AI data engine and when they should become bigger revenue contributors moving forward?

We are pleased with the progress on AFX and the early feedback on AI data engine. AFX has already had good with Neo Cloud in financial services in hedge funds and in life sciences, which were the target customers. For it, and we are seeing more and more customers beginning to qualify it. It will take time. It's a new architecture.

We always believe it would take time, but it is serving the purpose for what we created it for -- with regard to AIE, we have brought it to certain clients, and we are seeing good kind of good feedback on the value and the benefits it provides especially as our large installed base of customers who have huge amounts of unstructured data on NetApp wanting to organize that data for AI projects AI is a big help to them in doing so. And that feedback is coming back from our clients. SP551990915 Great. And then maybe just as a follow-up. I was wondering on the all-flash momentum, it's really, really impressive. Just some more color on how much of the growth is driven by pricing versus capacity and unit growth -- and then maybe just looking at the installed base, where does it stand now? And how much conversion runway do you still have going forward?

From an installed base perspective, like we have said, it picked up another 1% to 48% of the installed base. With regard to the performance in the quarter. Listen, it was really having differentiated solutions for a broad range of priority customer use cases. We raised prices during the quarter but we have not seen that materially translates into what we saw in the customers that -- into the transactions that we recorded in the quarter. It takes a little bit of time for that to flow through. In the past, it's taken about 3 quarters. We have tightened up our agreements with customers. So you should see that flow through the system over the next quarter to 2 quarters. .

Your next question comes from the line of Asiya Merchant with Citigroup.

This is Mike Cadiz for Merchant Citi. So I just have question.

It's looking into fiscal '27, how would we be thinking about strategic M&A at this point and leveraging growth and innovation in that respect, looking in the fiscal year .

Thank you for your question. We constantly look at opportunities for M&A, and we make decisions on whether that is the right use of capital. We feel good about our portfolio, but we won't rule anything in or rule anything out at this point in the year. .

Your next question comes from the line of Krish Sankar with Cowen.

I had to George, you kind of mentioned a large New York cloud win I'm kind of curious, are you sole source in that win? How do you think about the opportunity? Because I did not think that near clouds are big consumers of storage exabytes. So any color on that would be helpful and another follow-up.

I don't want to comment about their environment. This is a large meaning top 5 U.S. NEO cloud where they were looking to expand their offerings, especially to serve high-performance use cases for enterprise AI, and we were fortunate to be chosen to be the platform to do so. .

Our experience in architecting solutions for hyperscale is playing out to our advantage when we speak with New York clouds as they begin to broaden the set of use cases and offerings that they have for the enterprise.

Got it. That is very helpful. And then maybe a question for either George or Visa. When I look at your product revenues, is there a way to parse it out by what percentage of product revenue is actually gen AI related?

Yes. I mean, look, we don't break it out to that novel, Chris. We know that there's obviously the activity and the number of wins we mentioned generate revenue for us -- we just don't break it out to that level of details. The other thing I would say is, as you noticed, perhaps over the quarters, the few quarters that we've been disclosing the number of wins, these number of wins have been increasing.

And so you could assume that it's becoming a sort of a growing portion of our revenue, but it's not broken out to that level of detail.

Your next question comes from the line of Param Singh with Oppenheimer.

I had a couple. One, I wanted to understand the incremental revenue opportunity from AID. And do you view this as something that will help you gain share in the traditional market? Or is that an add-on module that you can sell and expand into addressing more AI workloads? How do you think about that? And how do you think about quantifying how would you monetize that in terms of percentage of revenue and so forth.

There's 2 use cases. Thank you for your question. There's 2 use cases. As you correctly said, one for our installed base, it creates a very sticky competitive moat where we are able to give them a huge amount of value for their existing infrastructure.

We can choose to monetize that as either stand-alone software subscription or as part of a broader offering a fuller solution, including storage. And then I think with regard to the net new environment, as I said, I was particularly pleased with the fact that a very large percentage of our AI wins were from customers who we are not the incumbent data infrastructure provider.

And there, what we are able to do is combine AIDE together with our storage so that they can build a really good data lake or a data prep environment, and we saw momentum on that this past quarter.

And on the second part, George, how do you think about pricing your product for that? I mean is it . Does the ASP go up by 10%, 15%? Or is it something related to the type of workloads you're running? How are you thinking about monetizing it?

It really depends on the volume of data and the type of data and services that we are offering. Broadly speaking, it's tied to the infrastructure, the size of the data set and the value that we are offering the customer related to the type of data use cases that they are using with AIBE.

Your next question comes from the line of Katherine Murphy with Goldman Sachs.

You talked about investing in additional sales resources against this AR AI opportunity that you've highlighted. Is there anything you could share about how NetApp's go-to-market strategy is evolving as you go after more of these neo Cloud and sovereign opportunities in addition to your base enterprise customer.

Yes. We have built out a specialist team to pursue AI opportunities, both those that are focused on completely use segments like Neo and sovereign cloud or to help our frontline teams to drive AI wins in the enterprise.

We have also expanded coverage of accounts because we feel good about our opportunity to gain share. So we have added more accounts to our directly managed coverage resources -- and it's a sign of confidence. We have seen momentum building in our business through the course of this year, and our outlook for next year feels really robust.

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

I guess I'm sort of looking at the midpoint of the guidance for Q1 as well as the endpoint for the full fiscal year. And I think this implies relatively little sequential growth through the year. And I get the extra week add some complication.

But it seems as if you're sort of suggesting that the year could have less than seasonal patterns. Could you help me understand what you're thinking here?

Yes. Let me address that. So when you look at the first half versus second half of the year. As George said, we're expecting a seasonal pattern in the typical first half, second half when adjusting for the extra week in Q1. In other words, we take out the extra week in Q1, which is approximately $65 million. And you do the math, you would end up with roughly similar type of seasonality first half second half.

And so that's part of it. And then when you sort of look at the midpoint of the guide for Q1 and then midpoint of the guide for the fiscal year and sort of look at the Q2 through Q4, it gets you still in the sort of mid-single-digit percent growth over the same time period in fiscal '26.

Great. And just as my follow-up, we obviously understand the memory issues, NAND and hard does, DRAM. Just wondering what you've observed or experienced in terms of other supply chain constraints and how you might see those risks relative to the memory challenges?

Yes. Listen, I think that we work with multiple suppliers for pretty much every component of our kind of silicon lineup. We are cognizant that there could be constraints in other parts of the ecosystem. And I think this is why we have a broad range of offerings as well. I think one of the things that we have seen clients talk to us about is on HDDs.

We've always believed that HDDs were an important part of customers' overall lineup, and we have a strong set of solutions for that. At this point, given where we are in the year, I want to just say 2 things. One is, listen, we feel really good about the momentum in our business. We are early in the year.

We'll tell you more about how it plays out through the course of the year. Second, at this time, we believe we can source adequate supply to meet our outlook for the year.

Your next question comes from the line of Ananda Baruah with Loop Capital.

Really appreciate the question. I guess I'll just sort of quickly ask 2 in 1 part here. You guys have mentioned that you expect next year of a cloud ex spot to see accelerating revenue growth -- any view on over time what a normalized growth rate could look like? Or should we expect growth rate acceleration for the foreseeable future?

And then can you just remind us with some -- how to think about the sort of the mechanics underlying the gross margin expansion. It sounds like there's some mix component going on, but the margin has been expanding for a while now. So if there's anything in addition to mix, that would be helpful as well to know about.

Listen, maybe I'll just tell you at a high level, right? We're not providing specific guidance numbers and so on. I think what we see is continued strength in our 1P and marketplace cloud storage services. Those have grown consistently above the overall cloud storage business -- cloud business and are now a much bigger part of the cloud business than they were a year ago.

And so our view of how the cloud portfolio evolves over the next year is essentially, if you remove stock from the compare to last year, we just see the same trend continuing through the next year. But because cloud storage is a bigger part of the mix, you can do the math on what that does to the overall cloud storage, cloud business.

And with respect to the margin question, look, the target margin for the public cloud business is 80% to 85%, and we've been operating at sort of higher end of that range. And so as the business continues to grow faster than the rest of the company, it does give us a bit of a nice margin tailwind.

We have time for 1 more question, and that question comes from Nehal Chokshi with Northland Capital Markets.

Congrats on the execution and realized acceleration that you've talked about here. And it sounds like a lot of this is coming from AI-related demand. And you're giving these metrics in terms of the number of deals, but we still don't have a good sense as far as like what percent of bookings or revenue that is. Can you help us out a little bit on that front?

Yes. Thanks for the question, Nehal. We don't break it out. As I mentioned earlier, I think the previous question, we only talk about -- we quantify the number of opportunities or activity, let's say, wins in the on-prem business, but we don't break out bookings or revenue for AI.

It sounds like though that the revenue per deal has gone up significantly in this past quarter as it does sound like some of these large deals that came to [indiscernible] are in that AI category deals that's in that 500 dare, is that correct?

Yes. Look, I -- it's a wide range of sizes. I wouldn't want to venture any sort of anything that may not be -- there may or may not be correct. So I'll leave it at that.

All right. Well, thank you, Nehal. I'm going to hand it over to George for some closing comments.

Thank you, Kris. FY '26 was a record year for NetApp. Reflecting strong execution and accelerating demand for AI and cloud solution. Our hybrid cloud intelligent data infrastructure platform is at the center of customers' data-driven transformation, delivering secure, real-time zero-copy data activation for AI.

Our broad portfolio allows us to deliver the right balance of cost and performance for our customers, strengthening our resilience in a dynamic market, continued innovation and strategic partnerships are expanding our opportunities and driving sustainable growth and strong financial results and disciplined capital allocation enabled us to invest in the future and return value to shareholders.

As we look to FY '27, we are confident in our strategy and our ability to deliver ongoing growth and leadership in AI and cloud. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.

All right. Why don't I start? So good morning, everyone. Welcome to day 3 of the Flagship TMT Conference. My name is Erik Woodring. I lead the U.S. IT hardware research coverage here at Morgan Stanley.

I am delighted to be joined this morning by NetApp's CEO, George Kurian. George has obviously been at NetApp for over 15 years, been the CEO since 2015. He played a major role in kind of transforming the business into what it's become today. So George, thank you. Thank you very much. Thank you for coming to the conference. Good to see you.

Thank you, Erik. Good morning.

So before we start, just from Morgan Stanley side, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures for important disclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I don't have the safe harbor agreement yet. But Jeriel, do you want to come up and read it?

We have a safe harbor statement that we would like to read ahead of the presentation.

It's in the NetApp here. Perfect. Thank you, Jeriel. So just from the NetApp side, today's discussion may include forward-looking statements regarding NetApp's future performance, share are subject to risk and uncertainty. Actual results may differ materially from the statements made today for a variety of reasons described in NetApp's most recent 10-K and 10-Q filed with the SEC, and available on their website at netapp.com. NetApp disclaims any obligation to update information in any forward-looking statement for any reason. Thank you, Jeriel.

Perfect, sir. Thank you.

George. Welcome, obviously, a lot to talk about. I think the most natural kind of starting point is just a review of earnings reported last week. And maybe to that, the 2 or 3 things, most important kind of key highlights from the quarter, speak to the momentum in the business, and then we can get into specifics from there.

Yes. Thank you for having me. We just concluded and reported Q3 of our fiscal year. We had a strong performance, as we indicated we saw acceleration in our business in the second half of the year. Revenue growth ex the divestiture of spot was 6%. All of our focused growth priorities did very well. We had close to 300 AI wins. We had 11% growth in our all-flash arrays, again, well ahead of the market. We had growth in our high-margin public cloud business. Again, ex spot total cloud grew 17% with our first parties and marketplace services growing 27% year-on-year, and our Keystone Storage as a Service business grew approximately 65%, 68% year-on-year.

So overall, really good momentum across the business. Operating income and EPS were also record highs. So I feel good heading into the final quarter of this year and the momentum heading into next year.

So I want to maybe start just on the AI side. And to your point, you highlighted about 300 AI wins in the quarter. That was up from 200 in the quarter prior. Can you just help us understand those wins, those workloads, how does that kind of differ in either intensity or product as it relates to kind of the traditional backward-looking kind of storage customers?

Yes. I think in the AI landscape, we have 3 different areas of focus. One is what you call data preparation and data lakes, where customers are bringing data of multiple types together to analyze, the second is model training and fine-tuning, and the third is RAG and inference, where you take a model and actually use it for either classic inference or increasingly agentic use cases. We have -- we reported in the quarter that 60% were the first bucket, 20% middle and 20% the last bucket. They are essentially use our all-flash arrays for high-performance use cases, and then they use our object storage, for example, for cold data. A data lake, for example, could be a hybrid of those where they use all-flash for high-performance parts of the data lake and our object store for the big archive of data.

And maybe building on that kind of more of a philosophical or strategic question is how -- as we think about the world shifting in that direction, how do you differentiate from competitors that are trying to do the same thing, position themselves within kind of the AI opportunity?

Yes. I think we have worked on AI for many, many years. I think that we started out with sort of predictive AI. We have hundreds and thousands of customers using predictive AI models with us. In an AI landscape, we differentiate on sort of multiple dimensions. The first is, you've got to have competitive cost performance, and we do. We have introduced a new family of products, which takes performance and scale to yet another level, the AFX family. The second is a suite of tools that allow you to manage your data efficiently because these AI environments, while they're about speed, they also need to have multi-tenancy built in cyber resilience so that somebody doesn't go and hack in and take this data that you are using for your AI models or poison it in certain ways.

You've got a variety of data management tools that make it easy to version models and data sets. And we have built those over many, many, many years. I think the third area of differentiation is on hybrid and multi-cloud. We were the pioneer in building integrated solutions in the hyperscale environment. And now we are integrating data pipeline into those hybrid -- into the hyperscaler applications. For example, we announced a capability called S3 access points with Amazon that we had worked on for a long time.

This allows an enterprise to take their data and directly pipe it into an Amazon AI tool like SageMaker or Bedrock or variety, a broad suite of tools and makes it super easy for an enterprise to use their data.

And then the last is, listen, we are one of the largest holders of unstructured data in the world, and it gives us an incumbent advantage.

Perfect. Maybe, again, staying on AI, I think as a follow-up, you mentioned, I think in the quarter, 40% of AI deals, you won were for workloads in production the quarter prior was 25% to 30%. So if we take that 200 and 300 customers, that means the number of customers that are doing workloads entering production is basically doubling sequentially, 60 to 120 quarter-over-quarter. What does this tell you about, it doesn't have to be an inflection point for kind of AI-driven enterprise data demand. But what does that tell you in terms of the momentum or the inertia? Where are we in that ball game, so to speak?

I think we are encouraged by the momentum. We follow the mix of our business every quarter. I think it's still early days for enterprise AI. We certainly see, for example, regulated industries, who have their data better organized like certain parts of public sector for national security use cases, certain parts of health care and life sciences where their data has been well organized either for advanced patient care, better diagnostics or faster drug discovery. You look in certain parts of financial services for advanced quantitative modeling, risk management, fraud detection. So it's still specific use cases, but we're starting to see better momentum across the broad mix of our business, particularly geographical. Now you're starting to see other parts of the world begin to adopt it.

And to that point, I think what I hear from you is you kind of the U.S. is leading that momentum, but you're starting to see Europe and Asia kind of start to follow.

Correct.

Okay. Cool. You also, in the quarter, I thought something that was important, you highlighted growing interest from neoclouds. You highlighted the neocloud win in the quarter. You're working with them on what you call the differentiated value proposition that brings the AFX conversation into this broader conversation.

How significant is the opportunity if we, not next quarter, but just take a big step back and say, neocloud's AFX more broadly relative to your traditional legacy markets? Maybe the first question, is just how big can that actually become?

It's still early to tell what mix of the overall AI market will happen between hyperscale, neocloud, sovereign cloud, colocation and enterprise data center, right? I think there's lots of speculation, but it's still work in progress. We want to participate as broadly as possible in all the sustainable parts of the AI landscape. We have strong solutions that we have developed over many years and strong presence in sovereign environments across the globe, national flag carriers in Asia, many of the leading European cloud service providers. And as they build their AI stacks, we are a natural partner. And so we have several wins there. With the neoclouds, we are pushing 2 sets of capabilities that allow us to stand apart in addition to super high-performance flash-based storage for training and model fine-tuning.

We also are working with them on more sustainable, longer-term business models for them by helping them bridge enterprise data into their neoclouds, just like we have done with the hyperscalers. And in the hyperscaler world, listen, we are built into many of the hyperscaler sovereign environments. For example, as they build out sovereign regions or sovereign environments for national security or for European providers, we're part of those.

So our goal is to compete as broadly as possible and to help those service providers build sustainable value by bringing enterprise clients in better solutions to them.

Does the go-to-market change significantly for you? Do you have to make significant changes to kind of capture that opportunity?

There's some optimizations like we do all the time, but we know how to co-sell with large cloud providers across the globe, and this is just another version of that.

Okay. And then I want to kind of tie that into then kind of the product set and really how that's changing, talking a lot about disaggregated architecture, private cloud, it kind of brings us back to your event last October. Just how does the rise of kind of Agentic AI and generative AI more broadly impact storage and data requirements, but then also impact the way that you think about innovation and what you need to roll out to make sure that you can stay ahead of your competitors and capture this opportunity?

Yes. Very simply, Agentic AI will hallucinate, deliver bad actions, not just bad data, if the quality of data and the guardrails put around the data are weak and frankly, compromised, right? And so for Agentic AI to work, you need a good data foundation. That data foundation needs to be fast and resilient because these agents constantly go back to the storage to ask for new sets of data to refine their reasoning.

And then the second is you need a series of data preparation and organization tools to help the models find the right data. And so we introduced the AFX platform for the first, which is super high performance, scalable storage, and then we introduced the AI data engine, which is a suite of software that allows the organizations to discover, organize and put guardrails around the data for the second challenge.

And if we now kind of take what you've said in past Analyst Days or your most recent Analyst Day, and then kind of layer on the opportunity associated with AI more broadly and how that could expand the TAM. I realize, it's early days, but just how do we think about from a growth trajectory perspective, whether that's how you think about the market or what it could pertain to NetApp. Does that -- is it too early to understand how that could reshape the growth algorithm? Or just your thoughts around how it actually could reshape that growth algorithm?

AI will definitely grow storage because you need more data to analyze your business better, and in the process of analyzing your business better, you will probably generate more data as well so that you can automate various elements of your business process. And so we expect that to accelerate storage growth over time, and we intend to be an unfair beneficiary of that by taking market share in that growing market.

Okay. I want to maybe shift from the market opportunity to the customer set. And U.S. public, we saw a nice recovery in the business last quarter, after some of the challenges that you saw earlier in the year. I guess, the simple question is has U.S. public turned the corner, but maybe the broader question is just help us understand, maybe what's shifting with that customer kind of customer cohort, how that's contributing, how you're thinking about the world as it's emerging.

Yes. I think a year ago at this time, there was a lot of disruption in U.S. public sector. Usually, the year after a new administration takes office, there is some shifting in both budget outlook, as well as which agencies get budget. And so we are accustomed to that. But if you look back a year ago, Doji was sort of running across the U.S. government looking at various elements of contracts and there was a really hard time figuring out, even if you won a deal when the deal would actually flow through the procurement process, we then had in the first half of this fiscal year, a softer U.S. government result because of the shutdown and the duration of when appropriations actually hit agencies and funding vehicles.

Q3 was a bit better as we had expected, still soft, but you saw the performance. Our performance met our expectations, although it was a bit subdued. And we are looking to see strength growing through the rest of this fiscal year for the government.

Okay. Very helpful. It took us 8 questions to get into the memory question, but I just want to make sure that we do touch on it. Interestingly, historically, in times of inflationary cost pressures, you've been able to pass through higher input costs to customers you've adjusted list prices. It has been a tailwind to both growth and margins. This period is a little bit more unprecedented to say the least, right? I'd love to just maybe at a high-level start, how does NetApp approach this situation differently, given the differences versus past memory cycles or past input cost inflation cycles?

This feels quite like the year after COVID where there were significant supply chain constraints. We work in a 360-degree manner to -- across all of our stakeholders. I think the first is the industry has over its long history, passed through commodity price increases to customers when they go up and pass through commodity price decreases to customers when they go down. So I don't think that customers see the industry as doing something unusual when we pass through price increases. We have raised prices, and we will continue to if we have to do so again, we will continue to do so. That is in line with our prior practice.

We are working with our customers and channel partners, given the dynamic nature of pricing to be more agile, meaning have shorter durations of price protections in our contracts. And conversely, when prices go down to be able to pass it through to them faster.

The timing of those adjustments are not always going to be perfectly aligned with the timing of the cost increases or decreases, right? And so we are working super hard to get those balanced. We are working -- we have done prebuys to assure ourselves of supply. Sometimes, the mix of components in the prebuys may be a little different than what we had planned than what we see because some customers will come and say, "I want this component as opposed to another one, and so in Q3, we had to go out and do some open market purchases." And in Q4, we are running ahead of our outlook. We are substantially ahead in terms of revenue relative to what we forecast. So sometimes you have to go out into the open market to procure supply.

In addition, we have multiple suppliers. We are working with pretty much every vendor in the industry to qualify alternate sources of silicon because our priority is to have available supply, on the one hand. And the second is to drive to a gross profit dollar target that we set to give us the earnings outlook that we have given the Street.

Yes. So I was going to touch on that. And the question was, I'd love, if you could maybe elaborate on that a little bit, which just as we think about how you can optimize given the input cost pressure, it sounds like a focus on optimizing for gross profit dollar growth versus maximizing gross margins. Can you maybe just double-click on that a little bit?

Yes. We have a broad portfolio of solutions, right? And so we start with, hey, position the right product for the right use case. So for example, we have a suite of hybrid flash products, which are much more economical than all-flash products for capacity and price-sensitive use cases that allows us a competitive advantage over flash-only players.

The second is to position tools like Keystone or cloud, where customers don't need to or don't want to buy a large CapEx purchase. I think with those in mind, you're always trying to balance gross margin dollars -- with gross margin percent with gross profit dollars. Ultimately, we run the company for gross profit dollars, right? Because that's the earnings engine and profitability engine of the company. But you're always trying to balance lots of different factors.

Yes. And maybe last related question is, we're still in the early days of pricing increases. And congrats because you nailed the prepurchases last summer. How have your customers responded thus far, not only to the pricing increases, but when you talk about agility in some of those shorter windows, what's the feedback that you're getting in kind of real time from your customer base?

Yes. I think, first of all, we are not the only ones who have raised prices. I think everybody in every part of the tech industry has raised prices including the PC vendors, right? So I don't think we are operating in an environment where customers don't know what's going on. I don't think anyone is happy that prices go up, but they also appreciate that we have a broad range of solutions to offer them, and they are evaluating those alternatives. And the second is, I think that we have been transparent with them, and I think they appreciate that transparency.

Okay. Good. Again, shifting to the maybe customer response, and I wrote one can envision shifts in buying patterns, you brought up Keystone. So shifting from kind of a CapEx to an OpEx model. We talked about a renewed interest in hybrid flash. Can you maybe just elaborate a little bit more on Keystone? I know it's smaller, but maybe the question is when you talk to customers, the intentions of shifting to an OpEx model, does that become some kind of permanency there? Does that become elongated? Is this specific to the environment? Or is Keystone something that in this market, it causes them to take maybe longer term changes to how they buy from you, so to speak?

Our Keystone business has been incredibly sticky. We originally brought Keystone into the market, because we thought clients had temporal use cases where they said, I'm not really sure about my plans. I want to use your Keystone as a bridge to an alternative plan, maybe to go to your cloud offerings or retire an application. What we have found is, it is incredibly sticky.

And many customers who started out saying it would be temporary now have run those environments for many years, well beyond the original contract term. I think with regard to these types of environments, we have seen in prior use cases, prior such situations, people moving the mix of how they buy to maybe cheaper alternatives to traditional flash-based solutions. We have seen them look at, hey, should I finance the environment using leasing or some other alternative? And so we expect them to continue to consider those. And perhaps Keystone is one of the really good ways that I would envision a customer looking at choices.

And then just one point of clarity. I believe Keystone is margin accretive. Can you maybe just talk to, again, the financial benefit that you get from Keystone as well there?

Yes. Keystone is, you deploy equipment at the customer premise initially, so it would be a smaller revenue and lower margin initially. But over the course of the term, it becomes very, very profitable. And so we think that as Keystone becomes a broader mix of customers with the balance of mature customers, and new adopter customers, the margin trends up. And for a mature customer, it is accretive to the gross margin profile of the company.

I want to maybe go back to a comment that you made earlier when we talked about international markets or at least geographic trends. You did mention Europe showing improvement last week. What's the strategy that you guys have for expanding in some of these maybe smaller, but because of that faster growth market. So are there specific markets where you see an outsized opportunity to either capture share or where there is faster growth that you can go after, to get to kind of change that growth algorithm?

Yes. I think the first is we have been able to outpace much larger competitors by being focused in where we deploy our resources. When you're competing with companies that are 5x your size, if you try to cover the waterfront in as many places as they do, you won't be able to beat them. And so we have concentrated our attack plan in the biggest markets, and I can tell you that, for example, in Europe, if you lose #1 position in Germany, France and the U.K., the smaller countries in Europe don't matter. They can't make it up. And we have successfully executed that strategy.

We have -- early on, many years ago, we decided that China was not going to be a durable long-term bet for American tech companies. And so we partnered with Lenovo to use their scale and local knowledge in China and built a JV that has been a good win for both companies, and we continued to do that.

Within the sort of the mature markets, North America, Europe, Western Europe are really the focus areas, and we are -- we have gotten to #1 in many of those markets. And our aspirations are to build a significant moat between #1 and #2 in those markets. We have also invested in select growth markets that we think are longer-term bets.

So India, which we think is going to be a big market over time; Middle East, which we see as an AI hub; we're expanding our investments in Korea; we see the Japanese incumbent vendors and storage are mortally wounded, so we're investing in Japan. And then in the rest of the world, we are leveraging strong partnerships with locally knowledgeable local scale players to penetrate the market.

Okay. You -- I don't think you mentioned leveraging AI for software development. And obviously, that's kind of been a big theme over the last few weeks, not necessarily in the world of hardware, but I'd love to maybe just, I don't think we've asked this question, but is there any AI disruption risk when we think about the fact that you do have differentiated software, and it's such a focus point for you guys, is there any AI disruption risk as we think about that?

Yes. We use AI tools in software development. I think that those tools require man in the middle or human in the loop to make sure that they are accurate, that they don't compromise the resilience, the performance of the system. And so you need to have a lot of knowledge of how distributed systems work to actually use AI tools. It's not like AI tools can just generate a file system, right? We are decades away from that despite what other people might say. I think the second is we are using AI tools to build velocity and productivity into our development organization, velocity measured by how much output we are able to deliver in terms of payload to bring competitive capability to the market. And productivity measured in terms of the number of get commits per developer, for example, and we're seeing encouraging trends there.

I think the third area is, we are using deep learning and machine learning models to automate the behavior of our systems to optimize the cost performance of data across its life cycle and most importantly, to enhance built-in cyber resilience capability so that we can detect anomalies or malicious behavior instantly and block it.

And I want to ask you maybe building on that in terms of what you're doing internally as we think about companies leveraging AI to be more efficient, to be productive. You mentioned some of those initiatives. What's the impact that you -- that we should maybe expect on your operating model, headcount needs, your ability to drive leverage in that OpEx base?

Yes. As you know, we have been a steady grower of operating profits over many, many years. I think our operating margins this past quarter were north of 30%. And so we feel good about the trajectory of continued discipline. We are using AI tools broadly across the company to make our go-to-market more efficient to deliver more value in products to streamline the back office. And our expectation is to continue to do that.

We will balance sort of margin accretion to invest more in the business as well. We see an opportunity in the market where we have some tailwinds from AI and cloud and some of these growth opportunities and also several weakened competitors that we can attack.

Yes. Okay. So just to make sure that -- maybe to summarize that is we'll find ways to drive efficiencies and gain efficiencies, but there is also an opportunity to reinvest, and we don't want to necessarily not do that, so to speak.

Correct.

Right. Great. Last 2 questions for me. Just kind of capital allocation and capital structure beyond share repurchases and dividends. If you could just -- I don't think anything is changing there, but just kind of maybe reinforce that. And then the second part would be just the strategic importance of M&A to either the financial model or expanding, complementing your current technology set?

Yes. I think we have been disciplined stewards of capital. We have returned in the range of 100% of free cash flow to shareholders over the last many years through a combination of dividends and buybacks. I think when we look at the go-forward opportunities, I think we will be, again, on M&A with large-scale M&A, never say never, but our strong preference is for tuck-ins, especially software tuck-ins that enhance our differentiation in capabilities like cyber or AI data prep and data pipelines.

Okay. Great. I want to give you the opportunity as we're wrapping up here. Just to maybe share the final word, and that is either what you're most excited about as we look forward, that could be what you think Wall Street might not fully appreciate about the NetApp story. But just what's the kind of final message you want to leave everyone with here?

Yes. We are excited about the opportunities that data has to transform businesses. AI is really dependent on high-quality data and unifying it is a requirement for all enterprises so that they can be successful. And we have been stewards of unifying data from 2004.

We talked about unifying different types of data, and then we talked about unifying all of the locations you have your data. And then we are adding a suite of services and capabilities to make it easier to secure your data to protect it and use it for competitive advantage.

So our multiyear view of what the enterprise will want and the bets that we have made are paying off, giving us the ability to gain share in all-flash storage, to have a unique and fast-growing high-margin cloud business that continues to create a competitive wedge against our traditional competitors and to innovate in new areas like AI, data prep, cyber resilience and new business models like Keystone.

So overall, from a top line perspective, feel really good. We have an experienced management team that has been through many of these cycles before. And so we have kind of capabilities to manage through kind of memory costs. We have a broad portfolio and different ways to serve customers, and we are disciplined operators. So I feel like we have strong long-term value creation potential in a market where traditional competitors are much, much weaker than they ever have been, and we intend to take advantage of that.

Perfect. We are just up on time. Thank you very much.

Thank you. Thank you very much for having me.

Thank you.

Good day, and welcome to the NetApp Third Quarter of Fiscal Year 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Kris Newton, Vice President, Investor Relations. Please go ahead, ma'am.

Hi, everyone. Thanks for joining us. With me today are our CEO, George Kurian; and CFO, Wissam Jabre.

This call is being webcast 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 fourth quarter and fiscal year 2026, our expectations regarding future revenue, profitability and shareholder returns and other growth initiatives and strategies. 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 website, including our most recent Form 10-K 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 measures are available on our website.

I'll now turn the call over to George.

Thank you, Kris. Good afternoon, everyone. Thank you for joining us today.

We delivered another strong quarter with Q3 revenue of $1.71 billion, an increase of 4% year-over-year. Excluding the divested Spot business, total revenue was up 6%. Our accelerating growth, coupled with continued operational discipline has enabled us to drive profitability metrics higher. Operating income and EPS achieved record highs. We are in a strong position to deliver sustained growth and are on track to deliver our strongest year yet.

I'm proud to share a marquee moment that underscores our pivotal role as the intelligent backbone for modern data-driven innovation. The Super Bowl is more than the biggest sports event of the year. It is a global showcase of innovation and partnership. During Super Bowl LX, our technology transformed Levi's Stadium into an interactive data center. We manage billions of data points powering everything from video boards to real-time inventory and security operations. In this most demanding, no-fail environment, we demonstrated our ability to deliver flawlessly.

In the AI era, organizations face security threats, fragmented architectures, shortage of expertise and operational complexity, which make it difficult to unify and harness data for its full potential. We help enterprises solve these pressing data challenges by delivering a data platform that is optimized, secured and AI ready. Customers rely on NetApp technologies to be the data foundation to support AI innovation, modernize data infrastructure, strengthen cyber resilience and transform cloud strategies.

In Q3, approximately 300 customers selected NetApp to help prepare their data for AI and to be the storage foundation for their AI innovations. Last October, we announced major enhancements to our enterprise-grade data platform for AI workloads. These new solutions, AFX and AI data engines are generating significant customer interest and engagement. AFX is our disaggregated storage system purpose built for AI that gives customers the benefit of enterprise-grade security and capabilities, coupled with extreme performance and scale.

We are excited to report strong early momentum in AFX in its first quarter of shipment. We have secured significant AFX wins across key industries, including neocloud, financial services and semiconductor. An example of an early AFX win is for model training and fine-tuning at a neocloud. AFX stood out among competitive disaggregated architectures for its multi-tenant management, container integration, cyber resilience and replication capabilities.

One of the biggest challenges in AI is data. The AI data engine helps to improve time to value in AI projects by simplifying workflows with integrated data discovery, curation, policy-driven guardrails and real-time vectorization for Gen AI. By understanding where their data is, customers can ramp AI projects faster, boost results accuracy and slash time to insight. Our early access program has been highly successful, engaging customers from key industries such as semiconductor, media and entertainment, financial services and IT services. AIDE will be generally available in Q4.

NetApp helps customers modernize their environments with a unified adaptive data foundation that extends across on-premises and cloud, delivering high performance, availability and integrated security. As data center demands grow, customers are leveraging all-flash arrays to achieve density and power requirements, strong customer engagement and interest in our unified and block optimized all-flash storage portfolio, delivered another record all-flash array revenue quarter, growing 11% year-over-year to $1 billion in Q3 for an annualized run rate of $4.2 billion.

The importance of our robust cyber resilience capabilities cannot be overstated as customers look to safeguard their most valuable asset, data. The NetApp data platform delivers comprehensive ransomware protection, backup disaster recovery and data governance in a single secure foundation that reduces the time to detect anomalies, recover data and get our customers back to business. Embedded protections and our ransomware recovery guarantee help customers confidently withstand today's sophisticated threats and prepare for tomorrow's challenges.

These capabilities foster trust in NetApp in an increasingly volatile digital landscape, enabling us to win new customers and displace competitors. An example of this is a European financial services company needing to refresh its entire data center to enable scalability and compliance with current regulations. In Q3, this customer selected NetApp all-flash systems to replace multiple competitors. Critical to the win were our anti-ransomware services, data classification, and write once, read many snapshots, delivering business continuity, robust data protection and regulatory compliance while positioning the customer to manage future growth.

Keystone, our storage as a service offering continues to perform well as customers navigate infrastructure transitions, cloud migrations and rising memory costs. Keystone revenue grew approximately 65% from Q3 a year ago. In Q3, an insurance technology company planning a multiyear migration to the cloud selected NetApp Keystone as the storage solution to enable this transition. This new to NetApp customer selected Keystone for a fast and efficient way to eliminate a competitor storage as a service footprint that did not offer a true path to the cloud. As that example demonstrates, our first-party relationships with the hyperscale cloud providers is a real differentiator for us.

Adjusted for the Spot divestiture, our public cloud services revenue grew 17% year-over-year driven by first-party and marketplace services, which grew 27%. These services are a powerful driver for new customer acquisition. About half of the revenue driven by new first-party and marketplace customers in Q3 came from new to NetApp customers, highlighting the role cloud play in expanding our customer base.

Let me share a couple of examples of how our cloud services are displacing competitors. A multinational insurance company aiming to overcome the complexity of its legacy infrastructure and improved agility selected Azure NetApp Files for its proven performance, ease of use and enterprise-grade reliability, ANF is now the cornerstone of their cloud transformation.

Similarly, a retailer after experiencing a ransomware attack, moved off a competitor's infrastructure to the cloud. They chose AWS FSx for NetApp ONTAP for its support of immutable volume copies, providing data protection against cyber attacks. FSxN is now their default storage service in AWS.

As a leading enterprise storage solution provider and the only one with first-party data storage services native to the public cloud, NetApp is uniquely equipped to help customers easily connect their data with the leading cloud-based AI applications and accelerate modern workloads like AI in the cloud. In Q3, we introduced a new capability, enabling Amazon S3 access points for Amazon FSx for NetApp ONTAP. This allows enterprises to make their workflow simpler and more efficient by connecting the many AWS AI and analytics services directly with their NetApp data, both in the cloud and on-premises. Also in Q3, we announced the public preview of Object REST API on Azure NetApp Files, enabling seamless real-time integration between an organization's data and Azure's advanced analytics and AI services.

With direct and secure access to enterprise data, companies can extract actionable insights and make data-driven decisions faster giving them a competitive edge in an increasingly data-driven world. Already, these connections are being used by customers. In Q3, a multinational manufacturing company selected FSxN as the high-performance data layer for its AI workloads on AWS. The customers leveraging our recently introduced S3 support to bring AI to its large existing trial-based data sets without having to duplicate or replatform its data.

Before I wrap up, I'd like to address how we are managing through the unprecedented inflation in memory prices currently affecting the global market. First, we have raised our pricing and will do so again as needed. Second, we are working with our customers and channel partners to be more agile in this dynamic environment. Third, we are working with our multiple suppliers to address availability and manage costs as we have successfully done in the past. And finally, unlike our all-flash-only competitors, we have a broad portfolio that includes hybrid flash arrays giving us the opportunity to better service price-sensitive workloads.

In summary, solid execution and operational discipline delivered another strong quarter. Customers are choosing NetApp for our unified data platform that delivers exceptional value and operational efficiencies, solidifying our position as the intelligent data backbone for the AI era.

As I look to the future, I am confident in the opportunity ahead and in our ability to successfully execute on our strategic plan. We will continue to invest in key areas that drive growth and provide long-term value for our shareholders.

I'll now hand it over to Wissam.

Thanks, George, and good afternoon, everyone.

As George mentioned, in the fiscal third quarter, we delivered strong results, exceeding both the midpoint of the revenue guidance range and the high end of the EPS guidance range. Total revenue for the quarter was $1.71 billion, up 4% year-over-year. Non-GAAP earnings per share was $2.12, up 11% year-over-year.

Excluding the divested Spot business, which generated $25 million of revenue in the third quarter of the prior year, total revenue was up 6% year-over-year. The effect of foreign currency exchange rates was favorable to revenue growth by approximately 2 percentage points year-over-year, while it was immaterial relative to guidance.

Looking at revenue by segment. Hybrid Cloud revenue of $1.54 billion was up 5% year-over-year, driven by product, support and Keystone. Keystone continues to build momentum with revenue growth of approximately 65% year-over-year. Public Cloud revenue of $174 million was in line with last year's third quarter revenue. Excluding Spot, Public Cloud revenue was up 17% year-over-year, driven by strong demand for first-party and marketplace storage services.

At the end of the quarter, our deferred revenue balance was $4.63 billion, up 12% year-over-year and 9% year-over-year in constant currency. Remaining performance obligations were $5.11 billion, growing 14% year-over-year. Unbilled RPO, a key indicator of future Keystone revenue was $482 million, up 38% year-over-year.

Moving to the rest of the income statement. Please note, my comments will be related to non-GAAP results unless stated otherwise. Gross margin for the fiscal third quarter was 71.2%, up 50 basis points year-over-year, driven by Public Cloud gross margin expansion. Gross profit was $1.22 billion, up 5% compared to Q3 2025.

Hybrid Cloud gross margin was 69.6%, down 1.8 percentage points sequentially as product gross margin declined by 4.2 percentage points to 55.3%. This was primarily due to an unfavorable revenue mix and to a lesser extent, the need to make market purchases to be unexpectedly higher demand for certain products.

Our Support business continues to be highly profitable at 92.5%. Professional Services gross margin was 31.3%, improving 100 basis points sequentially, driven by higher Keystone revenue mix. Public Cloud gross margin was 85.1%, up approximately 2 percentage points sequentially and approximately 9 percentage points year-over-year.

Operating expenses of $686 million were down 3% sequentially. Operating expenses were up 3% year-over-year, in part due to the unfavorable effect of foreign currency exchange rates. Operating income was $533 million, up 8% compared to Q3 2025. Operating margin was 31.1%, up 1.1 percentage points year-over-year.

Earnings per share was $2.12, growing 11% year-over-year, exceeding the high end of our guidance range.

Our results demonstrate strong execution on key revenue growth opportunities in all-flash, Public Cloud and AI, along with the continued focus on operational discipline, resulting in record highs in both quarterly operating income and EPS.

Cash flow from operations was $317 million and free cash flow generation was $271 million. During the quarter, we returned $303 million of capital to our shareholders, with $200 million in share repurchases and $103 million paid in dividends of $0.52 per share. The Q3 diluted share count of 200 million decreased by 8 million shares or 4% year-over-year. Cash and short-term investments were $3 billion. And gross debt outstanding was $2.5 billion, resulting in a net cash position of $522 million.

I'll now turn to non-GAAP guidance, starting with Q4. We expect revenue of $1.87 billion, plus or minus $75 million. At the midpoint, this implies a growth of 8% year-over-year. Excluding the divested Spot business from the year ago comparison, our revenue guidance implies a 9% growth. We expect Q4 gross margin to be between 69.5% and 70.5%. Operating margin is anticipated to be in the range of 30.5% to 31.5%. We expect EPS to be between $2.21 and $2.31.

Turning to full year 2026. We now expect fiscal year 2026 revenue to be between $6.772 billion and $6.922 billion, which at the $6.847 billion midpoint, reflects 4% growth year-over-year. Excluding Spot, our revenue guidance implies a growth of 5% year-over-year. We expect gross margin to be in the range of 70.7% to 71.7% and operating margin to be in the range of 29.3% and to 30.3%. Other income and expenses are anticipated to result in approximately a $24 million net expense.

For the year, the tax rate is expected to be in the range of 20.2% to 21.2%. EPS is expected to be in the range of $7.92 to $8.02.

In closing, as we look ahead to the rest of the fiscal year, we remain committed to our strategic vision and are confident in our ability to navigate this dynamic environment. Our focus on revenue growth and disciplined execution is yielding positive results and record profitability. We are dedicated to delivering exceptional long-term value to our customers and shareholders.

I'll now turn the call over to Kris for Q&A.

Thanks, Wissam. Operator, let's begin the Q&A.

[Operator Instructions] We'll go first to Param Singh from Oppenheimer.

Really appreciate if you could give some more color on what's driving this incremental growth on the product side. What are you seeing in terms of adoption? And how persistent is that?

We have, as we guided from the start of the year, been working on large deals that for many quarters, some of those deals closed in Q3 and a number of them are expected to close in Q4. And so we're excited about the momentum in our business and ability to close these large deals.

Got it. And maybe one for Wissam. Look, the product gross margin, obviously, is going to be a little bit difficult to manage in this pricing environment. Help us think through what can you pass through to customers? What's your supply chain agreements? And can you get enough componentry not only on the DRAM and NAND side, but also on the HDDs.

Yes, sure. Thanks for the question. So look, as we've said all along, we are operating in a dynamic environment. Commodity prices are increasing at fast pace. However, we do have agility and the ability also to manage the situation through either adjusting prices working with our customers and partners and partners to be more agile. And we also have our products qualified at several suppliers that we work very closely with to understand what the supply is doing and negotiate prices in advance where we can. And also, we have the ability to offer alternatives for some of our customers for price-sensitive workloads, we have the ability to offer our hybrid flash array or for some customers who have much more interest in the consumption model, we can go for our Keystone, which is storage as a service or our Public Cloud business.

With respect to maybe the second part of your question, you mentioned also hard drives. We are seeing some price increases there, but it's nothing compared to the rest of the components we're seeing, for instance, on the NAND memory, obviously, has been in the news for quite some time and other types of semiconductor supply chain.

Katherine Murphy from Goldman Sachs has the next question.

You talked about 300 AI deals signed in the quarter, up from 200 in the previous quarter. And I was wondering if there's anything you could share here about the mix across use cases and customer types, if there's any areas you're seeing particular traction. And just as a follow-up, anything you could share to help us think about the potential contributions of AFX and AIDE as we think about 2027 and what the potential margin profile would look like there?

We have seen strong momentum in our AI business across multiple industries, public sector, manufacturing, health care and life sciences and financial services in particular as well as early signs of adoption of AI in semiconductors, for example. In each of those cases, our hybrid architecture, our ability to deliver performance at scale with a rich set of data management capabilities has us standing out.

With the introduction of the AFX, we are also seeing momentum in the neoclouds for use cases such as model training and fine-tuning. In terms of the outlook for AFX and AIDE. AFX is a new architecture, so it requires qualification by customers. It comes with a proven software set, but still, customers will test and adopt it. We were ahead of our expectations in the first quarter of availability, but we are also not predicting a ramp like you saw, for example, with the C-Series, AIDE provides differentiation not only for new environments, but also for brownfield environments where customers can expand the value from their existing investments with us. and we'll tell you more on the outlook of these products as we head into the next fiscal year.

The next question is from Samik Chatterjee, JPMorgan.

George, maybe if I can start with your price increases and if you can share what is the magnitude of the price increases you've taken? And how are you seeing sort of customers respond to it? I assume if prices are going up, customer budgets don't flex up to the same extent? Or what are you seeing sort of as a typical customer response to that? And I have a quick follow-up.

Yes. We raised prices at the start of this quarter, and those increases were roughly in line with what you saw in the market. It varies, of course, by type of product. With regard to customers, we have said for many, many, many years, customers budget in dollars, not in systems, and those dollars are tied to their IT spending priorities. We offer them a range of options as Wissam mentioned earlier, hybrid flash, all-flash, Keystone consumption, cloud offerings as well as a huge range of features to optimize the use of flash in their existing systems to give them more value. And so those conversations are ongoing, just like they've been every quarter for many years.

Got it. Got it. And maybe for Wissam, if you can walk us through the gross margin drivers at the company level between sort of 3Q and 4Q? And is it really the moderation just driven by product gross margin. And I think on the last call, you had outlined that you still believe that when it comes to fiscal '27 gross margins can still be sort of basically flat over fiscal '26, even with memory prices going up. Is that still your expectation because memory prices have changed quite a bit over the last sort of 90 days?

So let me start with -- there's a few parts of the question. Let me start with Q3. Look, Q3 to Q4, really, the dynamics moving from quarters is very much driven by the revenue mix, the component of the revenue mix. When we look at Q3 versus Q4 revenue, we're seeing growth across the board. And so just the revenue mix is pretty much what's driving these components. And what's driving the ultimate 70% midpoint, let's say, on the guidance.

When I look at fiscal '27, one, I think it's too early for us to really guide to '27. And I don't recall necessarily saying that we're expecting to be to be in line as much as to say that we would be very actively managing our business, like I mentioned earlier, with respect to working with our suppliers to track the plan as much in advance as possible and where there is opportunities for us to lock in prices to do that, but also working through our -- with our customers to maintain that agility and help them find the right solutions for them in an environment that's dynamic, to also adjusting prices if needed to make sure we continue to protect our profitability.

Look, as we think through our product margin, I would say really a couple of things. One is our long-term product gross margin target is still that sort of mid-50s to high 50%. And then the second thing I would say is, from a company perspective, we really are focused on the total company margin. But more importantly, we're also focused on the gross profit. because we believe that gross profit for the company is really what drives our earnings growth.

The next question is from Aaron Rakers, Wells Fargo.

Just to kind of build off that last question a little bit. Wissam, maybe it would be helpful to appreciate what are you seeing from a pricing perspective, particularly on NAND flash? What's kind of embedded in your gross margin assumptions today?

And then talk a little bit about the duration or how the duration of your supply commitments have changed. I think in the last couple of quarters, you kind of talked about having good visibility through the fiscal year. But how has that evolved to kind of think about next fiscal year and any inputs into that?

So look, I mean we talked about also when you look at Q3, for instance, sometimes we have mix that is not as predictable. We did have to buy a little bit in the open market or basically replenish some inventories in Q3 because we had some unexpected high demand on certain products. But as we look for fiscal '26, the dynamics haven't changed from what we discussed before. We're still mostly covered from our prebuys that we did earlier in the fiscal year.

For Q4, we may have some demand where we're replenishing inventory. I'd rather not talk much about fiscal '27, given that we're still focused on really closing the fiscal '26 in a strong way. And there's a lot of -- I mean, as you know, this is a very dynamic environment. I wouldn't want to sort of make a statement on duration of cycle or [ any ] comments on the price, that's not necessarily my area of expertise.

Maybe I can just comment on the price increases. We did raise at the start of the quarter. As we have said many times, it takes a little while for those to be actually actionable at customers because we want to give them some amount of time to plan their purchases. And so we typically give customers a period of time like 90 days to 120 days to manage their purchasing agreements with us. So we raised prices at the start of this quarter, and we'll give you an update when we report the quarter.

Yes. Very helpful. And as a quick follow-up in this environment, I'm curious, you kind of alluded to, I think, the fourth point you highlighted in your prepared comments. You do have a hybrid product portfolio. Are you seeing customers actively maybe move away from deciding to go all-flash back to hybrid, maybe Keystone versus CapEx-centric purchases? Any change in behavior that you're seeing across customers in that regard?

It's too early to draw a trend. We are certainly seeing more interest from customers around some of those topics that you mentioned, hybrid flash, Keystone and other alternatives.

Wamsi Mohan from Bank of America has the next question.

Maybe, George, you can just help us think about some of the purchasing behavior trends you're seeing in storage if there's any concern around supply availability, which is causing people to perhaps prebuy, perhaps prebuy ahead of some of the price increases that the industry knows is coming. It'd be helpful to get sort of what you're picking up from your customer conversations. And I have a quick follow-up.

Yes. Thanks for the question, Wamsi. While we can certainly understand the behavior that you were describing, our Q3 results were not a result of pull-ins. And importantly, our Q4 guidance does not rely on pull-ins.

As we have said from the start of this fiscal year, we expected increasing momentum through the second half of the year for a few different reasons. First, as we said, Europe started to get better through the second quarter. And as you saw in Q3, we have increased momentum in Europe. We said that U.S. public sector would be less of a headwind in the second half of the year, and while it hasn't fully recovered, it was -- met our softer expectations in Q3. And we said that we were working on large deals that would happen in the second half of the year at the start of our fiscal. And we have been working on those deals. And we have seen some of them come through in Q3, and we expect more to come through in Q4.

Finally, with regard to what we see broadly in the market, IT spending has always been tied to customers' business outlook. And what we see today is that business outlook is pretty favorable. It is quite similar to what we saw last quarter, but in certain markets like Europe, things are picking up. And so IT spending, you can see in the public reports is expected to be reasonably durable this coming 12 months.

Customers then prioritize business projects and associated with those business projects, infrastructure projects, like we said, cyber resilience, cloud transformation, data center infrastructure upgrades, as well as AI projects, and we are well positioned to capture our share of those markets. And we are seeing that reflected in the mix of our business, high performance flash to support AI workloads growing number of AI use cases and of course, growth in cloud. We'll tell you more. It's a dynamic environment. We'll tell you more when we report next quarter.

Okay. And a quick follow-up. How do you feel about the supply availability on SSDs as you go into next year? There's been a lot of talk about memory companies coming back to renegotiate pricing at a faster rate, not necessarily honoring all the LTAs that were put in place prior. Obviously, you guys have a lot of scale. So just wondering what you're seeing on that end from a component both availability and negotiation standpoint of if that's -- the window of that is shrinking from maybe a quarterly negotiation to a monthly negotiation? And any color on LTAs, too.

Yes. I think we work very closely every year and every quarter with a broad base of suppliers for virtually every component in our systems. We are not experiencing any supply shortages at this time and are not aware of any that is upcoming. Of course, it's a dynamic environment. And so we are staying super close to our suppliers, qualifying multiple different components so that we have, first, access to supply so that we can meet customer demand; and second, competitive price points for those supply. So these are dynamic. It's not -- we don't see any specific trend to comment, Wamsi, other than, listen, we're engaged like we always have been with our suppliers.

The next question is from Erik Woodring, Morgan Stanley.

George, not to belabor the point here on memory inflation, but if you take some of the public views on future memory price hikes, we could be in store -- the industry could be in store for multiple price hikes this year. I would just love to know how you approach balancing protecting margins and keeping those product gross margins within the mid- to high 50% range, while also limiting the risk of demand destruction or even market share losses? I know historically, storage has an elasticity of less than 1, but we're in pretty unprecedented time. So just curious how you're thinking about balancing that in this environment.

Yes. Listen, I think that we anticipate pricing and the sort of the tight supply environment to continue for a period of time. And so we are not expecting this to be a short-term issue. I think, as we said, the first thing is to make sure we have adequate supply across multiple suppliers to both assure that we can meet customer demand as well as so that we can have competitive positions in the market from a pricing standpoint.

With regard to our operating model, listen, it's -- every quarter has puts and takes. There are deals that we want to be competitive on and there are deals where we say, listen, we probably don't want to be a part of that specific transaction. And I think those continue to date. I think with regard to our kind of operating model, as we said, as Wissam mentioned, our core focus is to drive gross profit dollars because that, in turn, drives the earnings per share model of the company. I think, of course, within that, we look at matching supplier cost to us with our pricing to customers while respecting that it may not happen immediately because we want to give customers some time to adjust. And so that's kind of how we are operating.

I think that -- with regard to demand, I think as we have said many, many, many times, customers budget in dollars and they budget against business priorities. It is our responsibility to be in the spending priority stream of our customers and to give them the best value offering for the budget dollars they have to spend, and so we bring a lot of different options. We bring competitive storage-efficient flash, we bring hybrid flash solutions. We'll bring cloud solutions. We'll bring Keystone and we'll bring the full portfolio. Just like we do every quarter, certainly now it's an elevated environment, and so we'll do even more of that.

Okay. Understood. And then just a quick follow-up maybe for you, Wissam, and maybe it's a clarification. But I think when we look -- when you were talking about fiscal 3Q product gross margins, you were talking about kind of unfavorable mix as the reason why margins were down sequentially. All-flash was up 11%, that was stronger than your overall product growth. So can you just maybe help us better understand why mix was the headwind to product gross margins when that part of your business, when all-flash was outperforming. We just want to make sure I understand that dynamic.

Yes, of course, Erik. So when we talk about revenue mix, it could be the multitude of things or a combination thereof. Revenue mix is driven by geos, by customer type, by customer, by product. And so there's multitude of things that contributed to that. I wouldn't want to get in more details than this.

Krish Sankar from TD Cowen is up next.

Two of them. George, first one, I'm just kind of curious, where do you think we are in enterprise AI storage adoption cycle. It looks like last year, they were still going through pilot and data preparedness. Do you think we enter production this year? Or do you think that's still TBD? And then I have a follow-up.

I think, as we said, our AI business has grown in terms of AI customer wins. I think this quarter, a year ago, it was around 100-plus wins, it's now close to 300. So we're seeing acceleration in our AI business. Within the AI business itself, there are industries and use cases that are certainly more advanced and more repeatable in customers, and there are others that are further behind.

So for example, in regulated industries where their data is well organized, you are seeing customers put stuff into production or if you want to call it a pilot, it's a very large-scale pilot. Health care, life sciences, some parts of public sector, manufacturing, there are lots of use cases there that are starting to progress well beyond what's the pilot. Within our mix of business this quarter, roughly 60% were still in the data prep, data readiness, data lake models and 40% were in production, training or production inferencing use cases.

Got it. Got it. And then just a quick follow-up. In the past, like your visibility on lead times for storage used to be a few months. Has that changed now with the memory dynamics, i.e., commodity costs going up, [ you're ] raising prices, has that really changed the visibility timeline?

Listen, it's certainly a dynamic environment. We are staying on top of lead times. I think that it would be inappropriate of me to say that lead times are uniformly extending. We're not experiencing that. There are, of course, specific components that might be on one configuration that are causing a longer lead time. We're not experiencing anything across the board and so far. And we are working hard to bring alternate silicon into those configurations so that we can meet reasonable lead times.

As you know, in the prior supply chain situation that we experienced a few years ago, we were able to manage through that without having really long extended lead times because we use merchant silicon that's off the shelf. And we have multiple suppliers who we qualify for a particular piece of silicon. That being said, it's dynamic, and we're staying on top of it.

The next question is from Steven Fox, Fox Advisors.

I guess I was just curious if you can provide more color going forward as NAND prices go higher, your assumptions on sort of hybrid arrays selling more? Are you seeing -- can you maybe talk about how much replacement demand you're seeing from customers that were looking at maybe lower-end AFAs now are going into hybrids replacement into other consigned business, et cetera. How does that mix look going forward?

I think it's a great question. It is a topic of ongoing discussion at our customers. As we said earlier, we raised prices at the start of this quarter. And so that has triggered some of the discussions with customers about what's the optimal architecture, and we are seeing more discussions of HFA. It's too early for me to say it's a trend, but there are certainly a lot more discussions once we raise prices, and those price increases were more on AFA rather than HFA.

And I know you said that, obviously, HDD prices aren't going up nearly as much as NAND prices. But can you just give us a sense for ability to procure HDDs at this point going forward?

Yes. Listen, I think that we are well aware of the constraints in the market. So far, on HDDs, we feel good about our ability to procure what we need even with an elevated demand picture potentially. I think that specifically, we use HDDs that are dissimilar to the ones that are in short supply. We are not buying the highest capacity HDDs, which are the ones that are more constrained. I hope that gives you enough color.

Tim Long from Barclays has the next question.

Let's see if I can get a prize for asking 2 without one of them being on memory. So maybe eleven here. Can you just touch on the Public Cloud business, maybe 2-parter on the Public Cloud business. Excluding Spot, I think we've been running in this high teens range for the last several quarters here. Talk to us a little bit about going forward how you think we could potentially break out of that range? Are there any new offerings or new customer sets or anything that you see in the pipeline that could maybe accelerate the growth in that piece of the business?

And then related to that, obviously, the gross margin in the Public Cloud was really high, I think, kind of above ranges. So Wissam, if you could talk a little bit about profitability of that business and how much more room is there, or are we kind of tapped out on the margin side for Public Cloud?

I'll take the first one. Thank you for the question. With regard to continued growth in Public Cloud, it's sort of threefold. One is to take the new customers who we continue to add at a good clip, get them to adopt more and more of our portfolio. We call that cohort management, and it's really expanding within our growing customer set to use more of our technology. That includes offering different price points for storage solution, adding new capabilities and so on.

The second is to connect into the AI growth rates of the hyperscalers. I think you saw us bring innovations to the market like S3 access points for AWS that allows customers to use their AWS' broad suite of tools alongside our storage solutions. This gives us the ability to expand into new wallet opportunities and customers.

And then the third is to scale go to market. I think we have done a good job in certain countries. We need to leverage more indirect routes to market as well as broaden the number of places we are growing. And you will see us continue to look at ways to invest to grow the business. It is a highly profitable business, and it's extraordinarily sticky.

And so I'll turn it over to Wissam for the second part.

Yes. And Tim, for the second part, we did provide the long-term range being 80% to 85% from a profitability perspective on the gross margin line for the Public Cloud business. Obviously, we are at the high end of that range in Q3, and we're comfortable operating at this level for now. I wouldn't say we're tapped out, but it's also too early for us to sort of move from that range.

The nice thing about the Public Cloud business, when you sort of put it also in the context of the overall company, if we go back to the comments around the margin for the total company and the gross profit for the total company, it is an accretive business and it's growing at a faster pace than the rest of our revenue streams. So all in all, it [ cuts us ] on the margin line.

Next question comes from Jason Ader, William Blair.

Just firstly, on the Q4 gross margin guidance. It just seems to imply if we keep everything else kind of equal, it seems to imply that the product gross margin will be sort of flattish sequentially, and I wanted to just confirm that, that's the right way to think about it, Wissam.

So Jason, without getting into a lot of the details on line by line, as I said earlier, when you look at the Q4 guidance for gross margin, really, the dynamics quarter-to-quarter are driven by very much the overall components of the revenue, basically, the revenue mix.

Right. But I mean like the other parts of the business, the cost of services has been pretty much 84-ish percent, right? So that was -- I'm just trying to do the math here based on what your guidance was. I just wanted to make sure that there's nothing on the maybe cost of services side that should be called out that would vary from where you've been over the last couple of quarters?

I mean, to your point, typically, there's sometimes minor fluctuations quarter-to-quarter on these lines. And so I really would rather not get into the line-by-line guidance because we typically guide [ for the ] total company. But yes, when you look at sort of the various components, there's fluctuations, minor fluctuations quarter-to-quarter.

Okay. Great. And then for George. George, as you kind of look at the just dramatic improvements, especially on the software engineering side that AI is bringing to bear, how are you thinking about the development organization at NetApp? Are you continuing to hire? Is this an area where you think there could be some pretty substantial efficiencies over the next couple of years at NetApp? Just what's your overall philosophy strategy at this moment? You may have seen there's some chatter today, the company Square is like laying off like half its workforce. So I know that's maybe a very extreme example, but -- and they're doing great. So it's just -- it's basically about AI and efficiency. Maybe just speak to that larger topic.

Yes. I think, listen, we have been prudent stewards of expenditure. Our operating margins are north of 30%, right? And so we will continue to look for efficiencies with regard to using AI to develop software. We already do so. And our first priority is to, at this moment of weakness for many competitors, to accelerate the amount of innovation we put into market. And so while we'll always look to be prudent and optimize spending to the right parts of the business, we also see that it's important for us to continue to bring innovation so that we can capitalize on some of our weaker competitors. And you'll see us provide more instructive direction on that as we go through the next fiscal year.

We'll take the next question from David Vogt, UBS.

So George, I jumped on late, I might have missed this. Have you seen a recovery in sort of the federal category that's been sort of an albatross in the industry for a while. And the reason why I'm asking is you said you saw some orders that you've been working on for a couple of quarters close. And what is kind of your expectation or that particular vertical as we move forward given sort of all the noise, particularly out of [ TC ] as of late. And then I have a follow-up for Wissam.

Yes. At the end of last quarter, we said that our outlook for the second half of the year was cautiously optimistic. We said that we saw people starting to come back to work in our Q3, but it was too early for us to see broad-based funding into programs translating into orders. We met our cautious expectations in our expectations for Q4 is that it improves from Q3. And then we'll tell you more about next year when we get to next year. I think that Q2 was, of course, because of the shutdown [ of ] severe impairment. Our expectation is that Q3 and Q4 were better than that, it's too early to comment whether it's robust yet.

Got it. Okay. And for Wissam, I know I might have missed this again. I didn't catch in either the prepared remarks or any responses to a question regarding your purchase commitments. I know you talked about you're covered based on the inventory and kind of the commitments that you've made. Can you kind of share with us sort of the magnitude of the purchase commitments that you have on balance and so we can kind of get a sense of how to think about that playing out over the next couple of quarters? And when we think about that also, what is sort of the working capital commitment or obviously, your program or your strategy to mitigate sort of the higher component costs that are flowing through the market right now?

Yes. So we didn't talk much about the purchase commitments. But I would say for fiscal '26, there isn't much of a change from what we talked about from what we talked about last quarter, David. I mean we did replenish some inventory in Q3, we're probably doing some in Q4 just to make sure that we have what we need from a mix perspective to deliver the revenue. It's too early to talk about fiscal '27. Obviously, our supply chain team works with all of our suppliers on a regular basis, as George mentioned earlier, and we continue to work to -- with -- the top priority for us is to ensure supply availability and then, of course, to be able to negotiate whatever pricing, better prices or best prices that we can.

Relative to working capital, look, we have a very strong balance sheet and there is no concern there if we need to take action to secure supply or protect or better pricing or do a combination of the two, then we have plenty of flexibility. And also sometimes we work with third-party logistics companies that could help with that. So this -- from my perspective, there's no concern on working capital fluctuations.

The next question is Simon Leopold, Raymond James.

I wanted to see if you could talk a little bit about the competitive environment, specifically in light of price adjustments. And what I'm trying to understand is, is every participate in every vendor raising price by the same amount at the same time. How much variation is there? And how should we think about this dynamic?

Thanks for your question. It's always been a competitive industry, and our -- most of the players in the market are rational. With regard to the price at the customer versus the list price, different vendors take different approaches. Some of them raised list prices and have the same discount level. Others may not raise list prices as much. But restrict discounting.

The net of it is everybody is roughly in the same boat in terms of the cost structure of their commodity supply. And so it really becomes around the software value you bring, the range of offerings that you can present to customers and the discipline at which you run your business. And so we don't see much deviation from that. I think one of the places that we have are sort of working on it to position the right offering for the right use case, particularly HSAs are starting to see a lot of interest from customers. And it's too early to comment whether that's a trend, but there's certainly a lot more discussion about that going on.

The next question is from Alek Valero, Loop Capital.

Alek on for Ananda. So my question is, how do you see the rise of AI agents impacting, first off, your AI business? And how should we think about the progression from where we are today in early adoption to a point where AI agents become a meaningful part of -- drive a meaningful part of your revenue and demand for your products?

I think it's a long question, but I'll try to give you a couple of short answers, right? I think, one is AI agents depend on high-quality data and good guardrails so that they don't make mistakes. We have introduced a series of technologies that we call the AI Data Engine that makes those data preparation and guardrails and enforcement much easier to do.

The second is AI engines typically repeatedly go back and do what's called a recursive kind of request for data so that it can improve its analytical outcomes. And so our higher performance systems like our AFX system, some of the cashing technologies that we have built to optimize the data pipeline, those become useful as the world moves to agentic. And there's a lot more innovation we are working on that we will tell you more as we bring that to market.

Our final question today comes from Asiya Merchant, Citi.

George, I don't know if you commented on this, and again, apologies if I joined in late. But just your opportunities to win business with some of the neoclouds, I mean, not necessarily the hyperscaler. And I know you have your first-party services on a lot of these hyperscale offerings. But how do you look at the sovereign or the neocloud opportunity? And was there any traction there that you're seeing? Just any color you could provide on that sort of customer segment would be great.

Yes. I think that once we introduce the AFX solutions, we are seeing growing interest in the neoclouds. As we said, we had a win in a large Asian neocloud this quarter with the AFX in its first quarter of availability. We are working with other neoclouds to provide a differentiated value proposition that includes the rich suite of cloud-ready data services like multi-tenancy, like integrated security, all of the things that we have proven in the hyperscalers, which now these neoclouds want in their environment. Of course, performance, scale, all of those capabilities.

And then hybrid use cases where as they move their business towards addressing enterprise AI, our incumbency and our ability to bridge on-prem to neocloud is quite differentiated. And so we'll tell you more about it over the next few quarters. We recognize that, that's a large segment that we can pursue and we're making a focused effort to go after it. It's early, but we'll tell you more, and we are encouraged by what we see.

Thank you, Asfiya. I'll now hand it over to George for some final comments.

Thanks, Kris. Thank you for joining us today. Our strong execution and operational discipline enabled us to deliver another outstanding quarter. Our unified data platform delivers exceptional value and operational efficiencies, solidifying our position as the intelligent data backbone for the AI era. And our broad portfolio positions us well to navigate the current inflationary memory environment.

We are on track to deliver our strongest year yet. And looking ahead, I am confident that our visionary approach to a data-driven future will enable us to outpace market growth and capture additional share, driving significant value for our customers, partners and shareholders.

Thanks, everyone.

And once again, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation. You may now disconnect.

Hi, everybody, thank you for joining Tim Long, IT hardware, com equipment at Barclays, very happy to have with him here from NetApp, CFO, relatively new CFO. But oddly enough, I did a fireside chat with this fine gentleman at their headquarters a few weeks ago. So we get to turn the tables a little bit here.

So maybe I think you got to read a little disclosure, and then we'll start.

Yes. Just make sure I read the safe harbor. So today's discussion may include forward-looking statements regarding NetApp's future performance, which are subject to risk and uncertainty. Actual results may differ materially from the statements made today for a variety of reasons described in NetApp's most recent 10-K and then 10-Q filed with the SEC and available on our website at netapp.com.

NetApp disclaims any obligation to update information in any forward-looking statement for any reason. Thank you.

Okay. Thank you. I appreciate the time. I know it's pretty crazy times for everybody. So got a few kind of hot topics here, but maybe we'll start off. You're still relatively new to the CFO seat at NetApp. And so maybe talk a little bit about kind of your first year and maybe the priorities that you're focused on, and then we'll get into some of the parts of the business.

That's great. First, thank you so much, Tim, for having me, and happy to be here. So yes, first year at NetApp, very excited. It's a great company with great technology and great future. The key priorities are no surprise focusing on revenue growth as well as profitability expansion. So basically, from top line to the bottom line, focusing on various elements, including our investment on the portfolio side, making sure that we're investing in growth opportunities with high ROI, all of our project from an R&D perspective and also looking at the go-to-market space, selling and marketing and making sure that we're investing our resources where we have the highest return on investment from a revenue generation perspective.

On the -- and obviously, with the focus on growth and profitability, the fallout of that is continuing to improve on free cash flow generation. The company has had a great record of being very disciplined in investment were very disciplined in where the OpEx goes and also very disciplined in cash generation. And so my goal is to improve on that as well as continuing to focus our capital allocation like we've done in the past on continuing to invest in the business as well as returning capital to our shareholders.

As you know, this year, we're returning up to actually over the last few years, including this year. We're returning up to 100% of our free cash flow to our shareholders through dividends and buybacks. Happy to be here.

Great. Great. Let's get into sort of topics that we obviously get a lot of questions on, and we got to start with the product gross margin. Really great performance last quarter. You got the question a million times rising and environment. How do you deal with it? So maybe walk us through how you see the moving parts around product gross margin. I think it was a very big surprise, most in the hardware world, had pretty nice surprises. We can never tell with pricing or what's in inventory.

So just give us your view of how to frame the outlook for product gross margins, particularly in the light of at some point, you're going to be facing more directly the increased NAND costs?

Yes. So we ended our Q2 with the product gross margin of 59.5%, which was a nice sequential improvement relative to the first quarter of the year. A lot of it was driven by improved cost, our cost structure. We did have -- we did lock in some good pricing on NAND for this fiscal year. And so for the remaining couple of quarters for fiscal '26, we expect product gross margin to be more or less stable. And the way we sort of think of it in the future is, obviously, if commodity prices are higher and we see headwinds on the product gross margin line in the storage industry, we would pass increased prices or commodity prices as price increases to our customers. Just like also in a deflationary environment, we also pass the benefits in terms of price adjustments to our customers.

It's a good -- I mean I tend to think of this as if the prices are up for the key components, you're raising pricing. Most customers are probably buying on a dollar basis. So maybe they wind up buying less bits. But from a financial standpoint, it could be similar revenues and gross margin percent. Is that a good way to think of it?

I think that's a reasonable way to think of it. Our customers tend to plan and budget on a dollar basis. And so let's say they have budgets of x millions or x dollars, then they would basically come to us with what problems they're trying to solve when we work rather to find the best solution for them in terms of what type of kit or what type of hardware/software we basically are offering.

And then in the years where NAND prices are higher, they may get a little bit less of a footprint. In the years where NAND prices are lower, they may get more of a footprint. So that's a reasonable way of looking at it.

Okay. Yes. And in past cycles, I know you weren't there, but I'm sure you've looked at it, just talk a little bit about how the company has managed through the changing commodity environments?

Yes. And look, we have a very experienced team on the supply management side as well as, obviously, on the leadership side. And in past cycles, we've managed through it really well. In fact, during those periods, also we saw increased EPS. And so we're -- we have processes, and we're very focused on that, as you would expect.

The way to think of this whole situation though, if I sort of want to step back and look at our financial statement or our P&L, we also focus on gross margin. I mean our gross margins are very healthy last quarter. We delivered a gross margin of 72.6%, which is really healthy when you look at the competitive landscape. We focus on gross margin, but we also focus on gross profit dollars. This is a key leverage for the sort of leverage points for the P&L. And so if I sort of want to look at that line and dissect how the various components of the gross margin line, we talked about the [indiscernible] product gross margin but there's a few other things that are happening within that line as well. One of them, if I want to think -- if I want to sort of stay in the hybrid cloud segment, one of them is our Keystone business, which is smaller but growing at a very healthy pace. In the first half of fiscal '26, the business grew approximately 8%. This also -- it has an accretive effect on the professional services margin. Within that same business we have -- sorry, same segment. We also have our support revenue that attracts 92-plus percent margin and very healthy.

And then when you look at the rest of the components, our Public Cloud business, Public Cloud segment, that has been growing at a really healthy pace. Last quarter, if we adjust for the divestiture of spot, that segment grew around 18% and delivered 83% gross margin. And so we're also targeting in that segment, 80% to 85%. So we're sort of towards the middle of that range. But the point is that segment is growing. And so from a portfolio perspective, we have high growth and high margin components of the revenue as well. And so the mix is favorable for us going forward relative to gross margin.

Okay. Great. Great. Yes, I did want to transition to Public, it's good you brought that up. You mentioned the 18% growth ex spot. Optically, it's still going to be overall challenged on the growth rate until you anniversary the divestiture spot. But how are you thinking about the growth of that business on an organic basis? Obviously, the first-party storage is very strong. So maybe give us your sense of how well that piece of the business is growing? And what will that growth rate kind of like once spot is fully gone.

Yes, of course. So yes, so by the first quarter of 2017 would be probably the first quarter where sort of year-on-year totally clean because we still have the tail end of spot in the fourth quarter of -- that was in the fourth quarter of fiscal '25.

And so when you look at the businesses, as I said, the Public Cloud segment ex Spot grew at around 18% last quarter. Within that, the first party and marketplace, the business the portion of the business you mentioned, grew at around 32%. So it's growing at a fast pace. This is really the growth engine of the Public Cloud segment.

And it's growing really for a couple of reasons. One, we continue to see healthy growth, just basically driven by the growth rate of the cloud. In addition, we continue to enhance the capabilities and the offering. And so we have -- we continue to add features into our Public Cloud across the 3 hyperscalers basically are with Microsoft, Amazon and Google.

When we -- when the business first started, it was very much in a narrower swim lane focused on Public Cloud environment. And now we're beyond that. We're also -- there's also exposure into the sovereign cloud and distributed cloud. And so there's more with the more features and capabilities. We're able to sort of expand the presence in the offering.

Most recently, we brought block to our offering at Google in addition to the Amazon -- our offering at Amazon. And so we continue to make improvements. In fact, we also a couple of weeks ago, there were some announcements around integration with AWS AI on the Amazon Public Cloud service basically our native solution there. And so we continue to expand the capabilities. And the business is, as I said, we're targeting 80% to 85% gross margin in that segment. Last quarter, we were at 83%, and there's no reason for it to improve from there.

Okay. That's helpful. Yes, basically 10% of revenues now. So it's pretty differentiated from competitive storage companies or peer groups. So are you -- you guys have a very big lead in this cloud-based storage as a service. Are you starting are you expecting to see some of the more traditional on-prem peers trying to develop this type of business model? Or is it they're so far behind, it's going to be difficult for them to replicate the success you've had?

Look, at the end of the day, we're focused on our capabilities and our offering. And we haven't -- so far, we haven't seen similar offerings in the marketplace. We have quite a bit of differentiation also in the offering because it's sort of -- it's all based on ONTAP, where you can also for customers who use ONTAP, hybrid cloud and public cloud, they have the capabilities to sort of move also similarly between the two. And so there's quite a bit of differentiation in that service.

Okay. And I believe there's a pretty healthy mix of new to NetApp as well in the public cloud. So talk about how you get those wins. I mean it helps to be cross-selling and have the hyperscaler sales force selling the solution on their own. So is that the main driver of the non-NetApp on-prem piece of that business?

This is a great point. So yes, I mean, it is a different another route to market for us. And if you think of it as sort of our go-to-market routes, that's another route to market for us. And it does also attract new customers to NetApp especially if you think of the customers that we typically don't reach with our on-prem business. Smaller- to medium-sized businesses, for instance, that don't typically fall within the large enterprise target audience for our on-prem business. Those tend to be, obviously, new adds to NetApp. And it's as they grow, obviously, they could also expand into cross-selling into the on-prem business as well. So all in all, it's a great segment for us, and it's seen a great growth.

Okay. Great. Maybe if we go over to the tech conference to talk AI. So in the context of NetApp and storage, obviously, it's been -- a lot of the AI has been large language models on big cloud. So there hasn't been a lot of storage arrays being sold. But you talked about a lot of data lake modernization. So a lot of customer accounts really growing. So maybe walk us through how you think AI more on the enterprise side is going to benefit NetApp.

NetApp? Yes, of course. And so as we see AI moving from training to sort of training large language models to inferencing, we think this will also create opportunity for data storage or data storage modernization on the enterprise side. And so we talked about having 200 wins last quarter, which if we compare it to the same quarter in the prior year, it's almost double the number of wins. It's just we continue to see good momentum in terms of activity and wins in that space.

We view these -- when we look at these wins, we categorize them into 3 categories. One is data prep. This is where enterprises are getting ready to implement -- for AI workloads, things like data lake modernization and data infrastructure modernization, that enables them to have sort of a unified view of the data. And so that's one category.

The second one is training and fine-tuning of large language models, either they're training their own model or fine-tuning sort of a pretrained model to optimize it for their own data. And then the last category is inferencing. So you can think of inferencing or RAC type of applications. And so the if we look at those sort of 200 wins, they're roughly around 45% of them was in the data prep type of category, around 25% in the training type of category and around 35% in the inferencing side.

Now we think the last category, which is the inferencing is what drives really the data infrastructure and sort of data sort of our part of the market. as it grows. If AI were to be successful, obviously, more and more inferencing will be adopted by enterprises and that, in our mind, would create a nice tailwind and sort of growth engine for the data infrastructure.

Okay. Investors like to see a revenue number, percentage, whatever. Do you envision these different AI use cases that NetApp has involved in a year or 2 from now translating into you having the ability to say x percentage of our business is now driven by AI? Or will it be too difficult to parse out with kind of the core business?

Well, this is the goal, Tim. We I mean, we'll as it becomes a more sizable portion of our revenue, then we should be able to be to quantify it and talk about it more in terms of the dollar incentive.

Okay. And would there be any margin differentiation or difference with these type of more advanced use cases relative to kind of the traditional storage business?

It's probably too early to tell. I mean for me now, I would say probably not necessarily. Now if there's a certain element of data, let's say, services or software, bigger software element then there could be some. But for now, I'm assuming that it's sort of in line with the content.

Okay. Okay. maybe back to you gave a forecast of, I think, 3% or so growth for next year at the midpoint. Talk a little bit about kind of the moving parts when you think of the businesses. Obviously, we're going to have very good growth on the cloud ARR piece. What's kind of underpinning the rest of that growth dynamic into fiscal '26?

Yes. So there's I would say a couple of things. In addition to the cloud continuing to grow at a healthy rate. I mean, we talked about the 80% ex Spot. So expect it to be in the sort of the high teens range. We expect, obviously, continuing growth in all-flash for the remaining part of the year. In fact, we're forecasting the second half of the year to be growing to be accelerating relative to the first half of the year. I think ex Spot, we're projecting around 5% or so growth for the second half of the year.

Within that, there's also when we look at the U.S. public sector, we did see some weakness we also see a subseasonal growth in Q3. But we think by the time we get into Q4, we would be getting back to normalcy. Obviously, this is this was a short-term effect from the shutdown, and we don't expect it to have a long-term effect on the business. And so when you put all this together, that gives us sort of -- we're close to that sort of 3%.

Okay. And you mentioned all-flash array. It's been a pretty good move for NetApp. Obviously, it tends to be a little bit better margin maybe 2 years ago or so, 2 or 3 years ago, really more aggressive with QLC NAND. So maybe talk a little bit about what you see the all-flash mix doing? And a little bit more exposure to QLC, maybe for some secondary workloads. What is that doing to kind of market share and ability to enjoy better margins, maybe at not the highest end of the market, but that mid-tier of the market?

Yes. So what -- if you look at our market share development over the last couple of years, we did gain share in all-flash. And part of that is some of the dynamics you mentioned, obviously, part of that is also all-flash portfolio and our ability to compete very effectively of course, ONTAP is a big element of that. And so when I look at these dynamics going forward, those are the same type of dynamics that should allow us to continue to sort of see more traction and potentially gain share in the space.

As of last quarter, we had around 2/3 of our Hybrid Cloud segment very much on -- in all-flash. And so that continues to grow as a percent of [indiscernible]

Okay. And it's still a pretty small percentage of the installed base that's on it. So how does that translate to upgrades and as you're looking out the next few years?

Yes. If you think of the installed base, we're around 46% of the installed base sort of refreshed from hard drive. And so if you think -- the way we've seen it develop and the way we think of it also going forward, we think that should continue to increase approximately 1 percentage point a quarter. So to get to that sort of 60%, let's say, it's going to take us a few years. We still have a few years of growth ahead of us. And those, obviously, as you said, our all-flash array business tends to attract a little bit better margin. So that also, in a way, provides us sort of a tail to the margin for the future.

Okay. And when you're looking at kind of just the overall mix of the business, obviously, the Public Cloud is going to be faster growth. Keystone is smaller, but very high growth in the maintenance services business, pretty stable growth. So is this a dynamic where the recurring revenue percentage as well, given some of those pieces underneath will continue to take higher for the company?

That's exactly how this works. I mean, you described it much better than I would, Tim, but that's exactly.

Okay. You mentioned public sector. You do have a fair amount of exposure there. So I guess the next water still a little subseasonal. So that's just some conservatism around when we'll start to get approvals flowing and that type of thing. But outside of that, there's a lot of focus from the federal vertical. It seems to modernize. So do you think once we get out of this post-shutdown mode will see that segment of the business in a much better growth algorithm heading [indiscernible]

Yes. So as I said earlier, what we've seen in Q2 and what we're seeing in Q3 is temporary. This is all sort of a result of the shutdown. We don't see a long-term effect on the business. And so to the extent that IT spending from the government side sort of increases in the future, we would be beneficiaries of that, and we should see that materialize.

Okay. And one of the areas, other verticals that was a little bit more challenging. was EMEA, a lot of macro situations over there. It seems like it was a little better last quarter. Where are we in the cycle for the Europe business?

So the nice thing about EMEA is we talked about it being sort of down in Q1. But in Q2, it came back nicely. I mean what we see is in Q2 is places like U.K. and Germany did well. It has a lot to do with GDP growth and how the GDP sort of the -- yes, GDP growth develops in various countries.

We do have really a strong presence in EMEA. Our team did really great in the second quarter. And so we expect to continue to do well there.

Okay. Maybe just going back to the Public Cloud business. I think there was a period, maybe it was spot, but there was some elements of the business that were just far too lumpy and not predictable. When that's anniversaried and you got more of this first-party end marketplace storage, do you envision other offerings and other technologies? I mean you're getting block in, you're doing kind of some of the blocking and tackling and getting all the relevant offerings into the big 3? Do you envision either M&A or other solutions that NetApp can offer to leverage the pretty big installed base you have with those customers?

Look, from an M&A perspective, we're a technology company, and we'll continue to look at options for value-enhancing tuck-ins that would be basically good, nice complementary for our product portfolio. At the end of the day, we want to make sure we have the most competitive product portfolio that allows us to continue to drive the growth of the business, the profitability and value creation.

Okay. And then just back to Keystone, you mentioned the 80% growth, very impressive off a smaller base. Are you seeing customers wanting that type of consumption model? Is it a push model still? Is it a pull model? How do you see that happening? And how is the sales force at adding on this could be challenging if I'm selling an array for $100 compared to a Keystone for $30 over 3 years in a row, 4 years in a row. How do you manage that transition? And will that limit revenue growth a little bit until you get it up to more scale?

Yes. Well, look, we typically go we're very customer-centric. We typically go wherever our customers want to go. We would we're always happy to propose to our customers the best in that suits their needs. And so in the event where Keystone is that we're happy to work with them there. And if it's not, then obviously, in on-prem sort of CapEx solution would work. That's sort of one view.

In addition, I would say it also depends on the customers. Some customers who aren't as sort of -- who are more sort of focused on this preferred subscription model or a consumption model would go for a Keystone agreement.

From a NetApp perspective and from a sales team perspective, the team is compensated either way. So there's no sort of incentive one way or the other, the team is incentivized to sell all of our services and provide the best service to our customers.

Okay. Maybe one last quick one. Would you say because others are trying for that on-prem business to turn into as a service business, everyone wants less hardware and more recurring. The strong position you have with the hyperscalers and how mature that model is, how does that translate to helping Keystone be differentiated from what a Dell or an HP or others want to do?

I mean the Public Cloud business is and as a service business, right? And it's nice. It's all consumption based. Some of it is subscription. And so it's a nice complementary service business to the Keystone business. So if you think of, let's say, if I go back to some of the comments I made earlier about some smaller-sized customers who are not necessarily very large enterprises, who would prefer to sort of get exposed to NetApp through the Public Cloud business, they could also be good customers or good sort of target customers for our Keystone service. So that's also the very -- these 2 businesses are very complementary.

Okay. Great. Great. I think we're run up on time. Thanks for, I think, being the last presentation of the day, I believe. So really appreciate coming out. Thanks, everyone, for listening, and thanks a lot.

Thank you so much, Tim. Happy to be here.

Thanks a lot, folks. My name is Simon Leopold, Raymond James semiconductor and data infrastructure analyst. So we're here at our TMT+C Conference here in New York City, fireside chat. And we have from NetApp, Jeriel Ong, who is the Director of the Investor Relations team. So fireside chat format, but folks have questions in the audience. But Jeriel, before I start, do you want to do a safe harbor?

Yes. The safe harbor statement, team will kill me if I don't read this, I almost forgot. So today's discussion may include forward-looking statements regarding NetApp's future performance, which is subject to risk and uncertainty. Actual results may differ materially from the statements made today for a variety of reasons described in NetApp's most recent 10-K and 10-Q filed with the SEC and available on our website at netapp.com. NetApp disclaims any obligation to update information in any forward-looking statement for any reason.

You're now safe.

Yes. I'm now safe.

Okay. Good. It's interesting. Only about 1/3 of my companies are reading safe harbor. I don't...

The rest of them are taking the risks.

Yes. Do whatever you want, whatever makes you happy, we're good. We're accommodating.

So I'd like to sort of start off in order to maybe set the groundwork for maybe you've got some investors who are interested, but new to the story. So how do you like to introduce NetApp to a prospective new investor?

Yes. So NetApp is a data infrastructure storage provider, right? We make your data valuable. We make the insights valuable. We deliver this variety of mediums as a service through our solution called Keystone in the public cloud on 3 major public cloud providers and then in a traditional kind of CapEx delivery way through our HDD and Hybrid Solutions as well as our all-flash solutions.

Great. And I want to sort of split it up. I definitely want to get to sort of the AI discussion, but I want to get to kind of the foundational aspect of the business, which is selling to enterprises. So I feel like we've gone through the last couple of years, post kind of the supply chain dynamics from the pandemic with worry about macro recessions, slowing enterprise. So what's your take on sort of core enterprise demand?

Yes. I would classify core enterprise demand as it's not amazing. It's not terrible. I think you can kind of see that in our most recent results. Our revenues, excluding the U.S. public sector business grew mid-single digits in the private Americas business, in APAC as well as EMEA. So that is -- if you look historically at NetApp, not the strongest revenue growth that NetApp has done in the last 5 years, personally not the weakest either, right? So it does feel like it's a tepid environment, but neither too strong or too weak.

And are you observing any sort of notable deviations either by geography or by vertical other than the federal? And one comes to my mind is historically, and I don't know the reason you guys have typically had very high exposure to Germany. What sort of ebbs and flows or differences are you seeing? Or is it really uniform across the globe?

Yes. We are a global company. About half of our business is based -- we have about 1/3 of our business is in EMEA, predominantly Europe and then probably somewhere in the mid-teens of our revenues are in Asia Pacific. So what Simon mentioned, we do have a pretty strong position in Europe. Germany is #1 market share geography as an example. There are other European countries where we're #1.

And in the Americas, we're solidly 2 or worse. Dell is by far the largest company in the United States in terms of share. Yes, but so in Europe, we are a little bit more macro exposed relative to Americas, where I think some of the company-specific performance can outstrip a broader macro environment. Yes, there are countries out there that are underperforming and overperforming. I think on the whole across these big geographical splits, there's nothing really to call out in terms of something that is overly one way or another.

I think the main call out to your point and to your original question is in that U.S. public sector business, which is down year-on-year in the most recent quarter that we reported and down year-to-date for the first 2 fiscal quarters of the year we had so far as well. And that's been driven by a bunch of cost cutting and cost control efforts that's happening at the U.S. federal government. The U.S. federal government is the majority of the U.S. public sector business. We have some state and local business in there as well, but it's probably about 3/4 of our U.S. public sector revenues, and that's really been -- has been what's been pressured.

And so the way I look at it is the business really, excluding this sector, grew mid-single digits, but our total revenues grew closer to 2% to 3%, and that's been really weighed down by this public sector dynamic.

So some of the other companies we follow selling into federal vertical have said, but our federal business is mostly DoD and DoD is not getting cut. And so we're going to be fine, don't worry about it. Others have said, well, if you're exposed to agencies like Department of Education, you're going to feel it. What's sort of maybe double-click the mix of your federal exposure?

Yes. So our U.S. public sector disclosure is any given quarter, anywhere from 10% to, let's say, 14% of revenues, depending on whether it's a heavier quarter or a lighter quarter. U.S. public sector is about 75% of that. So let's call it high single digits percentage of our total revenues. As I split down that high single digits, it is pretty split evenly into 3 categories. So there's like -- there's a military angle to that. That's probably about 1/3. There's FBI, CIA, DEA, those kind of agency, that's probably about another 1/3. And then the remaining 1/3 are what I would call civilian-based agencies.

I'm not sure I have any triple click to click down on what exactly of the federal government is being impacted between these 3 segments. But that kind of gives you a rough sense for the mix of our business and that federal segment as a whole is really what's holding down that -- our U.S. public sector revenues in terms of declines relative to state and local portion.

So I want to pivot the discussion to supply chain and memory chips. And maybe as a first step, educate maybe somebody who's new to the story, you've got different types of memory. There's DRAM, there's HBM and there's NAND. NAND presumably is the important one for you guys. But maybe give folks a little bit of education and let's talk about why this is important to you guys.

Yes. So we are an enterprise storage provider. And so what that means is people -- customers are buying our products because they have a certain workload that they want to store those bits on. I think that it's important to highlight that customers are buying our products not for direct access to bits. They're buying it because they value ONTAP as a software system on top of those bits, right? So I would argue if all you want is access to bits, any enterprise storage provider is actually a very expensive way to get access to those bits because we are a 70% gross margin company.

Customers -- so when customers are buying our products, DRAM is a very small portion of our bill of materials, call it, low single digits historically. And then SSDs are a growing portion of our bill of materials because we are increasingly -- the mix of our revenues are increasingly becoming all-flash revenues. So we still buy HDDs, we buy SSDs and SDCs are growing.

If I look at our COGS, which is about $2 billion annually in that range, not even anywhere close to the majority of this is related to these memory components. It's less than half related to, let's say, HDDs and SSDs. SSDs growing in the percentage of that mix. And so it is -- we spend a lot -- there's a lot of money in COGS and other things like other semiconductors, assembly, freight, EMS costs, warranty costs. There's a lot in there that is not related to commodities.

And I guess one of the challenges for the investment community is I think we're bombarded with headlines about spot prices on memory. And presumably, you don't buy much on the spot market. So how does the company manage the supply chain? And I'd say in your defense, gross margins were actually pretty good this quarter. People thought they were going to be terrible. What is sort of the operational aspect that allows you to sort of not pay these spot prices?

Yes. So we buy in volume. We're buying in much higher volumes. And so that's the first thing. When you have a volume, there is a discount relative to spot that you can get from that. But we're also opportunistic. So we don't buy on a steady cadence. So if we need, let's say, 1 terabyte in month 1, we don't just keep buying 1 terabyte every single month through the year. We buy it in spurts. And so yes, yes, we wait for -- we work with different providers effectively to achieve our needs.

We have a procurement team. They forecast -- they have -- they form their own view on the prices of these products and potentially which vendors to work with over the course of the year or 2. And yes, we remain kind of flexible to when we purchase products for commodities for our products.

And I guess talking to you guys and your peers, it sounds like basically, there is inflation, but there may be somewhat different strategies as to how you as a vendor go about raising price. So we're hearing about combinations of, well, we do less discounting. We're raising list price. What's sort of been NetApp's approach and philosophy managing the price hikes with your customers?

Yes. So what Simon is referring to is a little bit more complicated than perhaps just changing the price of an iPhone on the website, right? So we have a list price that is officially listed on our website or perhaps given to our channel partners. Typically, there's a discount rate that is applied to that. And so there's effective price that the customer experiences. And so different companies in the storage industry manage the effective price in different ways.

Some of them raise the list price and then have the same discount to rate and some companies reduce their discounting but have the same effective list price. But effectively, you're changing the actual customer experience price depending on your strategy. Our strategy is to try to manage both, right? I think that we raise our list prices if the commodity costs do increase, and we have in the past. In fact, we did it recently. And yes, then we try to manage up that effective price of the customer experiences through both efforts.

Now in the past, I think maybe the prior cycle might have been 2017, which might have been before you were over there. But the perception we've had is that sort of when the market share leader raises price, everybody just follows. Is that sort of been the dynamic in this cycle? Or is it somewhat different nowadays?

So number one, the cycle is yet to play out. So we'll see how this one plays out. Yes. I think that there is a little bit of a -- let's wait to see if we are in line with everybody else type dynamic with these price changes. I think what happens is, again, prices are typically on a decline. They kind of edge down over time because commodity costs are coming down over time, right? That's kind of what enables these storage systems to address more and more storage over time.

Yes, on the price raise, they tend to be a little bit more abrupt, I guess, or a little bit more of like a step function up. And so yes, there is a little bit of a, what is the industry doing dynamic. I think the reality is the market leader is smaller today than they were in 2017. So there's perhaps a little bit of like a let's wait to see what one company does dynamic in the industry. Yes, but we'll see how the cycle plays out.

Just to make sure I understand, your guidance, the forecast you've given the Street for this year suggests that your margins should hold in and/or improve through the year. You're not expecting further degradation. Is that accurate?

Yes. I think if you look at our fiscal 2026 guidance and what we've done this year, it certainly implies that gross margins kind of maintain in a similar range. And depending on your assumptions, we don't guide specifically to the product gross margin line. It could be in the range or maybe slightly lower, but not materially lower than the 59.5% that we just reported.

So I want to pivot to sort of the AI topic because that's sort of what's exciting these days. And I think it's interesting in that when we look at the IT space as a whole, compute is obviously sort of the center of the storm and storage has not readily participated. Now I feel like the narrative that we've been hearing from NetApp and peers sets it up to be a beneficiary. How do you envision sort of the storage angle of kind of the AI theme playing out?

Yes. I think that our thesis is that as the AI industry shifts its spending from training AI models to inference that storage has a bigger presence in that inference cycle in terms of, a, maybe contributing data that's been created in enterprise over -- sometimes decades to improving that AI model, but also as an AI model is used again and again to create outcomes, that data that is created needs to be stored. And that is the inference step that will generate more data for an enterprise storage provider than perhaps the training stage has so far.

So we still think that growth is still to come. Certainly, in the most recent quarter, we've already seen evidence of that. We talked about 200 design wins, AI design wins in the quarter, up from 100 a year ago. So that's evidence, it's happening, but that still feels like more sort of the tip of the iceberg in terms of future growth than it is we are right in the thick of that AI inference stage really taking off.

So what can you tell us about these 200 design wins? Are there common themes? Are they 200 completely different projects? What's sort of the nature of the customers and the applications?

Yes. There isn't really a geographical or, let's say, end customer mix that really heavily skews one way that I can call out. What I would say is that there's still a lot of data lake modernization wins in that number. And what data lake modernization is, it's kind of like -- it's an in-between step in AI where you have a broad data estate, perhaps it's extremely siloed across different vendors and you're aggregating that data into one data lake so you can improve your AI workloads.

So it's a copy effectively. It's a copy of your data. There's a lot of that still happening, which kind of indicates perhaps we're not as much in that inference stage strongly as we'd like to be. But I don't think that's specific to NetApp. I think that's more indicative of where the industry more broadly is at in this. And so yes, I think we hope that this AI inferencing -- these AI inferencing workloads continue to take off, and we really think NetApp will be a beneficiary once that -- as that kind of plays out.

And I think one of the logical and probably as yet unknown debates is when enterprises engage and use AI, where? So what's the mix that you would expect on public cloud, private cloud, on-prem and what makes a difference to NetApp?

That's a tough one to predict, if I'm being honest. I think that's where -- just because the inference stage isn't in its maturation stage, I think a lot of industry participants are just in their prediction stage. I would say one thing, one hat is in the ring why it makes more sense on-premise is that a lot of the data that will improve and augment and improve the quality of your AI outcomes is data that's from on-premise, number one. So that's the first point.

I think the second point is high-performance, low-latency workloads tend to be more on-premise, right? So if you look at the current spending in storage, if you have a lot of backup, a lot of recovery, a lot of low-touch stuff, you don't care if the cloud is down for an hour. It doesn't -- you don't really touch that workload very frequently. But if you have a workload that is essential to running your company on a daily basis, you want that to be a low failure rate, low latency, high-performance workload.

That's an all-flash workload, and that's an on-premise workload. So it feels like if an AI workload looks more like that, that there could be a higher chance it's on-premise, but we'll see how the market kind of plays out.

Yes. I have not made up my mind either, so I don't want to give you the impression that have some bias on that. I think it's probably the interesting debate. We'll get more clarity over the course of next year is my hope.

Yes. Yes. I think -- yes, we'll see what happens.

And then about a year ago, you guys announced a platform called the AFX, which I think inserted you more strongly into these AI discussions. Maybe help people understand what is it about the platform that was an evolution and what makes it more relevant to AI use cases?

Yes. So AFX was announced at INSIGHT. This happened in October of this year, so relatively recently. It's in the hands of some customers. So we'll see -- we'll get a better sense as we move through fiscal '26, what the traction on this is like. This product is fundamentally a little bit different than what NetApp has delivered in the past. So NetApp was founded in 1992. It was essentially a one product company, something called FAS. It was HDD-centric product, right? Eventually, we released something called A-Series. This is a high-performance all-flash product, NAND or SSD only.

And most recently, a few years ago, we released C-Series. The common -- which is also an all-flash product. The common theme through all these 3 products is that we are delivering our products in an integrated approach. So what that means is they get access to ONTAP, but the only way they get access to ONTAP is when they buy our storage arrays. It is a product. It's similar to -- if you buy an iPhone, if you want iOS, the only way you're going to get iOS is if you buy an iPhone, you cannot get iOS without an iPhone, right?

That's how the entire industry delivers storage technology to the -- to its customers. But really, AFX is disaggregated. It's AI focused. And the AI market has kind of increased the significance of disaggregated solutions. And so this new solution delivers our technology in a fundamentally different way for a different market. And so we will see the traction that this has. And I think that it's really where customers are wanting to consume ONTAP technology.

And so how does this contrast with the AFF, the A9000 -- or 900, A900.

Yes. So it contrasts in this kind of like integrated versus disaggregated approach, right, to the technology. But also the product that you're specifically describing is a very, very high-performance solution. So in terms of where exactly AFX stand in that stack is still kind of yet to be seen. We have a lot of options that consumers can offer there. But if it goes the way of all-flash solutions so far, I think AFX will probably be pretty high-end solution as well.

So you mentioned sort of well, you can't get iOS without the iPhone, but you guys have your PCS, your Public Cloud Services. So isn't that sort of a way to get ONTAP without necessarily...

Yes, Simon, so you make a good point here. So yes, we've had some experience already kind of disaggregating the technology. So when we first started selling ONTAP in the public cloud, we actually had to install our hardware on the public cloud itself. But as the business has matured, it's really shifted to more a software-only solution where the public cloud providers source and install their own hardware.

So in that sense, yes, it is kind of similar in that sense where we have offered our technology in a more disaggregated fashion. Our software -- our public cloud line is increasingly a lot more software only, so to speak. But yes, I think in terms of for that enterprise customer, it really has -- they really haven't had a disaggregated kind of solution to consume unless they go for the public cloud. So it's a little bit different from that respect.

And the way I've thought about it is -- and I won't be embarrassed if you correct me, is that this is the way that an enterprise customer can have the experience with ONTAP, but be in the public cloud. So they're using your software, your application, your interface, but it's public cloud economics, right?

Yes, I think that's fair. Yes, I think there's thousands of customers on our public cloud solution, big and small. I think on the small end, what's interesting is there are customers that really perhaps are large customers, but start off at really small workloads that maybe wouldn't have choose NetApp or NetApp wouldn't really have had a chance to address this customer in the first place. And then they become very big customers either through the growth in the company or the fact that it was just a testing environment that really worked really well, but then they're outgrowing pretty materially.

So we've seen a lot of good use case growth from this public cloud business. I think there's a sense out there that we're only -- it's kind of a little bit of left-hand, right-hand thing where they would have otherwise bought it on-prem, now they're buying on the cloud. Certainly, that doesn't feel like that's the case. Half of these customers are new to NetApp customers, never gotten a core product for our business ever until they were a public cloud customer.

And so it does feel like we're growing our customer base with this product. It's growing really well. The first-party marketplace revenue disclosure, which is about 3/4 of our public cloud revenues in the most recent quarter, grew in the low 30% range year-on-year. So this business is gaining a lot of traction. And yes, it continues to grow really well. It's a good business for the company.

And not arguing that point, I guess one of the things I've sort of struggled with is, well, why would the public cloud want to introduce competition to its own storage offering. So for them, what's the logic?

Yes. This is a good question. So ONTAP offers a set of features that is pretty fully featured, and it offers a different offering than what the public cloud has and has had already for coming on 2 decades now. So that's the main logic is that they have -- the public cloud -- each public cloud vendor has an incentive to offer as much on the public cloud relative to what the customer could choose on-premise, like at a high level, right?

And so NetApp offers that opportunity to move a workload that maybe would have been on-prem on to public cloud instead is really the single line. And really, within that category of fully featured products, ONTAP is, frankly, the best solution relative to the other core vendors that we compete with on-premise. And so every time a vendor chooses something in our category, so to speak, ONTAP is really winning in spades. And so that's why we feel really good about this business. I kind of acknowledge the risk kind of side of the question you're saying, which is that, well, if you're getting so big that perhaps you're bigger than the public cloud itself on the public cloud, like why wouldn't they just build a solution themselves? And -- we're just such a small insignificant revenue relative to their own solutions right now that it's really not even a question or a topic right now that really I think they're even thinking about.

I want to talk a little bit about the competitive dynamics, partly because one of your CEO from one of your competitors like he characterized as a knife fight in a phone booth. And that's just such a profound visual to characterize your market. Now it seems as if it's competitive, but it also seems as if everybody is doing pretty well right now in terms of not getting hurt by memory costs. So maybe it's not quite as brutal as that.

But how do you like to sort of think about or characterize the competitive landscape? It seems as if you guys have generally been a share gainer. What's enabled that?

Yes. We're generally a share gainer. So our share has been increasing according to IDC data. Roughly speaking, we're in the high teens in market share in the all-flash market at this point. At some point, if you kind of rewind it back a few years, we were probably in the low teens. So we've been gaining share and the market is consolidating. The top 7 vendors in all-flash have 90% of the market. I think what's enabling us is, yes, it's our operating system. It's our launch of our C-Series product a few years ago that enabled QLC NAND in all-flash enterprise workloads.

That was an expansion of the all-flash market. And I think in that expansion phase, I think there were certain vendors that did better and certain vendors did worse, and we happen to be one that did better in that transition. Yes. I think at a high level, yes, it is competitive. I wouldn't say it's -- scale 1 to 10, is it 10 out of 10 competitive? I mean I wouldn't say it's like crazy, crazy or crazy uncompetitive. It feels like we're still in that kind of middle ground where things are competitive. There's always -- especially for a new customer that is considering a new very large workload, yes, it's going to be competitive to win that. But yes, I like NetApp's odds in general. I think we've done well.

So I think one of the things we've observed really, I'd say, roughly in the last year is when we've done channel checks, it sounds to us that NetApp and Pure Storage are encountering each other more often than they used to. I felt like in the past, each of you had kind of a swim lane and you did your own thing, and it seems like you're competing more. And we're also getting questions from investors about, I'll say, noisier private companies, the WEKA's, the VAST, HAMR space. What do you see in terms of the smaller players and the newer players?

Yes. I think the smaller players and newer players have -- are more disaggregated versus integrated in terms of the solution delivery strategy. They have a lot -- a little more customer concentration, a little less features. But this is actually -- what I'm describing is actually very consistent with the history of storage start-ups, right? Like you can never start a solution from the ground up and have a fully featured set. You have to kind of pick and choose what features and what products you want to deliver. And then as you grow as a company, you expand that.

And so when a company choose -- when a customer chooses them, this is why the -- some of these companies are winning in the AI training space is because they don't need these fully fledged out features that the rest of the industry already provides. So that's what we kind of observed there is that they're winning AI training. We'll see what happens, who can make this leap to AI inference or perhaps more enterprise use cases. But ultimately, you have to win in enterprise if you want to become a fully fledged storage company because the vast majority of the spending is from an enterprise customer.

I think as it relates to Pure, I mean, yes, they've gotten big, right? And so are we. I mean I think our business is -- our all-flash business is in the $4 billion run rate size, and they're slightly smaller than that. And so as companies get big, you just kind of rub shoulders a lot more. I think this is also true for Dell or HPE. I think the market is more consolidated. The top 7 manufacturers in all-flash have 90% market share, like I said. But in the non-all-flash market, the top 7 have 55% share. So you just rub shoulders with a lot of different companies when you're talking about a hybrid or HDD estate versus the all-flash market.

Well, believe it or not, our time is pretty much flown by. I'd like to close with the following. What do you think is either the least appreciated or most misunderstood aspect of the NetApp story?

I would highlight like just how NetApp has changed over the years. Like I said, NetApp is founded in 1992. At that point, all-flash did not exist, right? It was an HDD-only market. And so we've built up an all-flash business that is now 2/3 of our revenues. The cloud business didn't exist 5 years ago in a material size. And now that's run rating at $600 million to $700 million, built largely from the ground up. And so I think I'd just highlight NetApp's ability to kind of continuing to drive innovation, continue to change itself as a company. A lot of companies in tech really have a hard time progressing beyond their first successful product, right?

Like that is really the history of technology, frankly. And NetApp has really done that twice, and we're kind of in this kind of reinvention stage, so to speak. And so yes, I think that will continue, and I think that's really the most underappreciated aspect of the company.

Well, great. Jeriel, thanks for joining us. Folks, thanks for joining us. This is our session with NetApp. Thanks a lot.

Thanks.

Awesome. So we're going to get started, not a lot of turnaround time here. So my name is Erik Woodring. I lead Morgan Stanley's U.S. IT hardware coverage. I'm pleased to be joined by George Kurian, CEO of NetApp.

Before we start, quickly, before we begin, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures.

And then from the NetApp side, today's discussion may include forward-looking statements regarding NetApp's future performance, which are subject to risk and uncertainty. Actual results may differ materially from the statements made today for a variety of reasons described in our most recent 10-K and 10-Q filed with the SEC and available on our website at www.netapp.com. We disclaim any obligation to update any information in addition to forward-looking statements for any reason.

So I'm, again, delighted to be joined this afternoon by George Kurian, CEO of NetApp. I think, George, maybe the best place to start. I know last week at a separate conference, you kind of discussed the October quarter pretty thoroughly.

Instead of doing a review, maybe just like what are two or three highlights that you want to leave the crowd with your key takeaways from the quarter or the January quarter guide -- full-year guide, everyone should kind of be aware of as kind of a starting point for our conversation?

Yes. I think, first of all, thanks for having me. Thank you for being here. In Q2, ex of our Spot business divestiture, we grew 4% year-on-year. We had continued strong momentum in our growth engines, first-party and cloud storage, which grew 32% year-on-year; all-flash, which grew 9% year-on-year, and we doubled the number of AI wins in the quarter. Product gross margins were above our expectations, driven by mix and continued prudent management of costs. Operating margins, gross profit margins and EPS were all records for the -- for Q2. And we have strong expectations going forward, where our business outside of U.S. public sector performed extremely well, showing our competitive position.

Okay. Perfect. And we'll kind of touch on a number of those points. I want to start just high level and really focus maybe first, like it's almost a little technical, but you and your peers all kind of had Analyst Days, product days over the last kind of 1.5 months. What we tend to hear is single pane of glass, we have the best software. ONTAP is world renowned.

And so I would love if you could maybe just help us understand where do you think NetApp is truly differentiated? And how do you leverage that differentiation to try and drive sustainable share gains?

Yes. I think we have pioneered many of the ideas that are coming to fruition in the customers. For many, many years, from the early 2000s, we have been believers in the idea that you want to unify your data across all your departmental boundaries, across all of your different data types so that you can actually have not only better management of your data, but the ability to extract insight. That is now de facto the norm that everybody in the industry is trying to get to.

The second, when cloud happened, we always believed that the world would be hybrid and multi-cloud. And so we built a hybrid multi-cloud architecture where our software is now deeply integrated into the major cloud providers, Amazon, Microsoft and Google; in a way that it's a decade-long journey that we have undertaken and are well ahead of anybody else in the market.

And then the third has been that in addition to having super high-performance scalable systems, which is sort of a basic requirement that many vendors can meet, we have a lot of data management value in terms of how people can exploit the value of data sitting in their systems.

This could mean advanced cybersecurity functions, the ease of management of data across hybrid cloud estates and increasingly a suite of tools that allow you to discover where your data is and to build super efficient pipelines so that you can take data from your enterprise applications and apply AI to it.

Okay. Perfect. So that's a good start. Let's kind of go higher level and turn to kind of the market opportunity. Can you just help us maybe understand two things. One is kind of how you think about the market growth of your end markets? And maybe you can separate cloud and on-prem stuff.

And then you've been clear that there is kind of a macro overhang on spending. Storage spend has lagged kind of server and compute spend. What needs to change to kind of get storage spend to kind of catch up to server a little bit?

I think broadly speaking, IT infrastructure spending is correlated to macro and within macro-specific business outlook. And we have not seen a major refresh of the infrastructure deployed in customers since 2018, 2019, the first Trump administration's favorable tax structure and cash repatriation period.

What that means is customers typically prioritize spending on infrastructure based on their application needs and their workload needs. And we are seeing a rotation of that workload mix into AI-specific applications, which we can talk about.

I think with regard to the compute cycle, it has been driven by AI. And I think what you see in the AI world is you have a lot of work to get ready for AI, all the model training, getting the models to a place where they can be applied to the data, that's what's been going on. And so we do not expect storage to uptick at the same pace and timing as compute.

Right. Okay. Before we turn to AI, I just want to quickly touch on U.S. public. And the question really is, at least what our view is, is that the government will always find a way to spend its own money. We just need to get kind of that engine moving again, get appropriations moving through the right agencies.

How do you think about government spending kind of coming back post the shutdown? And what are some of the signposts that we should be looking for as maybe like a precursor to that unlock?

Yes. I think we look at U.S. public sector as a combination of U.S. federal and U.S. state, local and higher education. For our business, U.S. public sector is low double-digit percentage of the total business, of which roughly 75% is U.S. Fed.

Within U.S. Fed, there are probably three or four things that we are part of and that we track. The first is multiyear appropriations. These are program spend vehicles. It could be defense programs, it could be infrastructure programs or national security programs. We are embedded in a lot of them, and they are immune from the annual appropriation cycle. And so our goal there is to capture more and more of those program dollars, and we have pursuit teams that have been successful doing that.

Then within the -- when an administration changes, usually the first year of an administration change, we watch for their spending priority shifts between, let's say, civilian and defense or any other kinds of budget shifts, and we move our resources to where the targets are. We saw some of those shifts within this administration as well. And that's part of the natural cycle of federal spending.

I think what we track now is the movement of appropriations to agency spending programs and the predictability of those spending programs and sort of translating from awards to actually orders, right?

And I think on the first one, in terms of appropriations being translated to spending, I think there's still work to be done. OBBB is still flowing down into the agencies and some of that was disrupted because of the shutdown.

And then the second, while there were some challenges, notably with DOGE earlier, in the year, those challenges have kind of abated. And so we are hopeful that by the spring time, the U.S. government is back in business. I think that we have been cautious about our Q3 because of just how long does it take for the government to come back. a normal course and speed.

Okay. Okay. Perfect. So that's kind of a good segue, get that out of the way. Turn to AI. Your point, George, kind of resonates when you talk about we didn't necessarily expect that to come right now.

Can you maybe help us understand what is the opportunity in AI? I think it's simplistic to say, well, there's just more data that will be generated, more data that will be stored. But is this something that you believe happens on-premise, but also you kind of have this hybrid model. So how do we think NetApp benefits from that? So kind of how does AI permeate the opportunity? And then what is kind of the hybrid opportunity for NetApp with AI?

Yes. We can capture value from data and data growth wherever it is because of our hybrid model. I think what we see is sort of three buckets of use cases within the enterprise, which is really our focus. You see sort of data prep and getting data ready for AI. You see people saying, "Hey, I want to take my models that are derivatives of big foundation models and kind of distill it or make it useful for my enterprise." And then you see people actually applying the two to actually run their business with AI, which is what is called inferencing or RAG.

I think for storage, data storage growth, the third bucket is the big bucket over time. And I think for enterprise productivity gains, it is also the big bucket, right? If inferencing is not useful for the enterprise, AI is more fluff than wave, right? And so that's what I think everybody in the industry is tracking.

We have seen the number of AI projects year-on-year double. So we said approximately 200 wins in the quarter. These are wins that have 45% of data lakes organizing my data to get ready for AI; 25% around training and fine-tuning, whether those are sovereign AI models or whether it's an enterprise model that's a distillation of a large foundation model; and 30% in inferencing.

And our view is for AI to be as successful as it is, the inferencing part needs to grow steadily.

Right. So maybe said differently, we're just early. And we might be seeing training happening in the cloud. We're at the early days of inferencing and kind of token growth.

What do you think catalyzes that kind of within the enterprise on-premise? Is it moving away from productivity gains to like creating new insights and business opportunities? Or can that kind of inflection on-prem still happen with just kind of the productivity approach to AI?

I think whether it's on-prem or cloud, the real value is the ability to get both unique insights as well as new ways of working that allow you to do more and bring more innovation, more growth faster.

I think in terms of new insights, we are seeing amazing examples in healthcare and life sciences, where there's everything from drug discovery to disease prediction to absolutely high-precision medicine to better -- much better diagnostic and therapeutic care. And so I think there, you are seeing transformative use cases now.

I think, with the others, there are several examples around ways to bring new capabilities to market, software development, for example, digital twins and immersive digital manufacturing. There is, of course, synthetic semiconductor designs where we are parts of lots of large customers' deployment models. But I think ultimately, for it to really change how businesses operate, it either needs to drive growth or really transform the way work gets done.

Can you maybe -- let's say it this way, I'd love to dig into those 200 wins, the 200 projects, AI projects that you talked about. Obviously, you just helped bucket them for us to understand kind of what you're doing within those.

Can you maybe give a few granular examples of like what I would call Keystone wins -- not the Keystone product, but flagship wins and exactly what the value add is that NetApp is doing underlying that project?

Yes. I think let's talk about data lakes, right? I think there are -- what a data lake is, is a customer says, "I want to bring data from multiple application landscapes into a single environment so that I can then organize my data and apply large language models into that controlled environment," we have really sophisticated tools for unifying unstructured data, structured data on-prem and cloud.

And so we have examples of -- in life sciences of customers that say, "I want to bring research data, clinical data, lab data all together across research teams in multiple geographies." We can do that in a way that nobody else can.

With regard to training, we have examples of large country-level language models where customers say, "Hey, I want to train this model, I want a trusted enterprise vendor. I've got good experience with NetApp technology. It's got the performance and scale and predictability in terms of resilience to support my environment."

And then in inferencing, listen, we hold an enormous amount of the world's unstructured data. And so when somebody else tries to start to talk about inferencing, they say, "Oh, let's copy all of the data into another environment to do inferencing." We said, "Just leave the data where it is, we'll help you do inferencing right where the data is."

And a lot of the innovations we announced at our customer conference was to just say, "Hey, keep your original data where it is, we'll allow you to create a derivative of it for inferencing in place with all of the security permissions, lineage track," which makes it much more -- a much lower bar for customers to adopt.

And I'd be remiss if I didn't kind of dig in with you or at least ask you about the all-flash transition because I believe today, 2/3 of your hybrid cloud business is already all-flash. You've obviously been able to benefit from this with growth and share gains.

Does that 2/3 go to 100? Or like how do we think about all-flash mix going forward over, call it, 1 to 3 years? And what does that do to your growth rate, do you suspect?

Yes. I think two things there. First is two data points. One is, as a percentage of hybrid cloud revenue, all-flash was 2/3. As a percentage of our installed base, it's 46%, and it's been ticking up roughly 1% a quarter, which is an indication of the size and scale of our installed base. And both numerator and denominator are growing in the second, right?

I think that flash will continue to grow as a percentage of the total out-of-the-factory shipments steadily over a period of time. Disk, with the data that we have, we don't see all-flash becoming 100% of the use cases. We see that there's a steady place for hard drive-based storage, especially for workloads that are either sequential workloads or workloads that just need a lot of capacity. I think -- so it will tick up as a percentage out of the factory.

I think in terms of the installed base, you can do the math. It's going to be many, many years of refreshes of hard drives based systems out of the installed base before we even reach 60%.

And I should have asked you this earlier, but your point on the installed base refresh last time being over half a decade ago, what do you think catalyzes that? Is it kind of a greater prevalence of AI? Or is there something else? Is it just the macro getting a little bit more certain to where CIOs can say, "I'm ready to partake in this type of refresh activity"? What is it do you think that catalyzes that refresh?

We are seeing workload-based refreshes going on right now. These are project-driven spend where someone says, "Hey, I've got this data set and this infrastructure, I want to bring it into my AI landscape. I probably need more modern systems." I was here yesterday, we were actually talking to a large financial services client about doing exactly that for fraud analysis and risk mitigation.

I think for a broad-based infrastructure refresh like we saw in 2018 and '19, where the customer said, "Listen, I want to modernize my entire estate," that's going to require a more constructive macro environment, and/or within specific customer circumstances, a more constructive outlook for their business, multi-quarter, multiyear outlook.

Okay. Okay. Perfect. If we kind of summarize all of this and take into account refresh opportunity, all-flash mix, early days of AI, you just -- I would love for you to take your fake magic ball and look out and just say like what do we think this should and/or could mean for NetApp when it comes to growth and margins and free cash? Obviously, we'll touch on Public Cloud in a little -- shortly. But just high level, what does all of this do for business fundamentals at NetApp?

Yes. I think our long-term model was mid- to upper single-digit growth on the top line. We should -- if you look at the year-on-year compares for the second half of the year, excluding the Spot business we divested, you're starting to be in that range -- at the bottom end of that range. And so we feel good about the acceleration of our business in the second half versus first half.

We hope that public sector becomes a more constructive environment next fiscal year. And so that's on the top line. Our goal is to drive mid- to high single-digit growth. We are -- we've got many secular drivers that allow us to participate in that.

Flash, cloud, AI, we're taking share in flash from our competitors, both structured and unstructured data workloads. Our cloud storage business, which is now the preponderant majority of our cloud business, is growing -- has been growing north of 30% year-on-year.

The mix of our business is shifting into higher quality business. Both margins are structurally much higher than they were in the prior model as well as the mix of kind of subscription and consumption-based offerings is higher. And so that's top line and margins.

I think, in terms of operating profile, listen, we've been disciplined operators of the business. Our last reported quarter was north of 31% operating margins and pretty disciplined allocators of capital, where a majority of our capital. Dividends is the first call on capital, and we've returned in the range of 100% of free cash flow to shareholders through dividends and buybacks over the last several years.

And you kind of touched on it, but I want to make sure we hit on the Public Cloud business. Two questions is, what do you believe -- so I think the business in totality grew 18% in the last quarter adjusted for the Spot divestiture. Like what is -- how sustainable is that growth? What is driving that? And then obviously, margins are very strong at 83%. Where do those go?

Yes. We said that -- let me get margins, and then we'll talk about growth.

I think we said that margins would be between 80% and 85%. We raised the range, and we are ticking along nicely as the mix of offering shifts more and more into software and as the depreciation from the original capital investment, particularly in Microsoft Azure, comes off the expense line. And so we see strong trajectory on margins.

Could it go over 85%? It could, right? We're not sort of saying that we will adjust the range upward. But is there something structural that prevents it from ticking upward? No.

I think with regard to what's driving growth is both the overall growth rate of cloud, which has been strong, but also the differentiation and the continued addition of new technology capabilities to our infrastructure.

So we started out with a narrower swim lane. We are now in a much, much bigger set of swim lanes and opportunities with clients and with the hyperscalers. We started out with their public cloud environments. We are now part of sovereign cloud, disconnected cloud, distributed cloud. So we are in a huge range of use cases of those hyperscalers.

We have done well in enterprise workloads where it's purely now scaling the go-to-market routes. And you have started to see us -- you will see us do a lot more with their AI workloads over the next 12 to 18 months. You should look at the Amazon re:Invent announcement that Matt Garman made about the integrations of our technologies with a huge range of AWS' AI apps, and there'll be much more to come. So stay tuned for the conferences in the coming year.

Okay. Cool, cool. We have a handful of minutes. I just want to quickly -- it took me whatever, 10, 11 questions before we hit on memory, but I'd be remiss if we didn't bring it up. Obviously, you know the backdrop better than we do.

Maybe the first question is, historically, actually in storage, you've been able to pass through these higher input costs. Is there anything that would not allow that to happen this time again? And again, the question is, how does that impact kind of demand elasticity as you're thinking about it in the environment today?

There's no reason why customers will not be asked to pick up higher input costs because we have passed that through to them in the past when it goes up, and we've passed the benefits of lower cost to them as well when it went down. With regard to elasticity, customers budget in dollars, and there historically has been very little elasticity positively or negatively due to input costs.

Right. Okay. So maybe before we end, I just kind of want to give you the dance floor because we've talked about a lot. We talked about the market, AI, share gains, technology, memory, cloud.

Just maybe what's the final message you'd leave for everyone if we think about where NetApp is in your journey, but also where you are from a stock perspective? Kind of what's the message that you want to send either what's underappreciated or where are you leaning into? And what's the opportunity for these guys that are sitting in the room with us?

I think, first of all, data is an ever-growing asset to the enterprise. Without data, there's no AI. And so especially unstructured data, which has historically had limited insight derived from it is becoming now a much bigger wellspring of value to clients. We hold a huge amount of the enterprises data in the world.

And we are now, because of our unique capability to do so across multiple cloud environments, very much seen as a data platform provider that can unify all of these estates. We are adding a lot more software functionality that allows us to differentiate in cloud, in cyber, in flash-based storage that gives us confidence that we should be able to grow above the market.

The growing parts of our business are an increasing share of the total, while the declining parts of our business are not only smaller parts of our total business, but also stabilizing in terms of the rate of decrease.

And then I think below that, listen, higher quality revenue, higher margin components of our business, good ability to manage sort of gross profit dollars, disciplined operators of the business, which should give us earnings leverage going forward.

Awesome. We are just out of time. George, thank you very much.

Thank you. Thank you, guys, for coming.

Great. Good afternoon, everyone. Thank you again for joining the UBS Tech Conference. I'm David Vogt. I'm one of the tech analysts here at UBS. And we're excited to have George Kurian from NetApp here, Chief Executive Officer. Before we kick off, Kris has a disclaimer she needs to read for all of us.

Very important information. Today's discussion may include forward-looking statements regarding NetApp's future performance, which are subject to risks and uncertainty. Actual results may differ materially from statements made today for a variety of reasons as described in our most recent 10-K and 10-Q filed with the SEC and available on our website at netapp.com. We disclaim any obligation to update information in any forward-looking statement for any reason. Back to you, David.

Thanks, Kris. Thanks again, George, for coming.

Thank you for having me. Thank you for coming.

So we just came off of earnings last week. So I think this is incredibly timely. What I thought we should do is maybe start with kind of just a quick overview of what you saw last quarter. Results were stronger, gross margin strong despite, I think, people's fear about commodity prices, other competitive issues. So maybe we can start there and talk about kind of what you saw in the quarter and how we're thinking about the January quarter and beyond through your fiscal year.

Yes. I think when we entered the quarter and guided the quarter, we said we were concerned about softness in EMEA driven by unsettled government structures in some of the larger countries, overall GDP outlook and then U.S. public sector. As part of the results on the top line, the European team, while GDP continues to be choppy, we have outexecuted really. We've done a super job in Europe.

I think you can see that in the market share data where not only are we #1 in many of those countries, we have opened up share gaps to our competitors quite nicely in some of the bigger markets. So at the halfway point in the year, Europe, we feel better and our outlook in the second half reflects that. U.S. public sector on conversely has performed materially worse than we expected going into the quarter.

The guide for the quarter was cautious, but it reflected the public data that U.S. government spending through the fiscal year was super back-end loaded. And so Q4 of the government calendar, which overlapped with our Q2 was expected to be a bulk spending quarter. And then with the shutdown, that kind of has pushed out. It cannot be pushed out forever, right? So it will come back. I think we are cautious about when it will come back. So Q3 is -- we're cautious about Q3. We're hopeful it's better than Q2, but still pretty cautious. I think with regard to the competitive landscape, listen, our flash business has performed well. Our cloud business continues to run unabated.

And our first-party cloud storage grew 32% year-on-year and gross margins are super strong in the cloud segment at 83%. I think if you look at hybrid cloud, the product gross margin beat was driven by mix better than we expected. The cost structure through our structured pricing agreements with NAND providers were part of our outlook.

Got it. So I want to come back to margin in a second. And maybe just touch on demand drivers for a second. So obviously, state and local was a little bit better, I think, U.S. federal worse. Is that a fair characterization?

I think overall, it's really tough, yes.

Really tough but to your point, you noted that these -- the money is there. People have to invest. So what is sort of the kind of mechanical process to really see that money start to flow into programs and projects that would benefit you? Is it just, "Hey, the person needs to be in the seat, the correct person needs to be in the right seat."

The assets have been sweat so long that they no longer can defer, delay, push out? Like is there anything that you can point to, to help us understand like how we should think about? Obviously, we don't think it's going to come this current quarter, as you pointed out, but as we move through the subsequent quarters next year?

Yes. I think we are speaking to every kind of connected party in Washington. And so far, the thinking is the springtime is when all of the pitchers and catchers get aligned so that you can get back to some degree of normalcy in spending. I think the 2 big buckets are the appropriations need to flow down to the agencies.

I think that's at various stages of kind of the receipts of appropriations being available to the agencies. And then within the agencies themselves, the right priorities in terms of what programs are they going to spend, what IT priorities are they going to spend on. I think both of those need to fall into place.

And does that business coming back, your all-flash business was very strong again. Prior quarter, it was strong ex U.S. federal public sector. Are they heavy consumers of flash at this point in the cycle? Or are they still sort of a mixed customer in terms of buying legacy drive systems? Or is it mostly an all-flash solution that they're looking for at this point?

They look like other customer segments. 2/3 of our business in hybrid cloud is flash. If you do the math on, if U.S. public sector were just flat, not up, right, you can see the acceleration it would have given to our all-flash business.

Got it. Outside of public sector, obviously, we've had reasonably good demand signals from other vendors. I think we had one earlier today, one of your competitors talked about their first-party IP starting to really accelerate. Do you think the market overall is healthy besides just what you're seeing?

Or are you taking material enough share that you're not seeing some of the -- well, let me rephrase that. You're not seeing some of the growth dynamics there. They're talking about acceleration, but they're growing far slower than you. So is that share driven? Is it product mix driven? How do you think about where you're positioned because you've taken a lot of share in the last couple of years?

Broad-based, I think that macro drives business outlook and IT spending. That's been the consistent theme. I think macro is still choppy. When we look at what that means is we have not had a broad-based storage infrastructure refresh since 2019, right? It's not like compute, which saw the new build-outs of GPU. Storage has been muted for a long time.

So what you see in that dynamic is 2 things. One is, hey, the projects that customers are spending on, those get storage spending as part of those projects. And then so you got to win your share of those projects and be in the swim lanes that have spending. And the second is you've got to take share. In the swim lanes that we are focused on that are seeing good traction, I think one is data prep and data infrastructure modernization for AI is showing good strength.

And our leadership in unstructured data gives us a strong entry point into that sales motion. The second is our technology leadership in building cyber resilience directly integrated at the storage layer, unlike our competitors that all rely on third-party applications is giving us the ability to go back and have conversations with our installed base and net new customers that says, hey, do you not want to have your production data sitting on a cyber resilience system. Cloud has been sort of immune from this. So our cloud business is really about completing more certifications for more workloads. That's on fire. It's been rolling for a good strong period of time. Those are the key...

Can I go back to the comment you made about compute seeing a little bit of a cycle recovery. If I look at compute historically pre-AI, storage and compute were generally attached at the hip, if you will. We haven't really seen that. Why do you think that's the case? And would that be additive to your outlook or your expectations, not just next year and the year beyond, if we do see a healthy recovery in traditional storage attached to traditional CPU-based server.

Yes. I think 2 things there. I think the compute build-out has primarily been GPU, right? And GPUs have been built for training LLM. That's been the majority of the investment in GPUs. The training use case, as we have consistently said, does not generate or need a lot of storage. It just uses storage like a memory buffer so that if the language model runs into trouble, it can recover its original position. We have solutions for part of that market, but it's not a giant market.

Right. But I guess maybe what I was trying to ask is we've seen some customers look for more power-efficient compute outside of GPUs. And -- but we haven't seen that translate into traditional storage demand.

I think storage is starting to tick up, right? So just following the earlier point, I think what we're seeing now as the AI market moves from the training part of the LLMs to actually the use of the LLMs to do business activity, you will see data infrastructure getting built out. We said that in the quarter, we had 200 AI wins.

These are GPU-connected storage landscapes. There's 3 types of them. One is a data prep environment, which is essentially where customers want to put all of their data so that the data science team can actually analyze it. The second is training and fine-tuning, this is where either you're training a large language model or you're taking a pretrained model and then optimizing it with your data or synthetic data.

And the third is, hey, inferencing broadly defined. It could be reinforcement learning, it could be RAG, it could be another form of inferencing. We said during the call that it's pretty similar. It's 45, 25, 30 in terms of the mix, 45% data prep, 25% training and 30% inferencing. So if you look at it, the storage build-outs are up from a year ago, and they are like the compute focused on the get ready for using AI part.

So when -- it's a good point. So when you think about -- in the past, I think you've said you want to bring AI to where the data is, not data to the AI, right? It's expensive. So in that framework, that 3-pronged framework that you laid out. So when we think about bringing -- fine-tuning models to the data, like where do you think we are in that cycle when you talk to enterprise customers?

And maybe can you talk to like where you are internally, like I would imagine that you have multiple projects and test cases and are exploring how it benefits NetApp. Like is this a calendar '26 kind of dynamic where we're going to see more use cases and customers really going out in that direction? Or is it more '27, '28 at this point where everything is still training-centric, and we're not really focused on fine-tuning these models and bringing it to where the data is on the enterprise side?

I think the number of kind of AI centers of excellence plus, hey, the number of AI projects has grown, right? You can say we said a year ago, it was 25, then 50, then 100, 150. Now we're at 200, right? So it's going up. So you're seeing more enterprises engage in the activity. With regard to the maturity of the use cases, listen, there's public data around it. We see the same thing.

So in healthcare and life sciences, there are truly transformative things happening, right? I mean, man, things that you never saw in the history of mankind, drug discovery, genomic analysis, large population studies, hybrid infrastructure use cases. I mean this is just unreal all the things that are going on. And just because the data was well organized, you are able to -- we are part of many of those because we can help bring together data sets across a diverse range of environments.

I think if you look in sort of from a horizontal use case, wherever there's software development, yes, that's ticking up. We have it. It's ticking up nicely within our own company. There are fairly standardized back-office use cases, hey, document analysis. It could be check analysis in retail banking. It could be contracts in procurement organization. It could be legal documents in law firms. It's kind of like the same thing. And then there's customer success where people that use our infrastructure, they want to correlate data from multiple parts of their customer success pipeline and do better chatbots...

Does that suggest a longer tail for legacy systems in storage as companies keep storage longer -- like keep data longer, so maybe asymptotically your hybrid system business, that's what, 1/3 of your storage solutions maybe stops declining effectively or the growth meaningfully moderates?

I'm just trying to think of like the longer-term ramifications for all of this incremental use case for data. We're going to create a lot of data. People will probably want to preserve [ said ] data for unknown potential incremental use cases. I mean is that -- should we think about the storage market then being sort of a healthier market over the long term, intermediate term than what we've seen over the last 5 to 10 years? Is that like a reasonable way to think about it?

If the data is seen as the way to get better value out of AI, which is a hypothesis that everybody seems to agree with, but you got to see that put into deployment at customers, that is true. We are seeing that evidence where people who historically, like I was with a large weather forecasting agency that collects an insane amount of satellite imagery and then analyzes it to provide better weather prediction, various kinds of storm analysis.

They used to archive a lot more data on to tape. Now they're keeping it on online storage. And it's for the reasons you mentioned, David. So it's early, but if that is the hypothesis that plays out, then yes, it should follow the trajectory that you had.

So we have to talk about margins. So storage historically has been a market where you've been able to increase prices to offset rising inputs, maybe albeit with a little bit of a lag issue. Do you think we're going to see that same type of cycle from customer behavior where you're going to be able to navigate maybe the higher NAND pricing, higher DRAM prices and other components by raising prices? I mean I think you talked about it on the last call where customers buy dollar amount of storage. I mean maybe can you kind of walk through how we should think about that?

Yes, customers budget in dollars, I think the way it works is IT as a whole gets a pool of funding from the CFO, they divide it up into projects. It could be, hey, I've got a cloud modernization project. I have a higher cyber risk management or, hey, I want to build data infrastructure for AI, right? And then within that, there are buckets for software, infrastructure and storage as a part of the infrastructure bucket. So that's kind of how it broadly gets laid out.

Typically, customers budget in dollars, right? They'll say, "Hey, I got $250,000 or $1 million for my data infrastructure." And what they will ask us to give them is the best solution for that use case. Sometimes it's a flash-based solution, sometimes it's a disk-based solution, sometimes it's the combo. And they might get more footprint out of that if it's a year where NAND or commodities are cheaper and less when the prices are higher.

With regard to our gross margin outlook, we run the business to drive corporate gross profit dollars. That's sort of the piece of the P&L that drives earnings leverage. When you look at the overall P&L, 4 buckets in there. There is support, which is a stable low growth but growing very high-margin business, 92% margins. Cloud enters next year at a much higher number than it started this year because both it has grown in revenue, but also margins are up at 83%.

Our Keystone business, which reports as part of the professional services line is growing. It's a smaller number, but growing at 80% in the first half of the year from a revenue year-on-year perspective. That pushes up the professional services margin line and then comes product gross margins. Within product gross margins, we manage that in multiple ways, right? One, the first thing we focus on is availability and access to innovation.

So we don't want to fall behind competition on either the latest types of silicon or assured access to supply. The second, because we -- and so we work with pretty much everybody in the market share charts. The second is we have structured pricing agreement with them. I think they appreciate the fact that both we are #1 in flash market share, but also we have been a stable -- we don't hockey stick our business up and down. We've been a stable buyer of theirs.

We have in the second half of this year, good line of sight to our kind of supply needs for the rest of the year. And we are in active discussions with them about what next year looks like, and we'll take the appropriate actions. In general, the storage industry is, as you said, David, we pass through higher prices when commodity prices go up, we pass through lower prices when it structurally adjusts downward.

And maybe just to go back to your point about customers have a fixed budget of dollars, and they may get more gigabytes in 1 year, less in the next year. Do customers trade down? So let's say, you were thinking about a higher end, more performative flash solution, maybe they trade down into a more modest cold storage-focused solution if it's adequate to meet that need? Or is it really the demand for that particular use case or workload supersedes that decision and they just buy less of said product for the same dollars?

There's no one consistent answer for most customer -- for all customers. Most customers say, "Hey, I got to serve this use case, give me what [ kit ] actually solves the use case." And then they might say, "Hey, I don't -- I'll just buy more next year, right, to offset the fact that they have less systems. Others might trade down. And so it just depends.

Depends. So the reason I ask is, so is there -- I know you don't break this out, but is there a margin differential across product lines based on performance within your portfolio. So very high-end flash performative, I would imagine, has more robust gross margin, more solution, more software versus maybe a lower-end solution. Is that a good way to frame it?

Yes, I mean, generally, the highest performance systems in any product family have the highest margins. And as you get lower, the capacity overruns the value of the software. And then the -- so margins get lower. I think in our portfolio, as we said, flash has higher margins than disk-based solutions. It's interesting. This quarter, actually, the mix shifted towards higher performance systems, which is what drove the -- so it's really hard to tell. Some clients might say, "Hey, I want to downshift, but it's a big market." You're serving thousands of clients a quarter. And so it's hard to -- for me to give you one answer.

Got it. Maybe on pivoting to public. Obviously, gross margins have been working their way higher, 83%, congratulations on the quarter. How do we think now that we're anniversarying Spot coming up, how do we think about the growth trajectory in those, I guess, discrete items within your public cloud, so first-party storage, et cetera, like is the holistic solution for public cloud kind of a mid-teens growth driver. And the reason why I'm asking is if I look at the profit dollar contribution from public cloud, it's kind of incrementally on par with your traditional business.

Correct.

And so if it's growing 2x, 3x your traditional business, obviously, then we're going to mix higher to mid-80s gross margin solutions. Is that a fair way to frame it?

Yes. I think, first of all, ex Spot, the cloud business performed at 18% for the quarter. The print was 2%, but that was because of the headwind from Spot. I think if you look at first-party cloud storage, which is the natively integrated storage, that is growing much faster. It's at 32% and is an increasingly large share. It's well more than the majority.

It is an increasingly large share of the cloud business. So both of them should provide for -- if we can sustain the performance of the first-party cloud business, which is the anchor tenant of our cloud strategy, which it should help drive the cloud numbers up because it's a bigger share. It's growing faster than the rest of cloud. And listen, from a margin perspective, we just gave the guide of 80% to 85%. So I feel like it would be inappropriate to come and reraise the guide.