NetApp, Inc.

Good day, and welcome to the NetApp first quarter of fiscal year 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Chris Newton, Vice President, Investor Relations. Please go ahead.

Hi, everyone. Thanks for joining us. With me today are our CEO, George Kurian, and CFO, Mike Berry. 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 2024, 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 estimates are available on our website. I'll now turn the call over to George. Thanks, Chris.

Good afternoon, everyone. Thank you for joining us today. Q1 marks a solid start to FY24. in what continues to be a challenging macroeconomic environment. We delivered revenue above the midpoint of guidance, while our operational discipline yielded operating margin and EPS above our guidance ranges. As I have outlined on previous calls, we are focused on managing the elements within our control, reinvigorating efforts to drive better performance in our storage business, and building a more focused approach to our public cloud business. We are seeing positive early indicators from this plan to sharpen our execution, deliver growth, increase profitability, and further strengthen our position for long-term success. Looking at the results of the quarter, I am especially pleased with the reception to our recent product introductions. The AFF C-Series has been the fastest ramping all-flash product launch in our history, with strong demand across all products in the family. Similarly, the AFF A150, our entry-level high-performance all-flash array, grew quickly in its first full quarter of shipping. Our storage lifecycle program is also seeing good early uptake driving longer-term commitments to NetApp as we help customers future-proof their environments with a world-class ownership experience. Building on this momentum, we introduced more storage innovation in Q1. We announced the ASA A-Series, a family of SAN-specific all-flash arrays supported by industry-leading data availability and efficiency guarantees. These systems are the only all-SAN storage arrays with virtual machine and application granular data protection mechanisms. Complementing our unified storage offering, they enable us to expand on the tens of thousands of customers who already use NetApp for block storage today and drive share gains in the $18 billion SAN market. In addition to delivering on our innovation agenda, We have implemented the go-to-market changes we outlined on the Q4 call, focusing our enterprise sellers on the flash opportunity and building a dedicated model for cloud. In May, we held our annual sales kickoff meeting, the first time we've gathered the global team in person since the pandemic. Everyone was energized by the innovation we're bringing to market and the objectives appropriately aligned to each team's strengths. Because many of the products we've introduced open new TAMs for us, we are also including training to sharpen our attack on these opportunities. The changes have been well received, are already showing up in pipeline expansion, and should help drive top line growth in the second half. Q1 hybrid cloud segment revenue of $1.3 billion was down 12% year over year. Our all-flasher rate business decreased 7% from Q1 a year ago to an annualized revenue run rate of $2.8 billion. The demand environment is unchanged from the last half of FY23, with headwinds from enterprise continuing to weigh on product and ASA revenue. Additionally, as Mike will outline, the first half of fiscal year 23 benefited from elevated backlogs impacting the year-over-year comparison. In the past few quarters, every conversation I've had with customers and investors has touched on artificial intelligence. Generative AI is top of mind for everyone. While still in the early innings of this opportunity, AI is not a new topic for us. We have been a leader in storage, for predictive AI and machine learning workloads since we introduced ONTAP AI, a joint NetApp and NVIDIA proven architecture in 2018. Today, hundreds of customers rely on NetApp storage infrastructure and data management for their AI workloads, including some of the largest pharmaceutical, financial services, and retail companies in the world. Effective, predictive, and generative AI projects depend on high-quality, well-managed, unstructured data. The data pipeline and workflow typically involve data from multiple file and object sources across cloud and on-premises. High-performance, highly scalable hybrid cloud storage and data management is a core NetApp advantage. and naturally positions us as a leader in this market and will continue to benefit us as the GenAI market evolves. While early, we are already engaged with customers who are interested in fine-tuning large language models with their own data on premises, as well as those who are leveraging the hyperscalers GenAI offerings on the public cloud together with the storage and data management capabilities of NetApp Cloud Volume services. Accelerated by the rise of AI, data continues to grow in both volume and value. A company's data is its most valuable asset. Our robust cyber resilience portfolio helps customers ensure that they have the right enterprise data protection and security on-premises and in the cloud. With built-in features that protect and secure data and deliver rapid recovery based on AI and machine learning, our systems can proactively spot and counter malicious or anomalous actions. Our confidence in our industry-leading capabilities is underscored by the ransomware recovery guarantee we announced in Q1 and demonstrated by the fact that NetApp is the only enterprise storage vendor on the NSA's classified program components list. Now turning to public cloud. I want to acknowledge our cloud results have not been where we want them to be, and assure you we are taking definitive action to hone our approach and get back on track. At the start of this year, we aligned our cloud sales specialists to our hyperscaler partners' go-to-market structures. Additionally, we are in the process of a strategic review to sharpen the focus of our cloud portfolio, expand on the success of first party services, and improve subscription performance. We will have more details to share with you on our next call. That said, public cloud segment revenue in Q1 was $154 million, an increase of 17% year over year. public cloud DBNRR declined to 107%. Within these numbers, strength in first-party and marketplace consumption services was masked by weakness in our subscription services. Let me emphasize that our strategic focus is on first-party cloud storage services, and we continue to see customer expansion and deepening partnerships as well as revenue and AR growth in this part of our portfolio. Our expectations for FY24 public cloud revenue are reflected in the guidance Mike will walk you through. First-party storage services, branded and sold by our cloud partners, position us uniquely and represent our biggest opportunity. Our partnerships with the cloud providers are strong and delivering growth, Our close and long-standing relationship with Microsoft Azure continues to deliver solid growth. Likewise, our partnership with Google remains strong, and in the coming weeks, you can expect to hear exciting news about the expansion of our partnership. Our relationship with AWS is also yielding positive results. As expected, we are starting to win large enterprise deployments with FSX for NetApp OnTap. We were chosen to be the cloud storage infrastructure for a global sportswear manufacturer's SAP HANA deployment. FSXN was the only storage service that could meet the company's mission-critical service-level availability and recovery requirements. This is a large, long-term SAP project that will continue to develop and grow over the coming years, driving significant consumption of FSXN capacity. Once completed, it will be one of the largest SAP environments on AWS. In the face of the challenging macro, demand remains muted and sales cycles remain elongated. Although customers continue to exhibit caution, They are moving forward with strategic initiatives, prioritizing investments in applications and technologies that drive business productivity and growth. Our modern approach to hybrid multi-cloud infrastructure and data management enables IT organizations to leverage data across their entire estate, simply, securely, and sustainably. Customers turn to NetApp to help them increase the performance and reliability of their digital and cloud transformational projects. Looking forward, our priorities are clear. We will continue to tightly manage the elements within our control, reinvigorate efforts to drive better performance in the storage business, and continue to refine our public cloud business. Early results indicate we are on track to drive margin expansion and earnings growth year over year, while yielding top line growth in the back half of fiscal year 24. Before turning the call over to Mike, I want to thank the NetApp team for their continued focus. I also want to remind you we'll be hosting our Insight User Conference in person in Las Vegas this October. We hope to see you there.