NetApp, Inc.

Good day and welcome to the NetApp second 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 third 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. Q2 improved on our 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 company all-time highs for gross margin, operating margin, and EPS. We remained relentlessly focused on managing the elements within our control while driving better performance in our storage business and building a more focused approach to our public cloud business. We are seeing positive results from these actions with increased profitability and a stronger position for delivering long-term growth. In Q2, we held our Insight User Conference, where I witnessed the tangible excitement for the silo-free innovation our unified data storage provides. It was invigorating to be with the thousands of attendees and hear stories of the extraordinary outcomes NetApp delivers for our customers. NetApp is at the forefront of the evolution of the storage industry, helping our customers turn disruption into opportunity with intelligent data infrastructure. Today's organizations need storage infrastructure that harnesses the power of public and hybrid clouds while keeping data secure and protected from ransomware attacks. They need infrastructure that supports dynamic workloads like AI, cloud-native, and open-source applications, and they need infrastructure that helps to create more sustainable data centers. Only NetApp delivers an entire architecture of unified data storage solutions based on one operating system, ONTAP, that supports any application, any data type, and spans on-premises and multiple cloud environments. This comprehensive architecture delivers unparalleled simplicity of management, simplicity of deployment, and consistency of automation, all unified by common APIs and a single control plane. We further elevate the customer experience with our Blue XP sustainability dashboard and NetApp Advance, a common set of programs and guarantees that include storage lifecycle program, which removes the burden of upgrade cycles, as well as storage efficiency, ransomware recovery, and data availability guarantee. Intelligent data infrastructure combines unified data storage, integrated data services, and intelligent operations so customers can operate with seamless flexibility to deploy new applications, unify their data for AI, and simplify data protection in a world of limited IT resources, rapid data growth, and increased cybersecurity threats. Looking at the results of the quarter, momentum from new products and the go-to-market changes we made at the start of the year drove 10% quarter-over-quarter growth in hybrid cloud segment revenue to $1.4 billion. Our all-FlashArray business benefited from the growth of the AFF C-Series, increasing 14% from Q1 to an annualized revenue run rate of $3.2 billion. The AFF C-Series all-FlashArray continues to exceed our expectations, delivering new to NetApp customers and numerous wins over the competition. In the quarter, we successfully competed against an all-flash competitor with C-Series to win a $16 million deal at an infrastructure as a service company. The customer was looking for new storage to host a broad variety of critical applications. Our ease of management for large storage environments, unique data resilience, common toolkit across all our storage systems and the right price performance ratio secured our win despite the competitor's attempt to use price once they realized their value proposition was insufficient. ONTAP One, our all-in-one software license that gives customers access to the industry's most comprehensive data management suite, has laid the groundwork for future tech refresh and expansion opportunities. Building on the success of the C-Series, we introduced blocked optimized and AI-ready versions. The ASA C-Series family is a solution tailored to deliver high performance and guaranteed high availability storage for critical applications, databases, and VMware infrastructure coupled with capacity flash to make enterprise grade block storage more affordable and sustainable than ever. We added the AFFC series to the ONTAP AI architecture, lowering the overall cost of entry to scalable AI without sacrificing performance. Keystone, our storage as a service offering, is also growing rapidly. In Q2, We added performance and availability guarantees to Keystone, expanding on the existing sustainability and storage efficiency guarantees, creating a comprehensive program to keep storage operations running optimally. We also announced NetApp Storage on Equinix Metal, powered by Keystone, providing customers with a single subscription to a full stack of compute networking and storage infrastructure with low latency interconnection to all major public clouds. Turning to public cloud. As we said last quarter, our priority is growing first-party cloud storage services. We aligned our cloud sales specialists to our hyperscaler partners' go-to-market structures at the start of the fiscal year and are seeing new customer additions and growth in those services. However, that growth has been masked by weakness in subscription services which have declined to 23% of public cloud ARR. During the quarter, we engaged in a strategic review to sharpen the focus of our cloud portfolio. As a result, we will continue to prioritize cloud storage offering delivered through the hyperscalers while refocusing some services such as Cloud Insights and Instacluster to complement and extend our hybrid cloud storage offerings, creating greater differentiation and additional value for customers. We will integrate other services that are sold as standalone subscriptions today, such as data protection, into the core functionality of cloud volumes. We will also carefully manage the transition of cloud storage subscription services to align to customer preference for consumption offerings. And we have decided to exit the SAS backup and virtual desktop services. We anticipate ARR headwinds of approximately $55 million from exited services and unrenewed subscriptions in the second half of fiscal year 24. Growth in first party and marketplace services are expected to partially offset this decline. positioning us to enter FY25 with a more focused and much healthier business from which to grow. Now to the results of the quarter. Public cloud segment revenue in Q2 was $154 million, flat from Q1 and up 8% year over year. Our first party and marketplace offerings are highly differentiated and are tightly aligned with customers' buying preferences. These services grew over 30% from Q2 a year ago. We continue to see customer expansion and deepening partnerships, as well as increases in customer count, capacity, revenue, and ARR in this part of the portfolio. In Q2, we extended our partnership with Google with the introduction of Google Cloud NetApp Volumes. Now, we are not only the only vendor to have a natively integrated storage service in the public cloud, but we are natively integrated into all three of the leading hyperscale vendors. And we're not standing still with this advantage. Just two months after introducing the GCNB service, we announced the availability of a new lower cost tier of Google Cloud NetApp volumes, expanding the offering to address a greater range of workloads. These partnerships uniquely position and enable us to participate in the innovation and adoption of AI services in the public cloud. As examples, during Q2, we announced support for Google Cloud's Vertex AI with Google Cloud NetApp volumes, as well as cross-protocol hybrid cloud AI pipeline on Amazon FSx for NetApp on tap, with support for SageMaker Studio Notebooks. Our position with the hyperscalers also enables us to displace legacy on-premises competitors as customers migrate workloads to the cloud. A U.S.-based medical equipment company chose FSX for NetApp ONTAP to replace a competitor's SAN systems when they move their database workloads to the cloud. This is the customer's first engagement with NetApp. Following a successful initial deployment, they are evaluating FSXN for workload consolidation and disaster recovery. Looking forward, our focus is clear and is delivering results. We expect the momentum we saw in Q2 to continue through FY24, despite continued softness in the demand environment due to the challenging macro. Customers value our modern approach to hybrid multi-cloud infrastructure and data management, which enables IT organizations to leverage data across their entire estate simply, securely, and sustainably. With recent innovations that enable us to address a broader set of markets more efficiently, I'm confident that we are well-positioned to deliver positive outcomes for customers and stockholders. I'll now turn the call over to Mike.