Fiscal Year '25 Outlook
Q: Early thoughts on fiscal year '25 guidance?
A: Mike Berry stated that they feel really good about the momentum in Q3 and the guidance built into Q4. They expect continued growth driven by the C Series, industry tailwinds, and priorities aligned with customer needs. Product gross margins are expected to land between the upper 50s to 60%. They plan to be prudent with investments to drive growth while maintaining disciplined spending. Cloud storage growth is now closer to 65% from a revenue perspective, and they see this as a key growth area. They also intend to return capital to shareholders while leaving flexibility for investments. -

Product Gross Margins and Mix Shift
Q: Can we expect flexibility in pricing due to QLC use affecting gross margins?
A: George Kurian explained that the mix shift from hard drives to flash continues, raising the structural baseline product gross margin from the mid-50s to the upper 50s and up to 60%. The mix shift is the most important lever, along with the value of their ONTAP software and commodity supply chain management. NetApp is uniquely positioned to benefit from using QLC in a broad range of applications, with only one other vendor offering QLC-based all-flash arrays. They feel good about their solution and emphasize that enterprise applications are about value, not just price. -

Momentum of C Series and Flash Products
Q: Is momentum for C Series and new flash products continuing?
A: George Kurian stated they are seeing strong advantages with the C Series in modernizing traditional hybrid flash systems and deploying new private cloud environments. The 10K drive transition is a multiyear process, and they are in the early stages. They also see renewed interest due to changes in software licensing. The ASA product family is in the early innings, focusing on the block storage market. Additionally, AI is set for rapid expansion and growth. They have strong momentum and plan to stay focused and disciplined in execution. -

AI Market Opportunity and Timing
Q: What's the timing for investments in AI and the competitive environment?
A: George Kurian mentioned they are in the early phases of the generative AI opportunity. Customers are collecting and unifying data, augmenting foundational models with their own data. This phase is expected to continue for several months or a year. Deployment of production models and movement from training to inferencing will become more relevant heading into next year. NetApp had a strong quarter in the flash business with several 8-figure deals in Q3, involving major companies in oil and gas, genomics, media, and open-source models. They feel good about their strength in the AI market and are expanding their opportunities. -

Increase in Consumption-Based Models
Q: Is there increased appetite for consumption-based storage models?
A: George Kurian noted that the maturity of offerings and customer comfort with cloud-like procurement models are factors. The increase in interest rates has caused some customers to consider CapEx versus OpEx. Customers transitioning environments find as-a-service models a good option. NetApp's Keystone service had another strong quarter, up more than triple digits year-to-date, including the past quarter. They see strong momentum but do not see a mandate, viewing it as a new way to address customer preferences. -

Impact of NAND Prices on Behavior
Q: How do rising NAND prices affect customer purchases of all-flash arrays?
A: Michael Berry stated that customers budget based on dollars, and short-term changes in NAND prices don't significantly change the market. Declining NAND prices have made SSD flash technology more affordable, offering benefits in environmentals, economics, and energy efficiency, improving economic decisions for customers. SSDs are less than 50% of their bill of materials or that of their competitors. -

Competitive Landscape in Fiber Storage and AI
Q: Understanding the competitive landscape in fiber storage market, especially related to AI?
A: George Kurian acknowledged the market has always been competitive with vendors coming and going. NetApp has a strong position due to the installed base of unstructured data, which is vital for building data pipelines for AI and ML applications. They offer solutions that allow customers to build hybrid cloud pipelines, providing scalability, high performance, security protection, and data management needed as AI models scale. They feel confident about expanding their market presence. -

AI Model Placement Preferences
Q: Notable trends in AI model placements due to security and data sovereignty?
A: George Kurian observed that data is foundational to AI, and enterprises are augmenting foundational models with their own data. Concerns like malicious data injection impact AI significantly. Maintaining data security, privacy, and lineage are crucial discussions, which will intensify with regulatory enforcement, such as in the European Union. This increases the need for data management across AI's lifecycle. NetApp is well-positioned with capabilities to build secure private environments both in the public cloud and customers' data centers. -

Differentiators of NetApp's FSX
Q: How does NetApp's FSX differentiate, and what customers and use cases are attracted?
A: George Kurian highlighted that unstructured data is vital in generative AI, operating on documents, images, and videos. NetApp stores a significant portion of enterprises' unstructured data. They help customers move data securely to the public cloud for AI training. Their high-performance scale-out solutions, like SSX on Amazon, are used for model training by one of the world's largest open-source model providers. They also have certifications with NVIDIA, allowing enterprises to build supercomputers, train models, and deploy them into production. They are confident about the expanding opportunity and have had several good wins. -