Q3 2025 Summary
Published Mar 7, 2025, 1:06 AM UTC- NetApp has refreshed its entire product portfolio, including the AFF series, AMC, and ASA series, and is seeing good traction with these new products, leading to winning new customer footprints.
- NetApp's Keystone, its Storage as a Service offering, continues to experience strong growth, reflecting customer enthusiasm for as-a-service models and NetApp's ability to meet demand for flexible cloud and hybrid solutions.
- NetApp remains confident in its long-term targets of mid- to high single-digit growth through 2027, with product momentum and go-to-market changes supporting these goals, and recent quarterly performance does not alter their positive outlook.
- Sales Execution Issues Leading to Deal Slippage: NetApp experienced inconsistent execution resulting in some deals slipping out of the quarter, impacting their top-line performance. The company is implementing tighter controls to improve deal progression and visibility into closures, but these issues could affect future revenue growth.
- Caution in Key Markets Potentially Impacting Revenues: NetApp has observed a degree of caution in the European markets, particularly France and Germany, where there is political uncertainty due to "no government in place." Additionally, they have seen a little more caution in U.S. public sector as part of their Q4 guidance. This cautious customer behavior could lead to delayed or reduced spending, negatively affecting revenues in these regions.
- Lower Free Cash Flow Due to Working Capital Factors: Operating cash flow was down year-over-year by approximately $241 million, driven by lower collections and higher cash outflows for previously secured strategic SSD purchases. NetApp expects free cash flow in Q4 to be below last year's levels due to timing of tax payments, indicating near-term cash flow challenges.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | FY 2025 | Between $6.54B and $6.74B | Between $6.49B and $6.64B | lowered |
Consolidated Gross Margin | FY 2025 | 71% to 72% | Approximately 71% | lowered |
Operating Margin | FY 2025 | 28% to 28.5% | 28.5% | raised |
Net Interest Income | FY 2025 | $55 million | $55 million | no change |
Tax Rate | FY 2025 | 20% to 21% | 20% to 21% | no change |
EPS | FY 2025 | $7.20 to $7.40 | $7.17 to $7.27 | lowered |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q3 2025 | $1.61B to $1.76B | $1.64B | Met |
Gross Margin | Q3 2025 | 71% to 72% | ~69.8% (calculated from 1,641Revenue and 496COGS) | Missed |
Operating Margin | Q3 2025 | ~29% | ~22% (calculated from 362 / 1,641) | Missed |
EPS (Diluted) | Q3 2025 | $1.85 to $1.95 | $1.44 | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Product Portfolio Refresh and Differentiation | Q4 2024 and Q1 2025 emphasized new generations of AFF/AFFA, C-Series, ASA products along with integrations for Gen AI and unified data management | Q3 2025 continues to highlight a refreshed portfolio including new entry-level and midrange ASA systems, AFF performance upgrades, and strong customer adoption | Consistently positive messaging with ongoing innovation and differentiation; the focus remains on refreshing the portfolio to drive competitive advantages. |
Expansion of Cloud and As-a-Service Offerings | Q4 2024 noted triple‐digit growth in Keystone and strong cloud storage gains; Q1 2025 highlighted 60%+ Keystone revenue growth and growing hyperscaler integrations despite subscription headwinds | Q3 2025 reports nearly 60% revenue growth for Keystone, rising public cloud revenue, and subscription headwinds from a divestiture, yet solid first‐party/cloud storage performance | Steady expansion continues with robust cloud and as-a-service growth while persistent subscription challenges remain; overall outlook remains optimistic despite near-term headwinds. |
Enterprise AI Integration and Competitive Dynamics | Q4 2024 and Q1 2025 described early-stage AI storage opportunities, integration with cloud and unstructured data, and competitive wins through high-performance and data management strengths | Q3 2025 emphasizes increased AI infrastructure wins and early revenue concerns while underscoring a strong competitive moat supported by hybrid cloud and software capabilities | Ongoing optimism mixed with caution: Emerging enterprise AI opportunities are consistently mentioned with a positive long-term view, though immediate revenue impact remains in early stages. |
All-Flash Array Business Growth and Adoption Dynamics | Q4 2024 and Q1 2025 highlighted robust YoY growth (17%-21%), strong new customer acquisitions, and opportunities to penetrate a large existing installed base | Q3 2025 shows moderate growth (10% YoY) driven by new customer logos while penetration into the installed base remains modest, partly due to sales execution challenges | Stable growth trajectory: The narrative remains bullish on new customer wins and growth potential, even though installed base penetration remains a challenge and sales delays are noted. |
Sales Execution and Regional/Cautious Customer Spending | Q1 2025 noted solid sales execution in key regions with caution in the U.S. public sector and moderate overall customer spending | Q3 2025 reports deal slippage, longer procurement cycles, and pronounced caution in Europe and the U.S. public sector, prompting tighter sales controls | Increased execution caution: While previously execution was strong in some regions, current sentiment reflects more deal delays and region-specific caution, leading to corrective actions. |
Operational and Financial Pressures | Q4 2024 reported record-high free cash flow and effective working capital management despite anticipated SSD cost pressures; Q1 2025 mentioned rising SSD prices, working capital constraints, and margin pressures | Q3 2025 details a notable drop in free cash flow, significant working capital impacts due to strategic SSD purchases, rising component costs, and margin pressure with expectations of near-term low points | Persistent financial pressures: Though earlier periods showed strong cash flow generation, Q3 now emphasizes working capital challenges and margin compression from rising SSD costs, highlighting an area needing ongoing focus. |
Long-Term Strategic Growth Outlook Amid Macroeconomic Uncertainties | Q4 2024 expressed cautious optimism with steady guidance and focus on strategic areas despite short-term economic uncertainty; Q1 2025 raised revenue and EPS guidance amid macro headwinds | Q3 2025 reaffirms long-term target confidence (mid- to high-single digit growth through 2027) despite near-term revenue caution driven by macro issues like FX effects and divestitures | Consistent long-term confidence with near-term caution: Across periods, strategic growth targets remain intact even as near-term macroeconomic uncertainties continue to temper revenue outlooks. |
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Product Gross Margin Outlook
Q: How will product gross margins trend beyond Q4?
A: Product gross margins are expected to increase after Q4 as we work through strategic prebuys and benefit from price changes and new products. We anticipate that Q4 '25 will be the low point, with margins improving in fiscal '26. -
Sales Execution Issues
Q: What caused deal push-outs and how are you addressing them?
A: Several large deals took longer due to procurement delays and customers upsizing transactions. We're enhancing our closing plans, and many deals that slipped from Q3 have already closed in Q4. -
Fiscal '26 Growth Targets
Q: Does recent performance affect your fiscal '26 guidance?
A: Nothing in Q3 changes our confidence in achieving mid- to high single-digit growth targets. We feel good about our product lineup and momentum entering fiscal '26. -
Strategic SSD Purchases
Q: Will you make more strategic SSD prebuys?
A: At this point, we are not expecting to do any more prebuys. We've used up previous ones and will only consider additional purchases if there's a material market change. -
NAND Pricing Impact
Q: Are you too optimistic about NAND pricing declines?
A: We're closely aligned with NAND suppliers and confident in our market understanding. We expect costs to remain steady entering fiscal '26 and then start to decline, benefiting our margins. -
AI Contribution Timeline
Q: When will AI materially impact revenue?
A: We expect AI projects to move into production in the second half of calendar year '25 or '26. While it's early, we're seeing good progress and wins across industries. -
Divestiture Impact
Q: How much revenue comes from the divested Spot business?
A: The divested cloud business contributed about $94 million in trailing 12-month revenue. Adjusting for this, cloud revenue growth increases from 15% to 21%. The impact is neutral to EPS. -
U.S. Public Sector Exposure
Q: What is your U.S. public sector exposure?
A: U.S. public sector accounts for 10% to 13% of total company revenue. We've seen caution in this segment, but it remains important to our business. -
All-Flash Array Business
Q: How is your flash installed base penetration progressing?
A: Our all-flash footprint penetration is now 43%, reflecting growth in both existing and new customers. Most flash business is net new footprint or new logos. -
Competitive Landscape
Q: Any changes in the competitive environment?
A: We haven't seen changes; our portfolio remains strong. Our software, hybrid cloud, and AI technologies provide a durable competitive moat. -
Tariffs Impact
Q: How will tariffs affect your business?
A: We've minimized dependency on China, so tariffs have little impact. We have flexibility in our supply chain and haven't factored tariffs into our Q4 guidance. -
VMware/Broadcom Dynamics
Q: How does VMware/Broadcom impact customer architectures?
A: We're well-positioned regardless of customer choices. We offer solutions for optimizing VMware environments, re-platforming to cloud, or using on-prem alternatives with partners like Microsoft and Red Hat. -
Keystone Adoption
Q: Are customers moving to as-a-service models?
A: Yes, there's broad enthusiasm for as-a-service models. Customers adopt Keystone for flexibility and to align with public cloud models, especially for early-stage applications like AI. -
Disaggregated Storage Progress
Q: What's the update on disaggregated storage solutions?
A: We've made good progress and will share more at Insight. Our third-generation disaggregated storage targets high-performance unstructured data and opens opportunities against NAS incumbents. -
Operating Expenses
Q: Are you taking incremental cost actions?
A: Operating expenses are flat year-over-year. We continuously scrutinize expenses to ensure returns and are investing in new projects, with no current plans for further cost actions. -
Free Cash Flow Outlook
Q: How is free cash flow trending?
A: Operating cash flow is down $241 million year-over-year due to strategic buys and incentive payments. We expect headwinds from tax payments in Q4 and anticipate cash flow to remain below last year.