Q4 2024 Earnings Summary
- Strong Position in AI: NetApp is leveraging its strength as the installed incumbent for the world's largest unstructured data sets to tap into AI opportunities. They've built supercomputing environments with major customers like a leading genomics company, accelerating drug discovery, and an oil and gas company, supporting a 1 trillion parameter large language model and their AI center of excellence.
- Growing Cloud Storage Services: NetApp's first-party and marketplace cloud storage services are seeing strong momentum, becoming a much bigger part of their overall cloud business entering FY '25 than in FY '24. They expect consistent revenue growth in cloud in fiscal '25, stronger in the second half.
- Success of Keystone Offering: NetApp's Storage as a Service offering, Keystone, had a really strong year, with strong wins displacing competitors. Customers appreciate the flexibility, operational consistency, and simplicity, leading to multiyear agreements and success across multiple verticals.
- NetApp projects fiscal year 2025 revenue growth of 4.5%, indicating cautious optimism but acknowledging macroeconomic uncertainties and cautious customer spending, which could limit growth prospects.
- The company expects gross margins to decline in the second half of fiscal '25 due to higher component costs, particularly rising SSD prices, which may pressure profitability.
- NetApp's cloud subscription offerings have faced headwinds, leading to decreased revenue in the second half of FY '24, with challenges expected to continue into the first half of FY '25, potentially impacting cloud revenue growth.
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Revenue Guidance and Macro Outlook
Q: Are you seeing macro concerns affecting growth outlook?
A: George Kurian said that while there is continued scrutiny of spending, NetApp is confident entering the year, having finished strong. The flash portfolio has strengthened with the refresh of A-Series products. The company feels good about tapping into AI opportunities and maintaining leadership in traditional enterprise applications. -
AI Impact and Opportunities
Q: How will AI deployments translate into revenue growth?
A: NetApp had over 50 AI wins in Q4 across data foundations and model training. The ramp on AI servers leads storage, as clients build computing stacks using existing data. AI growth is factored into next year's guidance, and the company sees strong long-term opportunities. -
Gross Margins and NAND Costs
Q: What is the outlook for product gross margins amid higher NAND costs?
A: Mike Berry stated they are comfortable with a 58% to 60% product gross margin range for fiscal '25, starting higher in the first half and decreasing as prebuy inventories are used. They have locked in a large portion of SSD demand at higher prices and focus on driving profitable revenue growth while being disciplined in pricing. -
Cloud Business Performance
Q: What's changing in the cloud business to drive growth?
A: George Kurian explained they sharpened focus on first-party and marketplace cloud storage services, now about two-thirds of the cloud business. Subscription headwinds are diminishing, and overall cloud revenue is expected to grow consistently in fiscal '25, stronger in the second half. -
Operating Margins and OpEx Leverage
Q: Will operating margins reach 30% given reduced OpEx?
A: Mike Berry noted that while they achieved 30% operating margin previously due to high gross margins, they guide a 27% to 28% operating margin for fiscal '25. OpEx is expected to grow about 2%, less than the revenue growth, as they target investments in sales and engineering. -
Cash Flow and Shareholder Returns
Q: How should we think about free cash flow and shareholder returns?
A: Operating cash flow is expected to track with net income, which is projected to increase. CapEx will be consistent with the prior year's $155 million. Dividends increased from $0.50 to $0.52 per share, using about $425 million in cash. Remaining free cash flow will go toward share repurchases. -
Competitive Landscape for C-Series
Q: How will increased competition affect the C-Series business?
A: George Kurian expressed confidence, highlighting that existing customers benefit from seamless upgrades due to the same operating system and management tools. They have seen upgrades from hybrid systems and net new customers, displacing competitors and optimizing VMware environments with C-Series. -
Product Launch Impact
Q: How does the A-Series launch affect seasonality and growth?
A: Mike Berry mentioned that while they are excited about the A-Series, it is just starting and won't significantly impact Q1. They expect it to drive growth as they progress through fiscal '25. -
Storage Density and SSD Adoption
Q: Are you increasing storage density with higher-capacity SSDs?
A: George Kurian confirmed they have 30-terabyte SSDs shipping, which are growing quickly as a percentage of total capacity. Their systems can pack more density into a single system than many competitors.
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