NetApp's Q1 2026: Contradictions Emerge on All-Flash Revenue, AI Market Growth, and Public Cloud Margins

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• Revenue: $1.56B, up 1% YOY; +3% YOY excluding divested Spot; FX added ~1 ppt; above midpoint of guidance
• EPS: $1.55 per diluted share; YOY comparison not provided
• Gross Margin: 71.1%, up 160 bps sequentially
• Operating Margin: 25.7% (no YOY context provided)

Guidance:

• Q2 revenue: ~$1.69B ± $75M (≈2% YOY; ≈3% YOY ex-Spot).
• Q2 consolidated gross margin: ~71% ± 50 bps.
• Q2 operating margin: 28%–29%.
• Q2 diluted EPS: $1.84–$1.94 (midpoint $1.89).
• FY26 revenue: $6.625B–$6.875B (midpoint ~$6.75B, ≈3% YOY; ≈4% ex-Spot).
• FY26 diluted EPS: $7.60–$7.90 (midpoint $7.75).
• Public Cloud long-term GM target raised to 80%–85%; expected to improve gradually.
• Product gross margin expected to improve through FY26 and operate in mid-to-high 50% range.

Business Commentary:

* Revenue Growth and Strategic Focus: - NetApp reported revenue of $1,560,000,000 for Q1 FY2026, surpassing the midpoint of guidance. - Growth was driven by robust performance in the Americas enterprise, offsetting declines in the U.S. public sector and EMEA, fueled by strong demand for all-flash offerings and cloud storage services.

• All-Flash Revenue and Market Leadership:
• All-flash array revenue grew 6% year-on-year to $893,000,000, representing an annualized run rate of $3,600,000,000.

• Forty-five percent of systems in the installed base are now all-flash, indicating a growing market share, which contributed to NetApp's number one position in the all-flash array market for Q1 2025.

• Cloud Services Expansion:

• Public cloud services increased by 33% from Q1 a year ago, serving as a strong engine for new customer acquisition.

• Growth was attributed to the seamless integration of NetApp's offerings with hyperscaler environments, providing advantages in terms of deployment, management, and cost efficiency.

• AI Infrastructure and Data Management:

• NetApp secured over 125 AI infrastructure and data lake modernization deals in Q1, double the number from a year ago.
• The demand for AI infrastructure is driven by the need to manage complex data requirements and enable enterprise-grade data protection, positioning NetApp well in the emerging AI market.

Sentiment Analysis:

• “Delivered a solid start… revenue of $1.56B above the midpoint.” “All flash array revenue grew 6% YOY to $893M… number one position in all flash.” “Public cloud gross margin was 80.1%… raising long-term target to 80%–85%.” “Q1 records for cash flow from operations ($673M) and free cash flow ($620M).” “We are reiterating our full year guidance.” Management noted some USPS/EMEA softness but expects USPS to improve seasonally in Q2.

Q&A:

• Question from Krish Sankar (TD Cowen): All-flash growth decelerated and product gross margins down; is this pricing or demand, and how should we think about product GM going forward?
  Response: Softness in U.S. public sector and mix dynamics tempered all-flash; higher flash costs drove most GM pressure; product GM should improve gradually and operate in mid–high 50% for the rest of FY26.

• Question from Krish Sankar (TD Cowen): For AI adoption, are customers buying more storage/capacity/software; what architectures are you seeing?
  Response: AI wins span data lakes (~20%), training (~45%), and RAG/agentic; data lakes mix hot flash and object archive, while training/RAG are typically all-flash.

• Question from Mari Hassini (Susquehanna International Group): Does 128TB QLC impact your AI storage solutions; and how to think about January seasonality?
  Response: Not gated by NAND; NetApp uses appropriate media across performance/capacity/archival needs; remains confident but will guide quarter-by-quarter given macro uncertainty.

• Question from Eric Woodring (Morgan Stanley): Will Americas strength vs. USPS/EMEA weakness persist; any end-market inflections expected?
  Response: Americas commercial and enterprise were strong; USPS was weak awaiting budgets (Q2 usually stronger); Europe/APAC mostly solid with localized softness.

• Question from Eric Woodring (Morgan Stanley): Why raise Public Cloud GM target to 80%–85%; what’s driving sustainability?
  Response: GM is rising due to depreciation roll-off on early hardware and higher software mix; expect continued gradual improvement, hence the higher target.

• Question from Samik Chatterjee (JPMorgan): Magnitude/size of AI deals and outlook for win pace through the year?
  Response: Deal sizes vary from small inferencing/RAG pilots to large RAG and model-training footprints and AIaaS; expect steady growth in wins through FY26.

• Question from Wamsi Mohan (Bank of America): Why could Q2 GM be down sequentially; and should operating leverage persist in 2H?
  Response: GM guide is essentially flattish; revenue mix (higher product in Q2) creates slight headwind; operating leverage expected to continue in 2H.

• Question from Tim Long (Barclays): How are you converting the remaining installed base to all-flash, and Keystone’s mid/long-term role?
  Response: High win rates on refreshes and competitive takeouts; HDD still used for cold/backup; Keystone grows as an as-a-service bridge and competitive tool, offering customer choice.

• Question from Simon Leopold (Raymond James): Readiness and roadmap to support enterprise AI and move up the value chain?
  Response: Focus on high-performance storage, cloud-equivalent services, expanded data management (search, governance, vectorization), and deeper ecosystem with NVIDIA and hyperscalers.

• Question from Ari Tarjanian (Cleveland Research): Update on all-flash competitive landscape and pricing actions?
  Response: Market remains competitive with no adverse trend; no tariff-related price hikes; mix and higher flash costs impacted GM, with costs easing as year progresses.

• Question from Doug Vaught (UBS): Was weaker high-performance vs capacity flash regional; and status of component pre-buys/inventory?
  Response: Variance was vs. internal mix expectations; high-performance flash outgrew capacity YOY; costs should improve with locked pricing; no supply chain issues.

• Question from Ananda Baruah (Loop Capital): Is AIaaS/training expanding TAM; and how do reasoning agents impact RAG pipeline?
  Response: Certified with NVIDIA Cloud Partners; seeing sovereign AIaaS and training wins but core remains enterprise; launching tools to organize/vectorize data and features to speed reasoning workloads.

• Question from Asiya Merchant (Citigroup): Strategy for hypervisors amid VMware/Nutanix changes and HCI trends?
  Response: NetApp supports a broad range of on-prem and cloud hypervisors based on customer demand and will continue expanding support.