NetApp's Q2 2026 Earnings Call: Contradictions Emerge on Component Pricing, Gross Margins, and AI Momentum

Date of Call: None provided

Financials Results

• Revenue: $1.71 billion, up 3% year-over-year (4% ex-divested Spot business)
• EPS: $2.05 non-GAAP, up 10% year-over-year
• Gross Margin: 72.6%, above guidance range; up 1.5 percentage points sequentially
• Operating Margin: 31.1%, up 2.4 percentage points year-over-year

Guidance:

• Q3 revenue $1.69B ± $75M (midpoint implies +3% YOY; +5% YOY ex-Spot)
• Q3 gross margin 72.3%–73.3%
• Q3 operating margin 30.5%–31.5%
• Q3 EPS $2.01–$2.11 (midpoint $2.06)
• FY26 revenue $6.625B–$6.875B (midpoint $6.75B, +3% YOY; +5% ex-Spot)
• FY26 gross margin 71.7%–72.7%, operating margin 29.5%–30.5%
• FY26 EPS $7.75–$8.05 (midpoint $7.90); other income/expense ≈ -$50M; tax rate 20.2%–21.2%

Business Commentary:

• **Revenue Growth and Strategic Focus:
• NetApp reported revenue of $1.71 billion for Q2, marking a 3% year-over-year increase.
• Excluding the divested spot business, total revenue rose by 4% year-over-year.

• This growth was driven by strong performance in All Flash and Public Cloud segments, which made up 70% of Q2 revenue, and increased demand for AI solutions.

• **Operational Efficiency and Margin Improvement:

• The company's gross margin reached a record of 72.6% for the fiscal second quarter, exceeding guidance.
• Operating income was $530 million, up 12% compared to Q2 2025.

• This improvement was attributed to a 1.5 percentage point sequential increase in hybrid cloud gross margin and a 3% year-over-year increase in public cloud revenue.

• **AI and Enterprise Expansion:

• NetApp closed approximately 200 AI infrastructure and data lake modernization deals across diverse geographies and industries in Q2.
• This represents an acceleration from 125 deals in the previous quarter.

• Growth in AI transactions was driven by demand for AI solutions, such as the introduction of the AFX platform and AI data engine, which simplify data discovery and enable efficient data pipelines.

• Public Cloud Services Growth:

• Public Cloud revenue reached $171 million, up 2% year-over-year, and excluding Spot, showed an 18% year-over-year increase.
• This was primarily due to strong demand for first-party and marketplace storage services, which grew by 32% year-on-year.
• Revenue expansion was driven by new offerings on major cloud platforms, enhancing NetApp's addressable market.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • "We delivered a strong Q2" with revenue of $1.71B, "gross margin set a Q2 record," "operating margin and EPS surpassed expectations and marked all-time highs," and the company is "raising gross margin, operating margin and EPS ranges for the fiscal year."

Q&A:

• Question from Aaron Rakers (Wells Fargo): How are you managing component pricing/constraints and visibility on pricing dynamics underpinning gross margin outlook?
  Response: We locked some component prices providing visibility through year-end, expect product gross margin to stay near Q2 levels (~59%+), will manage supply dynamically and pass through commodity cost via pricing if needed.

• Question from Erik Woodring (Morgan Stanley): What drove product gross margin expansion and can it expand further or is this peak?
  Response: Expansion was driven mainly by mix (All Flash, cloud) and pricing; target long-term product margin is mid- to high-50s, but mix shift to higher-margin cloud could sustain or improve margins.

• Question from Samik Chatterjee (JPMorgan): Trends in AI-related deals (200 this quarter) and is AFX driving those wins; why is Q3 guide roughly flat seasonally?
  Response: AI deal volume is accelerating with stable mix (data prep ~45%, training ~25–30%), AFX interest is high but still in qualification, and Q3 conservatism reflects temporary U.S. public sector softness from government shutdowns.

• Question from David Vogt (UBS): How should we think about inventory, purchase commitments and protecting supply into next year given federal recovery?
  Response: We have modest inventory now, good visibility through year-end and will be opportunistic and quick to secure supply or make purchase commitments before FY27 as needed to protect the business.

• Question from Sreekrishnan Sankarnarayanan (TD Cowen): Average AI deal size and pilot-to-production progress; quantify first-party hyperscaler services growth?
  Response: Deal sizes vary from small POCs to large scale deployments; data-lake/data-prep leads deployments and adoption is industry-dependent; first-party and marketplace services grew ~32% year-over-year.

• Question from Steven Fox (Fox Advisors): Any risk supply shortages next year hurting demand or shipments?
  Response: No current shortages; supply and pricing commitments secured through year-end and we'll take actions across a broad supplier ecosystem next fiscal year as required to ensure supply.

• Question from Timothy Long (Barclays): Impact of NAND/QLC/HDD dynamics and sustainability of cloud ex-Spot growth (high teens)?
  Response: All media types have roles; HDDs performed well this quarter; cloud services are growing robustly (>30% for first-party/marketplace) and we expect continued innovation and GTM scaling to sustain/accelerate growth.

• Question from Jason Ader (William Blair): Why not flow Q2 ~$20M beat through the year guide; is Keystone inflecting storage-as-a-service?
  Response: Beat offset by a larger-than-expected U.S. public sector decline; management is being cautious awaiting clarity on government spending; Keystone is a growing, durable shift to consumption models and will expand over time.

• Question from Wamsi Mohan (Bank of America): How much share capture is from pricing flexibility vs. product/mix; comment on cloud gross margin ceiling and cash flow weakness?
  Response: Wins are driven primarily by software/platform differentiation (hybrid, security, Keystone) with pricing flexibility as a tool; cloud gross margin comfortable in 80–85% range; Q2 cash flow seasonal plus a tax payment caused lower cash flow.

• Question from Asiya Merchant (Citigroup): How is mix shaping the higher overall gross margin and what's embedded for Public Cloud revenue in Q3 guide?
  Response: Management won't provide granular mix guidance but expects product gross margin to remain near recent levels and is comfortable with cloud margins exiting Q2; Q3 revenue guide embeds continued cloud growth consistent with recent quarters.

Contradiction Point 1

Component Pricing and Supply Chain Management

It involves changes in the company's strategy and expectations regarding component pricing and supply chain management, which are crucial for financial planning and investor confidence.

How is the company managing the component environment’s pricing and constraints? Have you leaned into any strategic purposes? What is the visibility on pricing dynamics underpinning the gross margin outlook? - Aaron Rakers (Wells Fargo)

20251126-2026 Q2: We did lock in prices for some components, which provides visibility until the end of the fiscal year. We have good visibility on component pricing for at least a few more quarters. - Wissam Jabre(CFO)

How is the company addressing pricing pressures from component environment impacts, and what strategic purchasing or visibility into pricing trends support the gross margin outlook? - Aaron Rakers (Wells Fargo Securities, LLC, Research Division)

2026Q2: We have secured supply commitments and pricing through the end of the fiscal year. Visibility exists for the next few quarters. We expect product gross margin to remain stable in the rest of the year. - Wissam Jabre(CFO)

Contradiction Point 2

Product Gross Margin Targets

It involves changes in the company's target for product gross margin, which is a critical financial metric for investors.

What are the drivers of product gross margin expansion, and is the current 59% margin the peak? - Erik Woodring (Morgan Stanley)

20251126-2026 Q2: Our target is mid- to high 50% margin. Continued growth in the cloud business and high growth in Keystone drive favorable mix. - Wissam Jabre(CFO)

What factors are driving the improvement in product gross margins, and can this expansion continue beyond the memory cycle? - Erik Woodring (Morgan Stanley, Research Division)

2026Q2: Our current product gross margin is due to a combination of factors: cost flatness, mix, and pricing. Our target is mid- to high 50% margin. Continued growth in the cloud business and high growth in Keystone drive favorable mix. - Wissam Jabre(CFO)

Contradiction Point 3

AI and Cloud Revenue Growth

It involves differing assessments of the growth and market potential of AI-related transactions and cloud revenue, which are crucial areas for the company's future growth.

What trends are you seeing in AI-related transactions and the impact of AFX on deal numbers? How do you view Q3 guidance given the macro and public sector dynamics? - Samik Chatterjee (JPMorgan)

20251126-2026 Q2: AI transactions are growing, with a mix of data prep, training, and inference. We're seeing strong interest in AFX. - George Kurian(CEO)

Can you explain the decrease in cloud ARR from $700 million last quarter to the current $605 million range? - Amit Daryanani (Evercore ISI)

2023Q3: The broad themes observed were shared across hyperscalers. There were no changes in our cloud business churn, but we saw optimization in high-cost, high-performance levels. Customer acquisitions were stable, and we feel good about the future despite optimization from larger customers. - George Kurian(CEO)

Contradiction Point 4

AI Win Momentum and Market Position

It involves NetApp's reported growth in AI-related transactions and market position, which are key indicators of its strategic success and competitive standing in the AI market.

What trends are you seeing in AI-related transactions and AFX's impact on deal volumes? How do you view Q3 guidance considering macroeconomic and public sector factors? - Samik Chatterjee (JPMorgan)

20251126-2026 Q2: AI transactions are growing, with a mix of data prep, training, and inference. We're seeing strong interest in AFX. - George Kurian(CEO)

What is the scale and outlook for AI wins, and will they accelerate this fiscal year? - Samik Chatterjee (JPMorgan)

2026Q1: AI wins include data lakes, training, and RAG/Agentic AI. We've doubled year-on-year wins. - George Kurian(CEO)

Contradiction Point 5

Component Pricing and Gross Margin Stability

It involves NetApp's long-term strategic approach to component pricing and its impact on gross margin stability, which are crucial factors affecting financial forecasting and investor sentiment.

How is the company managing component pricing and constraints? Have you utilized strategic sourcing? What visibility exists on pricing trends driving the gross margin outlook? - Aaron Rakers (Wells Fargo)

20251126-2026 Q2: We did lock in prices for some components, which provides visibility until the end of the fiscal year. We have good visibility on component pricing for at least a few more quarters. Our product gross margin was slightly better than our long-term model. We expect product gross margin to be relatively stable for the rest of the year. - Wissam Jabre(CFO)

Is the all-flash revenue growth slowdown due to pricing or demand? What is driving the product gross margin decline? - Krish Sankar (TD Cowen)

2026Q1: The all-flash revenue was driven by anticipated dynamics, including softness in U.S. public sector and EMEA. Product gross margin was affected by an unfavorable mix of high-performance flash versus capacity flash and a bigger uptick in flash costs. - Wissam G. Jabre(CFO)