A record quarter built partly on pricing gains ahead of rising memory chip costs has Wall Street debating how much of NetApp's growth will still be there once component prices catch up.
NetApp reported fiscal first quarter revenue of $2.025 billion, up 30 percent from a year earlier, and adjusted earnings of $2.58 a share, up 66 percent and well above the $2.11 analysts had projected on average. Chief executive George Kurian called it the company's strongest first quarter ever, and by several measures it was. Billings rose 36 percent to $2.057 billion, product revenue climbed 51 percent to $987 million, and revenue from NetApp's all flash storage systems reached $1.309 billion, up 47 percent. On a GAAP basis, net income rose 61 percent to $375 million, or $1.88 a share.
Adjusted gross margin came in at 70.6 percent of revenue, and adjusted net income rose 64 percent to $515 million. NetApp raised its full year revenue forecast to a range of $7.975 billion to $8.225 billion and its adjusted profit forecast to $9.73 to $10.03 a share. For the current quarter, it guided revenue to $2.025 billion to $2.175 billion and adjusted earnings to $2.54 to $2.64 a share. None of that kept the stock from falling. Shares dropped about 9 percent in after hours trading, to $164.64, extending a decline that started in the regular session, when NetApp closed down 1.3 percent at $180.77 ahead of the results.
The disconnect points to a debate playing out underneath the headline numbers. Product revenue increased 51 percent while support revenue, the steadier, more recurring base tied to existing customers, grew just 11 percent. NetApp's smaller public cloud business grew 28 percent to $206 million, while its larger hybrid cloud segment, which covers on premises storage hardware and software, grew 30 percent to $1.819 billion. The gap between fast growing product sales and much slower growing support revenue is consistent with a wave of new hardware purchases tied to AI infrastructure buildouts, rather than steady expansion of existing service contracts.
Kurian told investors that customers are increasingly choosing the NetApp Platform to power AI and hybrid multi cloud initiatives, and said the company closed roughly 350 AI and data lake modernization deals during the quarter. He also pointed to pricing adjustments tied to rising costs for NAND flash and DRAM memory, the same components at the center of the pull forward question facing the stock. Management characterized any pull forward in customer buying as limited company wide, while acknowledging some exists.
That tension showed up directly in the guidance. On the earnings call, Evercore analyst Amit Daryanani noted that NetApp's own growth rate implies a sharp slowdown: 26 percent in the first quarter once an extra week in the period is excluded, guided to 23 percent in the second quarter, and implying roughly 9 to 10 percent growth in the back half of the fiscal year. When another analyst pressed Kurian on why full year guidance did not reflect more upside given the size of the beat, he said, “We are one quarter in,” and that the company would update its outlook as the year progresses.
NetApp's adjusted operating margin rose to 31.9 percent from 25.7 percent a year earlier, and the company returned $200 million to shareholders through buybacks, plus a dividend of 52 cents a share, down from $300 million in buybacks a year ago. Finance chief Wissam Jabre told analysts that once the extra week in this year's quarter is adjusted for, the split between first half and second half revenue should return to a roughly even, more typical pattern, and that product gross margins improved slightly on pricing and cost factors. NetApp ended the quarter with $3.576 billion in cash and investments and $4.846 billion in deferred revenue on its balance sheet, a base of already contracted support and subscription obligations that will convert to revenue in future periods. Support revenue, the segment tied most directly to that base, grew a comparatively modest 11 percent to $720 million, while professional and other services revenue grew 15 percent to $112 million.
NetApp's own numbers make the near term case: demand strong enough, in the company's own words, to exceed guidance on every metric. The unresolved question is whether that pace holds once any pulled forward buying laps and the memory chip prices behind the current cost pressure settle. NetApp's second quarter report, whichever way it breaks against the guided deceleration, is the next point where investors get a real answer.