EPS of $1.15 decreased by 17.7% from previous year
Gross margin of 70.4%
Net income of 233.00M
""The data infrastructure demands of AI applications are complex and relentless, involving the need to unify, search, and organize massive volumes of data scattered across multiple silos on-premises and in the cloud."" - George Kurian
NetApp Inc (NTAP) QQ1 2026 Results Analysis: AI-driven Enterprise Demand Fuels Growth Amid All-Flash Leadership and Public Cloud Margin Expansion
Executive Summary
NetApp delivered a solid start to fiscal year 2026, with revenue of $1.56 billion, modest YoY growth driven by Americas Enterprise strength offsetting US public sector and some EMEA softness. The company highlighted robust demand for all-flash offerings, first-party cloud storage services, and AI solutions, including a meaningful ramp in AI infrastructure and data lake modernization deals (approximately 125 in Q1). All-flash revenue rose 5% YoY to $893 million, with an annualized run rate of $3.6 billion, and 45% of installed-base systems under active support are now all-flash. Public cloud gross margin reached 80.1% in Q1, within the long-term target range, and NetApp raised its public cloud gross margin target to 80-85% for the longer term. Management articulated a clear AI/data infrastructure narrative, stressing unified data management, multi-cloud integration, and governance as critical to enterprise AI adoption. For Q2 and full-year 2026 guidance, NetApp reaffirmed targets, signaling continued optimization in mix, cost structure, and services growth (notably Keystone). The outlook remains contingent on broader macro spending patterns, particularly in the US public sector, but the company is optimistic about enterprise AI demand and multi-cloud expansion as growth engines.
Key Performance Indicators
Revenue
1.56B
QoQ: -5.00% | YoY:-6.48%
Gross Profit
1.10B
70.43% margin
QoQ: -4.10% | YoY:-6.07%
Operating Income
309.00M
QoQ: -14.64% | YoY:-15.57%
Net Income
233.00M
QoQ: -22.07% | YoY:-19.93%
EPS
1.16
QoQ: -21.09% | YoY:-17.73%
Revenue Trend
Margin Analysis
Key Insights
Q1 2026 total revenue: $1.56B, up 1% YoY; excluding divested Spot, YoY growth approximately 3% (FX favorable about +1ppt).
Gross margin: 71.1% overall; Hybrid Cloud gross margin 70% (up 1.6pp sequential), Product gross margin 54%; Public Cloud gross margin 80.1% (up 80bp sequential, up 9pp YoY). Recurring support gross margin: 92.3%; Professional services gross margin: 29.9%.
Operating profit: $401M; Operating margin: 25.7%; Diluted EPS: $1.55 (Q1 commentary) versus guide confirmation for Q2 and FY2026 below.
AI and cloud initiatives: ~125 AI infrastructure/data lake modernization wins in Q1; Keystone revenue growth ~80% YoY; first-party cloud services up 33% YoY.
Cash flow from operations: $673M; Free cash flow: $620M.
Financial Highlights
Revenue and Profitability
- Q1 2026 total revenue: $1.56B, up 1% YoY; excluding divested Spot, YoY growth approximately 3% (FX favorable about +1ppt).
- Gross margin: 71.1% overall; Hybrid Cloud gross margin 70% (up 1.6pp sequential), Product gross margin 54%; Public Cloud gross margin 80.1% (up 80bp sequential, up 9pp YoY). Recurring support gross margin: 92.3%; Professional services gross margin: 29.9%.
- Operating profit: $401M; Operating margin: 25.7%; Diluted EPS: $1.55 (Q1 commentary) versus guide confirmation for Q2 and FY2026 below.
- AI and cloud initiatives: ~125 AI infrastructure/data lake modernization wins in Q1; Keystone revenue growth ~80% YoY; first-party cloud services up 33% YoY.
Cash Flow and Balance Sheet
- Cash flow from operations: $673M; Free cash flow: $620M.
- Balance sheet: cash, short-term investments of ~$3.324B; total debt ~$2.485B; net cash ≈ $0.84B; redeemed $757M senior notes due 2025; dividends and buybacks totaled $404M from equity and cash returns in Q1.
- Deferred revenue: $4.53B (up 9% YoY); remaining performance obligations (RPO): $4.94B (up 11% YoY); unbilled RPO: $415M (up 40% YoY).
Guidance and Outlook
- Q2 2026 revenue guidance: $1.69B ± $75M (2% YoY at midpoint; 3% growth excluding Spot).
- Q2 gross margin: ~71% ± 0.5pp; operating margin: 28–29%; Q2 diluted EPS: $1.84 to $1.94 (midpoint $1.89).
- Fiscal 2026: Revenue guidance $6.625B–$6.875B (midpoint $6.75B, +3% YoY; ex-Spot +4%); diluted EPS guidance $7.60–$7.90 (midpoint $7.75).
- Management reaffirmed strategy to capitalize on AI, cloud, and data-management opportunities, with expectations of margin improvement in public cloud and ongoing efficiency gains in operating expenses.
Management Sentiment and Key Drivers
- George Kurian emphasized AI-driven data infrastructure demand and NetApp’s ability to unify, search, and manage data across cloud and on-premises environments. He highlighted real customer wins in AI, data lakes, and autonomous systems, with NetApp positioned as a platform for enterprise AI readiness.
- Wissam Jabre highlighted that Q1 results exceeded the midpoint of guidance, with FX favorable but not material relative to guidance; public cloud gross margins have continued to improve, and the long-term target was raised to 80–85%. He explained the Q1 product margin dynamics were driven by higher flash costs and a less favorable mix, but expected sequential improvements and a return to the long-term margin range as the year progresses.
- The management narrative centers on enterprise AI adoption, cloud-hybrid flexibility, and the NetApp ONTAP-based architecture as a differentiator in data-management, security, and multi-cloud operations.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
1.56B
-6.48%
-5.00%
Gross Profit
1.10B
-6.07%
-4.10%
Operating Income
309.00M
-15.57%
-14.64%
Net Income
233.00M
-19.93%
-22.07%
EPS
1.16
-17.73%
-21.09%
Key Financial Ratios
Net Income vs. Revenue
Expense Breakdown
Management Commentary
AI and Enterprise Data Strategy
- George Kurian: AI infrastructure demand is driving modernization and cyber-resilience needs; NetApp’s unified data architecture enables AI initiatives across on-premises and cloud environments.
- Notable AI wins include an automaker for training infrastructure and a sovereign cloud provider for AI-as-a-service, underscoring multi-tenant, secure, high-performance data services.
Cloud and Data Services Momentum
- George Kurian: All-flash revenue up 5% YoY to $893M; 45% of installed-base systems under active support are all-flash; leadership position in all-flash market per IDC.
- Wissam Jabre: Public cloud gross margin at 80.1% in Q1, within the long-term target range of 75–80% and moving toward 80–85%; margin drivers include depreciation roll-off and higher software content.
Operational Excellence and Keystone
- Wissam: Keystone revenue growth ~80% YoY; larger share of services revenue from Keystone-embedded professional services; ongoing emphasis on transitioning customers to as-a-service models while preserving architectural flexibility.
Market Conditions and Expectations
- George and Wissam: Western markets show strength in Americas enterprise; US public sector remains soft; EMEA softer in the quarter, with Asia-Pacific performing reasonably well outside Australia/New Zealand. Second-quarter guidance assumes continuation of spending patterns with quarter-by-quarter visibility; annual guidance to be updated as visibility improves.
"The data infrastructure demands of AI applications are complex and relentless, involving the need to unify, search, and organize massive volumes of data scattered across multiple silos on-premises and in the cloud."
— George Kurian
"We are increasing the long-term gross margin target range for this [public cloud] business to 80% to 85%."
— Wissam Jabre
Forward Guidance
Outlook assessment: NetApp benefits from a robust enterprise AI adoption cycle and the increasing adoption of hybrid/multi-cloud storage solutions. The company maintains a positive trajectory driven by (1) AI infrastructure wins and data-management capabilities, (2) modernization of data lakes and multi-cloud workloads via ONTAP-based products, and (3) Keystone as-a-service monetization that improves stability of recurring revenues. Risks include macro headwinds in the US public sector and potential NAND and supply-chain cost volatility. Management’s guidance suggests continued improvement in public cloud gross margins (target 80–85%), favorable mix shifts toward software and services, and ongoing cost discipline. Key factors for investors to monitor include: (i) the pace of AI-related deal velocity and deal sizes, (ii) the rate of conversion of the installed base toward all-flash and Keystone, (iii) progress in hyperscaler/partner ecosystem announcements, and (iv) changes in US public sector budgets and overall IT spending. In sum, the company offers a constructive, evidence-backed growth thesis centered on AI-ready, data-centric infrastructure with a diversified, multi-cloud portfolio and improving public cloud profitability.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
NTAP Focus
70.43%
N/A
N/A
N/A
ANET
63.70%
42.80%
8.04%
29.99%
DELL
21.60%
4.14%
-34.00%
23.07%
DDD
34.60%
-38.90%
-25.40%
-1.90%
SSYS
44.30%
-9.12%
-1.66%
-13.49%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
NetApp’s QQ1 2026 results underscore a constructive, AI-driven growth path anchored by a diversified, cloud-enabled data-management platform. The company’s mix shift toward high-margin cloud services, Keystone recurring revenue, and expanding AI/data lake deals supports a favorable long-term earnings trajectory. The raised long-term public cloud gross margin target to 80–85% is a meaningful margin expansion lever that, if sustained, should improve overall profitability as AI deployments scale. Near-term performance will hinge on US public sector budgets and macro spend, but the enterprise AI cycle appears durable with a broad addressable market. Investors should monitor: (1) the pace of AI deal wins and their average size, (2) the continued expansion of Keystone and cloud-native services, (3) developments in hyperscaler partnerships and NVIDIA reference architectures, and (4) the trajectory of NAND costs and flash mix. Overall, NetApp remains well-positioned to convert AI-driven data-management demand into multi-year revenue and free cash flow growth, with a prudent balance sheet and strong liquidity to fund optionality.
Key Investment Factors
Growth Potential
- AI infrastructure and data lake modernization deals (125 deals in Q1) underpin a scalable, multi-year growth path.
- Keystone as-a-service expands recurring revenue alongside on-prem and public cloud deployments.
- Public cloud gross margin target uplift to 80–85% supports longer-term profitability in a high-growth segment.
Profitability Risk
- Prolonged weakness in US public sector and macro spending uncertainty could damp near-term bookings.
- NAND pricing dynamics and flash mix shifts remain a near-term margin driver; sustained cost inflation could pressure product margins.
- Competitive pressures in high-performance storage and cloud services; reliance on hyperscaler incentives and OEM partnerships exposes NetApp to external policy and pricing changes.
Financial Position
- Sound balance sheet with net cash ≈ $0.84B; cash and short-term investments ≈ $3.32B; total debt ≈ $2.49B.
- Deferred revenue and unbilled RPO provide visibility into future revenue streams (Deferred revenue $4.53B; RPO $4.94B; Unbilled RPO $415M).
- Improving gross margins in public cloud and disciplined opex suggest operating leverage and free cash flow expansion in H2 2026.
SWOT Analysis
Strengths
Market-leading all-flash leadership (55%+ of installed base under active support are all-flash; all-flash revenue $893M, up 5% YoY).
Strong, diversified data-management portfolio (ONTAP, SnapCenter, Vault, Astra) with robust cloud integrations and hyperscaler tie-ins.
Growing Keystone as-a-service ecosystem enhances recurring revenue and customer retention.
Public cloud gross margin trajectory improving toward 80–85% and long-standing enterprise AI capabilities enabling multi-cloud workloads.
Weaknesses
Exposure to US public sector softness and macro spending caution; geographic mix volatility (EMEA softness noted).
Product gross margin was pressured in Q1 due to flash mix and higher flash costs; near-term margin volatility tied to NAND pricing and mix shifts.
Opportunities
AI infrastructure and data lake modernization deals continue to scale; expand data governance and RAG readiness offerings.
Expansion of hyperscaler collaborations and NVIDIA/NVIDIA partner reference architectures to speed AI deployments.
Increased adoption of Keystone across larger enterprise footprints and transition deals from on-prem to hybrid/multi-cloud architectures.
Threats
Macro risks affecting IT budgets, particularly in the US public sector; potential delays in government procurements.
NAND/flash price volatility and supply chain dynamics could impact product margins in near term.
Competitive intensity in all-flash and cloud storage spaces requiring continuous innovation and price discipline.