NetApp Q1 earnings beat, but stock falls on margin outlook

NetApp Inc. (NASDAQ: NTAP ) stock fell in Thursday's premarket trading despite strong first-quarter results and an upbeat outlook.

The company reported fiscal 2027 first-quarter adjusted earnings of $2.58 per share, up 66% year over year.

That beat the consensus estimate of $2.12.

Revenue rose 30% to $2.03 billion, topping the $1.84 billion Street estimate.

Excluding an additional week, revenue increased 26%.

The extra week contributed about $65 million, mainly from Support and Public Cloud.

Gross profit climbed 29% to a record $1.43 billion.

Gross margin fell 50 basis points to 70.6% but exceeded the company's guidance.

Operating margin expanded 6.1 percentage points to 31.9%.

Operating cash flow totaled $503 million, while free cash flow reached $401 million.

NetApp returned $302 million to shareholders.

That included $200 million in share repurchases and $102 million in dividends.

The company ended the quarter with $3.6 billion in cash and short-term investments.

It had $2.5 billion in gross debt, leaving $1.1 billion in net cash.

During the earnings call, NetApp CEO George Kurian said strength across the company's all-flash arrays, Keystone and cloud storage businesses could remain durable for multiple quarters.

He said AI projects and broader data modernization drove demand across industries and customer segments, giving NetApp confidence to materially raise its full-year outlook.

NetApp also said it expects second-quarter gross margin of 67% to 68%, down sequentially from 70.6% in the first quarter.

The company attributed the expected decline mainly to a higher mix of lower-margin product revenue.

Double-Digit Growth Across Businesses Hybrid Cloud revenue jumped 30% to $1.82 billion.

Excluding the extra week, revenue grew 27%.

Product revenue surged 51% to $987 million.

Support revenue rose 11% to $720 million, while Professional Services revenue increased 15% to $112 million.

Public Cloud revenue climbed 28% to $206 million.

Excluding the extra week, revenue rose 19%.

Deferred revenue increased 7% to $4.85 billion.

Remaining performance obligations grew 14% to $5.65 billion.

However, higher component costs pressured product profitability.

Product gross margin fell 150 basis points sequentially to 54.6%.

Management said pricing actions helped offset some cost increases.

Still, the company expects less benefit from pricing during the second quarter, which could pressure margins.

Public Cloud gross margin reached 86.4%.

That marked an increase of 70 basis points sequentially and more than 6 percentage points year over year.

All-flash array revenue surged 47% to $1.31 billion.

NetApp cited growing demand from mission-critical and GPU-intensive artificial intelligence workloads.

Read Also: This NetApp Analyst Is No Longer Bearish; Here Are Top 5 Upgrades For Monday AI Deals And Acquisitions Fuel Growth NetApp secured about 350 AI and data-lake modernization deals.

The company said deal sizes increased as more projects moved into production.