Net profit surged 66% year on year, and guidance for next quarter far exceeded expectations is still insufficient! NTAP.US (NTAP.US) fell sharply after the market, and investors kept an eye on free cash flow and sustainable growth

The Zhitong Finance App learned that after the market on September 2, EST, the data storage and intelligent data infrastructure company NTAP.US (NTAP.US) announced financial results for the first quarter of the 2027 fiscal year. Despite several indicators reaching record highs and a sharp increase in annual performance guidelines, the company's stock price still fell sharply in post-market trading, falling nearly 9% at one point. Investors are focusing on concerns such as falling free cash flow, one-off favorable factors, and a significant deceleration in growth in the second half of the year.

As of the first fiscal quarter ending July 31, 2026, US Online Storage achieved revenue of US$2.03 billion, an increase of 30% over the previous year, exceeding Wall Street's expectations of US$1.84 billion. Excluding the contribution of about 4 percentage points brought about by an additional week in the current quarter, the year-on-year revenue growth rate was about 26%, which is still significantly higher than market estimates.

Adjusted earnings per share were $2.58, up 66% from the same period last year, and far higher than analysts' expectations of $2.12. Earnings per share based on US GAAP (GAAP) were $1.88, which was also higher than market expectations of $1.65.

In terms of profitability, the company's adjusted gross margin was 70.6%, 1 percentage point higher than market expectations, but down 50 basis points from the same period last year. Management explained that this is mainly due to an increase in product revenue share, and product gross margin is generally lower than service and support contracts. The non-GAAP operating margin reached 31.9%, a significant increase of 610 basis points over the previous year. Operating profit was US$645 million, up 61% year over year.

AI and all-flash drive revenue structure upgrade

The US Internet presence emphasized in its earnings report that artificial intelligence (AI) has changed from a “future vision” to a “corporate necessity” and has become an important engine for the company's growth. Management revealed that in the first fiscal quarter, the company won about 350 deals related to AI and data lake modernization.

Looking at the product structure, all-flash arrays and public cloud solutions together account for 75% of the company's total revenue, showing the effectiveness of the transformation to high-growth, high-profit products. Among them, all-flash array revenue reached a record $1.31 billion, up 47% year over year; public cloud revenue was US$206 million, up 28% year over year; hybrid cloud revenue was US$1.82 billion, up 30% year on year, and gross margin of the sector remained at 68.8%.

As a forward-looking indicator, billings (billings) reached US$2.06 billion, up 36.1% year over year; remaining performance obligations (RPO) were US$5.65 billion, up 14.3% year over year, indicating that customer commitments continued to grow.

In addition, in the first fiscal quarter of the fiscal year, the US Internet Presence announced the acquisition of AI data infrastructure company DataPelago to help customers simplify and accelerate large-scale AI deployments.

Looking ahead, US Net Savings expects revenue for the second fiscal quarter to be between US$2,025 billion and US$2.75 billion, with a midpoint of US$2.1 billion, far higher than analysts' expectations of US$1.85 billion; adjusted earnings per share are expected to be between US$2.54 and US$2.64, which also greatly exceeds the consensus estimate of US$2.16. The company also expects non-GAAP gross margin of 67% to 68% and operating margin of 30.9% to 31.9% for the second fiscal quarter.

For the entire 2027 fiscal year, US Online Storage raised its full-year revenue guidance from $7.33 billion to $7.58 billion to $7.58 billion to $7.925 billion, a midpoint of US$8.1 billion, an increase of US$650 million over the previous guidance. The adjusted earnings per share guidance was raised from $8.70 to $9.00 to $9.73 to $10.03. Both guidelines significantly exceeded market expectations of $7.55 billion in revenue and $8.92 per share. The new midpoint of full-year revenue corresponds to a year-on-year increase of approximately 17%.

CEO George Kurian said in the earnings report: “US Online Storage began the fiscal year with record performance. All metrics surpassed the guidelines and achieved our strongest quarter in history. “This momentum not only reflects the trust of our existing customers, but also our success in winning new customers, and organizations are choosing the NetApp platform to power their AI and hybrid multicloud initiatives.”

Stock price reaction and market concerns

Despite the impressive earnings report itself, the US online deposit stock price fell sharply during Wednesday's after-market trading.

The reason for the decline was partly due to weak free cash flow performance. In contrast to strong profit growth, the free cash flow of US online deposits in the first fiscal quarter was US$401 million, down 35% from US$620 million in the same period last year. The profit margin on free cash flow is approximately 19.8%. The company said that free cash flow usually fluctuates quarterly and is greatly affected by the timing of payments and payments.

The company returned $302 million to shareholders through share repurchases and dividends during the quarter, including $200 million in share repurchases and $102 million in dividends. The company also announced a cash dividend of $0.52 per share, which will be paid on October 28. By the end of the quarter, the number of shares outstanding after dilution was approximately 200 million, a year-on-year decrease of 1.5%.

Furthermore, the negative market reaction also stemmed from concerns about the sustainability of growth. Management acknowledged during the earnings call that part of the strong performance in the first fiscal quarter came from accelerated procurement from a few major customers, which may mean that some future demand was brought forward. Furthermore, one more week in the current quarter contributed about 4 percentage points to revenue growth. The pricing benefit from rising component costs is also seen as a one-time positive factor.

Despite a sharp increase in the full-year guidance, the implied year-on-year growth rate in the second half of the year will be significantly slower than in the first fiscal quarter, based on estimates of the midpoint of the new guidelines and realized revenue for the first fiscal quarter.

Analysts asked management on a conference call whether this quarter actually reflected the actual intensity of demand, or was it just an early release of future purchases. Kurian attributed the higher-than-expected performance in the first fiscal quarter to three factors: accelerated procurement by some major customers, pricing benefits from rising component costs, and broader demand improvements brought about by AI and infrastructure modernization. However, the company's follow-up guidance still suggests a return to a more normal growth pace in the next few quarters.