# NetApp, Inc. (NTAP) — Narrative, First Quarter of Fiscal 2027

NetApp's fiscal year ends on the last Friday in April. Fiscal 2026 ended April 24, 2026. Fiscal 2027 runs to April 30, 2027 and is a 53-week year: its first quarter (ended July 31, 2026) had 14 weeks against 13 in the prior-year quarter, which affects year-over-year comparisons for that quarter. All amounts are in US dollars.

## Business

*From the fiscal 2026 Annual Report on Form 10-K (accession 0001193125-26-259683), filed June 5, 2026.*

NetApp sells data storage and data management to enterprises and governments: all-flash and hybrid-flash storage systems running its ONTAP software, the support contracts attached to that installed base, and storage services delivered inside the major public clouds. In fiscal 2026 it booked $6,925 million of net revenue, roughly 46% from products and 54% from services. The business runs on recurring support and cloud revenue layered on top of hardware-plus-software system sales. Most sales go through indirect channels, and two distributors alone accounted for 43% of fiscal 2026 net revenue (22% and 21%). NetApp is headquartered in San Jose, California, sells in roughly 150 countries, and had about 11,700 employees at April 24, 2026.

The company reports two segments:

- **Hybrid Cloud** ($6,237 million of fiscal 2026 revenue). This segment covers on-premises and private-cloud storage plus its support and professional services. Products include the AFF A-Series and C-Series all-flash arrays, ASA block-optimized all-flash arrays, the new AFX disaggregated scale-out system for AI workloads, FAS hybrid-flash arrays, the E/EF-Series for high-bandwidth workloads, and StorageGRID object storage. All of them except E/EF and StorageGRID run on ONTAP. The software layer includes ONTAP One licensing, Snapshot, SnapMirror, SnapCenter and SnapLock, built-in Autonomous Ransomware Protection, and the NetApp AI Data Engine for AI data pipelines. All-flash revenue made up 67% of Hybrid Cloud segment revenue in fiscal 2026, up from 64% in fiscal 2025 and 58% in fiscal 2024. Keystone, NetApp's storage-as-a-service subscription, is reported here within professional and other services.
- **Public Cloud** ($688 million of fiscal 2026 revenue). These offerings are sold mainly as services. NetApp describes itself as the only provider of enterprise-grade storage services natively embedded in the largest public clouds, sold as Azure NetApp Files, Amazon FSx for NetApp ONTAP and Google Cloud NetApp Volumes. The segment also includes the self-managed Cloud Volumes ONTAP, data services run through the NetApp Console (backup and recovery, classification, ransomware resilience, Data Infrastructure Insights), and Instaclustr's managed open-source databases. NetApp sold Spot by NetApp, its cloud optimization business, to Flexera Software LLC in the fourth quarter of fiscal 2025, which slowed Public Cloud growth in fiscal 2026.

Manufacturing is outsourced to contract manufacturers in the US, Mexico, the Netherlands, Hungary, Taiwan and Singapore, and some components come from a limited number of suppliers. The business is seasonal. Revenue has historically dipped sequentially in the first fiscal quarter, as the sales force rebuilds pipeline after a strong fourth quarter and European demand is weaker in summer. Within each quarter, orders are weighted toward the end. Research and development spending was $991 million in fiscal 2026, most of it on software. Competitors range from full-stack infrastructure vendors and flash-focused storage companies to the cloud providers' own native storage services, along with newer AI-focused entrants. NetApp partners with some of these companies and competes with them at the same time.

## Risks

*From Item 1A of the fiscal 2026 Form 10-K (accession 0001193125-26-259683), updated by Part II, Item 1A of the first-quarter fiscal 2027 Form 10-Q (accession 0001193125-26-380207).*

The material risks are in the company's costs, its routes to market, and the pace of technological change:

- **Component costs and gross margin.** Third-party components, including NAND, make up a large share of product cost. Starting in the second half of fiscal 2026, inflation and supply constraints raised memory and other component costs and cut into gross margins. Management expects costs to stay high or keep rising in the near term, and warns that tight supply of some products could make it harder to meet demand. Tariffs, logistics costs and price competition add to the pressure.
- **Purchase commitments (new in the 10-Q).** The 10-Q adds a risk that a large share of purchase commitments are firm and non-cancelable at prices fixed before delivery. If component prices fall or demand weakens, NetApp could end up holding inventory bought above market prices, or excess and obsolete stock. These commitments rose from $1.4 billion at April 24, 2026 to $2.3 billion at July 31, 2026.
- **Supply chain concentration.** NetApp relies on contract manufacturers and a small number of suppliers, some of them the only source for a component. Suppliers can shift scarce volume to competitors when supply is tight. The 10-K says the conflict in the Middle East has disrupted timely fulfillment of orders in that region. Tension between China and Taiwan could affect components sourced there.
- **Customer and channel concentration.** Most sales are made through channel partners, and two distributors account for over 40% of revenue. These partners generally have no minimum purchase obligations and can stop buying at any time. The public cloud providers are critical partners for the cloud business and also compete with NetApp.
- **Technology and AI transitions.** Generative and agentic AI are changing what customers need from storage in ways that are still unsettled. Flash, cloud and as-a-service consumption models redirect spending, and subscription offerings recognize revenue over time rather than up front. If NetApp misjudges these shifts, demand and revenue could decline, as they did in fiscal 2024.
- **Global trade and macroeconomic exposure.** Most products are made outside the US and a large share of revenue comes from abroad. This exposes NetApp to US tariff policy that the company calls "fluid", possible changes to the USMCA, US–China trade and investment restrictions, export controls, and currency swings. The company hedges currency risk only in part.
- **US government demand and compliance.** The US public sector was 10% of fiscal 2026 revenue. Budget uncertainty, agency restructuring, shutdowns and changing certification requirements can delay or cancel purchases. NetApp, its competitors and its channel partners have all faced past False Claims Act actions by the Department of Justice over government-contract compliance.
- **Cybersecurity and data regulation.** NetApp is a target, including for nation-state-affiliated attackers, and some past attacks have succeeded. The company warns that AI tools used by attackers raise the risk further. It must also comply with GDPR, US state privacy laws, DORA for EU financial-sector clients, the EU Cyber Resilience Act and NIS2, and the EU AI Act.
- **Systems and execution.** The final phase of a new enterprise resource planning (ERP) system went live in the third quarter of fiscal 2026. The 10-K says disruptions during that transition have affected order processing and invoicing and may continue to. NetApp also notes the risks from repeated restructurings and sales reorganizations, and from integrating acquisitions or separating divested businesses.
- **Intellectual property.** NetApp is currently defending patent suits brought by non-practicing entities. It says it has strong non-infringement and invalidity arguments and had recorded no material accrual. An adverse jury verdict could still bring damages, redesigns, shipment stoppages or licensing costs.
- **Debt, tax and stock-price risk.** NetApp had $2.5 billion of senior notes outstanding, maturing in 2027, 2030, 2032 and 2035, and must comply with their covenants. Its effective tax rate depends on low-taxed foreign earnings and is exposed to the One Big Beautiful Bill Act, OECD Pillar Two minimum-tax rules and ongoing income tax examinations. Quarterly results also swing with seasonality, end-of-quarter order timing and the timing of large enterprise software license deals.

## Management's Discussion and Analysis — Fiscal 2026

*From Item 7 of the fiscal 2026 Form 10-K (accession 0001193125-26-259683).*

Fiscal 2026 brought modest revenue growth and a sharp gain in operating margin. Net revenues rose 5% to $6,925 million from $6,572 million, with both products and services up. Currency added about two percentage points of that growth. Gross margin rose to 71% from 70%: higher services margins more than offset lower product margins. Income from operations rose to $1,674 million (24% of revenue, up from 20%), which the company attributes primarily to higher net revenues. Net income was $1,276 million ($6.35 per diluted share), up from $1,186 million ($5.67). Net income grew more slowly than operating income for two reasons. Other income of $46 million turned into a $26 million expense, and the effective tax rate rose to 22.6% from 14.2%. Fiscal 2025 had included a $36 million benefit from the IRS substantially completing its examination of the fiscal 2018–2019 returns.

The drivers by line:

- **Product revenue** grew 5% to $3,194 million on higher all-flash system sales, currency, and a multi-year enterprise agreement. Hybrid Cloud product gross margin fell two points as component costs rose. Cost of Hybrid Cloud product revenue climbed to 44% of product revenue from 42%, and materials costs rose $126 million. NetApp raised prices in the fourth quarter of fiscal 2026 and said it expected the increase to support product gross margins early in fiscal 2027.
- **Support revenue** rose 5% to $2,636 million, reflecting a larger installed-base contract value and currency.
- **Professional and other services** rose 15% to $407 million, mainly from Keystone storage-as-a-service.
- **Public Cloud revenue** rose 3% to $688 million. Growth was held down by the loss of the Spot by NetApp business. Cost of Public Cloud revenue fell 32% to $113 million on cost optimization, lower depreciation and the Spot exit, and Public Cloud gross margin rose eight points.
- **Operating expenses.** Sales and marketing, R&D and G&A together totaled $3,204 million (46% of revenue, three points lower than in fiscal 2025). Sales and marketing was flat at $1,869 million, R&D fell 2% to $991 million, and G&A rose 11% to $344 million on compensation and professional services. Restructuring charges fell to $21 million from $83 million.
- **Other expense.** Net other expense was $26 million, compared with income of $46 million in fiscal 2025. Interest expense rose to $109 million from $64 million because more higher-coupon senior notes were outstanding on average, and foreign-exchange losses also increased.

Operating cash flow rose to $2,067 million from $1,506 million, helped by a $281 million increase in deferred revenue. NetApp used its cash to repay $750 million of 1.875% notes at maturity in June 2025, buy back 9.0 million shares for $950 million (an average of $105.89), pay $413 million in dividends ($0.52 per quarter), and make a final $179 million transition-tax payment. Cash, cash equivalents and short-term investments ended the year at $3,584 million, against $2,500 million of senior note principal. The $1.0 billion revolving credit facility and the $1.0 billion commercial paper program were both undrawn. On May 21, 2026 the board added $1.0 billion to the buyback authorization, which had about $0.5 billion remaining at year end.

## Current Quarter — First Quarter of Fiscal 2027 (ended July 31, 2026)

*From the Form 10-Q for the quarter ended July 31, 2026 (accession 0001193125-26-380207), and the earnings release furnished as Exhibit 99.1 to the Form 8-K of September 2, 2026 (accession 0001002047-26-000003).*

In the first quarter, the price increases and all-flash demand showed up in revenue. Net revenues rose 30% to $2,025 million from $1,559 million. Part of the gain came from the 14th week, which the company says added about $65 million of services revenue. Hybrid Cloud segment revenue grew 30% to $1,819 million and Public Cloud 28% to $206 million. The earnings release calls both net revenue and Public Cloud revenue records.

- **Products drove the growth.** Product revenue rose 51% to $987 million on higher all-flash system sales, which the 10-Q says were supported by the fourth-quarter fiscal 2026 price increases. All-flash revenue (systems plus related services) reached $1,309 million, up from $893 million, and rose to 72% of Hybrid Cloud segment revenue from 64%. Products made up 49% of total revenue, up from 42%.
- **Services grew more slowly.** Services revenue rose 15% to $1,038 million. Support rose 11% to $720 million, with about $50 million coming from the extra week. Professional and other services rose 15% to $112 million on Keystone growth. Public Cloud rose 28%, on cloud-market growth plus about $15 million from the extra week.
- **Margins held despite component inflation.** Consolidated gross margin was 70%, the same as a year earlier. Hybrid Cloud product gross margin was roughly flat, with higher selling prices offsetting higher component costs. Materials costs rose $152 million and reached 94% of Hybrid Cloud product cost, up from 89%. Public Cloud gross margin improved six points, and its cost fell to 14% of revenue from 20%.
- **Operating leverage, partly offset by restructuring.** Sales and marketing, R&D and G&A totaled $879 million, or 43% of revenue (down seven points). Compensation costs rose $75 million, or 15%, on higher incentive pay and the extra week. A new restructuring plan, mainly severance and expected to be substantially complete by the end of fiscal 2027, cost $56 million. Income before taxes was $484 million, compared with $304 million.
- **Earnings.** Net income rose 61% to $375 million, or $1.88 per diluted share versus $1.15. The effective tax rate was 22.5%, compared with 23.4%. On its own non-GAAP basis, the company reported net income of $515 million, earnings of $2.58 per share, and a 31.9% operating margin, against 23.9% on a GAAP basis.
- **Geography.** Revenue rose in every region. APAC (19% of revenue) and EMEA (33%) grew faster than the Americas (48%), where growth in Americas Commercial was slower.

**Cash and balance sheet.** Operating cash flow fell to $503 million from $673 million. Inventories rose $176 million to $375 million as NetApp bought components strategically and built finished goods to meet demand, which partly offset a $317 million drop in receivables. Capital expenditures were $102 million, and buybacks and dividends together used $302 million. Cash and short-term investments were essentially flat at $3,576 million. Working capital fell $651 million to $1.1 billion, mainly because the $550 million of 2.375% notes due June 2027 were reclassified as current. Remaining performance obligations were $5.6 billion, 44% of it expected to be recognized within 12 months. About $1.3 billion of buyback authorization remained.

**DataPelago acquisition.** On July 16, 2026, NetApp bought DataPelago, Inc., a privately held AI data infrastructure company that targets data-processing bottlenecks in AI and analytics workloads. The price was $193 million: $87 million in cash at closing and $106 million of contingent consideration. Net of cash acquired, the cash paid was $78 million. NetApp recorded $151 million of goodwill, split between the Hybrid Cloud and Public Cloud reporting units, and $22 million of developed technology. It also issued 28,706 common shares to a former DataPelago holder in an unregistered private placement. The company says the deal is not material to consolidated results.

**Supply environment and pricing.** Memory and other component costs kept rising during the quarter, and management expects them to stay high or increase further in the near term. NetApp had raised prices in the fourth quarter of fiscal 2026. It raised them again at the start of the second quarter of fiscal 2027, after the quarter end, and expects to keep adjusting prices to offset costs.

**Guidance and margin outlook.** In the September 2, 2026 release, NetApp said it had "significantly raised" its fiscal 2027 revenue and EPS guidance; full-year net revenue is now expected at $7.975–$8.225 billion. The margin ranges point two ways:

- **Gross margin is guided lower.** For the second quarter, the GAAP gross margin guide is 66.0–67.0%, below the first quarter's 70%. For the full year it is now 67.1–68.1%, slightly below the 67.5–68.5% given on May 28, 2026.
- **Operating margin is guided higher.** The full-year GAAP operating margin guide is now 24.3–25.3%, up from 22.1–23.1%. The second-quarter guide is 24.9–25.9% (30.9–31.9% non-GAAP).

## Subsequent Events

*From the Form 10-Q for the quarter ended July 31, 2026 (accession 0001193125-26-380207).*

The 10-Q has no separate subsequent-events note. Its notes, MD&A and Part II disclose the following events after the July 31, 2026 quarter end, besides the price increase described above. None of them is an acquisition, divestiture, financing or litigation outcome.

- **Dividend.** On August 27, 2026, the board declared a quarterly cash dividend of $0.52 per share, payable October 28, 2026 to holders of record on October 9, 2026.
- **Executive change-of-control agreements.** On August 28, 2026, NetApp entered new Change of Control Severance Agreements with George Kurian (CEO), César Cernuda (President), Syam Nair (Chief Product Officer), Elizabeth O'Callahan (Chief Administrative Officer) and Wissam Jabre (CFO), replacing their earlier agreements. If an executive is terminated without cause, or resigns for good reason, within 24 months after a change of control, they receive:
  - a lump sum of 150% of base salary plus the applicable percentage of target bonus (200% for the CEO);
  - a pro-rated bonus;
  - accelerated vesting of equity awards, with performance awards vesting at target unless the award says otherwise;
  - up to 18 months of company-paid COBRA coverage (24 months for the CEO).

The DataPelago acquisition closed on July 16, 2026, inside the quarter, and is covered above. The 10-Q discloses no other post-quarter acquisitions, divestitures or borrowings. The $1.0 billion revolver and the commercial paper program remained undrawn at July 31, 2026.