Net profit soared 66% year-on-year, and the guidance for the next quarter far exceeded expectations, but it still wasn't enough! NetApp (NTAP.US) plummeted after hours, with investors closely monitoring free cash flow and the sustainability of growth.

On September 2nd, after the market closed (Eastern Time), NetApp (NTAP.US), a data storage and intelligent data infrastructure company, announced its financial results for the first quarter of fiscal year 2027. Despite several key metrics hitting historic highs and a significant upward revision of its full-year performance guidance, the company's stock price plunged in after-hours trading, falling nearly 9% at one point. Investors focused on concerns regarding declining free cash flow, one-time favorable factors, and the potential for a marked slowdown in growth in the second half of the year. For the first fiscal quarter ending July 31, 2026, NetApp reported revenue of $2.03 billion, a 30% year-on-year increase, exceeding Wall Street's expectations of $1.84 billion. Excluding the roughly 4 percentage points contribution from an additional week this quarter, the revenue growth rate would be about 26%, still significantly above market estimates. The adjusted earnings per share (EPS) was $2.58, a 66% increase compared to the same period last year, and well above analysts' expectations of $2.12. The GAAP EPS was $1.88, also higher than the market expectation of $1.65. In terms of profitability, the company's adjusted gross margin was 70.6%, exceeding market expectations by 1 percentage point, though down 50 basis points from the same period last year. Management explained that this was mainly due to the increased proportion of product revenue, which typically has a lower gross margin compared to service and support contracts. The non-GAAP operating margin reached 31.9%, a significant expansion of 610 basis points year-on-year. Operating profit was $645 million, an increase of 61% year-on-year. AI and All-Flash Drive Revenue Structure Upgrade In its earnings report, NetApp emphasized that artificial intelligence (AI) has shifted from a future vision to an enterprise necessity and has become an important engine for the company's growth. Management disclosed that in the first quarter, the company secured approximately 350 deals related to AI and data lake modernization. From a product structure perspective, all-flash arrays and public cloud solutions together accounted for 75% of the company's total revenue, showcasing the effectiveness of its transition to high-growth, high-margin products. All-flash array revenue reached a record $1.31 billion, a 47% year-on-year increase; public cloud revenue was $206 million, up 28% year-on-year; and hybrid cloud revenue stood at $1.82 billion, an increase of 30% year-on-year, with this segment maintaining a gross margin of 68.8%. The billings, a leading indicator, reached $2.06 billion, up 36.1% year-on-year; the remaining performance obligations (RPO) were $5.65 billion, a 14.3% year-on-year increase, indicating continued growth in client commitments. Additionally, in the first quarter, NetApp announced the acquisition of AI data infrastructure company DataPelago, aimed at helping customers streamline and accelerate large-scale AI deployments. Looking ahead, NetApp expects revenue for the second quarter to be between $2.025 billion and $2.175 billion, with a midpoint of $2.1 billion, significantly higher than analysts' expectations of $1.85 billion; the adjusted EPS is projected to be between $2.54 and $2.64, also well above the consensus estimate of $2.16. The company expects a non-GAAP gross margin for the second quarter of 67% to 68% and an operating margin of 30.9% to 31.9%. For the entire fiscal year 2027, NetApp raised its full-year revenue guidance from the previous range of $7.33 billion to $7.58 billion to a new range of $7.975 billion to $8.225 billion, with a midpoint of $8.1 billion, an increase of $650 million from the previous guidance. The adjusted EPS guidance was raised from $8.70 to $9.00 to a new range of $9.73 to $10.03. Both guidance metrics are significantly above market expectations of $7.55 billion in revenue and $8.92 in EPS. The new full-year revenue midpoint corresponds to an approximately 17% year-on-year growth. CEO George Kurian stated in the earnings report, NetApp opened this fiscal year with a record performance, with all metrics exceeding guidance, achieving our strongest first quarter ever. This momentum reflects not only the trust of existing customers but also our success in winning new clients, as 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, NetApp's stock price saw a significant decline in after-hours trading on Wednesday. The drop was partly attributed to weak free cash flow performance. In contrast to robust profit growth, NetApp reported a free cash flow of $401 million for the first fiscal quarter, a 35% decrease from $620 million in the same period last year. The free cash flow margin was about 19.8%. The company stated that free cash flow typically experiences quarterly fluctuations and is heavily influenced by timing of payments and collections. During this quarter, the company returned $302 million to shareholders through stock buybacks and dividends, which included $200 million in stock buybacks and $102 million in dividends. The company also announced a cash dividend of $0.52 per share, to be paid on October 28. As of the end of the quarter, diluted shares outstanding were approximately 200 million, down 1.5% year-on-year. Furthermore, the market's negative reaction stemmed from concerns about the sustainability of growth. Management acknowledged during the earnings call that part of the robust performance in the first fiscal quarter was due to accelerated purchasing from a few large customers, which could imply that some future demand was pulled forward. Additionally, the extra week this quarter contributed roughly 4 percentage points to revenue growth. Rising component costs contributing to pricing benefits were also viewed as one-time favorable factors. Although the full-year guidance was significantly raised, based on the midpoint of the new guidance and the revenue already achieved in the first quarter, the implied year-on-year growth rate for the second half is expected to decelerate significantly compared to the first quarter. Analysts pressed management during the call on whether this quarter truly reflected the strength of demand or was merely a pull-forward of future purchases. Kurian attributed the unexpected performance in the first quarter to three factors: accelerated purchases from certain large customers, pricing benefits from rising component costs, and broader demand improvements driven by AI and infrastructure modernization. However, the subsequent guidance still suggests a return to a more normalized growth pace in the coming quarters.