NetApp, Inc. (NASDAQ:NTAP) Q2 2023 Earnings Call Transcript

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Mike Berry: So on the ARR point, so there’s been a couple of questions about the $800 million down to the $700 million. So when we looked at that, originally, when we had given the $800 million, we expect it to be, call it, somewhere around $650 million as of the end of Q2. Taking a look at the second half now, we expect to grow about $100 million. That’s all organic because we don’t have any acquisitions baked in. And we expect that to continue to grow across cloud storage, specifically ANF, FSx and GCP, we all expect to see some good growth. We have tried to be conservative or cautious, I will say, around the consumption business because we do expect that to come back in the second half. We’re just not really sure if it’s going to be Q3 or Q4.

So we feel really good about the $700 million, still a significant growth in that business. But stepping it down a little bit based on the Q2 results and also take a step back a little bit on Cloud Insights. So that’s the — I’ll call it, Krish, the product view of the rest of the year.

Krish Sankar: Got it. Thanks a lot George. Thanks a lot Mike.

A €“ George Kurian: Thank you.

Operator: Our next question will come from Sidney Ho with Deutsche Bank. Please go ahead.

Q €“ Sidney Ho: Thanks for taking my question. Maybe a couple more on the public cloud side. So on the reported quarter, your public cloud revenue on an annualized basis was lower than your ARR exiting last quarter. Is it fair to say that there were some cancellations and maybe some restructuring of some of the deals based on the three dynamics that you guys talked about earlier. And if so, how do you feel comfortable about the future ARR would not be reduced from the churn level? And maybe I’ll just throw in the next question here. If you look at your revised ARR for the $700 million, if I exclude the inorganic growth and then make some certain assumptions about dollar-based net retention, you still need quite a bit of ARR coming from new customers. So in terms of new customers, which offerings are you seeing the most traction at this point? Thank you.

A €“ Mike Berry: Hey, Sidney, it’s Mike. So let me do the first one. So great question. So we finished Q1 at $584 million in ARR. If you simply take — divide that by four, you get about $146 million that you’d expect to recognize in revenue. The revenue recognized in the quarter was $142 million. And the nuance here is that typically, you can make — you can do that calculation, it’s going to flow very nicely because of the things that we talked about in terms of some of the consumption being reduced during the quarter, some of the project-based initiatives, especially the larger chip design wins. Those happened during the quarter. Thus, we did lose some revenue that was in the ARR as of the beginning of the quarter. So that’s the nuance.

We don’t expect to see that happen in the future. It’s a great question, but it was largely due to that. The third part is the back-ended linearity on some of the subscription business that follows the NetApp, I’ll call it, core business as well. So it’s really those three things attributed to that revenue coming in lower than simply taking the ARR divided by four.

Q €“ Sidney Ho: Great. And in terms of the new customers — ARR from new customers?

A €“ George Kurian: Listen, we had a good quarter in terms of new customer additions. We have two major vehicles for new customer additions. The first being the native cloud services that we help our cloud provider partners, Amazon, Microsoft and Google sell for us. Those continue to be good vehicles for new customer additions. And then Spark has continued to be a strong vehicle for new customer additions. So I feel good about the pace of net new customers.

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