NetApp Q1 EPS beats 21.7%, raises FY27 guidance despite margin warning
- NetApp Q1 FY27 EPS of $2.58 beat estimates by 21.7%; revenue rose 30% YoY to $2.03 billion
- Full-year FY27 EPS guidance raised to $9.73-$10.03; revenue guidance lifted to $7.98-$8.23 billion
- Q2 gross margin expected to fall to 67-68% due to higher product mix and component cost pressures
- Stock fell nearly 10% in extended trading despite strong earnings and raised outlook
*this image is generated using AI for illustrative purposes only.
NetApp Inc (NASDAQ: NTAP) reported first-quarter fiscal 2027 earnings per share of $2.58, exceeding analyst estimates by 21.7%. Revenue grew 30% year-over-year to $2.03 billion. Despite the strong results, the stock fell 9.82% in extended trading.
The company raised its full-year fiscal 2027 outlook, citing robust demand for its AI and hybrid multi-cloud platform. Gross profit reached a record $1.43 billion, up 29% from the prior year period. However, management warned that gross margins are expected to decline in the second quarter due to a higher mix of lower-margin product revenue.
Financial Performance
Top-line growth was substantial, with quarterly revenue rising from $1.56 billion in the same period last year to $2.03 billion. This represented a beat against the Street estimate of $1.84 billion. Excluding an additional week in the quarter, revenue increased 26%. The extra week contributed approximately $65 million, primarily from Support and Public Cloud segments.
Profitability surged, with EPS beating the consensus estimate of $2.12 by 21.7%. This result marks a 66% increase over earnings of $1.55 per share from the same period last year. CEO George Kurian attributed the momentum to trust from existing customers and success in winning new ones for AI initiatives.
| Metric | Actual | Estimate | Prior Year | Change |
|---|---|---|---|---|
| Revenue | $2.03 billion | $1.84 billion | $1.56 billion | Up 30% |
| EPS | $2.58 | $2.12 | $1.55 | +21.7% vs Est |
| Gross Profit | $1.43 billion | N/A | N/A | Up 29% |
Segment performance highlighted broad-based strength. Hybrid Cloud revenue of $1.82 billion was up 30% year-over-year. Excluding the extra week, Hybrid Cloud revenue grew 27%. Product revenue of $987 million rose 51%, while Support revenue of $720 million grew 11%. Professional Services revenue increased 15% to $112 million. Public Cloud revenue reached $206 million, up 28% year-over-year, or 19% excluding the extra week.
All-flash array revenue hit $1.31 billion, up 47% year-over-year. Gross margin stood at 70.6%, down 50 basis points year-over-year due to greater product revenue mix. Operating income was $645 million, up 61% compared to Q1 2026, with an operating margin of 31.9%. Product gross margin fell 150 basis points sequentially to 54.6%, pressured by higher component costs, though pricing actions helped offset some increases. Public Cloud gross margin reached 86.4%, up 70 basis points sequentially.
Forward Guidance
NetApp raised its outlook for the full fiscal year 2027. The company increased its adjusted EPS guidance to between $9.73 and $10.03, surpassing the analyst estimate of $9.01.
Revenue guidance was lifted to a range of $7.98 billion to $8.23 billion, well above the market expectation of $7.54 billion. For Q2, the company expects revenue of $2.1 billion plus or minus $75 million, implying 23% year-over-year growth at the midpoint. Q2 EPS is expected to range from $2.54 to $2.64, beating the analyst estimate of $2.17.
Management 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 and less benefit from pricing actions during the second quarter.
Strategic Initiatives and Acquisitions
Management highlighted strategic acquisitions aimed at strengthening AI and cloud capabilities. In Q1, NetApp acquired Data Pelago, an innovator in AI data infrastructure, to enable high-performance in-place data processing. At the start of Q2, it acquired Jetstream, a leader in cloud-native disaster recovery for VMware environments.
The company won approximately 350 AI and data lake modernization deals in Q1. CEO George Kurian noted that deal sizes are increasing as customers move from proof of concept to production. Key wins included agreements with Samsung Electronics, an Asian neocloud provider, a major U.S. utility, and several public-sector customers. NetApp AFX with NVIDIA SuperPOD also supported advanced AI workloads.
Balance Sheet and Cash Flow
Cash flow from operations was $503 million, with free cash flow of $401 million. The company returned $302 million to shareholders through $200 million in share repurchases and $102 million in dividends ($0.52 per share).
NetApp closed the quarter with $3.6 billion in cash and short-term investments against $2.5 billion in gross debt, resulting in a net cash position of $1.1 billion. Inventory expanded sequentially as the company managed supply levels to support growing demand. Deferred revenue increased 7% to $4.85 billion, while remaining performance obligations grew 14% to $5.65 billion.
What the Numbers Show
The divergence between operational execution and stock price action is notable. While NetApp exceeded guidance on every metric and posted record earnings, the nearly 10% drop in extended trading suggests investors may be pricing in near-term valuation concerns or sector-wide headwinds rather than reacting to fundamental business performance. The significant upside surprise in both EPS (21.7%) and revenue indicates strong execution relative to current market expectations. However, the warning regarding Q2 gross margin contraction (from 70.6% to 67-68%) highlights the volatility associated with the shifting product mix towards lower-margin hardware components amidst rising input costs.
How might the anticipated Q2 gross margin contraction impact NetApp's valuation multiples compared to peers with more stable hardware mixes?
To what extent will the recent acquisitions of Data Pelago and Jetstream accelerate NetApp's integration into the NVIDIA AI ecosystem and influence future deal sizes?
Given the strong deferred revenue growth, how sustainable is the current 30% revenue growth trajectory once the one-time benefit of the extra week is normalized?
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