NetApp Inc. (NASDAQ: NTAP) had a blockbuster first quarter, but investors are focusing on what's next: thinner margins. The stock dropped in Thursday's premarket trading despite the company beating estimates and raising its full-year guidance.
For its fiscal 2027 first quarter, NetApp reported adjusted earnings of $2.58 per share, up 66% year over year and well above the $2.12 consensus. Revenue climbed 30% to $2.03 billion, beating the $1.84 billion Street estimate. Excluding an extra week in the quarter, revenue still grew 26%, with that extra week contributing about $65 million, mostly from Support and Public Cloud.
Gross profit hit a record $1.43 billion, up 29%. Gross margin slipped 50 basis points to 70.6%, but that was better than the company's own guidance. Operating margin expanded by 6.1 percentage points to 31.9%.
Cash generation was solid: operating cash flow came in at $503 million, and free cash flow was $401 million. NetApp returned $302 million to shareholders, including $200 million in buybacks and $102 million in dividends. The company ended the quarter with $3.6 billion in cash and short-term investments against $2.5 billion in gross debt, leaving $1.1 billion in net cash.
On the earnings call, CEO George Kurian said the strength across all-flash arrays, Keystone, and cloud storage could last for several quarters. He pointed to AI projects and broader data modernization driving demand across industries and customer segments, giving NetApp the confidence to raise its full-year outlook significantly.
But here's the catch: NetApp expects second-quarter gross margin to fall to 67% to 68%, down from 70.6% in Q1. The company blames a higher mix of lower-margin product revenue. That's a classic growth-vs-margin tradeoff, and investors are selling first and asking questions later.
Double-Digit Growth Across the Board
Hybrid Cloud revenue jumped 30% to $1.82 billion (27% excluding the extra week). Product revenue surged 51% to $987 million, while Support revenue rose 11% to $720 million and Professional Services grew 15% to $112 million. Public Cloud revenue climbed 28% to $206 million (19% excluding the extra week).
Deferred revenue increased 7% to $4.85 billion, and remaining performance obligations grew 14% to $5.65 billion, signaling strong future demand.
But higher component costs are squeezing product profitability. Product gross margin fell 150 basis points sequentially to 54.6%. Management said pricing actions helped offset some of those cost increases, but they expect less benefit from pricing in Q2, which could pressure margins further.
Public Cloud gross margin, however, was a bright spot, hitting 86.4%, up 70 basis points sequentially and more than 6 percentage points year over year.
All-flash array revenue surged 47% to $1.31 billion, driven by demand from mission-critical and GPU-intensive AI workloads. That's the engine of NetApp's growth story.
AI Deals and Acquisitions Fuel Growth
NetApp closed about 350 AI and data-lake modernization deals during the quarter, with deal sizes increasing as projects move from pilot to production. Major wins included Samsung Electronics, an Asian neocloud provider, a large U.S. utility, and several public-sector customers. NetApp's AFX with NVIDIA SuperPOD also supported advanced AI workloads.
The company also made two acquisitions. It bought DataPelago, whose Nucleus engine processes data in place, reducing costly data movement. And at the start of Q2, it acquired Jetstream, which provides cloud-native VMware disaster recovery and continuous data protection.
Guidance: Up, Up, and Away
NetApp raised its fiscal 2027 adjusted earnings guidance to $9.73 to $10.03 per share, well above the $9.01 analyst estimate. Revenue is now expected at $7.98 billion to $8.23 billion, versus the $7.54 billion consensus.
For the second quarter, NetApp forecasts adjusted earnings of $2.54 to $2.64 per share, beating the $2.17 estimate, and revenue of $2.025 billion to $2.175 billion, above the $1.846 billion consensus.
So why the stock drop? The market doesn't like margin compression, even when growth is strong. NetApp shares were down 7.92% at $166.45 in premarket trading Thursday, according to market data. The stock is still up 68.80% year to date, so investors are taking some profits off the table.
It's a classic case of good news being overshadowed by a forward-looking concern. The AI boom is real, but margins are the price of admission.
