NetApp's Q1 FY26 Results: Cloud Growth Offsets Hardware Margin Squeeze

NetApp, a key player in the enterprise data storage and cloud data management space, recently released its financial results for the first quarter of fiscal year 2026. Let's dive into the numbers from its latest 10-Q filing to understand the company's performance and strategic direction.

A Tale of Shifting Revenue Streams

At first glance, NetApp's top line shows modest growth, with net revenues inching up 1% year-over-year to $1.56 billion. However, the real story lies beneath the surface in the composition of that revenue.

• Product Revenue: Declined 2% to $654 million.
• Services Revenue: Grew 4% to $905 million.

This continues a broader trend of services becoming a larger part of NetApp's business, now accounting for 58% of total revenue.

The following flow diagram visualizes how NetApp's revenue is generated and allocated through costs and expenses to arrive at its net income for the quarter.

In the diagram, you'll notice an "Unallocated" cost category. This primarily consists of expenses that are not assigned to a specific business segment. For this quarter, the unallocated cost of revenue was $10 million, which the filing attributes to stock-based compensation ($7 million) and amortization of intangible assets ($3 million).

Segment Performance: Hybrid vs. Public Cloud

NetApp operates through two main segments, and their quarterly performance highlights the company's strategic pivots.

Hybrid Cloud, the company's traditional core business offering on-premise storage infrastructure and management, saw its revenue grow slightly to $1.4 billion. While sales from all-flash array systems were strong, the segment's product gross margin fell by six percentage points. The company attributes this squeeze directly to higher component costs, a challenge affecting many hardware providers.

Public Cloud, which provides cloud-native storage and data services, reported a modest 1% revenue increase to $161 million. While customer demand remains healthy, growth was tempered by the sale of its Spot by NetApp business last year. The standout metric here is profitability: the Public Cloud segment's gross margin impressively jumped nine percentage points to 80%. This was driven by cost optimizations and a change in the mix of offerings following the divestiture.

Profitability and Financial Health

While revenue saw a slight uptick, gross profit remained flat at $1.1 billion. The pressure from higher component costs in the Hybrid Cloud segment was offset by margin improvements in the Public Cloud business.

On a positive note, NetApp demonstrated disciplined expense management. Total operating expenses fell 3% to $789 million, thanks to reductions in sales, marketing, and R&D spending.

Despite this, net income for the quarter dipped slightly to $233 million, down from $248 million in the same period last year. The decline was primarily due to a higher provision for income taxes and increased interest expense.

The company's balance sheet and cash flow remain robust.

• Cash from operations was a strong $673 million, nearly double the $341 million generated a year ago, largely due to better management of accounts receivable.
• NetApp repaid $750 million in senior notes that matured during the quarter.
• The company continued to return value to shareholders, repurchasing $300 million of its stock and paying out $104 million in dividends.

Looking Ahead

NetApp's first-quarter results paint a picture of a company in transition. It is successfully managing a shift toward higher-margin cloud services while navigating margin pressures in its legacy hardware business. The strong operational cash flow provides flexibility for debt repayment, acquisitions, and shareholder returns. The key challenge for NetApp will be to sustain its momentum in the highly competitive public cloud market while effectively managing the input cost pressures impacting its foundational Hybrid Cloud segment.