NTAP Q2 Deep Dive: Enterprise AI Momentum and Cloud Margins Drive Mixed Market Response

Data storage company NetApp (NASDAQ:NTAP) reported Q2 CY2025 results exceeding the market’s revenue expectations, with sales up 1.2% year on year to $1.56 billion. The company expects next quarter’s revenue to be around $1.69 billion, close to analysts’ estimates. Its non-GAAP profit of $1.55 per share was 0.7% above analysts’ consensus estimates.

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StockStory’s Take

NetApp’s second quarter saw a slight uptick in revenue, but the market reacted negatively, reflecting investor concerns despite financial performance that met or exceeded Wall Street’s expectations. Management credited robust enterprise demand in the Americas for all-flash and cloud storage solutions as key drivers, offsetting weakness in the U.S. public sector and select European regions. CEO George Kurian emphasized strong customer uptake of NetApp’s unified data infrastructure, particularly for AI workloads, noting, “Organizations are turning to NetApp for data solutions that deliver competitive advantage and operational efficiencies.”

Looking ahead, NetApp’s guidance is shaped by continued investment in AI infrastructure, growing adoption of its cloud-based storage services, and an improved outlook for public cloud gross margins. Management anticipates further momentum in AI-related wins and expects the mix of high-performance flash and cloud services to drive profitability. CFO Wissam Jabre stated, “We are confident that public cloud gross margin will continue to improve and are increasing the long-term gross margin target range for this business to 80% to 85%.” The company remains focused on navigating macroeconomic caution while expanding its presence in emerging enterprise AI deployments.

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to ongoing AI-driven modernization, strength in enterprise flash adoption, and rapid expansion in cloud storage services, even as some end markets remained soft.

• AI workload adoption accelerating: NetApp saw a notable increase in AI infrastructure deals, with over 125 AI-related wins this quarter versus 50 a year ago. Customers are increasingly deploying large-scale data lakes, model training platforms, and inference workloads, driving demand for unified storage solutions.
• All-flash portfolio gains: The company’s all-flash array revenue grew 5% year-over-year, with management highlighting that 45% of the installed base is now all-flash. Competitive wins in sectors like aerospace and financial services demonstrated the appeal of NetApp’s ONTAP-powered arrays for high-performance, secure data management.
• Cloud services expansion: First-party and marketplace cloud storage services grew 33% year-over-year, supported by native integrations with major hyperscalers and a focus on enterprise-critical workloads. Management highlighted new customer acquisitions and workload expansions following initial cloud deployments.
• Keystone as-a-service traction: The Keystone subscription-based storage offering saw approximately 80% growth, especially among customers seeking operational flexibility or bridging on-premises and cloud environments. Management views this as a strategic differentiator in competitive deals.
• Margin improvement from product mix: A shift toward higher-margin support and cloud services contributed to improved gross margins, even as product revenue and public sector demand softened. Management expects product margins to improve as cost headwinds subside and mix shifts toward more profitable offerings.

Drivers of Future Performance

NetApp’s outlook hinges on capturing AI and cloud adoption tailwinds, while managing end-market variability and optimizing gross margins.

• AI and cloud momentum: Management expects growth in enterprise AI deployments and cloud storage adoption to sustain demand, citing a “steady clip” of new AI wins and continued expansion of cloud-native services. The company is investing in AI-ready infrastructure and deeper hyperscaler integrations to extend its market reach.
• Margin optimization focus: Operating leverage and public cloud gross margin are projected to improve, aided by depreciation roll-off of older hardware and a higher mix of software-based revenue. Jabre signaled confidence in maintaining public cloud margins in the 80% to 85% range, with Keystone and support services further supporting profitability.
• Macro and sector risks: Management acknowledged ongoing caution in U.S. public sector and select international markets, with variability in spending patterns. They anticipate recovery in these areas could support growth in the latter part of the year, but remain focused on execution as market conditions evolve.

Catalysts in Upcoming Quarters

Over the coming quarters, StockStory analysts will focus on (1) the pace of AI infrastructure wins and expansion into new enterprise use cases, (2) sustained growth and profitability in first-party and marketplace cloud storage services, and (3) margin improvement as product mix shifts toward software and services. Progress toward broader adoption of Keystone and execution in recovering public sector and EMEA markets will also be key areas to watch.

NetApp currently trades at $111.22, in line with $112.15 just before the earnings. Is there an opportunity in the stock?See for yourself in our full research report (it’s free).

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