NetApp (NASDAQ: NTAP) experienced a notable stock decline on Thursday, with shares falling 7.9% in premarket trading to $166.55. This drop came despite the company reporting record revenue and raising its annual forecast, as investors focused on a significant shortfall in cash conversion and free cash flow.
The San Jose-based data storage company posted fiscal first-quarter revenue of $2.025 billion, a 30% increase year-over-year. Adjusted earnings per share surged 66% to $2.58, surpassing Wall Street expectations. However, free cash flow decreased by 35% to $401 million, down from $620 million in the same period last year. The free cash flow margin contracted to 19.8% from 39.8%, highlighting the discrepancy between reported profitability and cash generation.
The cash flow shortfall was primarily attributed to a $176 million increase in inventory and a near doubling of capital expenditures to $102 million. These factors offset the gains from higher net income, leading to a cash conversion ratio that was halved compared to the prior year. This divergence between earnings growth and cash flow has raised concerns among analysts and investors about the sustainability of NetApp's operational efficiency.
Despite the stock selloff, NetApp's underlying business metrics showed strength. Revenue from all-flash arrays grew 47% to $1.3 billion, while Public Cloud revenue increased 28% to $206 million. Chief Executive George Kurian described the quarter as a "record-setting start to the year," citing accelerated buying activity from major clients. The quarter included an additional week, and excluding this factor, revenue growth was 26%.
NetApp also raised its fiscal 2027 revenue forecast to a range of $7.975 billion to $8.225 billion, with a midpoint of $8.10 billion, an increase of $650 million from its previous outlook. The company lifted its adjusted EPS guidance to between $9.73 and $10.03, up from the prior midpoint of $8.85. This upward revision reflects optimism about sustained demand for storage solutions, particularly in AI-driven workloads.
For the second quarter, NetApp projects revenue of $2.10 billion at the midpoint, with adjusted operating margin expected to range from 30.9% to 31.9%. The company returned $302 million to shareholders through buybacks and dividends during the quarter, and reported cash, equivalents, and investments totaling $3.576 billion. Diluted shares outstanding decreased by 1.5% to 200 million.
The stock's decline brings its premarket valuation to approximately 16.9 times its updated adjusted earnings midpoint, compared to 18.3 times on Wednesday. This repricing suggests that while investors acknowledge the strong top-line growth, they are cautious about the company's ability to convert earnings into cash efficiently. The market's reaction underscores the importance of cash flow metrics in evaluating technology companies, especially those with significant inventory and capital expenditure requirements.
Looking ahead, NetApp's management is scheduled to address investors at two conferences on September 8, which will provide further insights into second-half expectations. Analysts will be watching for any signs of improved cash conversion or potential headwinds from inventory buildup. The broader storage market remains competitive, with peers like Dell and Hewlett Packard Enterprise also reporting strong results, but NetApp's unique positioning in all-flash arrays and public cloud services could support long-term growth if cash flow concerns are addressed.
In summary, NetApp's record revenue and raised guidance are overshadowed by the cash flow decline, leading to a cautious market response. The company's ability to manage inventory and capital expenditures will be critical in restoring investor confidence and justifying its valuation.
