Mike Berry
Executive Vice President and Chief Financial Officer at NetApp
Thank you, George. Good afternoon, everyone, and thank you for joining us. Before we go through the financial details, I think it would be valuable to reiterate the key themes for today's discussion that George highlighted.
Number one, despite the temporary headwinds to revenue, our disciplined operational management yielded op margin and EPS above the high end of guidance. Number two, the macro backdrop and demand environment continue to be major headwinds. The weakening IT spending environment was most pronounced in our large enterprise and U.S. technology and service provider customers and materially impacted our all-flash revenue in Q3, while significant cloud optimization across all three major hyperscalers continue to weigh heavily on ARR growth. Although the U.S. dollar weakened slightly during Q3, FX continues to be a material headwind to our financial results on a year-over-year basis.
Number three, as we navigate through this fluid demand environment, we remain laser-focused on driving operating margins and free cash flow generation. Towards this end, we took swift action in Q3 to control costs through increased program spending scrutiny and a hiring freeze. And at the start of Q4, we implemented a reduction in force of approximately 8%. In addition to adjusting our own cost structure, we also introduced C-Series, a portfolio of QLC capacity flash arrays to support cost-sensitive data center customers, and we continue to work with our cloud customers to help optimize their spending.
And number four, as a result of our disciplined cost management, we are reiterating our full-year EPS guide of $5.30 to $5.50. We are also confident in our free cash flow target of $1.1 billion, adjusting for the restructuring and one-time cash payment in Q4. From a capital allocation perspective, we remain committed to returning more than 100% of fiscal '23 free cash flow to investors through dividends and share repurchases.
Now to the details. As a reminder, I'll be referring to non-GAAP numbers, unless otherwise noted. Q3 billings were $1.57 billion, down 11% year-over-year. Revenue came in at $1.53 billion, down 5% year-over-year. Adjusting for the 340 basis point headwind from FX, billings and revenue would have been down 7% and 2% year-over-year, respectively. Even with the challenging Q3, our cloud portfolio continues to positively impact the overall revenue growth profile of NetApp.
Hybrid Cloud segment revenue of $1.38 billion was down 9% year-over-year. Product revenue of $682 million decreased 19% year-over-year as customers took a decidedly cautious approach to capital spending. Total Q3 recurring support revenue of $616 million increased 5% year-over-year, highlighting the health of our installed base.
Public Cloud ARR exited Q3 at $605 million, up 29% year-over-year. Public Cloud revenue recognized in the quarter was $150 million, up 36% year-over-year and 6% sequentially. As highlighted by our three major hyperscaler partners, customers continue to optimize their cloud spend as organizations are exercising caution given the macroeconomic uncertainty. While the timing of the recovery remains unclear, we are confident that secular trends of AI, machine learning, IoT and high-performance computing, along with the migration of enterprise apps like VMware and SAP, will drive long-term growth in cloud storage consumption.
Recurring support and Public Cloud revenue of $766 million was up 10% year-over-year, constituting 50% of total revenue. We ended Q3 with $4.2 billion in deferred revenue, an increase of 6% year-over-year. Q3 marks the 20th consecutive quarter of year-over-year deferred revenue growth, which is the best leading indicator for recurring revenue growth.
Total gross margin was 67% in Q3, in line with our guidance. Total Hybrid Cloud gross margin was also 67% in Q3. Within our Hybrid Cloud segment, product gross margin was 46.5%, including a 2-point year-over-year headwind from FX. As noted, our large enterprise and U.S. tech and service provider customers have continued to reduce capex spend as they rightsize their spending envelops. These customers are the most forward-leaning technology adopters and the biggest consumers of all-flash systems in the economy, and their pause in capex spending has had a material impact on our total revenue, all-flash mix and product margins. And while the supply chain component premiums and NAND pricing notably improved in Q3, we had to work through higher-cost inventory during the quarter. We expect the improving supply chain and NAND pricing to be a tailwind to product margin in Q4 and fiscal '24.
Our growing recurring support business continues to be very profitable with gross margin of 93%. Public Cloud gross margin of 69% was accretive to the corporate average for the ninth consecutive quarter. We remain confident in our long-term Public Cloud gross margin goal of 75% to 80% as the business scales and an increasing percentage of our Public Cloud revenue is driven by cloud and software solutions.
While revenue came in at the low end of guidance, Q3 highlighted our operational discipline and cost controls, with operating margin of 24%, including 2 points of FX headwinds. EPS of $1.37 came in above the high end of guidance and included $0.14 of year-over-year FX headwind.
Cash flow from operations was $377 million, and free cash flow was $319 million. Inventory turns increased to 12 in Q3, up from 9 in Q2, as supply chain challenges eased in the quarter, enabling us to take down inventory by nearly $70 million sequentially. During Q3, we repurchased $200 million in stock and paid out $108 million in cash dividends. In total, we returned $308 million to shareholders, representing 97% of free cash flow. Share count of 219 million was down 4% year-over-year. We closed Q3 with $3.1 billion in cash and short-term investments, up $108 million sequentially.
Now to guidance. As George discussed, we have seen continued softening in the macro backdrop, with customers taking a decidedly cautious approach to spending. We now expect fiscal '23 revenue to be roughly flat year-over-year, which includes 3 to 4 percentage points of FX headwind.
In fiscal '23, we continue to expect gross margin to range between 66% and 67% as elevated component costs and FX headwinds weigh on product margins. While the timing is uncertain, we remain confident that our structural product margins will normalize back to the mid-50s in the fullness of time, particularly when you factor in our new C-Series portfolio, which will largely displace lower-margin hybrid spinning disk systems in our product mix.
Given our disciplined cost controls, we are raising our fiscal '23 operating margin guidance. We now expect op margin to range between 23% and 24%, which includes approximately 2 points of FX headwind. Last quarter, we committed to protecting both EPS and free cash flow during this uncertain macro environment. Today, we are reiterating our full-year EPS guide of $5.30 to $5.50, which includes $0.54 of currency impacts. We also continue to expect to generate $1.1 billion in free cash flow, excluding one-time items. From a capital allocation perspective, we remain committed to returning more than 100% of fiscal '23 free cash flow to investors through dividends and share repurchases.
Now on to Q4 guidance. We expect Q4 net revenues to range between $1.475 billion and $1.625 billion, which, at the midpoint, implies an 8% decrease year-over-year or a 6% decrease in constant currency. In this macro environment, we expect customers to continue to optimize our cloud spend at our three major hyperscaler partners. As a result, we expect cloud revenue and ARR to be approximately flat sequentially in Q4. Please note, as we head into fiscal '24, we plan to anchor our cloud segment guidance on revenue dollars instead of ARR. To be clear, we will continue to disclose cloud ARR as a key metric as we go through the year.
We expect consolidated gross margin to be approximately 67%. As we head into Q4, we are forecasting a material reduction in component premiums, decreasing NAND costs and engineering product efficiencies. As such, we are confident that product margins will rise in Q4. These trends also position us nicely heading into fiscal '24 to drive the leverage through our business model, particularly as customers begin to reengage on all-flash capacity buildouts and customers mix shift away from hybrid spinning disk systems to new QLC all-flash solutions. While the exact timing is unclear, large enterprise and U.S. tech and service provider customers are the largest consumers of data and storage in the global economy, and our all-flash ONTAP systems are structurally linked to their data growth cross-cycle.
In Q4, we expect operating margin to range between 23% and 24%. We anticipate our tax rate to be approximately 21%. We are forecasting earnings per share for Q4 to range between $1.30 and $1.40 per share. Assumed in our Q4 guidance is net interest income of $7.5 million and a share count of approximately 218 million.
In closing, I want to thank the entire NetApp team for their continued commitment in such an uncertain economic environment.
I'll now hand the call back to Kris to open the call for Q&A. Kris?
