Mike Berry
Executive Vice President, Chief Financial Officer at NetApp
Thank you George. Good afternoon everyone and thank you for joining us. As a reminder, I'll be referring to non-GAAP numbers unless otherwise noted. Before we go through the financial details, I think it would be valuable to walk you through the key themes for today's discussion: number one, Q3 was another strong quarter with all time company highs in gross profit dollars, operating income and EPS, as our business model continues to show significant operating leverage as we grow our operating profitability and margins. Number two, our cloud business had another outstanding quarter. We clearly are solidly ahead of our original plan to hit our $1 billion ARR target in fiscal '25. Number three, we are prioritizing meeting as much customer demand as possible as we navigate near-term component shortages and expect revenue to continue to be constrained in Q4. And number four, we are increasing our full-year guidance for revenue, EPS and Public Cloud ARR driven by the outperformance in Q3 and a very healthy demand backdrop for Q4.
Now to the details. In fiscal Q3, we delivered strong revenue, gross margin and operating leverage across the entire business. Outstanding execution by the NetApp team yielded Q3 billings of $1.76 billion dollars, up 10% year-over-year. Revenue came in at $1.61 billion, also up 10% year-over-year. Our solid Q3 results were driven by continued strong demand across both our Hybrid Cloud and Public Cloud segments. Hybrid Cloud segment revenue of $1.5 billion was up 6% year-over-year. Within Hybrid Cloud, we delivered product revenue growth for the fourth consecutive quarter and expect this momentum to continue into Q4 and throughout fiscal '23.
Product revenue of $846 million increased 9% year-over-year. Consistent with the trends we've seen over the last two quarters, software product revenue $507 million increased 18% year-over-year, driven by the ongoing mix shift towards our All-flash portfolio. Total Q3 recurring support revenue of $586 million increased 3% year-over-year. As George highlighted, our All-flash revenue run rate which includes both product and support revenue eclipse $3.2 billion for the first time in the company's history and was up 23% year-over-year.
Public Cloud ARR exited Q3 at $469 million, up 98% year-over-year and 21% sequentially, driven by strong growth in Azure NetApp Files, Spot and Cloud Insights with CloudCheckr contributing $35 million in ARR. Organic Public Cloud ARR, excluding CloudCheckr was $434 million in Q3, up 83% year-over-year. Public Cloud revenue recognized in the quarter was $110 million, up 100% year-over-year and 26% sequentially. The growing scale of our Public Cloud portfolio continues to positively impact the overall growth profile of NetApp, delivering 4 of the 10 points in revenue growth. Recurring support and Public Cloud revenue of $696 million was up 11% year-over-year constituting 43% of total revenue. When combined, software product revenue, recurring support and Public Cloud revenue totaled $1.2 billion, another company high, and increased 14% year-over-year representing 75% of total revenue, up from 72% in Q3 '21.
We ended Q3 with $4 billion in deferred revenue, an increase of 4% year-over-year. Q3 marks the 16th consecutive quarter of year-over-year deferred revenue growth, which is the best leading indicator for continued recurring revenue growth. Total gross margin was 67%, reflecting the value of our software and Public Cloud portfolio. Total Hybrid Cloud gross margin was also 67% in Q3. Within our Hybrid Cloud segment product gross margin was 52% while our growing recurring support business continues to be very profitable with gross margin of 92%. Public Cloud gross margin of 71% was accretive to the overall corporate average. As we highlighted last quarter we expect Public Cloud gross margins to continue to trend towards our long-term goal of 75% to 80%, as an increasing percentage of our Public Cloud business will be built on software solutions. The introduction of FSx for ONTAP with AWS and the addition of CloudCheckr to the Spot portfolio, both of which are software offerings, support our long-term margin goal.
Q3 highlighted a tremendous leverage in our operating model with operating margin of 25%, an all-time company high. EPS of $1.44 was up 31% year-over-year and also represented a new quarterly record for the company. Cash flow from operations was $260 million and free cash flow was $199 million. During Q3, we repurchased $125 million in stock and paid out $111 million in cash dividends. In total, we returned $236 million to shareholders representing 119% of free cash flow. We closed Q3 with $4.2 billion in cash and short-term investments.
As many companies have highlighted during this earning season, the dynamic supply-chain situation continues to cause disruptions across the technology ecosystem. These headwinds were further exacerbated by Omicron. In addition to a worsening freight and expedite environment, we also experienced component supplier decommits beginning in the second half of Q3, which required us to purchase components in the open market at significant premiums. We were faced with the short-term decision of supporting the robust customer demand versus optimizing near-term product margin. NetApp has consistently focused on being a great long-term strategic partner to our loyal customer base, especially throughout the last two years of COVID. Consistent with this philosophy, we made the strategic decision to prioritize meeting customer demand with the trade-off being lower product margins in the short term. To be clear, the pricing and availability of our core HDD and SSD components are stable and are not a contributor to the near-term headwinds.
With these supply-chain headwinds as a backdrop, I want to highlight two critical takeaways. Number one, we believe these cost headwinds are temporary in nature and number two, we expect that Q4 will be the trough for product margins. As you all know, the timing of getting completely through these supply-chain challenges remains fluid but we do expect cost improvements in the coming quarters as a supply headwinds begin to ease throughout the first half of fiscal '23. We also expect our recent price increases to help further stabilized product margins in the coming quarters. As a supply base for components and airline cargo normalize, we are confident that product margin will return to its structural level in the mid-50s, particularly as our mix continues to trend towards All-flash. We do anticipate the supply-chain challenges to impact our product revenue and product gross margins in Q4. The supply-chain headwinds and our ongoing actions to mitigate them have been factored into our Q4 and updated full-year guidance.
We expect Q4 net revenues to range between $1.635 billion and $1.735 billion, which at the midpoint implies an 8% increase year-over-year. We anticipate consolidated gross margin in Q4 to be approximately 64%. The near-term margin headwind is being driven by an incremental $50 million to $60 million of premiums we expect to incur in open market component purchases. Consistent with our philosophy and culture, we actively prioritize being a great strategic partner to our loyal customers, many of which have been with us for over 25 years and feel great about the discipline and execution the NetApp team has displayed in managing through the current supply situation. We expect operating margin to be approximately 22% in Q4, which would have been closer to 25% without the recent supplier decommits.
Assumed in this guidance are Q4 operating expenses of $705 million to $715 million driven by continued investment in revenue-generating activities, including expanding our Public Cloud portfolio and investments in both our cloud and customer success sales teams. We anticipate earnings per share for Q4 to range between $1.21 and $1.31 per share. Assumed in our Q4 guidance is our expectation that other income and expense will be a negative $15 million and our tax rate will be approximately 18%. Our Q4 guidance implies revenue growth of approximately 10% year-over-year for fiscal '22. We also have growing confidence in our expanding Public Cloud opportunity, driven by enhanced go-to-market activities, deeper and broader cloud partnerships and continued product innovation. As a result, we are raising the guidance on our Public Cloud ARR with a new range of $525 million to $545 million exiting fiscal '22. Please note that Fylamynt is a tech and talent acquisition and will not contribute any ARR in Q4.
The implied forecast for total gross margin is approximately 67% for the full year. Our disciplined management of the business, despite the backdrop of supply-cost headwinds has allowed us to reaffirm our full-year operating margin guidance of 23% to 24%. We are raising our fiscal '22 EPS guidance. We now expect EPS to range between $5.07 and $5.17, representing 26% year-over-year growth at the midpoint.
In closing, I want to thank the entire NetApp team for the outstanding execution in delivering strong Q3 results. We will continue to be disciplined in long-term minded as we manage through the temporary supply challenges to meet as much customer demand as possible. Given the current environment, George and I are incredibly proud that the team stayed focused on our strategic priorities and have collectively leaned into executing against the tremendous growth opportunity we see over the next three to five years. As George mentioned, we plan to host an Investor Day on March 22, where we will further discuss the long-term growth potential and value drivers for our shareholders, customers and partners.
I'll now hand the call back to Kris to open the call for Q&A. Kris?
