Pure Storage, Inc. (NYSE:PSTG) Q2 2024 Earnings Call Transcript

Pure Storage, Inc. (NYSE:PSTG) Q2 2024 Earnings Call Transcript August 30, 2023

Pure Storage, Inc. beats earnings expectations. Reported EPS is $0.34, expectations were $0.28.

Operator: Good day, and welcome to the Pure Storage Second Quarter Fiscal Year 2024 Earnings Conference Call. Today’s conference is being recorded. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. [Operator Instructions] And at this time, I’d like to turn the call over to Mr. Paul Ziots, Vice President, Investor Relations. Please go ahead, sir.

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Paul Ziots: Thank you. Good afternoon, everyone and welcome to Pure’s second quarter fiscal 2024 earnings conference call. On the call, we have Charlie Giancarlo, Chief Executive Officer; Kevin Krysler, Chief Financial Officer; and Rob Lee, Chief Technology Officer. Following Charlie’s and Kevin’s prepared remarks, we will take questions. A press release was issued after the close of market and is posted on our website, where this call is being simultaneously webcast, the slides that accompany this webcast can be downloaded at investor.purestorage.com On this call today, we will make forward-looking statements which are subject to various risks and uncertainties. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings and competitive industry and economic trends.

Any forward-looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted, and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties related to our business is contained in our filings with the SEC and we refer you to those public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures, other than revenue, remaining performance obligations or RPO and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Pure Storage Investor Relations website, and is being recorded for playback purposes.

An archive of the webcast will be available on the IR website and is the property of Pure Storage. Our third quarter fiscal ’24 quiet period, begins at the close of business Friday, October 20, 2023. With that, I’ll turn it over to Charlie.

Charlie Giancarlo: Good afternoon, everyone, and welcome to Pure Storage’s Q2 conference call. We are pleased with our financial results this quarter. While the macro environment continued to be challenging, we outpaced our competitors and saw a strong growth in our strategic investments, particularly in FlashBlade//S, FlashBlade//E, and Evergreen//One. Our results demonstrate that we continue to lead our market and that our strategy is working. Pure is delivering extraordinary outcomes for our customers, by transforming data storage, from a highly fragmented solution set to a single consistent platform. Pure is today, the first and only data storage company that can deliver a single, consistent, non-disruptive, operating and management environment, leveraging the most advanced flash technology, across all of data storage needs.

With the introduction of the E family, our all-flash products now stand from the highest performance systems to the most cost effective systems for bulk data. Uniquely in our industry, all of Pure’s products are based on one operating system, Purity, the only storage software that operates natively, direct to flash rather than using less efficient commodity SSDs. All of Pure’s products are managed with our Pure One management system, and have consistent APIs. All of our products support non-disruptive upgrades forever. Through our Evergreen technology and subscription programs and are all available to consume as a service through Evergreen//One. The data storage industry has for decades been plagued with different tailored software and hardware solutions for the wide range of the storage protocols, formats, performance levels and price points needed to cover the market.

The storage portfolio of legacy data storage providers was generally assembled by acquisition and are collections of disparate inconsistent environments. That approach left customers with a complex infrastructure, with multiple software operating environments, with different management systems and multiple differing operational processes. As a result, legacy storage environments are complex, they vary for each use-case, they require downtime for upgrades and require forklift replacements roughly every five years. Pure is the only company that provides customers a single, consolidated operating environment for all of their data storage needs, including block, file and objects. Q2 was the first full quarter of shipments for FlashBlade//E, sales and pipeline have exceeded our expectations and it is experiencing the fastest growth of all prior new product releases.

At purchase FlashBlade//E with three years of Evergreen subscription has an acquisition cost competitive with hard disk based systems and has substantially lower operating costs. It enables our customers to move ever more of their cost sensitive workloads, to all flash. The E-family of products allows Pure to now cover the entire spectrum of data storage, inclusive of low priced bulk storage, providing customers with a consistent, modern and reliable product line for all their storage needs. Flash-array E will become available later this year, joining FlashBlade//E. FlashArray//E will enable cost effective storage for bulk data or capacities from one to four petabytes. And as part of the E family, it can also reduce customers’ total operational costs, by up to 60% and produce 85% less e-waste, compared to hard disk based system.

We are seeing continued momentum and opening new opportunities with our cloud strategy. Last week, we announced an expanded multi-year partnership with Microsoft Azure services and its Azure VMware solution known as ADS, using our Pure Cloud Block Store. This offers a new age of cloud migration that can drive faster, more cost effective adoption of cloud services. Combining Pure’s industry leading data reduction, with our ability to decouple storage needs from compute, customers can significantly reduce their total cloud costs, while increasing hybrid cloud capabilities. In addition to operating in the cloud, our cloud operating model allows our customers to operate their storage environment like the cloud to offer services like the cloud, to better build for the cloud and also to consume storage like the cloud.

Pure Fusion enables our customers to manage the Pure portfolio as a fleet, as an integrated pool of storage across datacenters and across clouds. Pure Fusion allows customers to offer their developers access to bespoke data services through APIs. Portworx, the most highly rated Kubernetes data platform for deploying cloud native applications was chosen for the fourth consecutive year, by analysts from GigaOm as the leader for enterprise Kubernetes data storage, and cloud native Kubernetes data storage. Evergreen//One, allows our customers to also consume like the cloud, based entirely on a service level agreement with Pure to allow them to store their data, whenever and wherever they want. Evergreen//One is available for all of Pure’s product offerings.

The growth of subscription services contributed significantly to our success in Q2.. Evergreen//One, the industry’s leading storage as a service offering saw sales double again year-over-year. Our Evergreen technology and programs revolutionized the industry and provide Pure a sustainable competitive advantage ending traditional legacy hardware replacement practices customers and turning every sale into a storage as a service relationship. With our Evergreen forever subscription, company’s upgrade both hardware and software to the latest technology, without paying additional capital continually without downtime forever. As we discussed last quarter, Generative AI and ChatGPT have brought artificial intelligence to the top of mind for all customers.

And AI creates two sets of opportunities for Pure. First, we can supply products for AI training environments, such as the creation of large language models or LLMs short. And second, we can support enterprises to prepare their data architecture for AI inference, meaning the use of LLM’s on their own data. Most customers will leverage third-party LLM’s their base. They will return and retrain these models on their proprietary data within their own organizational boundaries. By adding guard rails they will enable AI inference to achieve outcomes specific to their business. The former requires very high performance, while the latter is enhanced with the replacement of low performance secondary hard disk systems with our E family of cost-effective flash storage.

During the quarter, FlashBlade//S one a Generative AI footprint in a production environment in the low eight digits. Portworx also saw multiple wins in early AI development environments. Customers purchased Portworx to ensure reliable data management during the training and inference process. Over the last five years, well over a 100 customers have chosen FlashBlade to accelerate their AI and machine learning environments. With the introduction of FlashBlade//E, AI customers are able to take advantage of a single operating and management environment for both their hot and their bulk data, dramatically simplifying their data storage infrastructure and reducing its cost and environmental footprints. For the last few months, I have visited customers, partners and resellers across the US, Asia-Pacific and Europe to highlight Pure’s new ever more powerful position.

Customers immediately grasped the benefits of and the need for a unified operating and management environment for all of their data storage needs, blocks, file and object. From the highest performance to the most cost-effective. They responded enthusiastically to the ability to operate their storage and data environment, as consistent storage pools, across datacenters and clouds. And they welcomed the advantages of our Evergreen technology and subscription available across our entire data storage platform. Pure’s products uniquely stand out in the industry, due to our single operating environment and consistent APIs across our products. This is powered by our consistent use of Purity and our Pure one management system across all our products.

Our new E family of products leverage our latest direct to flash capabilities of Purity software to unlock the most cost effective QLC flash to penetrate the bulk data market for the first time with all flash technology. Our high density direct flash modules or DFM’s, work with Purity to power this event. This enables better performance, better longevity, better reliability and ultimately better price performance than both hard disks and even SSD based systems. We have been shipping 48 terabyte DFMs for the last three years and we will introduce our 75 terabyte DFM later this year. Today, Pure’s DFM’s are 2 to 4 times denser than the largest hard disk and SSDs in competitive use and our advantage and density is accelerating. Our roadmap calls for a 150 terabyte DFM next year and a 300 terabyte DFM by 2026.

Our improvements in performance and density of direct flash versus commodity products will enable us to increase our competitiveness in the industry by a wide margin not only in performance and cost but also in energy efficiency and e-waste reduction. Speaking of energy and e-waste we issued our second ESG report last week. It details the advancements we continue to make across our technology portfolio, operations and people. Our largest area of contribution continues to be the extraordinary energy e-waste and space savings of our products, which enable our customers to achieve their environmental sustainability goals. Pure products can reduce the total energy and emissions from data centers globally, by upwards of 20% as Pure’s flash optimized systems use up to 5 times less power than competitive SSD based systems up to 10 times less power than the hard disk systems we will replace.

In closing, I have never been more confident in our long-term growth strategy, or in our opportunity to lead this market. I’ll now turn the call over to Kevin Krysler. Kevin?

Kevan Krysler: Thank you, Charlie. Revenue of $689 million in Q2 grew 6.5% year-over-year and exceeded our revenue guidance. We achieved record sales of our entire FlashBlade portfolio including FlashBlade//E in saw continued high demand for our Evergreen//One subscription services, as sales more than doubled year-over-year. While the spending environment remains relatively consistent to what we have seen over the last couple of quarters, our customers are choosing to invest in our high technology data storage solutions for their key, strategic projects. As we have seen with the sales performance of both our FlashBlade and Evergreen//One offerings this quarter. Momentum we saw across our entire FlashBlade portfolio included specific AI and ML use cases, including a significant Generative AI win that Charlie highlighted.

We are excited with the historic ramp for both sales and pipeline of FlashBlade//E throughout the quarter. Customers no longer need to settle for hard-disk systems and can now choose Pure’s higher performance flash solutions at competitive price points. Q2 operating profit of nearly $112 million exceeded expectations, due to the performance of our products and subscription gross margins. Our unique Purity security software architecture working directly with raw flash rather than less efficient and shorter lived SSDs contributed to the strength and product gross margins. Leveraging our Purity software, the majority of the capacity we now ship is based on QLC raw flash. More aggressive discounting behavior from our competitors, during the quarter, slightly offset product gross margin expansion.

In Q2, subscription services annual recurring revenue grew 27% year-over-year to $1.2 billion and included strong growth from our Evergreen//One storage as a service offering. Close to Evergreen//One contracts where the effective service date has not yet started are excluded from the subscription ARR calculation. Subscription ARR growth would have been 28% when considering closed Evergreen//One contracts, where the service date has not yet started. Remaining performance obligations or RPO grew 26% to $1.9 billion. Similar to the remarks we’ve made in previous quarters, our RPO previously included an outstanding commitment with one of our global system integrators. During Q1, this remaining outstanding commitment was fully satisfied and when excluding the impact of the past outstanding commitment RPO grew 30% year-over-year.

Subscription services revenue of $289 million comprised 42% of total revenue, which is 6 points higher than Q2 last year. U.S. revenue for Q2 was $495 million and international revenue was $194 million. We acquired 325 new customers during the quarter and our total customer count now exceeds 12,000. As previously mentioned, we were pleased with our continued strong gross margin performance of 72.8%, with product gross margin of 71.5%, and subscription services gross margin of 74.5%. Our head count increased slightly to approximately 5,400 employees at the end of the quarter. Pure’s balance sheet and liquidity remains very strong, including $1.2 billion in cash and investments at the end of Q2. Cash flow from operations during the quarter was $102 million and capital expenditures totaled $55 million.

In Q2, we repurchased nearly 600,000 shares of stock returning nearly $22 million to our shareholders. This represents a lower level of repurchase activity than recent quarters, as a result of the fixed trading parameters that were in-place throughout the quarter. We have approximately $190 million remaining on our existing $215 million repurchase authorization. Now turning to guidance. We expect Q3 revenue to be $760 million, representing double-digit growth of over 12% year-over-year. Our Q3 revenue guidance assumes continued strong subscription revenue growth fueled by our Evergreen//One subscription services. We continue to execute on aligning our cost structure with expected demand. The results of our continued operational discipline and the economic benefits we are seeing with our unique architecture of Purity software working directly with flash is reflected in our Q3 operating profit guide of $135 million, or 17.8% operating margin.

Our annual revenue guidance we previously communicated remains unchanged and assumes revenue growth in the mid to high-single digits, as we expect significantly stronger year-over-year revenue growth for the second half of FY ’24. As a reminder, revenue for our Evergreen//One subscription service offering is recurring and is recognized over time. The sales strength of our Evergreen//One offering through the first half of the year has outperformed our expectations and this momentum is expected to continue throughout the remainder of the year. The success of our sales of Evergreen//One subscription services, has been considered in our annual revenue guidance as the growth of this offering creates a near term headwind to the total revenue growth rate, as revenue is recognized over time.

We also continue to assume no significant improvement or worsening of macroeconomic conditions from what we have seen over the last few quarters. Finally, we are increasing our annual operating margin guidance from 15% to 15.5%, driven by our continued operational discipline, as well as the benefits we are seeing as a result of our unmatched flash management technology, powered by Purity software. In closing, treating data storage and management as high technology as demonstrated through our continuous innovation across our portfolio and business models, we have established an extraordinary advantage in reducing power consumption, real estate space, labor and e-waste for our customers. Our business value and total cost of ownership advantages are unmatched against our competitors.

With that, I will turn it back to Paul for Q&A.

Paul Ziots: Thanks, Kevan. Before we begin the Q&A session, I’ll ask you to limit yourselves to one question consisting of one part, so we can get to as many people as possible. If you have additional questions, we kindly ask that you please rejoin the queue. And we’ll be happy to take those additional questions if time allows. Operator, let’s get started.

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Q&A Session

Operator: Thank you. [Operator Instructions] We’ll go first this afternoon to Amit Daryanani at Evercore.

Amit Daryanani: Yes. Good afternoon. Thanks for taking my question. Yeah. I was hoping you could talk a bit more about the FlashBlade portfolio. I think in the press release you talked about record sales over here. So I’d love to understand where is the strength coming from, what’s driving the success you had given a challenged macro. And we are really related to this, any sense on FlashBlade//E adoption is looking and is there (ph) some traction there. I think NetApp recently talked about how they’re equivalent product at least is having a very strong launch. So love to hear you, whereas FlashBlade broadly resonating with customers. And is there any way to quantify what you’re seeing that would be really helpful. Thank you.

Charlie Giancarlo: Absolutely. Thanks, Amit. Well, I just as a reminder to the audience. We launched FlashBlade about five or six years ago now. And then more recently, a little over a year-ago updated it with what we call our FlashBlade//S program, which shares our direct flash modules with our FlashArray series, as well as more recently just last Q1, our FlashBlade//E product. FlashBlade//S addresses the high performance end the market and FlashBlade//E, as I mentioned in my script actually addresses the high capacity but bulk data, lower cost market overall. To answer your question directly, I believe the greater focus around AI certainly helps in FlashBlade sales, but frankly FlashBlade has continued to grow, especially since the introduction of FlashBlade//S, which gave it even greater compatibility with our FlashArray series, ever since we introduced that product.

And now that we’ve introduced the E, it really allows customers to look at the full range of price performance for their high capacity workloads with one consistent platform. And, I think completing, if you will, the family with E, has really helped FlashBlade sales overall.

Rob Lee: Yeah. Absolutely, Amit. This is Rob just to jump into the second part of your question. Look, I think it’s important to realize that E really has no equivalent on the market. E as Charlie mentioned is really enabled by our highly differentiated Purity software and direct flash technology that’s designed for that software, which really sets us far apart not only from disk, which is largely the displacement market we’re going after, but also any of the competitive set that might try to follow us with SSD based technology. And as Charlie mentioned, we started using this technology, leveraging and bringing — using it to bring QLC into the enterprise over three years ago with FlashArray C, at a time to displace a hybrid disk-based systems and then now with E, with both FlashBlade//E and FlashArray//E joining later this year, I really see a complete portfolio to go after the entirety of a customers’ data storage needs.

And again, as Charlie said, being able to do that and offer it with a very consistent, hardware, software and management approach.

Paul Ziots: Thank you, Amit. Next question, please.

Operator: We go next now to Aaron Rakers at Wells Fargo.

Aaron Rakers: Yeah. Thanks for taking the question. I guess, I wanted to ask about the AI opportunity. Charlie, if you can, can you unpack a little bit about the eight-figure deal that you won in AI this quarter. Have you revenue recognize that just kind of any context on that? And then also just to clarify the Meta deal, are you continuing to not assume any kind of follow-on from that footprint deployment, next generation data center opportunity at Meta in your guidance for fiscal ’24? Thank you.

Charlie Giancarlo: You bet. So the eight-figure deal was nice as I said low eight-figure deal, but in a production environment that has opportunity for expansion. So very excited and it was that, the largest Gen AI deal of it — of its type, which is why we wanted to highlight it not be not be only AI deal that we did in the quarter, but just because of its scale is something we wanted to highlight. I would also say that, it’s an area that where we are seeing additional interest overall in the market. That being said, as I said last quarter, I’m just excited by the opportunity to upgrade customers’ existing data environment, to the lower performance environment, because of the needs of wanting to use that data for AI inference in the future.

So I’m seeing both of those opportunities in front of us. Separately, with respect to the Meta RSC which we’ve commented on the past, because when new shipments happened into that tends to have an effect on our overall P&L. Yeah, as I’ve stated in the past we have there’s really no change from prior quarters. It continues to be an environment that Meta is happy with, our relationship with them is very good. There are no change as far as we know of their plans to expand in the future. In other words, that’s still our expectation, but we don’t know the exact timing.

Paul Ziots: Kevan, did you want to make a comment about revenue recognition for that eight-figure deal that was included in our revenue.

Charlie Giancarlo: Yes. Its included in our revenue. Yes. Thank you, Paul.

Paul Ziots: Okay. Thank you, Aaron. Next question, please.

Operator: Next now to Meta Marshall at Morgan Stanley.

Meta Marshall: Great. Thanks. A couple of questions from me, just coming out of accelerate. You guys have made some very bold statements, just about kind of customers not named us anymore, and I just wanted to get a sense of how you found that message resounding with customers and what pieces of the portfolio, do you feel like or pieces of the roadmap that you need to demonstrate over the next kind of coming years to demonstrate to customers that they can have more comfort in that transition. And then, just maybe a clarification on FlashBlade//E, just kind of typical order to ship time. Thanks.

Charlie Giancarlo: So, I can answer the first part of that question in a number of different ways. First of all, I believe that customers have already experienced the disk to flash benefits when they went with their primary storage from disk to flash and what they found was smaller footprints, higher reliability, less maintenance, less effort, overall, especially when they move to Pure flash. And so they already recognized that as a positive effect. And so, when we can now go in at these lower-price points, lower priced performance levels, they get very excited about it. But as I had mentioned in my prepared remarks, what gets them even more excited is consolidating their overall environment to a more consistent hardware, software environment, because it reduces the complexity and their overall IT datacenter reduces their complexity, when they want to move to the cloud, just reduces complexity generally.