Pure Storage, Inc. (NYSE:PSTG) Q4 2023 Earnings Call Transcript

Pure Storage, Inc. (NYSE:PSTG) Q4 2023 Earnings Call Transcript March 1, 2023

Operator: Good day, and welcome to the Pure Storage Fourth Quarter Fiscal Year 2023 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. At this time, I’d like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead.

Paul Ziots: Thank you. Good afternoon, everyone, and welcome to Pure’s fourth quarter fiscal 2023 earnings conference call. On the call, we have Charlie Giancarlo, Chief Executive Officer; Kevan Krysler, Chief Financial Officer; and Rob Lee, Chief Technology Officer. Following Charlie’s and Kevin’s prepared remarks, we will take questions. Our press release was issued after 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 relating to our business is contained in our filings with the SEC, and we refer you to these public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenues, remaining performance obligations, or RPO, and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings 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 first quarter fiscal 2024 quiet period begins at the close of business, Friday, April 21, 2023. With that, I’ll turn it over to Charlie.

Charlie Giancarlo: Thank you, Paul. Hello, everyone, and welcome to our Q4 and fiscal year 2023 call. We were pleased with our Q4 year-over-year revenue growth of 14% and we’re very pleased with our annual revenue growth of 26% and annual subscription ARR growth of 30%, especially considering the challenges of the steadily increasing global economic slowdown. Revenue growth, operating leverage and operating discipline helped drive strong annual profit and cash flow in FY 2023, with operating cash flow up over 85%, and non-GAAP operating income up almost 100% for the full year. We achieved solid growth as we continue to take share driven by our best-in-class portfolio of products and services, our innovative Evergreen business model and leading customer centricity proven by our industry-leading Net Promoter Score.

In FY 2023, we expanded our core product offerings with the new FlashBlade//S through our Fusion and Portworx Data Services offerings. We also expanded our as-a-service offerings, adding more service tiers and SLA guarantees to Evergreen//One and extending our as-a-Service model across the full suite of Portworx solutions. Pure’s sustainable competitive advantage lies in our highly consistent product lines, all based on our Purity operating system, direct flash modules, Pure1 cloud management and Evergreen subscription model. Competitors have tried for years to imitate our differentiated Evergreen business model, but have been unable to deliver the combined benefits of continual non-disruptive upgrades and forever flash through a transparent and flat and fair subscription agreement.

Pure, for the first time, had a presence at the World Economic Forum in Davos this past January. The largest topics at Davos this year were the war over Ukraine, digital currencies and sustainability. Our participation focused on promoting the important role that Pure will play in reducing technologies and IT’s demand for energy and its production of e-waste. Just prior to the event, the World Economic Forum produced a study stating that digital electronics of all types contribute 4% to 5% of all carbon emissions. Other studies identify that data center is used between 1% and 2% of all electrical power generated in the world. It is further estimated that data storage accounts for 20% to 25% of data center power usage, increasing to as much as 40% by the end of the decade.

The vast majority of data centers over 80% remains trapped on magnetic hard disks. As we have stated for the past year, Pure’s flash-optimized systems generally use between 2x and 5x less power than competitive SSD-based systems and between 5x and 10x less power than the hard disk systems we replace. Simple math then shows that replacing that 80% of hard disk storage and data centers with Pure’s flash-based storage can reduce total data center power utilization by approximately 20%. That same math shows that both data center space and e-waste would also be reduced by similar amounts with reduced labor costs and increased reliability as additional benefits. Reducing the world’s data center power, space and e-waste by 20% is a very significant reduction in the world of sustainability and needs to be recognized and amplified.

This opportunity is resonating not only within the highly specialized field of IT data storage teams, but now also with the entire C-suite, including CIOs, CFOs and even CEOs. While our product and technology leadership remains the primary reason by which customers select Pure, the competitive sustainability of our products continues to grow in importance with customers. In Q4, we saw more customers citing energy efficiency as a reason they chose Pure than in any previous quarter-to-date. Beyond just the environmental benefits we provide, customers are increasingly compelled by their ability to get more out of their storage at a lower total cost of ownership, given the backdrop of increasing energy prices. This simple step of replacing hard disk with Pure’s flash-optimized storage has significant benefits to any organization but has been out of reach economically for the majority of secondary tier data because of the higher cost of solid-state flash technology compared to the lowest cost hard disk drives.

Large, unstructured data repositories continue to be dominated by 7,200 RPM disks, despite their difficulty to manage, relatively low reliability and their substantial power, space and cooling needs, because superior all-flash systems were too expensive. Well, I’m pleased to announce that our founders’ vision of the all-flash data center is finally here. And the days of hard disk dominance of data are coming to a close. Today, Pure announced FlashBlade//E, a scale-out, unstructured data repository built for large capacity data stores, which provides a lower total operating costs compared to secondary tier disk. FlashBlade//E will ship late this quarter. FlashBlade//E will be priced under $0.20 per gigabyte at a system level and costs even less when measured on effective capacity.

Let me repeat that. FlashBlade//E will be priced under $0.20 per gigabyte at a system level, inclusive of the first three years of subscription, which directly competes with lower performance all hard disk systems. And operating costs for FlashBlade//E are significantly lower than the hard disk systems that it will replaced with its 5x to 10x reduction in cost for power, space, cooling and labor. FlashBlade//E, the second in our series of cost-optimized products after FlashArray//C opens up a massive new opportunity for us and allows us to expand further into our total available market. FlashBlade//E enables Pure to significantly penetrate many segments of the storage market currently dominated by disc, which has been inaccessible to Pure until now.

FlashBlade//E is a perfect example of how we are investing our R&D dollars in a focused and strategic manner to maximize long-term growth opportunities in one of the world’s largest IT categories. We are extremely excited about how this new product complements our innovative portfolio and strengthens our opportunity to drive Pure’s growth over the long-term. While we are excited about the prospects for our products and the competitiveness of our organization, we are also well aware of the challenges of the current economic environment and the strains that it places on our customers. Since our Q2 earnings call, we have discussed seeing instances of longer sales cycles and caution with large purchases, especially in the enterprise segment. As expected, these conditions continued through Q4 and close rates of our advanced stage deals continue to be consistent with the earlier quarters.

While we were able to generate considerable new opportunities and pipeline during Q4, the development and progression of these new opportunities slowed substantially, especially in our enterprise segment. This recent slowdown in customers’ purchasing expectations in conjunction with heightened concerns around further tightening monetary actions by the Fed and other central banks and governments, has impacted our growth outlook for the coming year. We also believe that our successful sales motion over the last few years will need to adapt to the additional scrutiny that customers are now placing on purchases. We are, therefore, adjusting our sales motion for the additional economic analysis that customers need to justify purchases with tightened budgets.

In particular, focusing our efforts on steps our customers can take to reduce their costs, both capital as well as operational while improving their human productivity. Evergreen One, FlashBlade//E and FlashArray//C will all play a large role in this new economy. We have high confidence in our long-term growth and strategy but have made operational changes for what we believe will be near-term economic headwinds. We have already taken action to reduce spending across the company and have reduced our spending in budgetary growth plans for FY2024 until we see improvements in the environment. As Kevin will cover in a few moments, we are maintaining our operating margin guidance for FY2024 even after taking into account lower revenue growth expectations than previously anticipated.

We are very excited about the innovations we delivered in the year and are particularly excited about the introduction of FlashBlade//E, which will further fuel our ability to make the all-flash data center a reality, a benefit for both our customers and our planet. We expect to continue to be share takers in FY2024. What we provide in terms of energy efficiency, total cost of ownership and best-in-class technology strongly resonates with our customers, especially in the current environment where organizations need to do more with less. Despite the lower-than-anticipated revenue guide for fiscal year 2024, we are confident that we will continue to grow faster than the overall storage market and continue to take share from our key competitors.

We will continue to lead the market in meaningful innovation in data storage and management. We will increase our relevance and opportunities with the world’s largest technology companies, and we will further leverage our leadership position to accelerate the drive to the all-flash data center. I’ll now turn it over to Kevan to cover our financial performance and outlook in more detail.

Kevan Krysler: Thank you, Charlie, and good afternoon. We delivered strong financial results in Q4, with revenue growing 14% and operating margin of 19.6% while navigating the increased challenges of the macroeconomic environment. Also as a reminder for comparability, our Q4 last year included an additional week of revenue and expenses. For the year, we grew revenue 26% to $2.8 billion and substantially expanded our operating margins from 10.8% to 16.6%. Subscription annual recurring revenue or subscription ARR continues to be strong, exceeding $1.1 billion, up 30% year-over-year. Evergreen//One once again represented a key driver of our subscription ARR growth in Q4 and resonate strongly with customers as they navigate tighter IT budgets without having to compromise performance and value.

Also consistent with last year, our subscription net dollar retention or NDR at the end of the year exceeded 120% compared to our long-term target of 15% as a result of expansion from existing customers. Remaining performance obligations, or RPO, grew 24% to $1.8 billion. Similar to the remarks we’ve made in previous quarters, our RPO growth is impacted by product shipments for an outstanding commitment with one of our global system integrators. Excluding these product shipments, RPO grew 28% year-over-year. Our headcount increased to approximately 5,100 employees. As the macro backdrop persists, our investment in incremental headcount next year will be focused on quota-carrying and critical business hires. International revenue in Q4 grew 39% to $258 million and U.S. revenue of $552 million grew 6% year-over-year.

U.S. revenue growth reflects caution in IT spending that customers are exercising most notably in the Enterprise segment. Q4 product revenue grew 11% and subscription services revenue increased 23% year-over-year and comprised approximately one-third of total revenue for the quarter. Adjusting for the extra week in Q4 last year, subscription services revenue would have grown 31% year-over-year. We acquired approximately 490 new customers during the quarter, which was strong despite the challenges of the macro backdrop. Contributions from both product and subscription services gross margins continued to be strong as total gross margins were nearly 71% in Q4. And we expect that product margins will continue to be resilient, benefiting from our ability to leverage raw flash and our increasing mix of QLC flash.

We are also pleased with the strength of subscription services gross margin of 74% for the quarter and nearly 73% for the year, driven by increasing efficiencies as we grow and scale our Evergreen subscription offerings. We remain focused on profitability as reflected in our strong Q4 operating profit of nearly $160 million and operating margin of 19.6%. We are very pleased with our substantial operating margin expansion this year, and we will continue to be very focused on our spending. Approximately two points of our operating margin in FY2023 was attributable to tailwinds that we do not expect will occur next year. This included higher attrition and slower-than-planned hiring that we experienced during the first half of FY2023 as well as lower-than-expected sales costs in Q4.

We have a very strong balance sheet that includes approximately $1.6 billion in cash and investments. We generated significant cash flows from operations during the quarter of approximately $230 million and approximately $770 million for the year as a result of strong collections and increasing profits. Capital expenditures in Q4 were $60 million and during the year represented approximately 6% of revenue. Factors driving our higher capital expenditures include the strength of our Evergreen//One solution as well as test systems for our new product offerings. In Q4, we repurchased over 2.4 million shares of stock, returning approximately $67.5 million to our shareholders. For the year, we repurchased approximately 7.8 million shares, returning nearly $219 million in capital to our shareholders.

We have approximately $31 million remaining on our existing $250 million repurchase authorization, and we are announcing today a new share repurchase authorization of an additional $250 million. Turning to revenue guidance for FY2024. We believe the current macro uncertainties will continue to persist, creating headwinds to enterprise IT spending. And as such, we expect revenue growth to be in the mid to high-single digits. This revenue guidance considers the macro backdrop and uncertainties that we are currently seeing today. As Charlie mentioned, the progression of new and early-stage sales opportunities are taking a longer period of time to close due to increased customer diligence, approvals and tightening budgets. We expect this to continue through FY2024 with some moderation later in the year as our sales teams adjust their selling motions to more closely align with evolving customer buying motions.

During Q4, we did not receive new product orders for Meta and this is reflected in our forecasted growth rate for next year. Also, our FY2024 revenue guidance assumes a modest ramp during the second half of the year from sales of our newest FlashBlade//E offering. Turning to operating margin guidance for FY2024. We remain very focused on profitable growth while continuing to support our highest, long-term growth opportunities, such as our announcement today of FlashBlade//E. As a reminder, last quarter, we shared a preliminary view of operating margins in the range of 14% to 15% for FY2024. At the time, our preliminary view contemplated key considerations, including higher revenue growth assumptions. With our expectations of slower revenue growth, we adjusted our spending budgets for next year to align with an expected operating margin of 15%, representing the high end of the range of our preliminary view.

We expect to achieve this operating margin by exercising strong focus and discipline on both hiring and spend management. Now turning to revenue guidance for Q1. As we have mentioned on multiple occasions in prior earnings calls, Q1 of last year reflected $60 million of product revenue impacting seasonality as this revenue had been contemplated for the second half of FY2023. Excluding the seasonality impact to product revenue of $60 million, we expect that Q1 revenue this year will be flat at $560 million when compared to Q1 of last year. Our Q1 revenue guide of $560 million takes into consideration that newer, early-stage opportunities will require a longer period of time to close. Again, we expect this impact will moderate later in the year.

While we are confident and committed to achieving 15% operating margin for the year, we expect that our operating profit in Q1 will be approximately $10 million. Operating profit in Q1 reflects a significant investment for our first in-person sales kickoff event since 2020 as well as higher costs as a result of our planned hiring in both Q3 and Q4 of last year. In closing, I’d like to thank our customers, partners and employees for an incredibly strong FY2023. Although the current macro backdrop presents its challenges, Pure is uniquely positioned to help our customers navigate these challenges, leveraging our innovative, high-performance solutions while providing financial flexibility through Evergreen and reducing total cost of ownership and energy consumption.

As we look forward, we are confident in our strategy and ability to continue taking market share and deliver strong operating margin of 15% in FY2024. With that, I will turn it to Paul for Q&A.

Paul Ziots: Thanks, Kevan. Before we begin the Q&A session, I’ll ask you to please 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.

Q&A Session

Operator: Thank you. Our first question for today comes from Amit Daryanani of Evercore ISI. Your line is now open. Please go ahead.

Amit Daryanani: Thanks for taking my question. I guess there’ll be a fair bit of focus on this fiscal 2024 revenue guide for mid to high-single digit growth. I think last quarter, you can obviously give a formal guide but I think the expectation would be around double-digit growth or thereabouts. So I’d love to understand what’s changed in the last 90 days? And to the extent you can talk about how much of this guide adjustment is due to macro worries versus perhaps something that’s more company specific? Do we worry about competition or share gain trajectory kind of slowing that? I’d love to understand the downtick you’re seeing, how much is macro versus company specific that would be really helpful. Thank you.

Charlie Giancarlo: Thanks, Amit. Absolutely. This is Charlie. Good to hear from you. First, let’s just say that as we went into last quarter, we were expecting double-digit for Q4, and we were able to deliver on that and feel really proud about the team and what they’re able to do. And that really represented the €“ a good close rate of our advanced stage opportunities, which continued through the quarter. What did change is, especially as we came into the new calendar year, was a slowing down of progression of the pipeline of the staged opportunities, meaning the progression that we had typically seen in earlier quarters of movement from early stage to later stage in the progression. That has slowed down since the beginning of the year.

And we have to assume that, that will be true for at least a couple of quarters going forward. And so that’s changed the outlook, if you will, for the year as we go forward. That being said, we’re positive on the year overall, we’re positive on our competitiveness in the market. What €“ the other thing that’s perhaps changed is that we do notice a change in the way that the customers are evaluating their purchases, a lot more focus on economic analyses, especially on near-term operating costs. And that’s €“ of course, we’re responding to that now by changing the way our sales teams go about working with the customer on evaluating our products in a much more €“ much greater focus on near-term operational costs as a justification for making the choice to proceed forward with a project versus maybe other projects that they have in their consideration.

Paul Ziots: Charlie, did you want to mention anything about the expectation to continue to gain share?

Charlie Giancarlo: I think both Kevan and I mentioned that. But as we’ve done certainly every year and almost every single quarter, we continue to gain share against our competitors. Everybody is affected by the macro. We’re no different than that. But the goal is obviously to continue to outpace the rest of the field.

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

Operator: Thank you. Our next question comes from Aaron Rakers of Wells Fargo. Aaron, your line is now open. Please go ahead.

Aaron Rakers: Yes. Thanks for taking the question guys. I just want to unpack the guidance a little bit in the current quarter and just understand what’s implied subsequent to that. So the $560 million, it sounds like, obviously, adjusting for the item you had the year ago quarter, if I take that out of product revenue, it seems to imply an extremely sharp decline sequentially in the subscription revenue. So I guess €“ the first part of that is, is that necessarily how you’re thinking about that? Or am I missing something that and why would subscription necessarily decline that much? And I guess, if I take at face value, the mid to high single digit for the year, to be even mid-single digit, the assumption would be is that your growth actually in the subsequent quarters looks like it’s even high single or even double-digit of returning.

So I’m just curious how you kind of bridge the seasonality after the first quarter guide to get to that mid to high single-digit full year guide. Thank you.

Kevan Krysler: Aaron, this is Kevan. I appreciate the question. And you’re right. With the first point, around the $60 million that really was seasonality and it really should be excluded in terms of how we’re thinking about the comparability of product revenue. As that $60 million, if you recall where we had mentioned that on previous earnings calls was really planned for the second half of the year. So that’s really impacting seasonality. So then after you adjust the $60 million, you still have for Q1 of last year a very strong year-over-year growth of 37%. So that does set up for a tough compare. And then the macro backdrop that Charlie mentioned and I mentioned, which really resulted in longer-than-expected sales progression of new and early opportunities did add additional headwind to that tough compare that we’re thinking about specific to Q1.

And that’s what’s leading to the Q1 revenue outlook of flat year-over-year when excluding the impact of seasonality. But look, it really does generally align in terms of seasonality when we think about Q1 and when we think about our overall guide for revenue in the mid to high single digits. It generally is aligning with our seasonality that we saw with FY2022. So we actually feel pretty comfortable with that.

Aaron Rakers: Yes. Okay. I think I was missing a point on the flash. Thank you.

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

Operator: Thank you. Our next question comes from Meta Marshall of Morgan Stanley. Your line is now open. Please go ahead.

Meta Marshall: Great. Thanks. Just on kind of some of the sales marketing changes that you guys are planning on making. Just when did you start making some of those changes as even last quarter, you would have started to kind of see some of this cost sensitivity. And just kind of what gives you confidence that those changes will be kind of impactful towards the back half of the fiscal year? Thanks.

Charlie Giancarlo: Yes. Thank you, Meta. Well, you’re correct. I mean, obviously, as we proceeded from Q3 into Q4, we knew that economic concerns would be higher. And we started adding some additional training to the sales force. We do have next week our first full in-person sales kickoff in three years since 2020 and a lot of what we’ve done is prepare the training for that for this new economic reality. So we’ve had enough forewarning, if you will, and we planned early enough so that the way that the training is working out for our sales kickoff is going to be very much in the mode of selling and creating value propositions in an environment where customers are much more focused on near-term cost savings rather than, let’s say, long-term advantage or long-term cost savings. So that’s a clear change in the training that we’re putting in place in our field.

Kevan Krysler: Yes. I think that’s a great point, Charlie. And maybe what we can add to is our thoughts around Pure’s unique positioning even in this environment and then connecting that with the field as well, which I think is going to be really important.

Charlie Giancarlo: While our development of FlashBlade//E was not done in anticipation of a recession, it couldn’t come at a better time. It’s operating costs well below the operating cost of a hard disk environment that it will be replacing. And Evergreen//One, we should mention Evergreen//One. We did see significant increase in Evergreen//One versus capital purchases. Last quarter, every time we see some economic slowdown, whether it was the early COVID days or now this, we see a pickup in interest in Evergreen//One. So we’ve already seen that, and we can expect that, I think, for the next several quarters. That will have both short-term and long-term effects, overall good for the company but a transition to Evergreen//One from a capital also has immediate reduction of the revenue line.

Kevan Krysler: Yes. That’s great. And I’d add a couple more to that as well, which is FlashArray//C continues to get traction and really is resonating with customers in this environment. And we introduced last year Evergreen//Flex, which is starting to pick up some traction and interest as well, and we do expect some more momentum on that front. But really, what it’s getting at is that we’ve got a lot of solutions for our customers that provide a lot of flexibility both in terms of consumption and financial. And I think that’s really going to resonate with customers as we navigate this environment.

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

Operator: Thank you. Our next question comes from Sidney Ho of Deutsche Bank. Sidney, your line is now open. Please go ahead.

Sidney Ho: Great. Thank you for taking the question. First of all, I want to clarify to an earlier answer to the earlier question. In your fiscal first quarter guidance, what are you expecting for your subscription services revenue to do on a year-over-year basis? And maybe I’ll ask a follow-up question here is the subscription ARR has been growing quite steadily at 30% a year, how does that growth rate change, if any, if the hardware sales slowdown in the near-term. Is there a lacking effect that we should consider? That’s my follow-up. Thanks.

Kevan Krysler: Yes, it’s a great question. This is Kevan again. Look, we’ve been very pleased, obviously, with the strength of our subscription business. You see that again in our subscription ARR growth rate. We see that continuing to be strong as we progress through the year. Charlie pointed out the strength that we saw in Evergreen//One in Q3 and Q4 of last year. We expect that to continue. So that’s going to be a benefit for us as we continue to navigate. And look, I do expect that overall, our renewals of Evergreen solutions will continue to be very strong. During this time, customers are valuing in a significant way the ability to have their solutions and peer solutions modernized through the Evergreen offerings. And so we do expect that to continue to be strong, offset somewhat slightly by the attach of Evergreen to new product given the slowdown that we’ve communicated.

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

Operator: Thank you. Our next question comes from Wamsi Mohan from Bank of America. Your line is now open. Please go ahead.

Wamsi Mohan: Yes. Thank you so much. Charlie, these growth rates are some of the lowest that Pure has seen, probably just excluding COVID and that was a very, very difficult, uncertain economic environment and now you’re guiding fiscal 2024 at the low end, maybe 2, 3 points about those growth rates. How can we get confidence that this is purely just macro when these growth rates are historically something that you’ve well outperformed taking massive amounts of share historically. Is there something happening either between pricing or between your ability to take incremental share? I mean you’re arguably $1 billion €“ $1.2 billion larger company . So what are the different factors that we should be thinking about especially with respect to NAND flash drives share and just the ability to take incremental share?

Charlie Giancarlo: Yes. Wamsi, thank you. We have consistently grown roughly 10% to 15% higher than our competition than the market as a whole on an annual basis. Obviously, every quarter is a little bit different. But on an annual basis, 10% to 15%, I expect that this year as well. It’s just a measure €“ a matter of calling out the overall market as a whole. I think that we also are not forecasting Meta because we don’t forecast until we get an actual order, and that obviously had an effect on both of our last two years. And we do have significant large high-tech customers. And as others have reported, those are down a bit, but they always come back. So on €“ I was €“ I think everyone on this call knows that I look at this business on a long-term basis.

I have no loss of confidence. I am every bit as confident about our long-term projections as I’ve had in quarters and years past. Evergreen €“ I’m sorry, FlashBlade//E, I think, is going to be a barn burner. Obviously, we’re just getting it started, and it’s going to be early days. But it opens up a major new part of the market for us. Our field teams have been strong year in and year out, and we’re only making them stronger with some of the new programs we’re putting in place for this fiscal year in our sales kickoff that will be next week. So no loss of confidence in terms of our overall ability to perform, but we are facing a very uncertain year as is everybody else on a variety of fronts. And as we €“ hopefully, as we go through the year, we’ll pick up confidence as we go along.

Kevan Krysler: Yes. Wamsi, I think the only thing I would add to Charlie’s answer is the strength we’re seeing on Evergreen//One and Evergreen//Flex is significant and is really resonating with our customer base. And obviously, if that mix changes significantly, that would have a short-term headwind on revenue as well. So that’s another factor to be considering when you’re thinking about our guide and outlook for revenue next year.

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

Operator: Thank you. Our next question comes from Pinjalim Bora of JPMorgan. Your line is now open. Please go ahead.

Pinjalim Bora: Hey guys, thanks for taking the question. I wanted to go back to the guidance just one more time. Maybe talk about the assumptions behind, it seems like your pipeline is good. Is it mainly a factor of the close rates that’s kind of driving then are you expecting to the last point that you made a higher shift towards Evergreen//One or subscriptions that might put potential pressure? Is that baked into the guidance?

Charlie Giancarlo: Certainly, more Evergreen//One relative to the overall is baked into the guidance. As we mentioned, we’re not including Meta at all. What we did see that was a significant shift was the amount of time it takes to go from early stage opportunity in the pipeline to a later stage in the pipeline. The close rates of later stage have been consistent, I would say. But it’s that progression as you go through a pipeline funnel that’s taking longer.

Kevan Krysler: And then I would add on to that, just that we’re also contemplating a moderate second half ramp of FlashBlade//E as well. And we do expect that to ramp in a manner similar to what we saw with FlashArray//C.

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

Operator: Thank you. Our next question from today comes from Nehal Chokshi of Northland Capital Markets. Your line is now. Please go ahead.

Nehal Chokshi: Yes. Thank you. Incredible free cash flow margin quarter and year, you’re now at 20% plus free cash flow margin. Your last Analyst Day implied expect to get to a Rule of 40 benchmark in due course, which at this free cash flow margin would require about 20% overall growth rate. So the question is that do you believe you’re already there if it was not for a macroeconomic impact?

Kevan Krysler: Thanks, Nehal. And it’s a great question and obviously made great progress really across the board in terms of performance on both the expansion of our operating margin as well as free cash flow. And yes, you’re right. I do think the headwinds that will navigate associated with the macro backdrop would be the one factor, which has been driving our outlook, our near-term outlook for FY 2024 for revenue growth. But when we think about our free cash flow performance, we’re very pleased with that. And we do believe that we’ll continue to outpace our free cash flow margin. We’ll continue to outpace our operating margin slightly. Now we will have some pressure, if you will, due to the lower outlook growth for product revenue, which will have some impact on that as well as continued strength of Evergreen//One which will add to our CapEx needs as we continue to expand. But overall, really happy with the direction we’re headed in.

Paul Ziots: Thank you, Nehal. Great. Next question please.

Operator: Thank you. Our next question comes from Simon Leopold from Raymond James. Your line is now open. Please go ahead.

Simon Leopold: Thanks for taking the question. I wanted to see if maybe you could address a longer-term opportunity around artificial intelligence and machine learning. I think that was sort of the root of the use case for Meta. And wondering, particularly with the introduction of the E platform for unstructured data, how we should think about that particular use case broadly affecting Pure Storage over the longer term? Thank you.

Rob Lee: Yes, Simon, this is Rob. I’ll take that one. So yes, I mean, certainly, as we’ve talked about in prior calls, the broader space of analytics and AI continues to be a strong one for us, certainly with Meta, but also the broader customer base. And then certainly, within the last several months, a lot of news in that space around new developments, generative AI technology, so on and so forth. Look, at the end of the day, we very much believe that this entire space of technology is extremely dependent on data, on very large corpuses of data. And if you step back and you look at where our customers are largely housing those sets of data today all together, way too often, it’s sitting in bulk repositories trapped on very, very inefficient pools of disk.

And this is precisely the opportunity that we developed FlashBlade//E to go and attack. And so I think, we feel long term that this is a €“ it does present a very significant the bulk data space overall, and certainly the focus of AI to go and capitalize on those sets of data presents a very significant opportunity for us. And we’re going to go pursue that very aggressively as we’re now really the only ones that are going to be able to take flash technology and go and modernize those environments.

Charlie Giancarlo: Yes, and Simon, I might add on to that. The listeners may recall that the Meta architecture was FlashBlade for the high performance side which was approximately in terms of bytes stored about 10% of the bytes stored. And then FlashArray//C for 90% of the bytes stored, which are let’s say in hot standby, the €“ with FlashBlade providing the high performance side of it and the FlashArray//C providing the warm storage for data that’s about to be processed. Well, what we see with FlashBlade//E is the opportunity to expand that even further. So it’s a great architectural, we have to provide both performance and then lower cost for the warm tier. And so, we can get into an all flash environment as well as an all pure environment in these customers, rather than having to have a high performance tier that’s flash, and then a lower performance, lower cost tier that’s hard disk.

Paul Ziots: Thank you, Simon.

Unidentified Analyst: Thank you.

Paul Ziots: Next question, please?

Operator: Thank you. Our next question comes from Matt Sheerin of Stifel. Matt, your line is now open. Please go ahead.

Matt Sheerin: Yes, thank you. I had another question regarding your strong free cash flow beyond the incremental buyback you announced today. How should we think about your use of cash and specifically on M&A? Do you continue to see opportunities there?

Kevan Krysler: We’re always evaluating M&A as we should and we want to make sure that we always have enough cash in reserve to be able to make, especially tuck-ins, but small M&A acquisitions. Obviously, if we were to consider a larger one that would probably require a more complex transaction. But yes, we continue to consider M&A. And we think that as you know, the current venture environment starts to become much more let’s say reasonable in terms of expectations. Those types of opportunities will come up a bit more often. I will say, however, that we are extremely fortunate as a company and being very rich in organic opportunities, and that continues to be our preference.

Charlie Giancarlo: And Matt, one other point just to raise in terms of use of cash. Obviously, we’ve got our converts coming up for maturity and use of cash will be contemplated as we work through that as well in April. So another consideration there.

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

Operator: Thank you. Our next question comes from Tim Long of Barclays. Tim, your line is now open. Please go ahead.

George Wang: Hey guys. It’s actually George Wang on for Tim Long. Just to have a couple of questions. First of all maybe you can kind of unpack give some update on the telco customers. In prior quarters, you guys talk about opportunities kind of for shipping to telco customers for the 5G deployment. Just curious if you have any latest update on this particular vertical?

Charlie Giancarlo: I don’t have any to call out, but we did have 5G shipments in the quarter. And it continues to be an area of strong focus and attention for us. We are €“ we do have a presence in Barcelona this week and getting a fair amount of attention there.

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

Operator: Thank you. Our next question comes from a Krish Sankar from Cowen. Krish, your line is now open. Please go ahead.

Unidentified Analyst: Hey guys. This is Eddie for Krish. Thanks for taking my question. Are you contemplating any impact from lower NAND prices on your ASPs in your fiscal 2024 guidance? And I have a follow up, please.

Charlie Giancarlo: Let me start with that, and then Kevan maybe can provide some additional color. There’s always ASP effect from pricing on flash. As you know, we operate in a market where the price per gigabyte generally declines every year. And that’s good for us because it allows us to penetrate increasingly the disk market. That being said, I would say that currently we expect to take advantage of what has been some lower NAND prices. And as callers who €“ or people who have followed us know, we tend to have an advantage in timing with early reductions in NAND pricing. And then eventually gets follows through to the rest of the market. And then, it comes back into equilibrium. But I think overall, the pricing of NAND is going to operate to our favor as we go through the year.

Kevan Krysler: Ye. And I think that’s without a doubt, Charlie. ASPs continue to be strong. It’s certainly going to give us €“ the NAND pricing will give us a significant advantage as we move out and aggressively market FlashBlade//E as well as FlashArray//C. So when we think about it in terms of product gross margins, we do consider that as an overall favorable factor for us as we navigate through next year. And again, to Charlie’s point, it’s all about us being able to take a full advantage of raw NAND and flash instead of our competitors who are having to still rely on SSD drives. But we do expect some balance with the favorability we’ll get on NAND, again, given the aggressive nature will pursue FlashBlade//E and FlashArray//C.

Paul Ziots: And Krish, request. I would like to ask if you’d please get back in queue, and hopefully we’ll have time to take your second question. Thank you very much. Next question please.

Operator: Thank you. Our next question comes from Eric Martinuzzi of Lake Street. Eric, your line is now open. Please go ahead.

Eric Martinuzzi: Yes, I wanted to get some color just sort of a month-by-month basis. The Q4 linearity and then with February in the book, obviously you had already had November in the books when you talked about the Q4 guide. But when you started to see the slowdown, was that in December? Was that in January? And then if you could characterize the advancement through the pipeline of February versus January?

Charlie Giancarlo: Yes. I would say that it was most noticeable as we turned the year €“ the calendar year that is. As we mentioned, we are able to close the advanced stage deals and as we went into the New Year, and to some extent I feel that it’s probably had to do with the resetting of budgets by our customers as they enter their new €“ most customers obviously are operating on a calendar year basis. That as they entered their New Year, perhaps it’s reconsideration or perhaps they’re going into a planning mode that may be slowing things down or perhaps it may be simply a tighter budget being held to tighter budget restrictions or doing greater analysis little bit we’re still trying to diagnose this. I would say it’s very hard to say in the first few weeks of February in the sense that as I said, we’re having our sales kick-off, all of the new quota and territory assignments are going out.

So it’s a little bit hard for us to get intelligence in the first few weeks of the fiscal year. But by going through the last month of the €“ of last fiscal year, that was when we really started to see this effect.

Kevan Krysler: Yes. And Eric, I’m going to add on to this a little bit. So I think a couple of takeaways when we think about how things develop through Q4 and then obviously up and through to what we’re talking to you today. As Charlie mentioned, our conversion of advanced stage opportunities were actually consistent with what we’ve historically seen. So I view that as a significant positive as we think about navigating through Q4. The other significant positive for us is we saw strong volume of new opportunities through Q4. Really, what the change was is really that to Charlie’s point that the sales progression of those new opportunities and early-stage opportunities that’s what substantially slowed down, and that’s what we saw really in January and February, which is giving rise to the outlook that we’re providing to you today.

Eric Martinuzzi: Got it. Thanks.

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

Operator: Thank you. Our next question comes from David Vogt of UBS. David, your line is now open. Please go ahead.

David Vogt: Great. Thank you, guys. I just want to go back to the guidance and not to belabor the point. But presumably, the $60 million in the first quarter last year that was pulled forward, a large percentage of that would have fallen in the fourth quarter. And so if I make that adjustment, it sounds like your 1Q guide is about 4 to 5 points below seasonal. And if that’s the case, would you need to have mid-teens growth in the second half if you follow sort of normal seasonality in the second quarter off of 1Q?

Kevan Krysler: Yes. I think it’s a great question. And I think you’re thinking about the $60 million, right, although I would clarify that a little bit. I would put that more in the second half category. So Q3, Q4, I wouldn’t put that all into Q4. Seasonality Q1-to-Q1 a little bit of pressure as we think about it. But again, that’s really as a result of the sales progression of these early opportunities in early stage that we’ve highlighted on multiple occasions. I think our assumption is that that will start to moderate somewhat as we progress through the year. In addition to that, we’re layering on some moderate contribution for FlashBlade//E in the second half as well.

Paul Ziots: Thank you David. Next question please.

Operator: Thank you. Our next question comes from Ashley Ellis from Credit Suisse. Ashley, your line is now open. Please go ahead.

Ashley Ellis: Hi. Thank you for taking my question. I was wondering, could you discuss a little bit more of the changes you’re making in go-to-market? Is this just kind of a change in the pitch? Are you making any structural changes? And then is it primarily given the weaker macro customers taking longer to make a decision? Or are you seeing some incremental competitive pressures that are making you change the way you want to approach customers? Thanks.

Charlie Giancarlo: Yes. I’ll start with the second part. We’re not seeing any different behavior by the competitors. So we’re not seeing additional competitive pressures. Win rates are holding basically steady. So no concern there. It’s changing both the pitch, but also we’re not making €“ the second part was we’re not making any major structural changes to the sales force either. So no major changes there. We are introducing a lot more training and enablement, but this has been on the books now for quite some time as well as more detailed information all the way down to the DM level so they can manage their operations better. We are expecting to see improvement in that overall. As you might imagine, during times like this inspection gets tighter.

And so we are planning for some much more detailed inspection of deals, especially as they progress through the different stages of the pipeline as you might imagine given this new environment. But outside of that, I would say it’s just general, improvement in general operational discipline and things, as I mentioned, that have been on the books for a while.

Rob Lee: I’ll add one thing to that, which is, I think we are, as we work with the sales teams coming to our sale kick-off next week. I’m really going to be working with them to highlight the cost savings benefits of our products and services and so whether that’s with FlashArray//C, the new FlashBlade//E and really just the potential that offers customers go and reduce their operating costs, their energy costs, their footprint, highlighting the benefits of the entire Evergreen portfolio, but specifically, as we look at Evergreen//One, Evergreen//Flex to create that optionality and flexibility for customers. That’s an area we’re going to be really focusing on articulating the benefits of the portfolio.

Paul Ziots: Thank you, Ashley. And it looks like we have time for one more question. And I think the last question is from a person who’s rejoined the queue. So the last question, please.

Operator: Thank you. Our final question for today comes from Aaron Rakers of Wells Fargo. Aaron, your line is now open. Please go ahead.

Aaron Rakers: Yes. I’ll just ask a real quick follow-up. On the FlashBlade//E product as you think about the engagement. Somebody asked, I think Simon asked about AI earlier in the call, I’m just curious of how your dialogue has evolved with other potential cloud opportunities, whether or not it’s related to AI or bulk storage now that the E-Series product is out?

Charlie Giancarlo: I’m going to give it a start, and then I’m going to invite Rob who’s very engaged in those conversations. The interest level around energy and space savings is very high. There’s always a question of doing it €“ that is in hyperscalers in particular, doing it internally versus using a vendor and a system level, but the conversations continue, which is very promising. I would say that outside of the three hyperscalers, the conversations in other, what you might call, cloud service providers and SaaS providers are very promising for both FlashArray//E as well as Pure Fusion, which is getting a lot of attention to enable these cloud service providers to operate much more like the hyperscalers in terms of the operations as well as being able to provide storage as a service to their customers.

Rob Lee: Yes. And I’ll just add on to that, Aaron. I think the conversations we are having with the top hyperscalers definitely continue to progress. And certainly, the introduction €“ well, the continued success we’re seeing in FlashArray//C in the last fiscal year. But now certainly with the introduction of FlashBlade//E, just further proof points highlighting our significant leadership position in being able to work directly with NAND flash. I think that really is having a positive effect for us as we go and pursue those early-stage conversations with the hyperscalers. I think another factor potentially is that the ability for some of these firms to potentially go in try to address their needs directly is perhaps reduced. And so a little bit more willingness to kind of engage and see, hey, how can we go and help accelerate their plans to transition to flash. So net-net, all very positive. And certainly, the introduction of E is only going to move that along.

Paul Ziots: Thank you, Aaron. Before we conclude, I think Charlie has a few final comments.

Charlie Giancarlo: I want to thank you all for joining us on today’s call. And I, of course, want to thank our employees for creating and driving our vision and constantly improving our operations and our culture. Thank you to our long-term investors for your support and being part of our mission. And special thanks to our customers and partners for continuing to choose Pure for their business, data storage and management needs. Goodbye all.

Operator: Thank you. That concludes the Pure Storage Fourth Quarter Fiscal Year 2023 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.