Everpure - Q1 2024

Transcript

Operator (participant)

Good day, and welcome to the Pure Storage First 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. If you'd like to ask a question, please press star one on your telephone keypad. At this time, I'd like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead.

Paul Ziots (VP of Investor Relations)

Thank you. Good afternoon, everyone, welcome to Pure's First Quarter Fiscal 2024 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 Kevan'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 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 second quarter fiscal 2024 quiet period begins at the close of business Friday, July 21st, 2023. With that, I'll turn it over to Charlie.

Charlie Giancarlo (Chairman and CEO)

Good afternoon, everyone, welcome to our Q1 FY 2024 earnings call. Thank you for joining us today. We were pleased with our Q1 performance in what continues overall to be a challenging IT environment. Highlights for the quarter include the highest all-time sales for Evergreen//One, our first sales of FlashBlade//E, which is experiencing the fastest first quarter pipeline growth for any new Pure product, our largest single order since inception of almost eight digits for our Cloud Block Store product, and the release of a major upgrade to our FlashArray unified block and file software. We are especially pleased with the customer response to our E product line.

The E line is the first and only all-flash storage system that can address the secondary storage market at competitive prices to 7,200 RPM hard disk systems, but with only 1/10 the power, space, cooling, and labor requirements. As I've stated in the past, the days of hard disks are coming to an end. We predict that there will be no new hard disks sold in 5 years. Beyond the benefits of the E product line itself, it enables Pure to now compete for our customers' entire storage environment. It enables Pure, for the first time, to be our customers' complete storage partner, something that our customers have been asking for for years. The operational and economic benefits of Pure's comprehensive storage portfolio are clear and overwhelming and are based on sustainable technology and business model advantages.

In March, we gathered our sales team for our annual sales kickoff, an event we had not held in person since 2020. Everyone was energized by both the event and the training we conducted there. This ongoing training focuses on honing sales skills with our expansion into the secondary storage market, advancing our as-a-service offerings, and selling in today's environment of constrained IT spending. This valuable training is already bearing fruit and enabling us to reach new customers, better support the needs of current customers, and reduce sales cycles, which have lengthened in this economic environment.

It's clear that our continued innovation strongly resonates with our customers, whether it is for AI machine learning, rapid recovery from ransomware, high-performance databases, electronic design automation and video editing, traditional or cloud-native applications, and now also for secondary storage environments such as content and media stores, enterprise imaging, and even traditional backup and archive. We deliver unique outcomes that are highly valuable to our customers in every environment. Compared to our all-flash competitors, we are 10 times more reliable, we are 2 to 5 times more power and space efficient, and we require 5 to 10 times less manual labor to operate, resulting overall in at least 50% lower total cost of ownership. Our products never become obsolete and never require forklift upgrades because our Evergreen program provides continual hardware and software upgrades non-disruptively to the customer's application environment forever.

Products we sold 10 years ago are not only still in service, but have been continually modernized to our latest models without disruption or additional customer expense with our Evergreen subscription. These capabilities are based upon 4 unique and sustainable competitive advantages. 1, our Purity software uniquely works directly with raw flash, while other competitors use more expensive, less efficient, and shorter-lived SSDs. 2, Pure's highly consolidated product line, consisting of our common operating system, Purity, and one management system, Pure1, operating on both a scale-up and a scale-out platform, utilizing common DirectFlash Modules, while competitors require many disparate software and hardware platforms to cover the same breadth of use cases. 3, Pure's unique Evergreen technology and services, which guarantee that deployed products never become obsolete, never need to be replaced, and enable non-disruptive upgrades.

Four, Pure's cloud operating model, which enables customers to operate their storage the way that cloud customers operate theirs: highly automated, orchestrated, and available as a service. As we expected, Evergreen//One is thriving in this economic environment. Sales of Evergreen//One more than doubled year-over-year. As a reminder, Evergreen//One is Pure's storage-as-a-service offering that enables customers to access storage entirely through service-level agreements with no capital expenditure, only paying for capacity as they use it. Customers can place their data on-premise, on Pure-owned infrastructure, or on AWS or Azure with Pure's Cloud Block Store. The customer only pays for what they use under a single contract for enterprise-class capabilities for less than what they pay for raw cloud storage. This past quarter, we saw the largest individual sale of Pure Cloud Block Store at almost 8 figures.

A Fortune 500 healthcare organization purchased Cloud Block Store because of its ability to securely store data in the cloud with enterprise features, reduce management overhead, and lower TCO. By using Cloud Block Store, the organization is able to significantly reduce their cloud storage spent while getting the most out of their data. Our extraordinary lead in driving power, space, labor, and e-waste reduction, both on-prem and in the cloud, has also garnered attention amid increased customer focus on these selection criteria. The continued strength of FlashArray//C and interest in FlashBlade//E speaks to our customers' demand for the TCO benefits of Pure all-flash products over competitive offerings, now including both their flash and hard disk systems. In particular, FlashBlade//E consumes approximately one-tenth as much power and space as similar capacity hard disk systems that it replaces, requiring up to one-tenth the labor and generates less than one-tenth the e-waste.

Only Pure's direct flash management and operational simplicity is able to deliver this operational performance. As I mentioned, early interest in FlashBlade//E is off the charts for a new product. FlashBlade//E is the second in a series of products that can compete for the secondary tier and soon lower tiers of the storage market entirely dominated today by hard disks. Prior to FlashArray//C and FlashBlade//E, all flash products were only price competitive for high-performance systems, and therefore, Pure could only provide products for our customers' Tier 1 storage needs. With the introduction of our E product line, Pure can now compete for customers' entire storage estate, enabling Pure to become their complete storage partner for the first time. For years, customers have asked us for products that could address the remainder of their storage estate.

I have now had many customer visits since our introduction of FlashBlade//E with senior IT executives, describing our key advantages and our ability to provide flash solutions for their entire storage environment. A common question from these senior executives is: Why aren't we doing this already? In April, we announced a major update to our FlashArray unified block and file software, representing a significant expansion of our broader file strategy and portfolio. I'm proud to share that we're now able to address customers' file needs across high performance, general-purpose NAS, VMware over NFS, and dozens of other use cases, allowing us to compete for all of a customer's file storage estate. Best of all, FlashArray customers can simply upgrade to the latest software to get these capabilities without any additional expense. This unified offering was a key component in the largest individual international market win in Pure history last quarter.

Touching upon the most recent trends, generative AI and ChatGPT has brought artificial intelligence to the top of mind in all of our major customers and has become a focal part of literally every earnings script this quarter. Pure saw the AI opportunity years ago and started innovating in this area with our introduction of FlashBlade in 2017, and then with our AI-ready infrastructure, AIRI product, co-developed with NVIDIA. We've continued to advance FlashBlade's high-performance parallel architecture, and Pure continues to be the go-to partner for storage on AI projects. For instance, we support more than 10 leading autonomous vehicle development companies in managing and processing the massive amounts of data required for their machine learning activity.

In addition to our very successful position with Meta in their AI Research SuperCluster, or RSC, the largest AI supercomputer in the world, Pure is the chosen vendor for AI environments across a broad range of industries, including media and entertainment, pharma, healthcare, aerospace, transportation, and financial services. We expect our leading role in AI to continue to expand, but we are equally excited that the requirements for big data will drive even more use of high-performance Flash for traditional bulk data. As we mentioned last quarter, we expect the current macro environment to continue through this fiscal year, and we continue to operate the company with our usual diligence, improving productivity and focusing investment on meaningful innovation and growth. Our as-a-service offerings, including Evergreen//One and Evergreen//Flex, and our Pure Financing vehicles provide customers with a wide range of economic alternatives to address their business needs.

Pure's superior TCO and flexible Evergreen offerings are making a difference in this challenging IT economy. While we saw continuing caution by enterprise and cloud customers in Q1, similar to what we saw in Q4, we also experienced enhanced demand for our most cost-effective solutions, especially Evergreen//One. Given all of our advantages, we remain confident that we will continue to increase our market share, outgrow our competitors, and pick up even greater momentum, especially as our new products and services gain mind share. I am confident that we are gaining recognition with both customers and prospects that Pure is the company to trust for their future data storage architectures. We are years ahead of the competition in our ability to provide all storage needs with the most consistent, modern, and efficient storage solutions.

We enjoy a highly sustainable competitive advantage based on the only direct-to-flash operating system in Purity, a simple, consistent product line with common management, our Evergreen technology to continually upgrade our products non-disruptively to the current state-of-the-art, and our ability to provide our customers with a cloud operating model. Our new capability to compete for the full range of enterprise storage needs gives us even greater relevance to our enterprise accounts and enables us to deliver a full and far more integrated storage solution to our customers. In closing, I am excited to share that in just a couple of weeks, we'll be hosting our annual Pure//Accelerate user conference in Las Vegas. We're looking forward to seeing customers, partners, and analysts from around the world to discuss the future of data storage and management. I'll now turn the call over to Kevan.

Kevan Krysler (CFO)

Thank you, Charlie. Good afternoon, everyone. In Q1, we achieved revenue of $589 million and operating profit of nearly $20 million, exceeding our expectations. We also set an all-time record of Evergreen//One subscription sales this quarter, as demand was exceptional. We were pleased that our U.S. enterprise business exceeded our expectations this quarter. Macro conditions continued to be challenging, consistent with what we saw in Q4. Against this macro backdrop, our sales force and leadership are actively monitoring deals to get ahead of challenges, as well as continuing to focus conversations both on our business value and total cost of ownership advantages, which are unmatched against our competitors. Our subscription services annual recurring revenue grew 29% year-over-year to $1.2 billion, and subscription services revenue of $280 million represented 48% of total revenue.

Remaining performance obligations, or RPO, grew 26% year-over-year to $1.8 billion. Similar to the remarks we've made in previous quarters, our RPO included an outstanding commitment with one of our global system integrators. During Q1, this remaining outstanding commitment was fully satisfied with Evergreen//One sales. When excluding the impact of the past outstanding commitment from our global system integrator, RPO grew 31%. Our headcount increased slightly to approximately 5,270 employees in Q1. We remain disciplined in managing our costs, including hiring. Incremental investments in headcount remains focused on quota-carrying sales capacity and critical business hires. As I previously mentioned, total revenue in Q1 was $589 million, and product revenue was $309 million.

As we noted in previous earnings calls, Q1 revenue last year included $60 million of product revenue that was contemplated in the second half of last year. Excluding this impact, Q1 total revenue grew approximately 5%. U.S. revenue for Q1 was $427 million, and international revenue was $162 million. We also acquired 276 new customers during the quarter. We were pleased with our continued strong gross margin performance in Q1 of 72.2%, with product gross margins of 70.8% and subscription services gross margin of 73.7%. Q1 operating profit of nearly $20 million exceeded expectations and included higher year-over-year costs for salaries and our first sales kickoff event since 2020. Pure's balance sheet and liquidity remained very strong, including $1.2 billion in cash and investments.

In April, we reduced our overall debt, paying off $575 million in convertible notes, using $475 million in cash and $100 million from our revolving line of credit. Cash flow from operations during the quarter was $173 million, and capital expenditures totaled $51 million. In Q1, we repurchased 2.9 million shares of stock, returning nearly $70 million to our shareholders, and have approximately $211 million remaining on our existing $250 million repurchase authorization. Turning to guidance. We are reiterating our annual guidance for FY24, with revenue growth in the mid to high single digits and expect an operating margin of 15%.

Our annual revenue guidance assumes that macro conditions will continue to be challenging and will be consistent with what we have seen over the last couple of quarters. We expect continued momentum of our Evergreen subscription services, in particular, Evergreen//One. The strength of our Evergreen//One offering has been contemplated in our annual revenue guide as the recurring revenue for these services is recognized over time. Also, as Charlie mentioned, early customer response to FlashBlade//E, which became generally available in late April, has exceeded our expectations. Our FY 2024 annual revenue guidance that we provided last quarter assumed a modest revenue ramp during the second half of the year from sales of FlashBlade//E. While we are very pleased with the early response to FlashBlade//E, our FY 2024 revenue guidance continues to assume a modest revenue ramp during the second half of the year.

Moving to Q2 guidance. We expect Q2 revenue of $680 million, representing an increase of approximately 5% year-over-year. Our Q2 revenue guidance implies continued strong subscription revenue growth and a slight year-over-year decline in product revenue. We also expect Q2 operating profit of $90 million as we remain focused on profitable growth and ensuring we are appropriately aligning our cost structure with demand. In closing, through our innovation, our competitive advantages are clear and aligned to our customer's focus on both performance and cost. We are uniquely positioned to deliver significant business value while reducing our customers' total cost of ownership, including labor, energy, and real estate.

It's a pleasure to also invite you to join us for our product and technology-focused financial analyst meeting at Pure//Accelerate on June 15th, either in person at Las Vegas or virtually through our investor relations website. With that, I will turn it back to Paul for Q&A.

Paul Ziots (VP of Investor Relations)

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. Alex, let's get started.

Operator (participant)

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered.

Amit Daryanani (Senior Managing Director of Equity Research)

Hello?

Operator (participant)

Our first question for today comes from Amit Daryanani of Evercore ISI. Amit, your line is now open. Please go ahead.

Amit Daryanani (Senior Managing Director of Equity Research)

Yep, thanks a lot, congrats on a really strong print here, despite the tough macro environment. Charlie, I was hoping to talk a little bit more about, you know, what are you seeing from an AI infrastructure investment perspective from your customers? You folks obviously have a good engagement with Meta, that's been doing well, I think. I would love to hear, you know, how are your customers really thinking about their storage needs broadly, and very specifically around Pure's product portfolio, around the AI ramps. It'd be really helpful to put any dimensions around it, and how do you distinguish yourself from the broader storage requirements? Thank you.

Charlie Giancarlo (Chairman and CEO)

Yes. Thank you, Amit. Good to hear from you. Well, you know, we've been viewing AI as a great opportunity for us and representing, you know, a reasonable portion of our sales now for multiple years, especially with the introduction of our FlashBlade product five years ago. We've continued to expand that area. We do believe that we are the go-to partner, as I mentioned.... for AI projects, and we literally support, you know, well over a half dozen to a dozen different industries in their AI activities. The majority of AI now continues to be part of what we as a industry and what everyone on the call had known of AI for many years.

You know, whether that's genomic research or, you know, advanced analysis, financial analysis or self-driving cars, and so forth. What's happening, of course, is every company is looking at large language models, ChatGPT, et cetera, trying to determine exactly what it means for them. We've seen some interest in that area, but it still remains a, you know, a minority, the majority being traditional, much more, if I can use that word, with AI traditional AI projects. What we're most excited by is both the opportunity for a high performance of FlashBlade systems, but frankly, we are at least as excited that customers now more and more are going to want to put what their data that is in cold, hard to reach, you know, hard disk systems.

Make that available for analysis by putting it in much more higher performance flash-based systems. Both our FlashArray//C and FlashBlade//E are perfect repositories for that, so we think it's coming out at a perfect time. Let me just, you know, let me go back to Meta. You know, we continue to have an excellent relationship around AI with Meta. They recently, you know, fully turned on the first two phases of their research supercluster, which they announced just a few weeks back, and we look forward to continuing to work with them on that project as they continue to build it out, but also on other projects that they are contemplating in the other parts of the company. Rob, anything to add?

Rob Lee (CTO)

I mean, I think, a couple things. You know, number one, Amit, as Charlie mentioned, you know, we're very excited about really what we see as two sets of opportunities that AI creates for us and I think are very constructive for Pure, supporting the AI training environments themselves, as well, supporting our enterprise customers as they look to connect their data sets to AI-powered applications. You know, one set of demands, which Charlie discussed, is, hey, this need to go and store larger and larger amounts of data. It can't be cold data, and so, it's a perfect fit for C and our E products.

Equally so, you know, enterprises are going to need to connect data from all across their organizations and all across different silos of infrastructure into these applications. They can no longer be, you know, islands of their own, relegated to silos that the infrastructure had held them to. If you step back from it, those are the hallmarks of a private cloud experience for storage, and is exactly what we're delivering with a cloud operating model. Net-net, we think this is very constructive for us, both in supporting the high performance and large-scale training environments, certainly, with our secondary tier disk takeout product lines, but also in what we're delivering with the cloud operating model.

Paul Ziots (VP of Investor Relations)

Thank you, Amit. Next question, please.

Operator (participant)

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

Meta Marshall (Equity Research Analyst)

Great, thanks. maybe first question, you know, you noted that you had had some FlashBlade//E sales had begun. Just wondering if there was any kind of surprise and where that uptake had been. you know, maybe as a follow-up question, you had noted kind of the 8-figure Cloud Block Store deal. Just wondering kind of how long that deal had been in the works, and kind of what were the ultimate decision-making factors for that? Appreciate it. Thanks.

Charlie Giancarlo (Chairman and CEO)

You bet. Thanks, Meta. you know, in terms of the. Let me start with the Cloud Block Store. as you know, we introduced that product about 2.5 years ago, approximately, and continued to work with major customers in terms of their efforts to so-called lift and shift their traditional apps into the cloud. That progress of lift and shifting traditional apps to the cloud has probably taken longer than any of our customers expected, perhaps a bit longer than we expected as well.

That being said, now that that has started, and they're seeing some of the bills coming back from the cloud vendors for the storage of those large amounts of data for traditional apps, they now really start to become even more curious about Cloud Block Store. You know, this particular deal, we had talked to them about 1.5 years ago before they moved into the cloud. They, at that time, they were so busy moving into the cloud, and they didn't really. I don't think they really appreciated what it would cost them as they started to deploy a production environment.

As they deployed that production environment and started to see the costs, they came back to us and said, "We really would like to understand better the Cloud Block Store." I would say from that point, when they came back to us to the sale, was probably only about 3 months, so a relatively short period of time.

Paul Ziots (VP of Investor Relations)

Thank you, Meta. Next question, please.

Operator (participant)

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

Tim Long (Equity Research Analyst)

Thank you. Charlie, I was hoping you could talk a little bit about visibility. A lot of talk of macro, and obviously, last quarter, there was, you know, a little bit more challenging environment, but, you know, pretty positive that you guys are keeping the full year here. Could you just touch on, you know, kind of how your visibility compares to a few months ago?

What are the kind of, you know, factors that, you know, can kind of swing the numbers into the second half or, and into next fiscal year, maybe from a product standpoint or, you know, where there could be upsides? Thank you.

Charlie Giancarlo (Chairman and CEO)

You bet. You know, what we saw, if I go back to Q4, we saw a fairly sharp degradation, you know, midway through Q4. What we saw in Q1 was, if you will, a stabilization to what we saw at the end of Q4. It didn't get any better, but it didn't get any worse, either. The visibility is basically just the way we're handicapping, if you will, how, you know, what we see, you know, in terms of, you know, from our sales team and the length of time that we believe accounts will close.

I think our sales teams have become much better at really understanding what the full gamut, if you will, of signatures and approvals that they're going to need to get in each account, and therefore have also become better at handicapping and staging, if you will, the deals. I would say that, you know, in general, the current environment we see as stable. We would hope for improvement towards the year, but we're not counting on it at the moment. I think that, you know, generally, we feel that this will be a somewhat, and I'm going to exclude, let's say, surprises in the, you know, federal issues. If we see...

We're expecting stabilization through the end of the year, and hopefully an improvement towards the end of the year, beginning of next.

Kevan Krysler (CFO)

Tim, I probably would add a couple things. This is Kevan as well. You know, we did indicate the fact that our enterprise business performed better than expectations. Again, I think that's a testament to our field really adjusting to our customers' buying behavior. That's a plus for us. I think, you know, the other two key highlights for us that came across as incremental strengths, if you will, would be Evergreen//One performance, which we alluded to. Again, that strength was much stronger than we were even anticipating, and we were already anticipating in this environment our Evergreen//One storage-as-a-service sales would be strong coming into this type of environment.

FlashBlade//E, again, is a highlight for us. Early, but customer response has been fantastic. Charlie, I don't know if you want to say a few words on FlashBlade//E, too, in terms of what we're seeing there.

Charlie Giancarlo (Chairman and CEO)

Yeah. As we mentioned, it's a very fast pipeline build. I've been, you know, in front of dozens of customers now, the excitement with customers around this product line and with the prospect of replacing their disks, which are troublesome, you know, with all flash products, has been very high. As I mentioned, I think what's most exciting is that we're seeing customers appreciate the fact that we can address the majority of their storage needs, you know, and to be able to do that with the simplicity, the power, the ease, and the reliability of Pure products.

That's I have to say it's the enthusiasm, that when any one of us go in with the new pitch, if you will, to our customers, that we feel coming out of it is really palpable.

Paul Ziots (VP of Investor Relations)

Thank you, Tim. Next question, please.

Operator (participant)

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

Pinjalim Bora (Equity Research Analyst)

Great. Hey, thanks for taking the question, and congrats on the strong quarter. One question for Kevan. Subscription obviously is very strong, and you kind of highlighted the potential headwind to revenue because of that. Is it possible to quantify that? You've kind of beaten the guidance by $29 million. You're kind of keeping the full year, which I appreciate, but I'm sure there is a little bit of conservatism there too. I'm trying to understand what for the year, what would you kind of circle as a potential year-over-year growth headwind from that Evergreen//One strength?

Kevan Krysler (CFO)

Yeah, look, we won't get into specifics there, Pinjalim. You know, consistent with our practice of really talking about the subscription portfolio in total, as well as from a performance standpoint, we do the same from a product standpoint. You are thinking about it right, in terms of the fact that the Evergreen//One strengths, we'll see it come through on top line over time, which is a positive. In terms of quantifying that, we won't. We'll let you do the math specifically on that. But again, you know, from a scale perspective as well, you know, we've already have, you know, over a third of our revenues are subscriptions.

You know, the headwind isn't as, you know, intense as one would expect, though it does have a consideration for us, and it has been contemplated in our annual guide, which we reiterated.

Paul Ziots (VP of Investor Relations)

Thank you, Pinjalim. Next question, please.

Operator (participant)

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

Wamsi Mohan (Senior Equity Research Analyst and Director)

Hi, yes, thank you so much. I was wondering, just to clarify, are you embedding anything from Meta in your guide? As my main question, I want to ask you. We're hearing a lot of strategic buys that are happening in, now for some areas within memory, particularly NAND, and wondering how you're thinking about it and potential impact to product margins for the rest of fiscal 2024. Or maybe a different way to think about the same thing is, you know, you are going to see competitors, particularly, be able to take advantage of this low-cost NAND environment for, maybe a prolonged period of time. Do you think that closes any of the competitive gap at all or pressure to margins on the second half? Thank you so much.

Kevan Krysler (CFO)

Yeah, maybe we can talk about the competitive advantages first, Charlie.

Charlie Giancarlo (Chairman and CEO)

Sure.

Kevan Krysler (CFO)

If you want to take that around, our direct to flash management, advantages-

Charlie Giancarlo (Chairman and CEO)

Yeah

Kevan Krysler (CFO)

which really I think are sustaining, and we'll hit that first, then we'll hit Meta.

Charlie Giancarlo (Chairman and CEO)

Absolutely. Well, you know, the interesting thing here, Pinjalim, I'm sorry, Wamsi, is that we believe that our advantage based on the Purity operating system and our continuing advancement of our, what we call our DirectFlash Modules, is going to allow us to accelerate our advantage over SSDs. I'm gonna ask Rob to jump in and give you some detail there.

Rob Lee (CTO)

Yeah, absolutely. You know, Wamsi, I think we've been pretty clear with our view that disk is, well, a dead technology spinning, so to speak. But our view on SSDs, frankly, isn't that much rosier. We think it's, you know, SSDs are gonna fall further and further behind, and that's really driven by our ability to outdistance SSDs with our direct flash technology. You know, if I step back, certainly SSDs have played an important role in making flash more broadly available. But they're inherently, you know, less efficient, more complex, less performant, less reliable, and just have overall shorter lifetimes than the systems we can deliver based on our direct flash software technology.

While we get a lot of benefits today, the issue for SSDs and frankly, our competitive set that are reliant on SSDs, is that SSDs are gonna find it harder and harder to keep up with the rate of improvement that we're forging down. You know, if you think about it, NAND flash, it's getting harder and harder to work with. That's creating pressure for what the SSD has to do from a technology perspective. Trying to build larger capacity SSDs only exacerbates that.

Then, you know, I think you have an economic barrier around, hey, is there consumer demand that that's going to drive, you know, the same and follow the same type of roadmap that we're gonna drive with our DirectFlash technology? So you net it out, I think, you know, we're very bullish here that we've got a three to five-year structural and sustained competitive advantage over, frankly, the rest of the field that I think is trapped on SSD technology. We're gonna be pretty aggressive about going after that. Then bringing this back to Meta, right?

I think that, you know, our engagement in Meta is a great example and proof point of the value that we're able to deliver based on this technology. you know, as we've discussed in prior calls, Well, really the key reason that we won that engagement was our ability, our sole ability to deliver the balance of performance, cost efficiency, as well as power, space, and cooling savings. That traces its roots directly back to the direct flash technology.

Kevan Krysler (CFO)

Wamsi, I do think, you know, just to answer your question specifically, around our product gross margins. Look, I think the pricing environment, clearly we're seeing heightened competitiveness around the pricing environment. Probably not a lot different than what we've seen historically. That's always been an area where our competitors compete with us. Even despite that, you saw the favorability in product gross margins, which again, is the testament to what Rob and Charlie were talking about, specific to our direct to flash management advantages, which again, I think are sustaining despite what the competition will do from a pricing competitiveness perspective.

Paul Ziots (VP of Investor Relations)

Thank you, Wamsi. Next question, please.

Operator (participant)

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

Speaker 18

Hey, guys. This is Eddie for Krish on Cowen. Thanks for taking my question, and congrats on strong results. Going back to the AI question, of course, just at a high level, what is the predominant storage solution for AI today? Is it hybrid storage or flash storage? Like, when you go to a customer already working on AI applications, what kind of systems do you usually replace, a competing all-flash solution or a hybrid storage system?

Charlie Giancarlo (Chairman and CEO)

Yeah, I'll take that. You know, AI systems are typically new, so they're greenfields, so we're not generally replacing. What we're competing with are solely all-flash systems. You know, hard disk systems just can't provide the kind of performance necessary for a sophisticated AI environment. Of course, you still have hard disk systems in there for some analytics environments, where the performance is not generally as required. For anything that's machine learning or real-time AI-oriented, it's only all-flash systems, and we compete on the basis largely of our FlashBlade product, which has been in place for five years now, and now augmented by the latest generation, FlashBlade//S.

Rob Lee (CTO)

Yeah, Krish, you know, just this is Rob, just to add on to that. As Charlie said, AI, earlier in cycle, generally, in the training environments, you know, are net new and all flash. I think the broader brownfield opportunity we see is, hey, so what are the large corpuses of data that enterprises have been collecting for sometimes decades? They've been, you know, throwing in the corner on hard disk-based systems that, you know, have generally been very, very cold, and haven't had a need to access that data. Now with AI technology, there's now a demand to apply AI or AI applications to those large data sets.

Well, now all of a sudden, those large pools of data need to be accessible, they need to be to a degree, performant. I think that's where you know, we see a tremendous opportunity for us with especially E in our FlashArray//C line.

Paul Ziots (VP of Investor Relations)

Thank you, Eddie. Next question, please.

Operator (participant)

Thank you. Our next question comes from Shannon Cross of Credit Suisse. Your line is now open. Please go ahead.

Shannon Cross (Analyst)

Thank you very much. I wanted to ask about operating income and margins. Given the outperformance this quarter, I know you didn't really change your guidance for the full year, I'm wondering, assuming there may be some upside, are there areas that you would look to invest further? Is this something where, you know, if revenue upside grew, we should expect perhaps greater than 15% operating margins through the year, given the opportunity for leverage? Thank you.

Kevan Krysler (CFO)

Yeah, Shannon, I'll take this and let Charlie comment as well. Yeah, pleased with obviously our Q1 results, including, you know, better than expectations, both on top line as well as operating profits. You know, we are continuing to be disciplined in terms of spending, really focusing on key hires and expanding sales capacity, and that focus remains. It's not changed from how we're thinking about Q1. When we look at Q2, we're pleased with our guide. You see the expansion sequentially from Q1 to Q2 in terms of our operating profit and again reiterating the 15% operating margin for the year, which we feel comfortable with. Charlie, any other commentary you'd have?

Charlie Giancarlo (Chairman and CEO)

Yeah, it's a bit early in the year to be speculating, I think on, you know, on this topic. What I would say is we think 15% really represents the best compromise, if you will, between continued growth, and profitability. You know, we continue to invest in growth overall as a company. If we, you know, I would say that's where our mindset is at the moment, but it's another long three quarters ahead of us. We may, you know, we'll look downstream before we update you on that.

Paul Ziots (VP of Investor Relations)

Thank you, Shannon. Next question, please.

Operator (participant)

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

Sidney Ho (Analyst)

Great. Thank you. I have a question on subscription revenue. Your subscription ARR and revenue has grown pretty consistently, 30% a year. Are there any risks that growth will start to slow down over the next few quarters when product sales are actually going through a correction in the last quarter and maybe next couple of quarters? Thanks.

Kevan Krysler (CFO)

Yeah, it's a great question, and look, we don't specifically guide to subscription ARR, but we really do view this metric as important in measuring the overall health of our subscription businesses. Look, we've stated back in fiscal 2022 that our three-year CAGR expectations for subscription ARR would be around 30%, and we're tracking nicely to that expectation. Like we've noted in Q1, we saw just outstanding strength of our Evergreen//One offering. Obviously, that's really offset any reductions you might have on other Evergreen offerings that might be attached to CapEx sales. Look, I think we're continuing to see strength in terms of our subscription ARR growth.

The value of Evergreen is really resonating with our customers due to flexibility that these offerings provide. Of course, there's incredible value for customers in being able to use critical data storage infrastructure that frankly stays modernized, and you don't have to pull out and refresh. Therefore, yeah, I think we're continuing to see strong subscription growth and ARR growth.

Charlie Giancarlo (Chairman and CEO)

Yeah, I tend to think of this number as a, you know, a, a stabilizing element in our, in our overall performance as a company, in that, you know, when the economy slows down, customers are much more oriented towards these as-a-service offerings, you know, to be able to save on cash outlays and CapEx. When the economy is strong and they move to CapEx, you know, we get it, with the Evergreen attached subscription. You know, I think there's some balance there, and it'll vary a little bit, but I think it's a fairly stable number.

Paul Ziots (VP of Investor Relations)

Thank you, Sidney. Next question, please.

Operator (participant)

Thank you. Our next question comes from Jason Ader from William Blair. Your line is now open. Please go ahead.

Jason Ader (Analyst)

Yeah, thank you. My question is on Portworx. I haven't talked about that one in a bit, so I'd love to hear thoughts on, I guess, two years in, something like that, you know, how that product is doing. Just, you know, what are some of the dynamics out there, you know, some of the puts and takes relative to the point in time when you acquired the asset?

Charlie Giancarlo (Chairman and CEO)

Portworx, you know, had a good quarter. We're very pleased with the progress overall of Portworx. I would say that the enterprise market for cloud native applications, for stateful cloud native applications, has probably progressed a bit slower in the last year than we had expected early on. Our expectation is that 5 to 10 years from now, all applications will be designed in a cloud native environment, you know, with containers and Kubernetes. We're very confident about the future. We remain, you know, the best-in-class product in that area, you know, according to, you know, numerous analyst reports, as well as we track sales of competitive products. We're number 1 in that space, and we expect that to continue.

Overall, pleased, maybe the market a little bit slower this past year than we might have expected, but overall, very bullish on the segment.

Rob Lee (CTO)

Yeah, Jason, this is Rob. Let me just add a few thoughts to that. You know, as Charlie mentioned, you know, we saw, you know, a strong quarter from Portworx, and I would call it in particular, you know, strength in seeing customers expand with us. You know, I think that, to a degree, this is natural, as we see this idea of platform engineering, the evolution of DevOps, really starting to take hold. You know, we believe this is driving more customers to look for, look to Portworx for really the complete enterprise and scale-ready solutions for their cloud-native applications.

I'll also point out that, you know, I think we're starting to hear stories back from customers that, hey, you know, Portworx is saving them, you know, a lot of money in terms of whether that's optimizing, helping them optimize their virtualization strategy, optimize their cloud storage, and compute costs and spend, or just speeding up their overall time to market. You know, as we've discussed with other elements of the portfolio, you know, I think there's definitely a focus across the board on value that customers are essentially the solutions are solutions that are able to save customers money in this environment.

Paul Ziots (VP of Investor Relations)

Thank you, Jason. Next question, please.

Operator (participant)

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

Nehal Chokshi (Senior Research Analyst)

Yeah, thank you, and congrats on a strong quarter. I wanted to ask about the MediaZen win that you guys cited last week in a press release. Specifically, you guys cited a shortening of the voice recognition modeling cycle from 6 months to 2 weeks, which is definitely an order of magnitude improvement. A few questions on this press metric. First, is this applicable generative or recommendation AI case study? Is the voice recognition modeling another way of saying basically the training period? Finally, is this a typical level of benefit to customers they're seeing, i.e., an order of magnitude of performance improvement? It sounds like the typical structure that's being competed with is indeed all flash arrays with the AI case pieces. If you can address all 3 of those-

Paul Ziots (VP of Investor Relations)

Thanks for the multi-part question, Nehal. We're going to try to consider it a one question and condense the answer. Please go ahead, Charlie.

Charlie Giancarlo (Chairman and CEO)

As Nehal mentioned, we actually had two press releases last quarter associated with, or recently, I should say, recently with 1st quarter wins in the AI space, MediaZen and Cradle Labs. You know, these were releases that these organizations themselves put out, so we're very pleased to see it. In each case, you know, dramatic improvements in the overall speed of training of their various environments. I'm going to have Rob speak in more detail on MediaZen, which was the focus of your question.

Rob Lee (CTO)

Nehal, you know, I think, you know, what MediaZen saw is not atypical from customers that are scaling their AI training environments, which is, you know, as they started down the AI path, they're doing a lot of training on smaller data sets. Those data sets might be sitting directly on the GPU servers, you know, at small scale, that works really well. The issue, of course, is, as you know, to produce very good results with AI, you need to apply it to very large sets of data.

Immediately, what customers run into is this challenge of, "Hey, how do I get a subset of my large pool of data, which might be sitting on cold tier systems, over to my GPU server so I can go and crunch on them and feed them to GPUs?" I think what they saw was, again, not atypical. They were spending a ton of time waiting for data to move back and forth between these disparate systems. What Pure FlashBlade was able to do for them is essentially collapse those systems, right? Allow them to train directly off of other shared storage, thus removing a not just, you know, long manual steps, but just reducing the overall time to training.

To your first part, or I guess maybe it was the third part of your multipart question, you know, these types of results are, I would say, not atypical as, you know, as AI projects start to scale beyond what they're able to achieve with a small-scale infrastructure.

Paul Ziots (VP of Investor Relations)

Thank you, Nehal. Next question, please.

Operator (participant)

Thank you. Our next question comes from Thomas Blakey of KeyBanc Capital Markets. Your line is now open. Please go ahead.

Thomas Blakey (Senior Equity Research Analyst)

Hey, everyone. Thanks for taking my question here. I think I'm going to go back to Portworx as well, actually, just the MongoDB announcement that you had in the press release today. Just wondering what the driving force there, just in terms of market demand, was there? What does this incrementally bring to Pure, and the Portworx, the data services platform? Any kind of updates on details you can leave into the partnership? You know, is Mongo serving as a channel, you know, just consumption-based, et cetera. If I could squeeze one more in, Paul, don't get mad at me, but I don't know if I heard the answer to Wamsi's question about Meta and hyperscale in the fiscal 2024 guide from Kevan, if that'd be helpful. Thanks, guys. Appreciate it.

Paul Ziots (VP of Investor Relations)

Tom, I think we're going to need to take the Meta question. We're running out of time, and we have quite a few people left in the queue, so I'm sorry, everybody, but we do need to stick to our policy.

Thomas Blakey (Senior Equity Research Analyst)

Great.

Charlie Giancarlo (Chairman and CEO)

Tom, on Meta, our annual guide continues to exclude new Meta orders and in particular future phases, i.e., phases three and four, of the RC environment. No changes from our annual guide, which again, we have reiterated this quarter.

Paul Ziots (VP of Investor Relations)

Thank you, Tom. Next question, please.

Operator (participant)

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

Simon Leopold (Senior Equity Research)

Thanks for taking the question. I was interested in Charlie's comment about the demise of HDDs several years out, and just wanted to see what your thinking is or your take on the hard disk technology known as heat-assisted magnetic recording or HAMR, whether that's a competitive threat or how you think about that in the landscape. Thank you.

Charlie Giancarlo (Chairman and CEO)

Yes, absolutely, Simon. Well, look, the density of hard drives will continue to increase. You know, that's a logarithmic curve that hasn't failed for over 40 years. Unfortunately, what's not going to increase is the IO speed on and off of these disks, which is now becoming more important. What's also not going to change, you know, is the overall weight and failure ratios of these devices. As systems become larger and more dense, flash is just accelerating its performance curve beyond hard disk at an amazing rate. You know, when we say that we're able to replace hard disk systems that exist today at 1/10 the space, power, and cooling, even with these new hard disk technology, we're still five times better, and we'll accelerate beyond that.

I think it's going to be very hard for the hard disks to keep up. One last thing to remember is, you know, the last refuge for hard disks now, is in the secondary and tertiary tier. Now we're able to reach price parity with them at a procurement cost, and yet, have much lower total cost of ownership and be smaller and be more reliable. That's there's no other markets that are going to hold revenue for hard disks that flash won't penetrate. What that means is just lesser revenue and therefore lesser investment in ongoing development of hard disks. That's also going to be a problem for the vendors. You know what? It's unfortunate.

I don't hold any malice, but, you know, similar to markets in the past, you know, When these transitions take place, you know, CDs over vinyl or DVDs over VHS, there's just no stopping progress.

Paul Ziots (VP of Investor Relations)

Thank you, Simon. We're going to actually run over by a couple of minutes. We're going to try to get in, at least three more questions if we could. Next question, please.

Operator (participant)

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

Speaker 19

Hi, this is Jake on for Aaron. Thanks for taking the question. I was just hoping you could talk a little bit about your views on component pricing for the rest of the year and maybe its effect on FlashBlade's ramp.

Charlie Giancarlo (Chairman and CEO)

Yeah, I would say that, you know, we're seeing. Obviously, we've seen a significant drop in flash pricing over the last several quarters. We're expecting the same that, you know, the same that you're reading in analyst reports. We're expecting that to stabilize through the remainder of the year. You know, our economics on FlashBlade E are really strong and compelling, and we believe that's gonna. As we said, we're offering it now at the same price as hard disk systems for nearline. We expect our improvements in density, regardless of flash pricing, to allow us to accelerate as we go into next year.

Meaning that we can penetrate ever deeper into lower and lower cost tiers of disk while maintaining the kind of margins that we expect as a company. I hope that answers your question.

Paul Ziots (VP of Investor Relations)

Thank you. Next question, please.

Operator (participant)

Thank you. Our next question comes from David Vogt of UBS. Your line is now open. Please go ahead.

David Vogt (Managing Director and Senior Equity Analyst)

Great. Thanks, guys, for squeezing me in. Charlie, I just wanted to go back to your product roadmap and how you're seeing it developed going forward. You know, I know you're shipping, you know, DFM solutions up to 40 terabytes today, but, you know, given the exponential, well, the likely exponential growth in data going forward, can you kind of talk through how you're thinking about scaling your business going forward? As you know, some of the HDD guys are talking about, you know, 50 terabytes and up to 100 terabyte drives getting deployed over the next couple of years. Just would love to get your thoughts on how you're thinking about your product roadmap. Thanks.

Charlie Giancarlo (Chairman and CEO)

You bet. You bet. Thank you for the question. Well, we're expecting to deliver a 75 terabyte SSD DFM, right? We provide direct flash modules. We'll provide 75 this year. We expect that to double next year and to double again by the year after that. You know, it's an incredibly, it's not. Yeah, we believe that that's not an ambitious roadmap. We believe that's eminently doable. There's, if you, if you look at the roadmaps for hard disk vendors, they can't get close to that, and certainly not at the same power, weight, you know, power, size, space, cooling envelope that we'll be fitting in.

Rob Lee (CTO)

Yeah, this is Rob, just to add on to that. You know, to Charlie's point, you know, that roadmap is, you know, we have very high confidence in it. It's based on, effectively, existing technology. We don't. You know, no new physics needs to be invented to make that happen. I think that's a roadmap that, again, to my earlier discussion, I think vastly distances us from the hard disk roadmaps, but as well, the SSD manufacturers, right? We just do not believe that the SSDs are going to be able to keep pace with where we're headed. That's one of the reasons why we're so bullish about our advantage here.

Paul Ziots (VP of Investor Relations)

Thank you, David. Let's take one more question, please. This will be the last question.

Charlie Giancarlo (Chairman and CEO)

Thank you. Our final question for today comes from Eric Martinuzzi of Lake Street. Your line is now open. Please go ahead.

Eric Martinuzzi (Senior Research Analyst)

Yeah, curious on the CapEx. I'm looking at it year-over-year there for Q1 versus Q1 a year ago. looks like we're up about $18 million or so. I understand you called out the capitalized software investments up a couple million. What else is driving that increased CapEx spend here, Q1 versus a year ago? What are you expecting for Q2?

Kevan Krysler (CFO)

Great question, and really, there's two drivers for that. It's really around our test equipment for new product releases. Obviously, we've come out with FlashBlade//E, and we've got a lot of stuff in the works. We've got some test equipment investments associated with that. Then, we're moving into our new headquarters, we've got some additional CapEx associated with that as well. But again, when we look at it in terms of our CapEx rate, we'll see a little bump this year against as a percentage of revenue, but around 6%-7% is what we're thinking.

Paul Ziots (VP of Investor Relations)

Thank you, Eric. Before we conclude, Charlie has a few comments to make.

Charlie Giancarlo (Chairman and CEO)

Thank you, Paul, and thank you all for joining us on today's call. We continue to outpace the industry. I think as you can see from our commentary in innovation, and the advantages now in total cost of ownership, energy efficiency, price performance, are really setting the pace in the data center and really make us the preferred choice now for global organizations. I do thank our employees for their dedication to our partners and suppliers, to their ongoing partnership, and to our customers for entrusting Pure Storage with their data storage and management needs. As a reminder, we all look forward to seeing you at Accelerate, whether that is physical or virtual, so you can hear more about our continued momentum and the future of data storage and the data center. Thank you. Thank you.

Paul Ziots (VP of Investor Relations)

That concludes the Pure Storage first quarter fiscal year 2024 earnings conference call. Thank you for your participation. You may now disconnect your line