Pure Storage - Q2 2024

Transcript

Operator (participant)

Good day, and welcome to the Pure Storage second quarter fiscal year 2024 earnings conference call. Today's conference is being recorded. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would 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 Mr. Paul Ziots, Vice President, Investor Relations. Please go ahead, sir.

Paul Ziots (VP of Investor Relations)

Thank you. Good afternoon, everyone, and welcome to Pure's second quarter fiscal 2024 earnings conference call. On the call, we have Charlie Giancarlo, Chief Executive Officer, 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 the close of market and is posted on our website, where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at investor.purestorage.com. On this call today, we will make forward-looking statements which are subject to various risks and uncertainties. These include statements regarding our financial outlook and operations, our strategy, technology, and its advantages, our current and new product offerings, and competitive industry and economic trends. Any forward-looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them.

Our actual results may differ materially from the results forecasted, and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties related to our business is contained in our filings with the SEC, and we refer you to those public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenue, remaining performance obligations, or RPO, and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Pure Storage.

Our third quarter fiscal 2024 quiet period begins at the close of business Friday, October 20, 2023. With that, I'll turn it over to Charlie.

Charlie Giancarlo (CEO)

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

Uniquely in our industry, all of Pure's products are based on one operating system, Purity, the only storage software that operates natively direct to flash, rather than using less efficient commodity SSDs. All of Pure's products are managed with our Pure1 management system and have consistent APIs. All of our products support non-disruptive upgrades forever through our Evergreen technology and subscription programs, and are all available to consume as a service through Evergreen//One. The data storage industry has, for decades, been plagued with different tailored software and hardware solutions for the wide range of storage protocols, formats, performance levels, and price points needed to cover the market. The storage portfolio of legacy data storage providers was generally assembled by acquisition and are collections of disparate, inconsistent environments.

That approach left customers with a complex infrastructure, with multiple software operating environments, with different management systems, and multiple differing operational processes. As a result, legacy storage environments are complex. They vary for each use case. They require downtime for upgrades and require forklift replacements roughly every five years. Pure is the only company that provides customers a single, consolidated operating environment for all of their data storage needs, including block, file, and object. Q2 was the first full quarter of shipments for FlashBlade//E. Sales and pipeline have exceeded our expectations, and it is experiencing the fastest growth of all prior new product releases. At purchase, FlashBlade//E, with three years of Evergreen subscription, has an acquisition cost competitive with hard disk-based systems and has substantially lower operating costs. It enables our customers to move ever more of their cost-sensitive workloads to all-flash.

The E Family of products allows Pure to now cover the entire spectrum of data storage, inclusive of low-price bulk storage, providing customers with a consistent, modern, and reliable product line for all their storage needs. FlashArray//E will become available later this year, joining FlashBlade//E. FlashArray//E will enable cost-effective storage for bulk data for capacities from 1-4 PB. As part of the E Family, it can also reduce customers' total operational costs by up to 60% and produce 85% less e-waste compared to hard disk-based systems. We are seeing continued momentum and opening new opportunities with our cloud strategy. Last week, we announced an expanded multi-year partnership with Microsoft Azure Services and its Azure VMware Solution, known as AVS, using our Pure Cloud Block Store.

This offers a new age of cloud migration that can drive faster, more cost-effective adoption of cloud services. Combining Pure's industry-leading data reduction with our ability to decouple storage needs from compute, customers can significantly reduce their total cloud costs while increasing hybrid cloud capabilities. In addition to operating in the cloud, our cloud operating model allows our customers to operate their storage environment like the cloud, to offer services like the cloud, to better build for the cloud, and also to consume storage like the cloud. Pure Fusion enables our customers to manage the Pure portfolio as a fleet, as an integrated pool of storage across data centers and across clouds. Pure Fusion allows customers to offer their developers access to bespoke data services through APIs.

Portworx, the most highly rated Kubernetes data platform for deploying cloud-native applications, was chosen for the fourth consecutive year by analyst firm GigaOm as the leader for enterprise Kubernetes data storage and cloud-native Kubernetes data storage. Evergreen//One allows our customers to also consume like the cloud, based entirely on a service level agreement with Pure, to allow them to store their data whenever and wherever they want. Evergreen//One is available for all of Pure's product offerings. The growth of subscription services contributed significantly to our success in Q2. Evergreen//One, the industry's leading storage-as-a-service offering, saw sales double again year-over-year. Our Evergreen technology and programs have revolutionized the industry and provide Pure a sustainable competitive advantage, ending traditional legacy hardware replacement practices for customers and turning every sale into a storage-as-a-service relationship.

With our Evergreen//Forever subscription, companies upgrade both hardware and software to the latest technology without paying additional capital, continually, without downtime, forever. As we discussed last quarter, generative AI and ChatGPT have brought artificial intelligence to the top of mind for all customers, and AI creates two sets of opportunities for Pure. First, we can supply products for AI training environments, such as the creation of large language models, or LLMs for short. And second, we can support enterprises to prepare their data architecture for AI inference, meaning the use of LLMs on their own data. Most customers will leverage third-party LLMs as their base. They will retune and retrain these models on their proprietary data within their own organizational boundaries. By adding guardrails, they will enable AI inference to achieve outcomes specific to their business.

The former requires very high performance, while the latter is enhanced with the replacement of low-performance secondary hard disk systems with E Family of cost-effective flash storage. During the quarter, FlashBlade//S won a generative AI footprint in a production environment in the low eight digits. Portworx also saw multiple wins in early AI development environments. Customers purchased Portworx to ensure reliable data management during the training and inference process. Over the last five years, well over 100 customers have chosen FlashBlade to accelerate their AI and machine learning environments. With the introduction of FlashBlade//E, AI customers are able to take advantage of a single operating and management environment for both their hot and their bulk data, dramatically simplifying their data storage infrastructure and reducing its cost and environmental footprint.

For the last few months, I have visited customers, partners, and retailers across the U.S., Asia-Pacific, and Europe to highlight Pure's new, ever more powerful position. Customers immediately grok the benefits of, and the need for, a unified operating and management environment for all their data storage needs, block, file, and object, from the highest performance to the most cost-effective. They responded enthusiastically to the ability to operate their storage and data environment as consistent storage pools across data centers and clouds, and they welcomed the advantages of our Evergreen technology and subscription available across our entire data storage platform.... Pure's products uniquely stand out in the industry due to our single operating environment and consistent APIs across our products. This is powered by our consistent use of Purity and our Pure1 management system across all our products.

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

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

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

Kevan Krysler (CFO)

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

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

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

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

Cash flow from operations during the quarter was $102 million, and capital expenditures total of $55 million. In Q2, we repurchased nearly 600,000 shares of stock, returning nearly $22 million to our shareholders. This represents a lower level of repurchase activity than recent quarters as a result of the fixed trading parameters that were in place throughout the quarter. We have approximately $190 million remaining on our existing $250 million repurchase authorization. Now, turning to guidance. We expect Q3 revenue to be $760 million, representing double-digit growth of over 12% year-over-year. Our Q3 revenue guidance assumes continued strong subscription revenue growth, fueled by our Evergreen//One subscription services. We continue to execute on aligning our cost structure with expected demand.

The results of our continued operational discipline and the economic benefits we are seeing with our unique architecture of Purity software, working directly with flash, is reflected in our Q3 operating profit guide of $135 million or 17.8% operating margin. Our annual revenue guidance we previously communicated remains unchanged and assumes revenue growth in the mid to high-single digits, as we expect significantly stronger year-over-year revenue growth for the second half of FY 2024. As a reminder, revenue for our Evergreen//One subscription service offering is recurring and is recognized over time. The sales strength of our Evergreen//One offering through the first half of the year has outperformed our expectations, and this momentum is expected to continue throughout the remainder of the year.

The success of our sales of Evergreen//One subscription services has been considered in our annual revenue guidance, as the growth of this offering creates a near-term headwind to the total revenue growth rate as revenue is recognized over time. We also continue to assume no significant improvement or worsening of macroeconomic conditions from what we have seen over the last few quarters. Finally, we are increasing our annual operating margin guidance from 15% to 15.5%, driven by our continued operational discipline, as well as the benefits we are seeing as a result of our unmatched flash management technology, powered by Purity software. In closing, treating data storage and management as high technology, as demonstrated through our continuous innovation across our portfolio and business models, we have established an extraordinary advantage in reducing power consumption, real estate space, labor, and e-waste for our customers.

Our business value and total cost of ownership advantages are unmatched against our competitors. With that, I will turn it back to Paul for Q&A.

Paul Ziots (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. Operator, let's get started.

Operator (participant)

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If for any reason you would like to remove that question, simply press star one again. Again, that is star one to ask a question, and as a reminder, if you are using a speakerphone, please remember to pick up your headset before asking your question. We will pause here briefly as questions are registered. We'll go first this afternoon to Amit Daryanani at Evercore.

Amit Daryanani (Senior Managing Director)

Yep. Good afternoon. Thanks for taking my question. Yeah, I was hoping you folks could talk a bit more about the FlashBlade portfolio. I think in the press, you talked about, you know, record sales over here. So love to understand, you know, where's the strength coming from? What's driving the success here, given the challenged macro? And, you know, really related to this, any sense on how FlashBlade//E adoption is looking, and where you see traction there? I think NetApp recently talked about how their equivalent product, at least, is having a very strong launch. So love to hear, you know, where is FlashBlade broadly resonating with customers? And if there-- anybody quantify what you're seeing would be really helpful. Thank you.

Charlie Giancarlo (CEO)

Absolutely. Thanks, Amit. Well, just as a reminder, to the audience, you know, we launched FlashBlade about five or six years ago now, and then more recently, a little over a year ago, updated it with what we call our FlashBlade//S program, which shares our DirectFlash modules with our FlashArray series, as well as more recently, just last Q1, our FlashBlade//E product. FlashBlade//S addresses the high-performance end of the market, and FlashBlade//E, as I mentioned in my script, actually addresses the high capacity, but bulk data, lower cost market overall. To answer your question directly, I believe the greater focus around AI certainly helped, you know, in FlashBlade sales.

But frankly, you know, FlashBlade has continued to grow, especially since the introduction of FlashBlade//S, which gave it even greater compatibility with our FlashArray series, ever since we introduced that product. And now that we've introduced the E, it really allows customers to look at the full range of price performance for their high capacity workloads, you know, with one consistent platform. And I think, you know, completing, if you will, the family with E has really helped FlashBlade sales overall.

Rob Lee (CTO)

Yeah, absolutely. And Amit, this is Rob, just to jump into the second part of your question. You know, look, I think it's important to realize that E really has no equivalent on the market. You know, E, as Charlie mentioned, is really enabled by our highly differentiated Purity software and DirectFlash technology that's designed for that software, which really sets it far apart, not only from disk, which is largely the displacement market we're going after, but also any of the competitive set that might try to follow us with SSD-based technology.

And as Charlie mentioned, you know, we started using this technology, leveraging it, bringing it, using it to bring QLC into the enterprise over three years ago with FlashArray//C at the time, to displace hybrid disk-based systems. And then now with E, with both FlashBlade//E and FlashArray//E joining later this year, really see a complete portfolio to go after the entirety of a customer's data storage needs. And again, as Charlie said, being able to do that and offer it with a very consistent hardware, software, and management approach.

Paul Ziots (VP of Investor Relations)

Thank you, Amit. Next question, please.

Operator (participant)

We'll go next now to Aaron Rakers at Wells Fargo.

Aaron Rakers (Managing Director and Technology Analyst)

Yeah, thanks, for taking the question. I guess I wanted to ask about the AI opportunity. You know, Charlie, if you can, can you unpack a little bit of, about the eight-figure deal that you won, in AI this quarter? Have you revenue recognized that? Just kinda any context to that. And then also just to clarify, the, the Meta deal, are you continuing to not assume any kind of follow-on, from that footprint deployment, next generation data center opportunity at Meta in your guidance for fiscal 2024? Thank you.

Charlie Giancarlo (CEO)

You bet. So, the eight-figure deal was a, you know, nice, as I said, low, eight-figure deal, but in a production environment that has opportunity for expansion. So, very exciting. And it was the, you know, the, the largest GenAI deal of its, of its type, which is why we wanted to highlight it. Not the, not the only AI deal that we did in the quarter, but just because of its scale, something we wanted to highlight. I would also say that, you know, it's an area that where we are seeing, additional, interest overall in the market.

That being said, as I said last quarter, I'm just as excited by the opportunity to upgrade customers' existing data environment, their lower performance environment, because of the needs of wanting to use that data for AI inference in the future. So I'm seeing both of those opportunities in front of us. You know, separately, with respect to the Meta RSC, which we've commented on in the past, because, you know, when new shipments happen into that, tends to have an effect on our overall P&L. You know, until, as I've stated in the past, we have, there's really no change from prior quarters. It continues to be an environment that Meta is happy with. Our relationship with them is very good.

You know, there's no change as far as we know, of their plans to expand it in the future. In other words, that's still our expectation, but we don't know the exact timing.

Paul Ziots (VP of Investor Relations)

Kevan, did you want to make a comment about revenue recognition for that eight-figure deal that was?

Kevan Krysler (CFO)

Yeah, it's included in our revenue. Yes, thank you, Paul.

Paul Ziots (VP of Investor Relations)

Okay. Thank you, Aaron. Next question, please.

Operator (participant)

Go next now to Meta Marshall at Morgan Stanley.

Meta Marshall (Managing Director)

Great, thanks. A couple of questions for me. Just coming out of Accelerate, you know, you guys had made some very bold statements just about kind of customers not needing this anymore, and I just wanted to get a sense of, you know, how you found that message resounding with customers. And, you know, what pieces of the portfolio do you feel like or pieces of the roadmap that you need to demonstrate over the next kind of coming years to demonstrate to customers that they can have more comfort in that transition? And then this may be a clarification. On FlashBlade//E, just kind of typical order-to-ship time. Thanks.

Charlie Giancarlo (CEO)

So, you know, I can answer the first part of that question, you know, in a number of different ways. First of all, I believe that customers have already experienced the disk-to-flash benefits when they went with their primary storage from disk to flash. And what they found was, you know, smaller footprints, higher reliability, less maintenance, less effort overall, especially when they moved to Pure flash. And so they already recognize that as a positive effect. And so when we now can go in at these lower price points, lower price performance levels, they get very excited about it. But as I had mentioned in my prepared remarks...

What gets them even more excited is consolidating their overall environment to a more consistent, hardware, software, environment, because it reduces the complexity in their overall, IT, you know, data center, reduces their complexity when they want to move to the cloud. Just reduces complexity generally. So it's not, E is interesting, not just in the disk-to-flash transition, but in the ability of customers to move to a more consistent portfolio overall.

Rob Lee (CTO)

And Meta, just to jump in here, you know, I think, part of your question had to do with building comfort with customers around the transition. Look, I think it's important to realize that, the transition from hard disk to the flash we're offering with E is completely seamless, right? Another way to look at it is there are basically no reasons that a customer says, "Hey, you know, I would like to get disk. I would like to keep disk." There are really no puts and takes. The only reason that customers have held on to disk in a lot of these environments historically has been price. And then now, with our technology, with what we've been able to do with E, you know, we have effectively neutralized that.

And so, you know, I think you know, I think that's something that you know, perhaps goes less appreciated. And you know, I think we'll ease that transition because it's not a rearchitecture, it's not a redesign. It really is just a seamless and really instantaneous improvement on all dimensions.

Kevan Krysler (CFO)

Let me just touch on that last question on order-to-ship time for FlashBlade//E, consistent with what we see across our portfolio, so no significant difference there.

Paul Ziots (VP of Investor Relations)

Thank you, Meta. Next question, please.

Operator (participant)

The next now to Pinjalim Bora at JPMorgan.

Pinjalim Bora (Executive Director of Equity Research)

So good day, guys. Congrats on the quarter. Staying on the AI team, I want to ask you about Portworx. Seems that was a little bit surprising. I don't think people are thinking about Portworx and AI together. Maybe talk about that AI opportunity with respect to Portworx. What are you seeing? What kind of workloads are these? Are these on-premises or, or cloud attaches? Are these more of a training or inference time of AI? That would be helpful. Thank you.

Charlie Giancarlo (CEO)

Yeah, thanks, Pinjalim. Well, first of all, it's both inference and training. And as you might imagine, you know, a lot of these new developments are being made in container-based and Kubernetes-based environments. And Portworx is without, you know, without equal in terms of its ability to manage storage of all types, you know, for Kubernetes and containers, and to do it both on... It can do it on bare metal, it can do it in the cloud, it can do it on top of our infrastructure. And so, you know, as these are very large environments. Portworx has always been really superior when it gets to large-scale production.

Before going into a development where the developers know it's going to go large-scale when they scale out, they're starting off with Portworx for their stateful data management.

Kevan Krysler (CFO)

And Pinjalim, just to add on to that, you know, I look at the Portworx and cloud native piece of this puzzle as really a part of the overall set of environments that we see as being impacted by the uptake of AI technology and positively impacted. And so certainly number one, you know, AI training, infrastructure, and environments, we've talked to you all a lot about that. Number two is really the demand to store more and more data in the enterprise, remove the silos, and really move more of that cold data into the warm. And then, as Charlie says, number three, looking at the application environments that the trained AI models are connected to.

If you look at, you know, where a lot of that data is coming into enterprises, it's coming from multiple sources. It's coming from business data, databases, IoT sensors, machine data, all over the place. A lot of these application sets, environments, are very highly dynamic, very aligned to open-source, cloud native technologies. You know, it's also important to realize that, you know, getting these trained AI models deployed and connected to real-time systems is ultimately the goal for a lot of these enterprises. And so when you look at the application environments driving these real-time systems that folks want to plug chatbots or what have you into, again, all very heavily based on and built on cloud native architectures, open-source software.

And they have the needs for agility, scalability, elasticity that those architectures afford while at the same time having the enterprise capabilities that technologies like Portworx can offer. And really, that's what we're seeing out there today.

Paul Ziots (VP of Investor Relations)

Thank you, Pinjalim. Next question, please.

Operator (participant)

The next now to Wamsi Mohan at Bank of America.

Wamsi Mohan (Senior Equity Research Analyst)

Hi, yes. Thank you so much. Charlie, we've not really seen a large uptick on on-premise AI-driven workloads, but you mentioned sort of this large inference opportunity at enterprises. Any thoughts on when that can happen? Do you see that in calendar 2024 or 2025 from a materiality perspective? And if I could, like, subscription ARR has been decelerating over the last four quarters. How should we think about the growth trajectory here? Thank you.

Charlie Giancarlo (CEO)

You know, it's an interesting question. I would say that we do see opportunities on-prem for AI in, you know, I would say, highly specialized environments. And so I think that is a real thing. Of course, many of them are waiting for delivery of GPU and AI-based processing systems and environments. And I would say that a lot of focus has been on the- currently on the compute side of it, a little bit less focused by the customers. Because they've been so focused on the compute side, a little less focus on the storage infrastructure. I believe that's just starting to become a, you know, a better-known and understood requirement for these AI systems. But I'd say that I just would disagree, Wamsi.

I'd say that we are starting to see interest, if not yet deployments, on, on-prem.

Kevan Krysler (CFO)

Wamsi, let me touch on the subscription ARR growth. Definitely pleased with what we saw in terms of subscription ARR growth, especially Evergreen//One, which is outperforming our already strong expectations that we had at the beginning of the year. As a reminder, in my prepared remarks, closed Evergreen//One contracts where the effective service date has not yet started, are excluded from the ARR calculation. Our subscription ARR growth would have been 28% had we included those contracts where the service date had not begun. Look, you know, as a result of product revenue being lower for our CapEx sales, we do have less attach of our Evergreen subscription, which is also reflected in our subscription ARR growth rate.

Paul Ziots (VP of Investor Relations)

Thank you, Wamsi. Just a kind reminder to everyone to please ask one question consisting of one part, and we'd be happy if you'd like to ask another question later on in the queue. Next question, please.

Operator (participant)

The next now to Krish Sankar at TD Cowen.

Krish Sankar (Managing Director and Senior Research Analyst)

Yeah, hi. Thanks for taking my question. Charlie, I had a question on AI, too. From a storage standpoint, where do you think benefits the most for AI workloads between block storage and object? Where do you think benefits the most? And also, can you help us clarify what products in your portfolio today support InfiniBand, and how to think about it in the future?

Charlie Giancarlo (CEO)

Absolutely. I would say that a lot of the AI environments use block 'cause it's very straightforward, especially with programmers, and block can be utilized for any structure that you want underneath. But increasingly, it's moving to an object-based environment because over time, block is easier, it's more efficient, and it requires less state than what's generally necessary in a block environment. So I think we're starting to see that shift, but it's been taking a lot of time to get to a very high-performance object. Rob, do you want to add?

Rob Lee (CTO)

Yeah. No, Wamsi, I think, sorry, Krish, a couple things. You know, look, I think if we step back from, you know, the application sets we're seeing AI technology being applied to today, and we look at the long-term drivers, I think it's going to have a positive effect on all forms of storage. And what makes me believe that is, look, the source data that enterprises are looking to feed into AI technology and get benefits from are coming from all over the place. They're coming from business systems, they're coming from traditional databases, they're coming from, you know, more modern databases. They're coming from unstructured data, log files, images, and that really spans the gamut of block, file, and object.

I also think that, you know, the enterprise's kind of source data that, you know, they're collecting, you know, through those means today and is going to increase in the future. I think that's the larger opportunity set. AI is clearly a fast-moving technology space that every enterprise is looking to adopt and looking to take advantage of. And that's just going to drive a greater demand to collect and store data across, you know, across the enterprise. You know, I think just to address the second part of your question, you know, on InfiniBand, look, we've really focused on addressing, you know, the AI space as one of several very important segments, you know, in the portfolio.

One of the things that really sets us apart in the market and really with our customers is the benefits we can deliver by having a consistent hardware, software, and management experience across all of their workload sets. And this is where, you know, we see the benefits of, you know, Ethernet-based technologies. We see the benefit of more ubiquitous technologies that again, as the, you know, current application sets that you see perhaps in AI training environments broaden, and those environments need to connect to other parts of a customer's data center, special purpose technologies, if you will, such as InfiniBand, really hinder that, really get in the way. And so, you know, InfiniBand is nothing new.

We've been around for quite some time, but mostly found in more specialized environments. We see the bigger demand and a value to the enterprise, in being able to give them a complete solution set, not just for the AI training environments, but for all of the data environments that are going to be impacted by the uptake of AI technology.

Paul Ziots (VP of Investor Relations)

Thank you, Krish.

Krish Sankar (Managing Director and Senior Research Analyst)

Thank you.

Paul Ziots (VP of Investor Relations)

Next question, please.

Operator (participant)

The next now to Sidney Ho at Deutsche Bank.

Sidney Ho (Equity Research Analyst)

Great. Thanks for taking the question. My question is on the remaining purchase obligation that is still showing really good growth and 26% growth year-over-year, but the unbilled portion really has accelerated in the past few quarters. Can you talk about what's driving that acceleration? Does it have anything to do with the new products or maybe Evergreen just growing rapidly? Thanks.

Charlie Giancarlo (CEO)

Oh, appreciate the question, and it's a real simple answer. You're exactly right. It's due to the Evergreen//One acceleration and just timing of billings is really what it comes down to.

Paul Ziots (VP of Investor Relations)

Great. Thank you, Sidney. Next question, please.

Operator (participant)

We go next now to Shannon Cross at Credit Suisse.

Shannon Cross (Managing Director)

Thank you very much. You, you mentioned that E is exceeding your expectations. I'm wondering if you can talk a bit more about how the customer conversations are going, how much you're seeing this, you know, being sold into existing customers versus some of the new customers. Is this opening up, you know, a new opportunity for RFP to bid on new RFPs? Just any more color you can give there. Thank you.

Charlie Giancarlo (CEO)

Yeah, let me start. First of all, it is exceeding our expectations, both in terms of the revenue that we saw in our first full quarter of shipments, as well as in the pipeline growth, which continues at unprecedented rates, very, very fast. The conversations are. First of all, you know, they're happening all around the world. They're happening across a very broad set of use cases, and, you know, in some cases, at prices higher than what the customer would be paying for new disk environments because of the lower total operating cost that they're able to get and the better performance that they're able to get out of the all-flash E environment.

So, I would say that it's really. I have yet to hear of a use case for an existing disk-based system that FlashBlade//E was not able to address.

Paul Ziots (VP of Investor Relations)

Great. Thank you, Shannon. Next question, please.

Operator (participant)

We'll go next now to Jason Ader at William Blair.

Jason Ader (Co-Group Head–Technology, Media, and Communications)

Yeah, thank you. Hey, guys. Can you quantify the revenue growth headwind over the last 12 months from Evergreen//One? And also just any color on materiality to the total services revenue. I mean, can you give us a ballpark of how big it's becoming?

Charlie Giancarlo (CEO)

Yeah, no, it's a great question, and Evergreen//One performance has simply been terrific in the first half, and we're expecting that momentum to continue. And you're right, you know, there is a short-term headwind on revenue as a result of revenue being recognized over time. And when we think about it from an annual lens, it's probably about one to two points, is how we're thinking about it currently. And then, we're not quantifying Evergreen//One specifically at this point in time, Jason.

Jason Ader (Co-Group Head–Technology, Media, and Communications)

Okay, thanks.

Paul Ziots (VP of Investor Relations)

Thank you, Jason. Next question, please.

Operator (participant)

We'll go next now to Mehdi Hosseini at Susquehanna.

Mehdi Hosseini (Senior Equity Research Analyst)

Yes, thanks for taking my question. I want to better understand the dynamics of the folks that you're talking to, decision-makers at the customer side, and how is that changing? I'm asking you because I'm looking at your OpEx that is on track to grow in the low teens versus a revenue growth target of mid- to high-single-digit.

Charlie Giancarlo (CEO)

Yeah, regarding the type of customer environment, the new positioning, the new messaging we're talking about is definitely getting us into the C-suite, increasingly, and it's both. You know, that message is made up of several parts. One is, you know, an extremely consistent environment that, first of all, can take care of all of their storage needs with the same environment, therefore lowering their total operating costs. The dramatically lower power, space, and cooling that both lowers cost but improves their own ESG ratings, you know, which is extremely important.

And then also, as I'd mentioned in my prepared remarks, the ability now to be able to rise above just individual arrays attached to individual use cases and enable customers to create an environment where they can have consistent storage pools across their entire enterprise, multiple data centers, multiple clouds. You know, this is really a new message. It's one that addresses the concerns of CIOs, of CTOs, even of business units and developers. So this is getting us, you know, certainly a higher level attention in major accounts.

Paul Ziots (VP of Investor Relations)

Thank you, Mehdi. Next question, please.

Operator (participant)

We'll go next now to David Vogt at UBS.

David Vogt (Managing Director and Senior Equity Analyst)

Great. Thanks, guys. So, Kevan and Giancarlo, I just want to go back to the current demand environment and the macro. You touched on the challenging macro backdrop and, you know, FlashBlade//E was a really strong launch during the quarter. Just curious about, you know, what did you see from customers? Was there any sort of potential spin down where it did make sense to maybe use a more lower-cost all-flash solution in the quarter at the expense of maybe a little bit more performant solutions, in addition to maybe disk replacement? And then, how do you think about that sort of dynamic as we move through the balance of the year, where it doesn't sound like the macro is getting dramatically better?

So should we expect to see, you know, obviously on the FlashBlade//E side, and then ultimately the FlashArray//E side, sort of, be a key growth driver in the second half of the year? Thanks.

Charlie Giancarlo (CEO)

Yeah, we haven't really seen that type of, you know, whether you call it a spin down or cannibalization. We track this very, very closely, as you might imagine, when we bring in a lower price performance product to see, you know, if customers are trading down. We really don't see that. It really did open up net new opportunity for us to go into new areas. I think if we were in a better economic environment, all of these numbers would be, would be enhanced. But no, I think it's just, you know, we'd all love to see even stronger growth than what we're seeing now. And of course, we're peddling very hard to drive more performance out of the team overall.

But, you know, but the economic effect has been broad-based. And I would say, if anything, you know, when you have an economy that started off the year the way it did, customers, you know, reduced their intentions to spend, and they have their high-priority projects. And, because we announced the disk-to-flash transition, you know, after the beginning of the year, I think if anything, it's muted, and will be increased next year as customers start to plan for it, you know, in their budgets. So no, I think it's more economy than anything else.

David Vogt (Managing Director and Senior Equity Analyst)

Great. Thanks, John David.

Paul Ziots (VP of Investor Relations)

Next question, please.

Operator (participant)

We'll go next now to Thomas Blakey at KeyBanc.

Thomas Blakey (Senior Research Analyst)

Hey, guys. Thank you for taking my question. I just wanted to circle back to the subscription service line, and, you know, from a puts and takes perspective, Evergreen//One, doing great, off to a great start. Just maybe focus on the other areas that maybe are experiencing some pressure, and I specifically want to know if, like, maybe there's just understanding how you relatively, you know, start smaller and grow with your customers. If there's any pent-up demand that you could see there heading into next year from that, from any pressures in the other areas of the Evergreen products. Thank you.

Kevan Krysler (CFO)

Yeah, no, this is Kevan, and I'll start off and have Charlie add on any more commentary. But it's a good question, and again, we commented on the strength of our subscription ARR, which really has been driven and fueled by our Evergreen//One subscription offering. Now, obviously, with demand being a bit lower on the CapEx side, the attach of Evergreen subscriptions, whether that's Forever or Foundation, is impacting somewhat our subscription ARR growth rate, which I've talked about a little bit earlier. Now, if we look at... And really, that's the only thing going on that I would highlight in particular.

If you're looking specifically at our subscription revenue growth rate, I do want to let you know we've got professional services in that line item as well, and obviously, that's not growing at the same pace as our subscription offerings, and so that would be driving your difference that you might be noting.

Paul Ziots (VP of Investor Relations)

Thank you, Tom. Next question, please.

Operator (participant)

We'll go next now to Simon Leopold at Raymond James.

Simon Leopold (Managing Director)

Great. Thanks for taking the question. I want to see if we could maybe step back and help us size the AI opportunity as to sort of where it is now and where it's going. I think in the past, you've talked about sort of where FlashBlade is, and that maybe AI use cases, not just generative, were probably more than half of those use cases. You've given us some customer metrics. Wondering if we could get some revenue metrics as well, even a ballpark. Thank you.

Charlie Giancarlo (CEO)

Yeah, we, as you know, Simon, we don't generally like to break these things out. I would say, though, that, you know, AI is a significant contributor to our revenue. It's not a dominant one, nor frankly, do I expect it to be. You know, it's a very exciting new area without a doubt, and we expect to see growth in that. But, you know, plain old data storage, both for high-performance databases, as well as for lower performance bulk data, will continue to dominate our market. What is exciting about the AI environment is, you know, high-performance systems generally are high-profit system environments, which is good.

We do hopefully anticipate, you know, like the Meta RSC, that we might see environments where the scale of it really starts to grow. But I would say still, you know, and I think this is true for everyone except for the GPU builders. You know, while it's an exciting new area, you know, it's probably going to be a small, let's say, you know, low double-digit portion of their overall revenues in general.

Simon Leopold (Managing Director)

Thank you.

Paul Ziots (VP of Investor Relations)

Thank you, Simon. Next question, please.

Operator (participant)

We'll go next now to Nehal Chokshi at Northland Capital Markets. Nehal, your line is open if you do have a question.

Nehal Chokshi (Senior Research Analyst)

Yeah. Thank you. Hey, thank you for the question, and I really like the new presentation content format. It's really great. Thank you for that. So, FlashBlade//E sounds like you've had better expected revenue and pipeline. With respect to pipeline, are you assuming a lower conversion rate of that pipeline for the remainder of this fiscal year, that's more or less driving the, you know, no, no change in forward guidance here?

Charlie Giancarlo (CEO)

Yeah, Nehal, it's a great question, and the answer would be no. Our conversion rate, especially for FlashBlade//E, is quite healthy. And we've considered that in our overall annual revenue guide that we've provided. The other thing to highlight as well is, and we've highlighted that in my prepared remarks, is the strength of Evergreen//One, which needs to be considered as well, 'cause obviously that takes more time to make its way to revenue, and that's been considered as well as we've looked at our overall annual guide for this year. So hopefully that's helpful for you.

Paul Ziots (VP of Investor Relations)

Thank you, Nehal. Next question, please.

Operator (participant)

We go next now to Matt Sheerin at Citi.

Matt Sheerin (Analyst)

Yes, thanks. My question is on the recent Azure VMware announcement. Could you help us understand the significance of that in terms of your position with Microsoft within the, you know, the Azure ecosystem, how that positions you, you know, versus competitors in the cloud, and how we should think about the product roadmap going forward?

Charlie Giancarlo (CEO)

Yeah, we consider it to be a, you know, very significant announcement. It is a combination of, you know, the VMware in the cloud, Azure VMware services, as well as our Cloud Block Store, providing a simpler methodology for customers to move their existing workloads into the cloud, and also dramatically reducing their overall cloud costs. So it's really a one-two punch that's hard to beat. You know, we consider the relationship with Microsoft very strong and continuing. You know, we're looking forward to doing more things with them as we go forward, and I think this is going to be a very competitive offering in the market. Rob?

Rob Lee (CTO)

Yeah, no, I mean, just to add on to that, you know, what Charlie said, I think one of the things that really makes us unique is the, you know, the integration that we've undertaken with, in partnership with the Azure team, really over the last year plus, to bring this service to market. You know, we have had a number of Cloud Block Store customers that have really been pushing both of us in this direction and have been a part of early previews and beta activities, and they're very excited now to be able to move into production.

And look, overall, you know, we just see this as a continued validation of the benefit that customers are seeing from the Cloud Block Store technology in reducing their cloud costs, and really giving them a much better environment on the cloud infrastructure to run their production workloads. You know, as we mentioned last quarter, we had our largest individual sale in the quarter of Cloud Block Store to a large healthcare organization. That organization is now moving into production, and frankly, is seeing even better than expected cost reductions and savings as a result of that.

Overall, we see this as just continued validation of, you know, the great technology, the ability to go drive meaningful savings for customers, and then now in partnership with Azure, tightly integrated to a very, very important use case for our customers.

Paul Ziots (VP of Investor Relations)

Thank you, Matt. It looks like we have time for one more question, and I'm happy to say we have a person who's rejoined the queue, so this will be second at bat. So our last question.

Operator (participant)

We'll take that now from Mehdi Hosseini.

Mehdi Hosseini (Senior Equity Research Analyst)

Yes, thanks for opportunity. I want to go back to my original question. As you engage more of a C-level executive, obviously, opportunities are reflected in your subscription. Is there any other metric that we could track and to better understand your longer-term revenue growth? Because you're spending, your OpEx growth is much higher than this year's fiscal year revenue growth, but obviously, it helps the sustainability of revenue growth, and I'm just wondering if there's any other metric that we could look at to better measure your longer-term revenue growth.

Kevan Krysler (CFO)

Nothing specific, Mehdi, that I'd point you to other than the, you know, rich amount of in our portfolio and the opportunity associated with that portfolio across our entire data storage platform. So obviously navigating through this year provided a guide for this year, and as we navigate through the second half, we'll be looking at next year as well.

Mehdi Hosseini (Senior Equity Research Analyst)

Thank you.

Paul Ziots (VP of Investor Relations)

Thank you, Mehdi. Before we conclude, I think Charlie has some final comments.

Charlie Giancarlo (CEO)

Thank you. Customers appreciate our new capabilities and the positioning. As, as I'd mentioned, the only consistent consolidated data storage and management platform for all of their data storage needs. I want to thank our customers and partners, suppliers, employees, and investors. Your collaboration, your innovation, your hard work, and your trust propel us forward. So we look forward to meeting you around the world. We have a number of Accelerate roadshows set up in various major cities around the world. We look forward to seeing you all there. Thank you.

Operator (participant)

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