Pure Storage Q1 2024 Earnings Call Transcript

There are 16 speakers on the call.

Operator

Day, and welcome to the Pure Storage First Quarter Fiscal Year 20 24 Earnings Conference Call. Today's conference is being recorded. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. At this time, I'd like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good afternoon, everyone, and welcome to Pure's Q1 fiscal 2024 earnings conference call. On the call, we have Charlie Giancarlo, Chief Executive Officer Kevin Kreisler, Chief Financial Officer and Rob Lee, Chief Technology Officer. Following Charlie's and Kevin's prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously The slides that accompany this webcast can be downloaded at investor.

Speaker 1

Peurstorage.com. On this call today, 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 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, we refer you to these public filings.

Speaker 1

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 This call is being broadcast live on the Pure Storage Investor Relations website 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 Q2 fiscal 'twenty four quiet period begins at the close of business Friday, July 21, 2023. With that, I'll turn it

Speaker 2

over to Charlie. Good afternoon, everyone, and welcome to our Q1 FY 'twenty four 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 EvergreenOne, our first sales of FlashBlade E, which is experiencing The fastest first quarter pipeline growth for any new Pure product.

Speaker 2

Our largest single order since inception Of almost 8 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 1st 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 tenth 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.

Speaker 2

But 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.

Speaker 2

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 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.

Speaker 2

Also, 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 1 management system, Pure1, operating on both a scale up and a scale out platform, Utilizing common direct flash modules, while competitors require many disparate software and hardware platforms to cover the same breadth of use cases.

Speaker 2

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. And 4, Pure's cloud operating model, which enables customers to operate their storage the way that cloud customers operate theirs, Sales of EvergreenOne more than doubled year over year. As a reminder, EvergreenOne is Pure's Storage as a service offering that enables customers to access storage entirely through service level agreements with no capital expenditure, 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 This past quarter, we saw the largest individual sale A 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, reduced management overhead And lower TCO.

Speaker 2

By using Cloud Block Store, the organization is able to significantly reduce their cloud storage spend 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 onetenth as much power in space As similar capacity hard disk systems that it replaces, requiring up to 1 tenth the labor and generates less than 1 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.

Speaker 2

FlashBlade E is the 2nd in a series of products Prior to FlashArrayC and FlashBladeE, 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 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.

Speaker 2

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 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 chat GPT 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, Aerie 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.

Speaker 2

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 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 EvergreenOne and Evergreen Flex And our Pure Financing Vehicles provide customers with a wide range of economic alternatives to address their business needs.

Speaker 2

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 EvergreenOne. 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 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.

Speaker 2

In closing, I am excited to share that in just a couple of weeks, we will be hosting our annual from around the world to discuss the future of data storage and management. I'll now turn the call over to Kevin.

Speaker 3

Thank you, Charlie, and good afternoon, everyone. In Q1, we achieved revenue of $589,000,000 and operating profit of nearly 20,000,000 Exceeding our expectations, we also set an all time record of EvergreenOne subscription sales this quarter as demand was exceptional. We were pleased that our U. S. Enterprise business exceeded our expectations this quarter.

Speaker 3

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 $1,200,000,000 and subscription services revenue of $280,000,000 Represented 48 percent of total revenue. Remaining performance obligations or RPO grew 26 percent year over year to $1,800,000,000 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 EvergreenOne sales.

Speaker 3

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, and 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 $589,000,000 And product revenue was $309,000,000 As we noted in previous earnings calls, Q1 revenue last year included $60,000,000 of product revenue that was contemplated in the second half of last year. Excluding this impact, Q1 total revenue grew approximately 5%.

Speaker 3

U. S. Revenue for Q1 was $427,000,000 and international revenue was $162,000,000 We also acquired 276 new customers during the quarter. We were pleased with our continued Strong gross margin performance in Q1 of 72.2 percent with product gross margins of 70.8% And subscription services gross margin of 73.7 percent. Q1 operating profit of nearly $20,000,000 exceeded expectations And included higher year over year costs for salaries and our first sales kickoff event since 2020.

Speaker 3

Pure's balance sheet and liquidity remained very strong, including $1,200,000,000 in cash and investments. In April, we reduced our overall debt, paying off $575,000,000 in convertible notes Using $475,000,000 in cash and $100,000,000 from our revolving line of credit. Cash flow from operations during the quarter was $173,000,000 and capital expenditures totaled $51,000,000 In Q1, we repurchased 2,900,000 shares of stock, returning nearly $70,000,000 to our shareholders and have approximately $211,000,000 remaining on our existing $250,000,000 repurchase authorization. Now turning to guidance. We are reiterating our annual guidance for FY 2024 with revenue growth in the mid to high single digits and expect an operating margin of 15%.

Speaker 3

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, EvergreenOne. The strength of our EvergreenOne 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 'twenty four 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.

Speaker 3

While we are very pleased with the early response of FlashBlade E, our FY 'twenty four 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 $680,000,000 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 $90,000,000 as we remain focused on profitable growth And ensuring we are appropriately aligning our cost structure with demand.

Speaker 3

In closing, through our innovation, Our competitive advantages are clear and aligned to our customers' 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 With that, I will turn

Speaker 1

it back to Paul for Q and A. Thanks, Kevin. Before we begin the Q and A session, I'll ask you to limit yourselves to one question consisting of 1 part, so we can get to as many people as possible. If you have additional questions, Alex, let's get started.

Operator

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

Speaker 4

Thanks a lot and congrats on a really strong print here despite the tough macro environment. Charlie, I was hoping to talk a little bit more about 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 how your customers are thinking about their storage needs broadly And very specifically around PURA's product portfolio around the IRRANs, will you be able to put any dimensions around it and how do you distinguish yourself from the broader storage requirements? Thank you.

Speaker 2

Yes. Thank you, Amit. Good to hear from you. Well, we view AI well, we've been doing AI as a great opportunity for us Representing a reasonable portion of our sales now for multiple years, especially with the introduction of our FlashBlade product 5 years ago, and 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 well over a half dozen to a dozen Different industries in their AI activities.

Speaker 2

The majority of AI now continues to be part of what we As an industry and what everyone on the call had known of AI for many years, whether that's genomic research or Advanced analysis, financial analysis or self driving cars and so forth. Now what's happening, of Every company is looking at large language models, chat GPT, etcetera, trying to determine exactly what it means for them. We've seen some interest in that area, but it still remains a minority, the majority being traditional, much if I can use that word With AI, traditional AI projects, what we're most excited by is both the opportunity for our high performance 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 Hold hard to reach hard disk systems and make that available for analysis by putting it in much more higher performance Flash based systems. And both are FlashArrayC and FlashBlade E are perfect repositories for that. So we think it's coming out at a perfect time.

Speaker 2

And let me just let me go back to Meta. We continue to have an excellent relationship around AI with Meta. They recently 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?

Speaker 5

No. Yes, I mean, I think a couple of things. Number 1, Amit, as Charlie mentioned, we're very excited about really what we see as 2 sets of opportunities that AI creates for us and think you're very constructive for Pure, supporting the AI training environment themselves as well supporting our enterprise customers as they look To connect their data sets to AI powered applications, one set of demands, which Charlie discussed is, hey, this needs 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. But then equally so, enterprises are going to Need to connect data from all across the organizations and all across different silos of infrastructure into these applications.

Speaker 5

They can no longer be 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 the cloud operating model. So 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 disc takeout product lines, but also in what we're delivering with the cloud operating model.

Speaker 1

Thank you, Amit. Next question please.

Operator

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

Speaker 6

Great. Thanks. Maybe first question. You noted that you had had some flashlights, e sales had begun. Just wondering if there was any kind of surprise and where that uptake has been?

Speaker 6

And then maybe as a follow-up question, you noted kind of the 8 figure Block Store deal. Just wondering kind of how long that deal has been in the works And kind of what were the ultimate decision making factors for that? Appreciate it. Thanks.

Speaker 2

You bet. Thanks, Meta. 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 It has probably taken longer than any of our customers expected, perhaps a bit longer than we expected as well.

Speaker 2

That being said, now that they now that that has Started and they're seeing some of the bills coming back from the cloud vendors for the storage Of that those large amounts of data for traditional apps, they now really start to become even more curious about Cloud Block Store. This particular deal, we had talked to them about a year and a half ago before they moved into the cloud. And 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 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. And I would say from that point, where they came back to us To the sale was probably only about 3 months, so relatively short period of time.

Speaker 1

Thank you, Meta. Next question please.

Operator

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

Speaker 3

Thank you. Charlie, I was hoping you could talk a

Speaker 7

little bit about visibility, a lot of talk of macro. And obviously, last quarter, there was A little bit more challenging environment, but pretty positive that you guys are keeping the full year here. So can you just touch Kind of how your visibility compares to a few months ago and what are the kind of factors that Can you kind of swing the numbers into the second half or and into next fiscal year, maybe from a product standpoint or where there could be upside? Thank you.

Speaker 2

You bet. What we saw, if I go back to Q4, we saw a fairly sharp degradation midway through Q4. And what we saw in Q1 was, if you will, a stabilization to what we saw at the end of Q4. So 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 what we see in terms of From our sales team and the length of time that we believe accounts will close, and 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 Count therefore have also become better at handicapping and staging, if you will, of the deals.

Speaker 2

So I would say that 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. And I think that generally, we feel that this will be a somewhat and I'm going to exclude, let's say, surprises in federal issues. But 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.

Speaker 3

Tim, I probably would add a couple of things. This is Kevin as well. We did indicate the fact that our Enterprise business performed better than expectations. And again, I think that's a testament to our field, really adjusting, to our customers' buying behavior. So that's a plus for us.

Speaker 3

I think The other two key highlights for us that came across as incremental strengths, if you will, would be EvergreenOne 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 EvergreenOne storage as service sales would be strong coming into this type of environment. And then FlashBlade E, again, is a highlight for us early, but customer response has been fantastic. And Charlie, I don't know if you want to say a few words on FlashBlade E2 in terms of what we're seeing there.

Speaker 2

Yes. As we mentioned, it's a very fast pipeline build. I've In front of dozens of customers now and the excitement with customers around this product line and With the prospect of replacing their disks, which are troublesome, with all flash products has been very high. And 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 and to be able to do that with The simplicity, the power, the ease and the reliability of Pure Products. So 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.

Speaker 1

Thank you, Tim. Next question, please.

Operator

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

Speaker 8

Great. Hey, thanks for taking the question and congrats on the strong quarter. One question for Kevin. Subscription obviously It's very strong and you kind of highlighted the potential headwind to revenue because of that. Is it possible to quantify that?

Speaker 8

You've kind of The guidance by €29,000,000 you 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 did you kind of circle as a potential year over year growth headwind from that EvergreenOne strength?

Speaker 3

Yes. Look, we won't get into specifics there, Pendulum. Consistent with our practice So really talking about the subscription portfolio in total, as well as from a performance standpoint, we do the same from a product standpoint. But you are thinking about it right in terms of the fact that the EvergreenOne's strength, 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.

Speaker 3

But again, from a scale perspective as well, we've already have over a third of our revenues or subscriptions. So the headwind isn't as 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.

Speaker 1

Thank you, Binjalom. Next question please.

Operator

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

Speaker 9

Hi. Yes, thank you so much. I was wondering, just to clarify, are you embedding anything from Meta in your guide? And 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 are going to see competitors particularly Be able to take advantage of this low cost NAND environment for maybe a prolonged period of time, You think that closes any of the competitive gap at all or pressure to margins in the second half?

Speaker 9

Thank you so much.

Speaker 3

Yes. Maybe we can take talk about the competitive advantages 1st, Charlie, if you want to take that around our direct to flash management advantages, which really I think are sustaining and we'll hit that first and we'll hit Meta.

Speaker 2

Absolutely. Well, the interesting thing here, Pinduil, 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 direct flash modules It's going to allow us to accelerate our advantage over SSDs. And I'm going to ask Rob to jump in and give you some detail there.

Speaker 5

Yes, absolutely. Wamsi, I think we've been pretty clear with our view that disk is a dead technology spinning, so to speak. But our view on SSDs frankly isn't that much rosier. We think it's SSDs are going to fall further and further behind. And that's really driven by our ability to outdistance SSDs with our direct flash technology.

Speaker 5

If I step back, Certainly, SSDs have played an important role in making flash more broadly available, But they're inherently less efficient, more complex, less performant, less reliable and just have overall shorter lifetimes Then the systems we can deliver based on our direct flash software technology. And so 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 going to find it harder and harder to keep up with a rate of improvement that we're forging down. If we 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.

Speaker 5

And then I think you have an economic barrier around, hey, is there consumer demand That's going to drive the same and follow the same type of roadmap that we're going to drive with our direct flash technology. And so you netted out, I think we're very bullish here that we've got a 3 to 5 year structural and sustained competitive advantage over, Frankly, the rest of the field that I think is trapped on SSD technology, and we're going to be pretty aggressive about going after that. And then bringing this back to Meta, right, I think that our engagement in Meta is a great example and proof point of the value That we're able to deliver based on the technology. As we've discussed in prior calls, one of the 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. And that traces its roots directly back to the DirectFlash technology.

Speaker 3

So then, Wamsi, I do think 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. But even despite that, you saw the favorability in product gross margins, which Again, it's a 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

Speaker 1

Thank you, Wamsi. Next question, please.

Operator

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

Speaker 10

Hey, guys. This is Eddie for Krish on for 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?

Speaker 10

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 offline solution or a hybrid storage system?

Speaker 2

Yes, I'll take that. Well, AI systems are typically new, so they're greenfield. So we're not generally replacing. What we're competing with are solely all flash systems. Hard disk systems just can't provide the kind of performance necessary for sophisticated AI environment.

Speaker 2

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 5 years now and now augmented by the latest generation FlashBlade S.

Speaker 5

Yes, Christian, this is Rob. Just to add on to that, as Charlie said, AI earlier in cycle generally in the So what are the large corpuses of data that enterprises have been collecting for sometimes decades? They've been Throwing in the corner on hard disk based systems that have generally been very, very cold and haven't had a need to access that data. Well, now with AI technology, there's now a demand to apply AI or AI applications to those large datasets. Well, now all of a sudden, there's large pools of data need to be accessible.

Speaker 5

They need to be, to a degree, performing. I think that's where we see a tremendous opportunity for us with especially E in our FlashArray C line.

Speaker 1

Thank you, Eddie. Next question please.

Operator

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

Speaker 6

Thank you very much. I wanted to ask about operating income And margin, given the outperformance this quarter, I know you didn't really change your guidance for the full year. But I'm wondering, Assuming there may be some upside, are there areas that you would look to invest further? Or is this something where if revenue upside grew, we should expect perhaps

Speaker 3

Yes, Shannon, I'll take this and let Charlie comment as well. But yes, pleased with, obviously, our Q1 results, including 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. So when we look at Q2, we're pleased with our guide.

Speaker 3

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 would have?

Speaker 2

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

Speaker 1

Thank you, Shannon. Next question please.

Operator

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

Speaker 11

Great. Thank you. I have a question on subscription revenue. So 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?

Speaker 11

Thanks.

Speaker 3

Yes, 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. And look, we've stated back in fiscal 2022 that our 3 year CAGR expectations for subscription ARR It 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. And obviously, that's really offset Any reductions you might have on other evergreen offerings that might be attached to CapEx sales.

Speaker 3

So 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 due to flexibility that these offerings provide. And 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. So therefore, yes, I think we're continuing to see strong subscription growth and ARR growth.

Speaker 2

Yes. I tend to think of this number as a stabilizing element in our overall performance as a company in that when the Save on cash outlays and CapEx and when the economy is strong and they move to CapEx, we get it With the Evergreen attached subscription. So I think there's some balance there and it will vary a little bit, but I think it's going to be it's a fairly stable number.

Speaker 1

Thank you, Sydney. Next question please.

Operator

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

Speaker 12

Yes. 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, 2 years in, something like that, how that product is doing and just what are some of the dynamics out there, some of the puts Thanks relative to the point in time when you acquired the asset.

Speaker 2

Yes. Portworx had a good quarter, so 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, but our expectation is that 5 to 10 years from now, all applications will be Designed in a cloud native environment with containers in Kubernetes, so we're very confident about the future. We remain the That's in class product in that area. According to 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.

Speaker 2

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

Speaker 5

Yes. And Jason, this is Rob. Let me just add a few thoughts to that. As Charlie mentioned, we saw a Strong quarter from Portworx. And I would call it in particular strength in seeing customers expand with us.

Speaker 5

And 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. 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 I think we're starting to hear stories back from customers that, hey, Portworx is saving them 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. And so as we've discussed with other elements of the portfolio, I think there is definitely a focus Across the board on value that customers are essentially solutions are solutions that are able to save Customers' money in this environment.

Speaker 1

Thank you, Jason. Next question, please.

Operator

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

Speaker 10

Yes. Thank you and congrats on a strong quarter. I wanted to ask about the Mediasen When that you guys cited last week in a press release, and basically you guys cited a shortening of voice recognition modeling cycle 6 months to 2 weeks, which is effectively saying an order of magnitude improvement. So a few questions on this breast measure. First, Is this applicable generative or recommendation AI case study?

Speaker 10

And then is the voice recognition modeling another way of saying basically the training period? And then finally, is this the typical level of benefits customers are seeing, I. E, in order of magnitude and performance improvement? And it sounds like the typical structure that's being contained with is indeed all flash arrays with the AI cases.

Speaker 11

If you can address all 3 of those.

Speaker 1

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

Speaker 2

Yes. As Nahal mentioned, we actually had 2 press releases last quarter associated with or recently, I should say, Recently with 1st quarter wins in the AI space, MediaZen and Crater Labs, these were Releases that these organizations themselves put out, so we're very pleased to see it. In each case, 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.

Speaker 5

Nehal, I think what Mediazen saw is not atypical from customers that are scaling their AI training environments, which is 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 and so 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, very large sets of data. And immediately, what customers run into is this challenge of, hey, How do I get a subset of my large, large pool of data which might be sitting on cold tier systems over to my GPU servers so I can go and crunch on them and feed them And so I think what they saw was, again, not atypical.

Speaker 5

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, and allow them to Train directly off of other shared storage, thus removing a not just long manual steps, But just reducing the overall time to training and to your first part or I guess maybe it's the third part of your multipart question. These types of results are, I would say, are not atypical as AI projects start to scale beyond What they're able to achieve with small scale infrastructure.

Speaker 1

Thank you, Nehal. Next question, please.

Operator

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

Speaker 13

Hey, everyone. Thanks for taking my question here. I think I'm going to go back to Portworx as well, actually. Just The DB announcement that you had in the press release, I was just wondering what the driving force there just in terms of market demand was there. What does it incrementally bring Pure and the Portworx, the data services platform.

Speaker 13

Any kind of updates on details you can lay into the partnership, is Mongo serving as a channel, is this And 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 'twenty four guide from Kevin, that would be helpful. Thanks, guys. Appreciate it.

Speaker 1

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.

Speaker 2

Great.

Speaker 3

Yes. And then Tom, on Meta, our annual guide continues to exclude New meta orders and in particular future phases, I. E. Phases 34 Of ERC environment. So no changes from our annual guide, which again we have reiterated this quarter.

Speaker 1

Thank you, Tom. Next question please.

Operator

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

Speaker 3

Thanks for taking the questions. I was interested in Charlie's comment about the demise of hearts 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.

Speaker 2

Yes, absolutely, Simon. Well, look, the density of hard drives will continue to increase. That's a logarithmic curve that hasn't failed 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 is the overall weight and failure ratios of these devices. And as systems become larger and more dense, Flash is just accelerating its performance curve Beyond hard disk at an amazing rate.

Speaker 2

So when we say that we're able to replace hard disk systems that exist today at onetenth the So, I think it's going to be very hard for the hard disks to keep up. One last thing to remember is, the last refuge for hard disks Now is in the secondary and tertiary tier. And 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. So that's the there's no other markets That are going to hold revenue for hard disks that flash won't penetrate. And 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.

Speaker 2

So it's unfortunate. I don't hold any malice. But similar to markets in the past, you're just when these transitions take place, CDs over vinyl or DVDs over VHS, there's just no stopping progress.

Speaker 1

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 3 more questions if we could. So next question please.

Operator

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

Speaker 14

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?

Speaker 2

Yes. I would say that 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're reading in analyst Reports, we're expecting that to stabilize through the remainder of the year. But our economics on FlashBlade E are really strong and compelling, and We believe that's going to it's as we said, we're offering it now at the same price as hard disk systems for nearline, and 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 disc, While maintaining the kind of margins that we expect as a company. So I hope that answers your question.

Speaker 1

Thank you. Next question, please.

Operator

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

Speaker 11

Great. Thanks guys for squeezing me in. Charlie, I just wanted to go back to your product roadmap and how you're seeing I know you're shipping DFM solutions up to 48 terabytes today. Given the exponential 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 50 terabytes and up to 100 terabyte drives getting deployed over the next couple of years. Would love to get your thoughts on how you're thinking about your product roadmap?

Speaker 11

Thanks.

Speaker 2

You bet. You bet. And thank you for the question. Well, we're expecting to deliver a 75 terabyte SSD DFM, right? We provide direct flash modules.

Speaker 2

We'll provide 75 this year. We expect that to double next year and to double again by the year after that. So it's an incredibly it's not we believe that that's not an ambitious roadmap. We believe that's eminently doable. And there is if you look at the roadmaps for hard disk vendors, they can't get close to that.

Speaker 2

And certainly not at the same power weight, power size Space, the cooling envelope that we'll be fitting in.

Speaker 5

Yes. And this is Rob. Just to add on to that. To Charlie's point, that road map is We have very high confidence in it. It's based on effectively existing technology.

Speaker 5

We don't no new physics needs to be invented to make that happen. And 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 and that's one of the reasons why we're so bullish about our advantage here.

Speaker 1

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

Operator

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

Speaker 15

Yes. 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 $18,000,000 or so. I understand you called out the capitalized software investments up a couple of What else is driving that increased CapEx spend here Q1 versus a year ago?

Speaker 15

And then what are you expecting for Q2?

Speaker 3

Great question. And really there's 2 drivers for that. It's really around our test equipment for new product releases. And obviously, we've come out with FlashBlade E and we've got a lot of stuff in the works. So we've got some test equipment investments associated with that.

Speaker 3

And then we're moving into our new headquarters. And so we've got some additional CapEx associated with that as well. But again, when you 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% to 7% is what we're thinking.

Speaker 1

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

Speaker 2

Thank you, Paul. 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. And as a reminder, I do we all look forward to seeing you at

Operator

Thank you. That concludes the Pure Storage First Quarter Fiscal Year 20 24 Earnings Conference Call.

Earnings Conference Call
Pure Storage Q1 2024
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