Pure Storage, Inc. (NYSE:PSTG) Q3 2023 Earnings Call Transcript

Pure Storage, Inc. (NYSE:PSTG) Q3 2023 Earnings Call Transcript November 30, 2022

Pure Storage, Inc. beats earnings expectations. Reported EPS is $0.31, expectations were $0.25.

Operator: Good day, and welcome to Pure Storage Third Quarter Fiscal Year 2023 Earnings Conference Call. Today’s conference is being recorded. All lines have been muted during the presentation portion of the call with an opportunity for question-and-answer at the end. At this time, I would like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead.

Paul Ziots: Thank you. Good afternoon everyone, and welcome to the Pure’s third quarter fiscal 2023 earnings conference call. On the call we have Charlie Giancarlo, Chief Executive Officer; Kevan Krysler, Chief Financial Officer; and Rob Lee, Chief Technology Officer. Following Charlie’s and Kevan’s prepared remarks we’ll take questions. Our press release was issued after close of market and is posted on our website where this call has been simultaneously webcast. Slide which accompanying this webcast can be downloaded at investor.purestorage.com. On this call today we will make forward-looking statements, which are subject to various risks and uncertainties. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings and competitive industry and economic trends.

Any forward-looking statements that we make are based on facts and assumptions as of today and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties relating to our business is contained in our filings with the SEC and we refer you to these public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenues, remaining performance obligations or RPO, and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings 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 fourth quarter of fiscal ’23 quite period begins at the close of business Friday, January 20, 2023. With that, I will turn it over to Charlie.

Charlie Giancarlo: Thanks Paul. Hello, everyone and welcome to the call. We hope that our fellow Americans had a wonderful Thanksgiving holiday, and that our non-U.S. listeners had a wrestle few days while everyone in the U.S. was offline. We are once again pleased with our quarterly results, showing a year-over-year revenue growth of 20% and subscription ARR growth of 30%, surpassing $1 billion for the first time. Our portfolio of subscription products had a strong quarter with Evergreen//One achieving record results. Our new products including FlashArray//C, FlashArray//XL, and FlashBlade S also saw excellent growth this past quarter. FlashBlade S our newest product is off to a great start in its first full quarter sales. The number of S systems sold were above our plan and petabytes sold were well above our plan.

We’re also seeing S customers taking advantage of the increased performance and scale choosing to purchase larger systems than the prior generation. Pure continues to lead the industry in product innovation having released a record number of new products and services this year, including FlashArray//XL, FlashBlade S, Pure Fusion, Portworx data services and Evergreen//Flex. We are proud to share that this innovation has once again been recognized with Gartner’s highest rankings in their magic quadrant, Pure was named the leader for the ninth consecutive year for primary storage and a leader for distributed file systems and object storage, significantly increasing flash blades ranking year-over-year. Pure’s unique value proposition of advanced technology, low total cost of ownership, industry leading energy savings, combined with powerful performance is the reason that leading edge technology and hyperscale cloud companies increasingly choose to rely on Pure.

This past quarter as planned, we were pleased to ship the second phase of Meta’s build out of their research super cluster or RSC. As a reminder, our shipments for Meta’s RSC consists of both FlashBlade and FlashArray//C. Meta relies on Pure’s FlashBlade to provide lightning fast data delivery to their NVIDIA GPUs and FlashArray//C to provide performance oriented and cost effective bulk data storage at 1/10, the space power and cooling of a disk alternative. NAND cost per bit continues to approach that of magnetic disks. Because of Pure’s unique intellectual property, Pure’s QLC based systems are now competitive with hybrid disk based systems on a price per bit level years ahead of the commodity crossover point. We expect that the currently anticipated improvements in Pure’s NAND economics this coming here will enable Pure to deliver our QLC based products at prices competitive with most near line disk arrays on a total cost of ownership basis.

We believe strongly that the days of the hard disk in the data center are over. Customers that do not take advantage of Pure’s QLC products to replace disk systems are choosing the more expensive and energy intensive options. New enterprise customers this quarter include a large global telco, a large global payment processor, and a major energy provider. Existing customers like Vertafore, a leading provider of modern insurance technology continue to expand their relationship with Pure, relying on the combination of technology performance, total cost of ownership and an Evergreen customer experience to fuel their data dependent business objectives. This past quarter significant numbers of enterprise companies specifically chose Pure for our exceptionally low power space and cooling performance.

This has been especially evident in Europe, where not only energy prices, but energy security is a major concern. As mentioned, we saw strong growth in both new and existing Evergreen customers this quarter. Evergreen’s flexible approach to both consumption and pricing is helping customers of every size, deal with the uncertainties that businesses and organizations face in the current environment. Many new customers also cited energy savings as a new important benefit. Also this quarter, we saw several large telco customers purchase our portfolio to support projects ranging from 5G deployment to modernizing infrastructure. For example, one of the largest telecommunication providers in Asia increased their Pure portfolio including their FlashArray//C footprint, furthering their commitment to environmental sustainability, while accelerating their transformation and services offerings to their customers.

Looking ahead to world economic conditions, we continue to see instances of longer sales cycles in the enterprise segment, and expect that enterprises will continue to exercise caution in spending over the next year. We believe that this focus on spending uniquely favors Pure Storage in the quarters ahead. The combination of Pure’s Evergreen offerings, best-in-class power space and cooling, and operating simplicity results in significantly lower operating costs for enterprise customers. Given challenging economic and energy situations around the world, more enterprises are focused on total cost of ownership and the area where Pure excels. As we look forward, we are keeping our eyes on a number of macroeconomic factors, in particular inflation, slower economic growth, and lingering supply chain disruptions.

Considering the current economic uncertainty, we plan to thoughtfully invest in our expansion, while continuing to deliver strong operating results. Despite the challenges and uncertainties of the current business environment, we remain confident in our ability to take share and outpace the market, while delivering products, solutions and services to customers that exceed their expectations. I’d like to hand the mic over now to our CFO, Kevan Krysler for a review of our numbers.

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Kevan Krysler: Thank you, Charlie. Through solid execution, we delivered strong financial results in Q3, growing revenue 20% and increasing our operating profits by over 50%, while navigating the effects of the macroeconomic environment. Substantial revenue from sales to Meta also contributed to our financial results this quarter. Our customers which now exceed 11,000, and represent 58% of the Fortune 500, leverage our portfolio of innovative data storage and management products and subscription services to drive optimal business outcomes and performance. Revenue performance growth and demand our FlashArray//C and FlashBlade S solutions, both leveraging QLC Flash was very strong this quarter. Our leadership in Flash management, enabled by our software and declining cost of Flash is accelerating our progress and replacing traditional disk solutions in substantially reducing data center, energy consumption.

We also continue to be pleased with meaningful contributions from new business as we acquired approximately 390 new customers this quarter including across the telecom industry. Subscription annual recurring revenue or subscription ARR exceeded 1 billion this quarter, growing 30% year-over-year. Record sales of Evergreen//One in Q3 represent a key driver of our subscription ARR growth. Remaining performance obligations or RPO grew 26% to $1.6 billion. Similar to the remarks we made in previous quarters, our RPO growth is impacted by product shipments for an outstanding commitment with one of our global system integrators. Excluding these product shipments, RPO grew 31% year-over-year. Our headcount has increased to nearly 4,900 employees and our investments in talent continue to be disciplined and focused around our key business objectives.

Total revenue for the quarter grew 20% to $676 million. For Q3, U.S. revenue was $493 million, an increase of 21% year-over-year with international revenue, which continues to be impacted by foreign exchange headwinds growing 19% year-over-year to $183 million. Product revenue grew 15% and subscription services revenue increased 30%. Subscription services comprise 36% of total revenue for the quarter. Contributions from both product and subscription services gross margins continue to be strong, as total gross margins were 70.9% in Q3. Sales of our larger configuration systems and new FlashBlade S contributed to slightly higher product gross margins of 70.1%. Subscription services gross margins were 72.3%. Our strong Q3 operating profit of 107 million and operating margin of 15.9% were driven by a combination of factors including strong gross margins.

We ended the quarter with approximately $1.5 billion in cash and investments. Cash flow from operations was $155 million in Q3, resulting from the combination of strong sales, collections and operating profit. Capital expenditures trended higher this quarter at nearly $40 million due to deliveries of test equipment, which had previously been on backorder. In Q3, we returned approximately $24.5 million in capital to repurchase approximately 900,000 shares of stock. This represents a lower level of repurchase activity than recent quarters as a result of the fixed trading plan parameters that were in place throughout the quarter. We would expect that share repurchase volume will increase next quarter. We have approximately $100 million remaining from our $215 million share repurchase program.

Now, turning to guidance, we estimate revenue for Q4 to be approximately $810 million up 14% year-over-year. For comparison purposes, a couple of reminders, our Q4 of last year, included an additional week a revenue of approximately $20 million as a result of FY ’22, including 53 weeks. Also, from our previous remarks, approximately $60 million of product revenue recognized in the first quarter of FY ’23 had been forecasted to close in the second half of the year. Adjusting for this impact of seasonality, our expected revenue growth in the second half of FY ’23 would have been nearly 21% year-over-year. For FY ’23, we are reiterating our annual revenue guidance of approximately $2.75 billion, an increase of 26% versus FY ’22. Our operating profits remained solid, which is reflected in our Q4 operating profit outlook of $130 million or operating margin of approximately 16%.

As a result of our performance in Q3 and outlook for Q4, we are increasing our operating profit outlook for the full year to $430 million. Operating margins are expected to be approximately 15.6%, reflecting a significant expansion from 10.8% last year. Revenue growth and strong product and subscription services gross margins have contributed to our strong operating profit and operating margin outlook for this year. During the first half of the year, our operating profits also benefited from less travel, higher attrition and slower than anticipated hiring. We do not expect that our operating profits will continue to benefit from these tailwinds next year. While the remains too early to provide guidance for FY ’24, our current preliminary view is for operating margins to remain robust, around 14% to 15%.

In closing, through our unwavering commitment to innovation, and customer service, we continue to be in a unique position of creating valuable outcomes for our customers, including dramatically reducing energy consumption and e-waste. With the strength of our portfolio of products and the power of our evergreen offerings, the opportunities in front of us remain compelling. With that, I will turn it back to Paul for Q&A.

Paul Ziots: Thanks, Kevan. Before we begin the Q&A, I’ll please ask you to limit yourself to one question consisting of one part so we can get to as many people as possible. Operator, let’s get started.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. Our first question comes from the line of Amit Daryanani with Evercore. Amit, your line is now open.

Amit Daryanani: Perfect. Thank you and congrats on the print book. I guess my question is, Charlie, do you believe the print and the guide you provided is fairly impressive especially in comparison to the commentary, I think some of your peers like Dell and NetApp recently. So I’d love to just understand, what do you think is driving this contrast within your peers? I don’t think you both have a sizable backlog, for example, that could be helping you. So would be great to just hear what you think is enabling the divergence of performance at Pure versus — at Pure versus your peers? And then, what do you think the durability of the divergence as you go forward? Thank you.

Charlie Giancarlo: Thank you, Amit, and hope you’re well. Thank you for the question. Well, Amit, I think it’s a based on a variety of different things, but fundamentally upon our core strategy. So, the core strategy, first of all, is to drive an all Flash data environment in the data center and to be able to provide a product that’s very modern in terms of its software capabilities and management abilities. We have consistently grown market share, since the day that we were founded, that is based on the fact that, we have all the vendors developed a software stack that focused on the benefits of using a Pure semiconductor versus just refilling disk oriented architectures with SSDs. And that’s allowed us to provide a product that’s simpler to operate uses less power, space, power and cooling requires far less labor is far more reliable, and more performance than competitive products that are out there.

And to this day, our competitors still compete with SSD alternatives. Secondly, it’s based on a much broader portfolio, we believe. Going from, our roots or our initial product, which was block oriented to now having file and object based systems. And then thirdly, it’s now starting to pursue our replacements for secondary tier disk alternatives. So, this allows us a lot of market allows us to expand into a lot of market adjacencies and allows a lot of elasticity in our market as flat prices decline. So, we’re very excited about this. Finally, what I’ll mention is, once we penetrate an account, our ability to expand in that account is very large because of the improved experience that our customers have. When I repeat to our team that our Net Promoter Score, the most important number in the Company, that’s, it’s the experience of our customers that allow us really broad expansion capabilities in an account once we penetrate.

So, I think you add those things together, it allows us to continue to operate as a share taker in this market, in this $50 billion market. And as you well know, we’re still coming up upon 3 billion in terms of our total revenue. So lots of growth opportunities in the future.

Operator: Thank you. Our next question comes from the line of Meta Marshall with Morgan Stanley. Meta, your line is now open.

Meta Marshall: Maybe a question for me of, clearly you are highlighting that some of the memory pricing getting cheaper is helping with the QLC this conversion. So just wanted to kind of get a sense of what kind of traction you’re seeing with either very large enterprises or hyperscalers with that motion, and whether you’re seeing kind of some shortening of sales cycles as we kind of get closer to some of these conversion points?

Charlie Giancarlo: Yes, let me address the hyperscaler first. Obviously, we I spoke about Meta in my initial remarks, the fact that we were able to deliver FlashArray//C for their bulk data, requirements at a price point that competed with their own software running on — their, what would have been their disk arrays, really speaks to the power of the being able to use QLC and Flash to compete with disk. And now that environment also benefited from the lower power and lower space requirements. And I think that’s part of what will allow Flash to compete against a disk in this environment, are increasingly in this environment, as the Flash prices start to — NAND costs start to come down. We’re seeing the same in large enterprises, although I would say that that’s in an earlier phase right now, but FlashArray//C has been an incredible grower for us, and that does compete largely with the hybrid disk market, and we think we’ll be able to go after the non-hybrid, that is the what’s called the near line market, as we go into this New Year.

So, we believe that, thirdly, the power while we’ve been speaking about the lower power requirements and cooling requirements for many years, this is the first year and starting in Europe, but also Asia, where we’re seeing companies say it specifically because of the power savings, that they’re buying Pure products or getting them initially to start with Pure products. So we think it’s going to become an even bigger issue as we go forward. So, we are starting to see that now in large enterprise.

Operator: Our next question comes from the line of Wamsi Mohan with Bank of America. Wamsi, your line is now open.

Wamsi Mohan: Charlie, I was wondering, if you could share some color around the outlook on IT spending into 2023, particularly for the storage market? And some of your competitors are talking about that being down on a year-on-year basis. You mentioned your confidence in your ability to take share and outgrow that market. So curious if you could give us some high-level thoughts of what those trends look like if storage is going to grow or decline and how much you can outgrow that market? And what’s embedded in that inside of that operating margin of 14% to 15%? Thank you.

Charlie Giancarlo: Yes, let me start with sort of our view on GDP in general, and then go into what we think will happen in the IT side with storage. So for GDP in general, obviously, there are a lot of different analysts out there, speaking about, the current economic environment and how that their prognostication for next year. The way we’re looking at it is a roughly flat U.S. economy next year, and perhaps a slightly recessionary international economy, obviously, varying a lot, country by country. And as we go into that, we’re seeing IT spending, a holding steady, maybe it’s slightly up relative to the overall GDP growth. But in addition to that, what we are looking at is storage, remaining relatively healthy relative to the rest of the IT economy.

So, we actually believe that storage might be up a moderately next year. That being said, you’re correct. In terms of our own results, we believe we’ll be continuing to take market share. And we believe that we similar to this quarter versus our competitors, we believe that we’ll be able to stay in the double digit growth area. Perhaps a bit more moderate than our overall growth this year, but we believe still solidly well into the double digits.

Operator: Our next question comes in the line of Sidney Ho with Deutsche Bank. Sidney, your line is now open.