Yahoo Finance Pure Storage, Inc. (NYSE:PSTG) Q3 2024 Earnings Call Transcript
Pure Storage, Inc. (NYSE:PSTG) Q3 2024 Earnings Call Transcript November 29, 2023
Pure Storage, Inc. beats earnings expectations. Reported EPS is $0.5, expectations were $0.41.
Operator: Good day, and welcome to the Pure Storage Third Quarter Fiscal Year 2024 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I'd like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead.
Paul Ziots: Thank you. Good afternoon, everyone, and welcome to Pure's third 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 Kevin's prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at investor.purestorage.com. On this call today, we will be making 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 these public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenue remaining performance obligations or RPO and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes.
An archive of the webcast will be available on the IR website and is the property of Pure Storage. Our fourth quarter fiscal '24 quiet period begins at the close of business, Friday, January 19, 2024. With that, I'll turn it over to Charlie.
Charlie Giancarlo: Good afternoon, everyone, and welcome to our Q3 earnings call. We are pleased with Pure's Q3 financial results. We saw healthy demand for our portfolio throughout the quarter, proving that Pure's platform strategy and vision is resonating with our customers. The Pure Storage platform provides customers the ability to deploy a consistent software and management environment across the full price performance range for block, file and object workloads, for both traditional and cloud-native applications. The Pure platform guarantees customers never experienced change management downtime. It guarantees the lowest space power and e-waste in the industry and provides infrastructure and services that always get better with age without disruption.
The Pure Storage platform also promises a cloud operating model for our customers, enabling them to manage their data storage like the cloud providers to reduce their storage costs in the cloud to provide tailored storage services to their developers like the cloud and to consume storage like the cloud as a service. This model is gaining traction with leading customers. Evergreen//One, our Storage as a Service consumption offering saw continued extraordinary growth, more than doubling year-over-year. Evergreen//One and Evergreen/Flex are our preferred services for providing customers data storage on a consumption basis. Although we continue to offer customers the choice of consuming storage as CapEx, we believe the continued high demand for Evergreen//One is being driven by our sales activities, new customer buying behavior, and the current macro environment.
Customers are attracted to the ability to manage and consume Evergreen storage as a cloud service as they need it. But with the low cost advanced capabilities and data security of on-prem storage. The outperformance of Evergreen//One this year has been significantly above our prior expectations and we now expect this strong level of demand to continue through Q4. While this success is a long anticipated and welcome expansion of our business model, its overperformance will have an effect on near-term revenue, which Kevan will cover in detail. In Q3, Pure set a new industry standard with eight service level agreement or SLA guarantees across our Evergreen services. With the innovative new paid power and rack program, we pay our Evergreen customers power and rack space costs.
This first-of-a-kind program is enabled by our ability to deliver the cloud attributes that customers desire with the most energy efficient and reliable storage technology. Paid power and rack directly addresses the increasing cost of electricity and data center space. Additional SLAs introduced in Q3 and guarantee no change related downtime, no future data migrations for hardware replacements, upgrades or expansions and zero data loss. Portworx, our Kubernetes and container storage software for cloud native applications also had a record quarter. Portworx was recently named a leader in the inaugural IDC Marketscape for container data management. We saw increased multiyear renewals from existing customers and new customers deploying the Portworx suite of products for multi-cloud databases, messaging and logging systems.
Portworx was also selected by a leading global retailer to provide a single integrated platform for their machine learning researchers and analysts ensuring consistent models across multiple clouds. A large international government authority is supporting their artificial intelligence and machine learning environments with Portworx deployed in mission-critical cloud-based applications. Customer momentum in the field of artificial intelligence also continues for Pure with a double-digit number of AI wins in the quarter across our portfolio. This included era technology and AI-based decision intelligence and automation platform that chose our Portworx solution for seamless cloud integration, outperforming competitive solutions by 200%. And Olympus adopted Pure's AI-ready infrastructure based on a FlashBlade and NVIDIA solution for a new AI development environment, ensuring performance and capacity for large-scale models to accelerate their success with transformative AI solutions.
We remain our customers' preferred partner for AI deployments and have strengthened our innovation and leadership by earning NVIDIA-based pod certification. Aerie, our complete AI-ready infrastructure built on the NVIDIA DGX base pod reference architecture and the latest FlashBlade//S storage platform makes AI scaling and deployments faster and easier for our customers. We continue to see strong demand for FlashBlade//E. And this month, we announced the general availability of FlashArray//E and shipped our first orders. This past quarter, we announced our latest Gartner accolade, a leader in the Magic Quadrant for distributed file systems and object storage, and it's now three years running. This marks the tenth successive year overall that our leadership has been acknowledged by Gartner in transforming the storage industry.
The early success of our E family reinforces our belief that flash is replacing this enlarging Pure's opportunity in enterprise and eventually cloud storage. In Q3, Pure scored another major win for new 5G infrastructure to be deployed in our fiscal 2025. Pure's continuing success in the 5G space is based on our superior performance, reliability, density, longevity and advanced remote management capabilities. We are seeing strong early customer interest in our expanded partnership with Microsoft and the Pure Cloud Block store integration with Azure VMware Solution, also known as AVS. Pure and Microsoft announced the public preview of this service this quarter. CVS and AVS are providing customers the opportunity to reduce their cloud storage spend by half or more while providing them the advanced services that they experience with Pure's enterprise systems.
Customers are also enthusiastic about managing their storage and data across data centers and clouds in a consistent hybrid environment. Despite the uncertainties of the current business environment, Pure superior low total cost of ownership and Evergreen offerings are making a difference in this challenging IT economy. We are seeing a strong positive response to our position of having a consistent, unified flash platform for all storage needs from the data center to the cloud. This position is enabling us to compete for ever larger footprints in large enterprise accounts. This, coupled with the strong overall demand for our platform gives me the confidence in our continued ability to take share and outpace the market. With that, I'll turn it over to Kevan for further commentary.
Kevan Krysler: Thank you, Charlie. We are pleased with our financial results this quarter. We delivered strong revenue and operating profit, both above our prior guidance for the quarter. Revenue was $763 million, up 13% year-over-year, and operating profit was $169 million. The macro spending environment remains relatively consistent to what we have seen throughout this year. However, demand for our solutions was robust throughout Q3. Our business strategy continues to focus on transitioning our offerings for our customers to consumption and subscription services. These types of offerings provide more value to our customers, which is resonating as customer demand for our consumption and subscription-based offerings across our Evergreen portfolio, especially Evergreen//One and Portworx is very strong.
We achieved another quarter of record sales of our FlashBlade portfolio, including FlashBlade//E, which has quickly grown to become a meaningful portion of our FlashBlade business since becoming generally available in late April. We are also seeing customers consuming our FlashBlade technology, including FlashBlade as a service, leveraging our Evergreen//One Storage as a Service offering. Our operating profit of $169 million in Q3 exceeded expectations. Our differentiated flash management technology powered by purity software operating natively with raw flash continues to be a key driver of our strong product and subscription gross margins. As we mentioned last quarter, the majority of our capacity shipped is based on QLC raw flash. Remaining Performance Obligations or RPO was very strong and exceeds $2 billion growing 30%.
During Q3, we closed a large non-cancellable product order with a large telco customer totaling $41 million that is included in the RPO balance at the end of Q3. Based on the timing of the shipment schedule for this order, product revenue is not expected until next year, which impacts our revenue outlook this year, which I'll discuss further in my remarks when updating annual guidance. When excluding both the noncancelable product order from RPO in the current quarter and the outstanding commitment in Q3 of last year with one of our global system integrators, RPO growth for our subscription services was also very strong at 29%. As we mentioned last quarter, the outstanding commitment with our global system integrator was fully satisfied during Q1 of this year.
In Q3, subscription services annual recurring revenue grew 26% year-over-year to nearly $1.3 billion, highlighting the strong traction for our consumption and subscription-based service offerings. As we have mentioned previously, closed Evergreen//One contracts where the effective service date has not started are excluded from the subscription services ARR calculation including closed Evergreen//One contracts where the service date has not yet started, subscription services ARR was also strong, growing 27%. Subscription services revenue of $310 million comprised 41% of total revenue. U.S. revenue for Q3 was $536 million and international revenue was $227 million. Our new customer acquisition grew sequentially as we acquired 353 new customers during the quarter.
As previously mentioned, we were pleased with our strong gross margin performance of 74%. Product gross margin was 73.1%, and subscription services gross margin was 75.4%. Our headcount increased slightly to approximately 5,500 employees at the end of the quarter. Pure's balance sheet and liquidity remains very strong, including $1.35 billion in cash and investments at the end of Q3. Cash flow from operations during the quarter was $158 million and capital expenditures totaled $45 million. In Q2, we repurchased over 630,000 shares of stock, returning over $22 million to our shareholders. Consistent with our remarks last quarter, our share repurchases represent a lower level of repurchase activity as a result of the fixed trading parameters that were in place throughout the quarter.
We have approximately $167 million remaining on our existing $250 million repurchase authorization. Now turning to our updated annual guidance for FY '24. A key assumption used to derive our FY '24 annual revenue guide at the beginning of the year was that the macro environment would not meaningfully improve or deteriorate throughout the year. This assumption is holding as the spending environment continues to be challenging. Though despite these challenges, we are seeing increasing demand in the second half of the year across our data storage platform especially for consumption and subscription service offerings. Although we expect the demand to increase for the second half of the year, there are two important factors that are impacting our annual revenue expectation this year, which we now expect to be $2.82 billion, growing 2.5% and Q4 revenue is expected to be $782 million, declining 3.5%.
First is the impact of our Evergreen//One Storage as a Service momentum, which will be discussed in more detail. And second is the impact of a $41 million non-canceled product order with a telco customer that is not expected to be fulfilled until next year. Both factors on a combined basis represent approximately 4.5 points of incremental headwind when compared to the annual revenue guide we provided at the beginning of the year. We are very pleased with the momentum and growth of our Evergreen//One service offering, while appreciating that this momentum creates a short-term impact on revenue growth. Last quarter, we stated that sales of our Evergreen//One service offering was expected to create 1 to 2 points of headwind to the annual revenue guide we provided at the beginning of the year.
Based on our Evergreen//One sales in Q3 and the opportunities in our seasonally largest quarter Q4, we now expect that annual sales of our Evergreen//One and Evergreen//Flex offerings will more than double this year, reaching nearly $400 million and expect the impact will now create 3 points of headwind to the annual guide we provided at the beginning of the year. When excluding the impacts of the increased shift to our Evergreen//One offering and a $41 million order with a telco customer, our annual revenue growth would have been 7% when compared against the annual revenue guide we provided at the beginning of the year. We expect that our consumption and subscription business models will drive improved long-term growth for Pure as our subscription and consumption business continues to grow, we will provide additional business metrics that will help measure the health of our business.
This includes translating growth rates of our subscription and consumption service offerings to a growth rate under our traditional model of a CapEx sale. Finally, we are increasing our annual operating margin guidance from 15.5% to 16% driven by our continued operational discipline and gross margin strength. Q4 operating margin is expected to be approximately 19%. In closing, we are pleased with the strength and demand across our entire Pure Storage platform, including our expectation of more than doubling sales this year of our combined Evergreen//One Storage as a Service and Evergreen//Flex offerings. We could not be more excited with how our solutions resonate with our customers, delivering a consistent, nondisruptive operating and management environment, leveraging the most advanced flash technology.
Our innovation across our storage platform also extends to our Evergreen business models, providing customers with increasing flexibility and business value. With that, I will turn it back to Paul for Q&A.
Paul Ziots: Thanks, Kevan. [Operator Instructions] Operator, let's get started.
Operator: Thank you. [Operator Instructions] The first question comes from the line of Amit Daryanani of Evercore. You may proceed.
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