Everpure, Inc. (P) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Alex Kurtz, infrastructure and software analyst here at KeyBanc Capital Markets. I really appreciate having CFO and Chief Architect -- Chief Product Architect. Is that the right title, Rob?

We'll go with that.

We'll go with that -- with us today. So we're going to go through a couple of questions for Kevan and Rob. We'll start with Kevan with some financial questions from the quarter and then get into some technology and architecture questions, Cloud Block Store and things like that.

So Kevan , just at a high level, now that you've been here, what is it, like, a quarter?

90 days. Yes.

Pretty crazy.

It is.

I guess, really interesting to hear your impressions of transitioning from VMware to Pure, right? So involving 3-year term deals and stuff like that, and now you're here, big differences, small differences?

Well, when I came to VMware, I was -- I came in, in 2013, which VMware had essentially been through Act 1, and really moving to Act 2 and Act 3 and beyond. And it was a scaling question. And obviously, you know the story of VMware since 2013. And Pure is very similar, right? We've got Act 1 that we've been through. And what does the next act look like? What's that growth profile look like? And so a lot of similarities from that perspective. Obviously, the software story for Pure, I think, is understated. I think it's a significant value for the company in terms of its narrative and in terms of driving growth for the future, including the flexibility that we can extend to customers around business models, and then scale, really helping Pure scale. It's gone through a really fast growth trajectory, and I do think there's an opportunity for scale and efficiency longer term.

Yes. Just -- can we just talk about Pure as a service for a second?

Sure.

So I thought that was one of the most important things that came out of the earnings call. So let's start with you and just talk about is this a new go-to-market model for the company and why people want to consume it. And then secondly, what's the -- how do you think about it financially as far as how the model is going to develop over the next couple of years?

Yes. No, absolutely. So yes, I mean, it's certainly a bit of a newer go-to-market kind of mission that we introduced about midway through the year. Frankly, we did it in response to customer demand, right? This is, in many ways, is a natural extension of the Evergreen subscription model that we've had, really, all along. It's a couple of things that are really important to kind of take away. One is, it's more than just a leasing model, right? I look at this as -- and really, the customer interest behind Pure as-a-Service, really, as validation for some of the core tenets and architectural differentiation that allow us to deliver the subscription to customers, whether it's in the form of Evergreen subscriptions or Pure as-a-Service. And for me, that nets out to 3 things: one is the ability to always get the latest and greatest innovation software, hardware, nondisruptively; two, the ability to very elastically scale, so it starts small and grow large, not have to have complete foresight and capacity planning; and three, the ability to really have a transportable license, right? So as customers are looking forward to, "Hey, I've got my workloads sitting on-prem today, but I want some optionalities to move to the cloud." Having that optionality and transportable license is very meaningful. And so we've seen a lot of good uptake. And I'd highlight -- and I think Charlie highlighted this in his prepared remarks. We had a couple of very large banks pull us into 6-, 7-figure deals within the quarter. And I think the common thread there is these are organizations that are in the process of fairly large digital transformation initiatives, trying to modernize a whole swath of IT infrastructure at the same time. And with a complex project like that, it's not always easy to plan when you're going to consume capacity. And so they know they're going to get there. They know they need about a couple of hundred terabytes, a couple of petabytes when they get to the end. They just don't know what that path is going to look like. And so having the ability to consume as a service, pay as you go, really help speed them along that journey.

So what does the actual deployment look like? Is it just typically on-prem, right, this is not a managed hosting service?

Yes. So I mean, maybe the way to think about it is it's largely the same appliances that we would typically hit on a CapEx kind of deal. But in addition to the Evergreen subscription, you're essentially taking the entire purchase under the subscription model. And so as a customer, that gives you flexibility to, again, pay by capacity consumption. So as you want to grow, you call up Pure or we have automated systems to kind of add that capacity and bill you for it as you go. And then the other bit of flexibility you have is, again, going to Cloud Block Store, as customers want to move a certain amount of that footprint into AWS or now Azure, they've already paid for that license. It's all, kind of, part of that service.

And Kevan, can you see a larger chunk of the installed base kind of migrating to this over time? Or do you think that those 2 deals you talked about on the call are very discrete?

Yes. So I think it's an opportunity for the existing installed base, but I also think it's an opportunity for new customers. It's a really compelling business model across the board, if that's the customer's preference. And that's really our priority is saying, if this is the customer's preference, we want to make sure that we'll lean in to that preference. And so the focus, when we looked at our plan for this year is really taking our bias from the field in terms of the selling motion. And so the customer is really preferring a service model and a service level agreement. The compensation, we wanted to make sure we get parity, so we really did a lot of work to drive that for this year. And then we also are looking at making sure on the Evergreen model that there's a preference from our field to be selling 3-year Evergreen subscriptions. So hopefully, we'll get some traction on that as well.

Okay. If -- from a comp perspective, are there -- how do you navigate the traditional model and how the reps are being comped? And then all of a sudden, the customer flags, "Hey, I want the as-a-service." Are you basically kind of changing that one person's comp plan, like real time? Or how does that...

Trying to keep it as simple as possible, and really base it on TCV, in terms of next year.

Okay. TCV.

That's right, that's right.

Okay. And just as far as the applicability across the broader installed base. I mean do you feel like this is going to be the go-forward motion over the next 5 years? Or is this kind of wait and see what the adoption looks like and adjust accordingly?

I think it will be a long-term motion that customers will prefer an I-see-growth momentum multiyear with this business model.

Okay. Yes. I'm just going to flip back to 2019. I know you weren't responsible for that, but I just wanted to go through some of these things, because there was a pretty wild change in my perspective. The 2 quarters in the middle of the year, pricing dynamics really had a lot of fluctuation, a lot of volatility to them. And we come out of this Q4 and it just seems like a lot of that had stabilized. And I was kind of pleasantly surprised to see that you guys felt better about 2020, so kind of what led to that level of confidence, and what you -- how you saw the pricing in the market?

Yes. So a couple of things, and you're talking calendar year, so I'll hit fiscal because -- in my mind, fiscal '19 was more of the norm, then we went into this unparalleled pricing environment, if you will, in fiscal '20. And then this really came out of that in Q4. But really, I think how I'm looking at it is what we saw in Q4 was similar to what we saw in fiscal 2019. What we saw in, really, Q2 and Q3 of fiscal '20, it really was extraordinary from a pricing decline perspective. And once we saw that normalize in Q4 and the outlook in terms of pricing as we look out to next year, seem to be back to that framework of the normalized environment that we're used to seeing. And so those are the data points we're using in saying, okay, with that normalization, we're back to the elasticity that we've been operating within.

So when you say you're effectively talking about effective price per gig, is that kind of the best measure of pricing? Or how do you think about the unit economics of that? Like, what's the thing that you're looking for from the sales force from reporting out of the deal flow that gives you the kind of the confidence? What's the level of analysis that you're doing? Is it based on what's happening in the balance sheet, in NAND? Or is it really about the street pricing?

That's as simple as looking at detailed level between volume and our ASPs, as simple as that. And where is that operating within, is that within the normalized frame or guardrails or fairway that we're typically seeing? And the answer to that was Q4, yes. That was similar to what we saw in fiscal 2019. And what we're -- in terms of the data points we're looking at for FY '21, what we're seeing in FY '21 as well.

Okay. Rob, FlashArray//C is something that -- you talk to the channel and following the company for a while, it seems like a really important product because FlashBlade would seem very purpose-built, right, initially? And the FlashArray//C was a really important kind of secondary product that you need in the portfolio to help reps have a broader conversation with customers, right? So maybe frame how that product has tracked so far. I know that there are some components that were still being -- you're waiting on different types of NAND, right, for that product, so maybe take us through that a little bit?

Yes. No, absolutely. I mean at a high level, the way I think about the product portfolio at this point is between FlashArray//X and FlashBlade, we're really covering the map of high-performance block and file and object, respectively. What FlashArray//C does for us is it really opens up a lot of that Tier 2 lesser performance-demanding types of workloads. And out of the gate, we're doing that with block, and then second half of this year, we're looking to add file to that platform, to really expand and kind of widen that aperture. Initial tracks have been great, right? We gave some color on this on the call. Certainly, the -- I think in our Q4 call, we kind of had a partial quarter, and we had some pent-up demand, and that was a little bit expected. But we're seeing continued good momentum out of that business. And that's -- it's -- like you said, it's a very important market opener for us. And really what it allows us to do is go after the last kind of remaining disc in the data center. If you -- as you know from tracking the company, of our history, we've really put the depth now to 15k spinning drives, what we've done with FlashArray and FlashBlade. 10k spinning drives are really on the cusp of tipping over. What FlashArray//C does is really open up the fight to take over a lot of the workloads that today are still sitting on hybrid systems or 7,200 RPM drive systems. I think the most -- one of the most remarkable things about FlashArray//C is we're a good kind of full quarter-to-quarter half in now and it's unparalleled. It's unmatched, where we haven't heard any sort of indication from the competitive set about similar or comparable offerings. And I think that's really just ultimately validation of a lot of the work we've put in, in expanding our core IP of understanding how to build software for flash and taking that to QLC. Said another way, QLC, to get the most out of that commodity component, it's really hard to work with. We've been at it for 10 years. And so a lot of the investments we've made upfront in terms of our software, design for Flash, DirectFlash, which we've taken into the FlashArray//X line are now continuing to pay dividends as we bring that technology and apply it to QLC.

Just from a sales force perspective, Kevan, it seems like a product -- well, do you want the sales organization focused on this product? Or do you just think about the overall quota and the yield per rep, and that's really what's going to drive? Or are you going to have some kind of comp plan that really focuses on FlashArray//C in the first 12 months?

No, it's really around the portfolio, in terms of prioritization of the portfolio, of the platform, and then really looking at the customer need and preference and making sure we're fulfilling that in the priority.

The other bit of color, if I may add, is though it's going after an opening up very distinct and adjacent markets to FlashArray//X, it is the same product, right? So under the covers, it's the same software base. They have the same feature set functionality, just applied to a different performance profile. And so from the point of view of the field, from the point of view of the sales channel, there isn't a whole lot of really any retraining required, right? It's a product they know -- already know how to sell, they're already trained on. From the perspective of customers, there's not a whole lot of retraining required. This just allows us to expand how much of a customer's footprint or wallet share, we're now able to address.

Do you think adding file -- I mean you're going after a multi-protocol typical array, right? And so the file is going to be a really critical element to this, right, when you add file protocols?

Yes, yes. I mean absolutely. I mean I think the way I look at it is it just further widens the aperture. And so we're getting our feet wet with the Tier 2 block workloads, again, because we have a massive head start over the competition bringing this technology to the market and bringing flash into these parts of the data center. We're going to go after it aggressively. And certainly, as file comes online second half, that's going to just help open the aperture a little wider.

So how do you make sure that -- one of the questions we get from investors is that FlashArray//C could potentially cannibalize the core product, the X series. So I know you said different capacity tiers, one that -- one of the piece of the feedback we got from the channels, like, with the 500 terabytes, right, for the initial tier?

366, raw. But yes, refactoring data reduction. Yes, it's pretty big.

It's pretty big. So that -- was that done intentionally, just to keep some distance with X? Or is that -- how do you think about that?

Yes. So how do we think about where it fits in the portfolio? Look, the way I'd answer that is FlashArray//X is 10x faster than FlashArray//C, 10x. But the FlashArray//C is 10x faster than the disk array system that it's replacing. And so we think of the segmentation really as being driven along performance lines. Now with that being said, the next question is, well, why did you focus on bringing such a large capacity box to market? Well, it turns out that if you look at a lot of these enterprise customer kind of footprint, in a lot of places, these Tier 2 workloads are the ones where, over the years, they've gotten a less -- a lot less care and attention and feeding, they kind of spread like bunnies. They're all over the place. And they just tend to be very large capacity wise. And so they're great targets for consolidation. And as you know, we are able to, on our larger capacity systems, drive a better price point just because of efficiencies of scale. So that's where we've seen initial demand. And -- but -- and as we gain more experience, if we get a lot of customer demand pushing towards lower capacity, it's certainly something we'll take a look at.

So Kevan, the 20% bookings commentary from the call, it seems like there's a lot of confidence in that for the year. How does FlashArray//C play into that? And kind of what are the different components that give you the confidence, right? It must be, at some level, maturing cohort of certain rep groups that are coming online in '21, but maybe take us through the high level, what are the top 3 drivers to get to that number?

Well, that's great, Alex. I mean I think the -- first of all, FlashArray//C is obviously part of that bookings growth percentage for next year. But it's a rollup. I would say that we rely on the field in terms of what the field is calling bottoms-up approach, in terms of how they're looking at it, whether it's an account level, whether it's a geo level. Obviously, pricing is considered. ASPs are considered. And then we look at the total portfolio as well. But yes, I do feel good about it. And this was -- when we look out to next year, this is where we started to see a divergence between our bookings growth rate. And then our revenue growth rate, really driven by the momentum we're seeing in our subscription services, including Pure as-a-Service, which is fantastic. But yes, so when I look at the bookings number, I just thought it was an important metric, an annual metric to look at because that's how we're viewing the growth of the company for next year. And that's what drove in the investment plan behind it.

Can you see a scenario where, because of the growth of the Evergreen and as-a-service platform that maybe we're talking about bookings more consistently about the business on an annual basis going forward and not just this year?

I think so. I think it absolutely could be a metric that we use going forward beyond this year. But also other metrics that might be useful that we'll continue to evaluate as we get more and more momentum throughout the year, which we fully expect.

Right. Do you think your channel partners can sell as a service, I mean sort of a little bit more complexity as to how that product is sold, right, the ROI framing rate and the payoff and all that type of kind of discussion point?

No. I mean -- so yes, I absolutely believe our channel partners can sell it. And I think if anything, it simplifies a lot of the selling motion. For one thing, gives our channel partners and our resellers just a lot more places to add value in terms of service delivery. And ultimately, when you frame up to a customer the pricing models and billings models for Pure as-a-Service, it actually ends up being a lot simpler than doing capacity planning exercises. And so I think that's what we're seeing in terms of early customer uptake and adoption and interest really, is on customers wanting to gravitate towards, "Hey, it's just a lot easier to think about, I pay this much per terabyte or per 10 or 50 terabytes. And if I need more, I'd go buy more."

Right. Do they have to -- just from a deployment perspective, like what's the array? I mean did they have -- are they -- do the arrays show up with like a certain amount filled? Or is there a certain amount of capacity just not turned on, like how is that actually?

Yes, yes. So I mean -- so maybe the way to think about it is it's very similar to how you buy infrastructure from public cloud infrastructure. So you -- there's a minimum kind of reserve capacity, minimum commit, if you will. And exceeding that, we kind of bill on-demand capacity. Now customers, we give customers plenty of visibility into what that looks like, both in real time as well as in terms of our capacity planning tools through Tier 1. And customers at any point in time can raise that capacity. You get that reserve capacity in a co-term basis. And so yes, I mean, what it looks like is when the deal is negotiated, there's a certain reserve capacity set. We'll put a little bit of additional gear on the floor to cover kind of burst around demand usage, and then we'll work with the customer and the reseller to continually evaluate that and see, hey, do we need to add more here? Or very rarely -- I mean storage basically doesn't shrink. But if it did, we would look at, "Hey, do we want to pull some of that gear back?"

Any questions before I wrap up with a couple for me? Competitively, there's been a lot of changes in the marketplace. EMC has gone through a couple of different cycles, right, the post-Dell combination, there's obviously a lot of change to the commercial group at EMC. It seems like maybe EMC is finding it's footing a little bit more, and then there's maybe some changes with some of your competitors. So just win rates and overall competitive commentary, Kevan, how do you see it right now?

Well, I've had a quarter to look at it. And obviously, we're quite pleased with the performance this quarter, which is simply the result of solid win rates right across the board. And so from my perspective, I view it as solid. We were pleased within our outlook in terms of what I'm seeing in the marketplace continues. So I'm not seeing any significant change in our win-loss rates with the thought that our win rates are solid.

Yes.

Okay. And just last question about leverage, wrapping it up here. Leverage came down a little bit in consensus models for fiscal '21 and '22. There have been a target set out there a few years ago and now also, then -- and just how do you think about getting back to those targets and what the different drivers that would need to be in place to get there?

Yes, fair. The long-term philosophy is unchanged in terms of driving more operating leverage. Looking at it for this upcoming year, really, I think the biggest component was the compression due to the momentum we're seeing in our subscription services. As simple as that. And the growth projection of the business of 20%, that's how we develop the plan. And obviously, that puts compression on our leverage for this year. But I'm excited with what we're doing. We've got some great innovation that's continuing from an R&D standpoint. So you will see an uptick in R&D investment as a percentage of revenue year-over-year, that's a great trade. I'm happy with that trade. Sales and marketing, we'll continue to invest on quota carrying, but we will make some efficiencies on the nonquota-carrying side. And we'll see the percentage of revenue of that coming down, which is a good answer. And then I think from a scale standpoint, this company has grown at a very rapid pace. And I think there's some things we want to do to make sure we can continue that journey, that growth journey. And so you'll see a little bit of an uptick that would be nonrecurring from the G&A side to really set us up for scale.

Okay. All right. No other questions, we'll wrap it up there. Thank you. Perfect, Rob. Thanks, Kevan.

Thank you.

Thank you.