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

Hi, everybody, and welcome to the Deutsche Bank Technology Conference on our second day. I'm Jeriel Ong, the IT Hardware analyst here at Deutsche Bank. And with me, we have a few executives from Pure Storage, CEO, Charlie Giancarlo; and CFO, Kevan Krysler. Before we jump in, the format is a fireside chat. But before we jump into the questions, I'd like to give Pure Storage, a couple of minutes here to start off and describe their company and open this up before we jump in. All right. Go ahead, guys.

Well, thank you, Jeriel. Very pleased to meet you all. I'm here with my CFO, Kevan Krysler, and I'm very pleased to be presenting to you. So for those of you that perhaps are not as familiar with Pure Storage, I'd like to give you, hopefully, a brief update on our -- how we got started and what we represent and where we're going. So Pure Storage was started just over -- or just about 11 years ago. We were the company that recognized that magnetic media was aging and really causing the storage industry to slow down its pace of innovation and recognized that something that was very new flash -- flash memory could actually be used as an enterprise storage capability. So we developed the first enterprise scale and enterprise-class flash storage, mass storage. Introduced it to the market about 7 years ago and that allowed Pure actually to tie for first place as the fastest-growing company in B2B technology. So we grew to $1 billion in about 5 years after shipping our initial product and have continued to grow at rates much faster than the industry as a whole. We were able to achieve that because we recognized that the software required to manage data at both high-speed and as a solid-state environment was entirely different than the software that had been developed to provide magnetic storage. Furthermore, nearly all of our competitors, all of the people in the magnetic storage business had been in the business for 30 years or more, and were really suffering from aging software stacks. So our storage software really focuses on getting the best out of solid-state storage, delivering that with low total cost of ownership. One of the things that had characterized and still characterizes most of the storage industry is that, vendors will regularly update their hardware on roughly a 5-year repeating basis. And at that point, force their customers to go through very disruptive upgrade cycles, where the customers need to migrate their data, take their systems down, a weekend job with lots of risk associated with it. We had decided right from day one, that we did not want to put our customers through that. So we developed a capability, which we call Evergreen, which provides a cloud-like experience on-premise. And what that means is that our customers never have to take their systems down. We consistently and constantly upgrade the systems, both software and hardware while the customers are still -- have their applications up and operating. And this allows for a service where the systems in place at the customer are always new and never cause any downtime to the customer. This allowed us last quarter to have the highest reliability in the industry at [ 79s ], which is the equivalent of only 3 seconds average downtime per year. And of course, we're continuing to improve even upon that, at least 10x higher than the industry as a whole, if not larger than that. So this has really allowed us to develop a very strong reputation in the industry. We have a Net Promoter Score, which is a very tough measure of customer satisfaction, over 80. And now to give you a sense, that puts us in the top 1% of all companies worldwide in any business. The customers love our product and love the company because of the high reliability, the simplicity of the product and the fact that it never causes them to have to take their systems down. So just to bring you up-to-date then on where we are and where we're going in the future. We've migrated our software to AWS and Azure. That allows our customers to have the same experience and the same interfaces to their applications, whether on-prem or in the cloud. We've put that together into what we call a unified subscription. So the customers can have -- can pay for only what they use regardless of where they use it on-prem or in the cloud. And it allows the customers to have truly a multi-cloud experience, all able to be managed and accessed via APIs through their standard orchestration software environment. And this has proven to be one of our highest growth areas right now, the -- what we call Pure as-a-Service, because it allows the customers that flexibility to have, as I said, a multi-cloud experience, whether it's on their premise or on their favorite hybrid cloud vendor, their hyperscaler vendor. So with that, Jeriel, let me turn it back to you for questions and be glad to answer any of your or the -- anyone on the webcast, their questions.

Awesome. And so as a reminder, you can submit questions through the webcast, and we'll definitely leave some time close to the end to jump into them. But I guess with that in mind, you guys recently reported, let's jump right in. You guys recently reported earnings a couple of weeks ago. And on that call, you talked about a weak U.S. environment, at least for your company. And obviously, for you guys relative to some of your competitors, the U.S. really matters as you have about 70% of your revenue coming from U.S. sources versus peers that maybe closer to 50% or less. And so as we kind of forecast the growth for your company going forward, is that U.S. demand, the only factor the investors need to monitor? Or there are other factors that could drive growth going forward?

Well, in U.S., of course, is always important, frankly, in any tech business. And as you point out, it's a larger percentage of our business, although International has been growing. And I think that's just a reflection of our age and maturity as a company that as we continue to grow our expectation is that International will become a larger and larger fraction of our revenue. But there are a lot of elements that go into our mix and growth. Certainly, net new customer is also important for a growing company, a scaling company. And in the COVID period, new customers -- we are still proud of the fact that we had over 350 new customers in the last quarter, although that was down from prior quarter and prior year as to be expected with a COVID pipe situation. We also -- about 50% of our revenue -- over 50% came from enterprise, but that's still a growing area for us. We're still about 50% commercial as well. And so as we continue to grow in the enterprise, that will also show growth for us going forward. So commercial has been particularly hard hit in the last quarter. So I think we just had some -- uniquely some things in the last quarter were somewhat unique to the situation. We do see -- we do believe that as the current situation as customers become more accustomed to this COVID environment that we should see improvement as we go forward.

Got it. And I appreciate that answer. And I want to touch on something you mentioned there about the customer growth. And so I guess, historically, your revenue growth as a whole has often been tied very close to your customer growth. I published your chart in the past in my work, which shows there's basically a very significant positive correlation between the year-on-year growth of the number of customers you have versus your revenue growth. However, in the past few quarters, it seems to be changing, in particular, for example, with the rough guidance for the next quarter for revenue. It's almost a 25 to 30-point delta in growth between -- meaning that customer growth could grow 20% to 25% year-on-year, even if it's flat quarter-on-quarter, but revenue is guided differently, perhaps down year-on-year. And so I guess why is the delta widening? Could you help us understand what's going on with the customer mix that's maybe causing this delta in customer growth versus revenue growth?

Sure. I think that's a very short-term phenomenon that's taking place. Again, COVID based. What it simply says is that while we're -- we continue to be able to develop new customer relationships that on average, customers spent less than the last quarter. And our expectation is that there is a bit of a slowdown in purchasing activity during this COVID environment. We expect that, as I said, to moderate as we go forward. So I think it's really more of a few quarter phenomenon not a long term -- it's not a long-term trend.

Got it. I appreciate that. I want to jump over to Kevan and ask a couple of financially related questions here. And welcome, Kevan, to the conference as well. And I want to focus on something that you guys talked about in your latest call, which is about the rest of the world margin. And so with the last quarter, you guys sort of noted that the rest of the world grew really well. And -- but also that the margin related to that is slightly dilutive, at least in comparison to the United States. As you scale and U.S. would, by definition, become a small portion of the mix. Does that margin delta change over time? Does the rest of the world approach U.S.? Or do you expect that to sustain?

Yes. Thanks, Jeriel. The -- when we think about the mix globally and how that's impacting really our product margins, you're right. We did indicate that the increase in International business did have an impact on our product gross margins. But it wouldn't -- when I think about it from a long-term thesis standpoint and where we think margins will land long term, that does contemplate the fact that our International business will be growing at a faster rate than our U.S. business. So I would say that from a long-term thesis perspective, that's already been incorporated in terms of how we're thinking. From a short-term perspective, yes, you may get some variation depending on mix. And if International continues to be strong as we saw last quarter, you may see a little bit of an impact on product margins because of mix. And then obviously, some strategic deals also played a part in where we landed with product margins as well.

Got it. Appreciate that. And I guess just one on operating expenses. In the past, you've largely elected to grow operating expenses almost in line of revenues, modest amounts of incremental margin leverage have been achieved in the last couple of years. Does the present demand environment change your plans at all, your approach to operating expenses?

Yes. And I'll let Charlie to speak a little bit about this as well. But when we went into the COVID environment and the related recessionary effects associated with COVID, we made an intentional decision that we would continue to thoughtfully invest really in areas around innovation on the product side and to a more limited aspect on more capacity on the sales side. With the idea to strengthen ourselves that when we're exiting this recession, we'll rebound back to accelerated growth rates that we've seen historically. And that's been tracking well for us. And in the meantime, we're also very diligent in terms of looking at areas where we can do business differently to further optimize and leverage our operating dollar investments, and that's been going quite well as well that we'll be able to leverage as well as when we exit the recessionary environment. So I'm actually quite pleased with our plan in terms of how we've gone into it from an investment decision standpoint, while at the same time, taking advantage of doing things differently and optimizing where we can to set us up nicely for real accelerated growth and more leverage on the operating expense side. Charlie, do you have any other thoughts on that front?

No. Kevan, I very much agree with the way you've described that. And just to be clear, we're very confident in our development plans and in the products that we -- frankly, we've introduced a lot of products over the last year and the products that we will continue to deliver over the next year or 2. We operate as the best-of-breed vendor in our market. We know that the -- that all of the challenges that are presented right now by COVID will eventually go away. And we believe that we will exit this the pandemic or the crisis, much even stronger than when we entered it. And at that point in time, we pick up 20% to 30% or we have 20% to 30% higher growth than our competitors, and we believe that, that will continue once we exit the crisis.

All right. Thank you so much for all that detail. I'd like to ask a couple of longer-term questions if you guys don't mind. And I want to understand some of the -- your expectations for new products. And so let's -- I want to understand how you see your company maybe 3 or 5 years from now. Obviously, at the moment, the vast majority of revenue comes from your first product, FlashArray, FlashBlade, which was announced about 3.5 years ago now has grown well to account for maybe 15% of your sales per your latest disclosures. But on the last call, you talked about this Tier 2 opportunity, FlashArray//C, and we have unified services, Pure as-a-Service, Cloud Block Store. These new and growing and perhaps more nascent portions of your business. I guess if you have the success that you predict from your company, looking at these couple of broad categories, FlashArray, FlashBlade, FlashArray//C, unified services, how would you think that your revenue mix could look differently, call it, 3 or 5 years from now versus how it is right now?

Yes. Thank you. Well, I think the main trend that we see is that more and more of our business is migrating towards subscription. And even though you mentioned products, many of our customers now -- I think the first thing to remember about any business, any tech business today, whether it's SaaS, hyperscale or whatever. At some point, the data and the processing lands on hardware. So in that sense, Amazon, Azure, they're all hardware suppliers. It's just that the -- they supply it on their own premise. And that's effectively what we're doing with Pure as-a-Service. With Pure as-a-Service, with our software, regardless of whether the software is operating on hardware in the customer's premise or on hardware located in Azure or AWS. We are providing a service level agreement and a subscription to our customers that is based on -- and our customers interact with us based on a set of APIs and through our Pure 1 management system, which is all web based. So the major transition that's taking place for us is the migration of our revenues from onetime CapEx sales to more and more of a subscription business. I've mentioned Evergreen at the very beginning. The way to think of Evergreen is even if a customer buys our product as CapEx at the beginning from that point on, it becomes a subscription service because all of our activities to upgrade and manage that array as that customer goes forward is all based on our Evergreen subscription service after that. So I would say the -- it's not so much about what product the customer may use on their premise or in the cloud. And it's much more about how customers are going to be choosing to consume those services. And again, not just financially, but frankly, technologically as well because consumption or interacting with a service, such as Pure as-a-Service is, again, all through API and programmer commands and orchestration rather than through a physical connection. Kevan, do you want to add to that?

No. No, Charlie, it'd be great to expand a little bit on your vision around the modern data experience and how the different solutions were coming out with kind of fit into that vision. So if you could highlight a little bit on that would be great.

Sure. It's actually -- thank you, Kevan. It's actually one of the reasons why I got involved in this business. When I looked at storage, I saw really quite antiquated technological environment where storage was still connected to individual workloads physically and could only attach to that physical -- it can only support that physical workload. Not unlike attaching an external hard disk to your laptop, but then not being able to share it with others in your family, whereas with any one of your popular web-based services, Dropbox, Box, OneDrive, et cetera, it's just a cloud service. You don't pay any attention to whether you need to buy more or less. You don't have to go out and physically connect something. It's always there for you, and you can share it with others. We're doing the same thing with Pure as-a-Service inside -- both inside customers' premise, their private cloud, and we make it multi-cloud as well. So that the customer now has this, we call it, a modern data experience, where as opposed to having to have their IT people physically connect physical arrays, to individual workloads, to individual application environments it really appears to be a cloud to their programmers inside their private cloud environment. And if they want to utilize the hyperscalers the experience of that -- of those data services looks exactly the same across the multiple clouds. So -- and of course, they only pay for what they use. So both physically as well as financially, it appears to be a cloud service.

Got it. That all makes sense. And I think you've made a great qualitative kind of argument for why this is the future of consumption in this regard and just based on my checks across competitors, it seems like the industry as a whole is kind of moving in that direction as well. But I guess focusing on unified services and on your -- as a service and Cloud Block Store offerings. Is there any sense of quantification? So it seems like you expect it to be more as a percentage of revenue, but any sense of quantification that you can provide for how it's grown relative rest of the business or sizing it or gross margins versus op margins in comparison? I think any kind of financial detail you can provide would definitely be appreciated about this growing part of your business?