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

All right. Thank you all for joining. I think we're going to go ahead and get started. I'm Matt Cabral. I cover IT Hardware here at Crédit Suisse, and we're very pleased to have Pure Storage here joining us. Charlie Giancarlo, who's Chairman and CEO; and Kevan Krysler, CFO. So thank you both for taking the time to join.

Our pleasure, Matt. Thank you for having us.

Of course. I guess maybe to kick off the conversation. And apologies. Before I do, just a reminder to everybody that we're not taking live questions, but we are giving the option to e-mail. So if you want to shoot me a message that you'd like me to ask the team, it's matthew.cabral@credit-suisse.com.

So with that, I guess, to start off, Charlie, 2020 has been a challenging year in a lot of ways, it's probably the understatement of the conference. But wondering as you're talking about customers and they're starting to think about budgets into next year, just how they're planning for things. And the biggest priorities that are coming across the conversations that you're having?

You bet. You're absolutely correct. I mean 2020 has really tested all of our resilience for sure. And part of the challenge has been, of course, the rollercoaster nature of it, right? And now entering the winter months and seeing COVID cases on the rise again. But as we went through, we really saw -- anticipated and saw a pattern, which was that in Q1 of the year where COVID first became a significant issue from an economic standpoint in the middle of the quarter, actually, the quarter was quite good for us because we had to make a lot of emergency shipments for companies that were dealing with all of a sudden having all their people at home or enhanced -- you're doing all of their business on the internet and having to enhance their systems in order to be able to deal with that. So that was unfortunate due to the virus, but a strong quarter for us. We anticipated a slowdown in Q2, which is what we saw. And largely because -- less because of the economy per se, and more because customers that were going to spend, wanted to spend the time replanning. They had built plans for the year. And of course, corona upset all of that. And they hunkered down to take stock of the situation and to replan their IT trajectory for the year. We start to see them come out of that in Q3. With new plans with the termination 1 way or the other as to how they were going to engage from an IT standpoint. And I would say, on average, a strong commitment to much greater focus around digital transformation, that's been a buzzword in the industry now for a very long time. As you know, I mean, we've all been either talking about it or commenting on it. But I think what companies found is that during COVID, that it was the companies that were better prepared from a digital standpoint, not only for their own employees, but for their customers, who were doing better. And so most companies, companies that were not, let's say, most affected economically by COVID, decided to reengage and to re-up even more strongly in their digital transformation trends. We started to see that in Q3. In Q4, which obviously is in front of us now. Our view is that companies are better prepared to deal with corona. And with the prospect of vaccines to ameliorate the situation in the spring and summer are deciding to invest in the business, so they come out of it stronger. Now this is a bit of speculation on our part because this was all before the new lockdowns that are taking place with COVID. So we have that uncertainty, right? Do we go with the greater intent by companies to invest in their IT environment for digital transformation, knowing that this is -- this crisis is probably going to end sometime in the next, say, 6 to 12 months. Or are they going to respond because of the new lockdowns that are occurring, probably a slower economy in the next quarter or 2, are they going to respond to that? So that's the yin and the yang of the current situation.

Got it. That's helpful. And I want to return to that yin and yang in a little bit as we get more into the conversation. But before we do, I think one of the things you spent a decent amount of time on the earnings call talking about was just customers looking more and more for -- I think you called it complete solutions or outcomes as they're starting to make that journey for the digital transformation. I guess maybe just expand a little bit on what you meant by that? And what you think Pure's role is in helping to deliver those complete solutions to customers?

Yes. We spoke about an outcome orientation by customers. And what we meant by that is that if you think about almost any purchase that anyone makes, right, you're either -- you have some outcome in mind. And the purchase might be a tool to enable you to get to that outcome or it might be the outcome itself. So let me just give you an example of a consumer. A consumer might buy a washing machine, but the outcome is clean clothes, right? If the customer -- if a consumer could just have clean clothes, they wouldn't bother buying a washing machine in the first place. And in the case of -- if we look at why our customers -- IT customers moving to SaaS environments, the alternative was buying software. Now if you bought software, you had to implement it, you have to load it, you have to run the environment, the IT environment for it, and you usually had to customize it for your internal users. But the outcome that you wanted was either you wanted a ERP capability or you wanted a human resource management capability or a customer management capability. That's what you wanted. And Saas, if you will, a SaaS environment, gets you closer to that outcome because you're no longer having to implement software. You're no longer having to run an environment. You're getting much closer to the outcome that you wanted, which is simply enabling your employees to be able to engage directly, with the tool that they need to run that environment, right? So in our environment, what does that mean? Well, the outcome that customers want is to enable their developers, their internal developers, to be able to get access to the storage and data management that they need via code rather than pick up the phone, calling IT, IT having to physically procure storage capability, implement software, tie it directly to an application, which can take weeks or months. What developer -- what companies actually want is to enable their developers with an infinite set of capabilities that's basically transparent or, as from the developer standpoint, is invisible. And so that's what we're delivering increasingly with our Pure as-a-Service capability, which is data services, data management services that the customer interacts with through either code or through a GUI based on a website. And in our case, whether that storage sits on the customer premise or whether it's in one of the hyperscalers, it all looks the same to the customer, who's able to engage in it through code. So that's what we mean by delivering outcomes rather than delivering just the means for the customer to be able to create the outcome on their own.

And building on that, and Kevan, maybe to bring you in the conversation a little bit, I guess, how should we think about the ramp of Pure as-a-Service and that playing out from a financial standpoint. I guess how do we think about it impacting the P&L over time? And just the adoption curve versus the more kind of CapEx-based purchasing models that we've all been used to for you guys and just the industry more broadly?

Yes. I'll take that first, Charlie, and then feel free to jump in. But I think we're quite fortunate, Matt, because a couple of things. First of all, we're starting here where we've got 1/3 of our total revenues are really driven by subscription services. And the genesis was years ago where Pure made this decision to offer an Evergreen subscription that would allow and enable customers not to have to go through a disruptive upgrade or refresh, which really all of the legacy providers really push their customers towards. And that really -- what that created was this nice base for us in terms of customers continuing to see the value of our Evergreen subscription, and that's growing with some really nice momentum. And so when we think about layering on our Pure as-a-Service unified subscription, where that's going to get layered on is a couple of things. One is it's going to create some greenfield opportunities for us. So customers who ordinarily may have decided to go a different path, Pure may not have been a vendor that they were previously looking at. I think that opportunity has expanded for us with Pure as-a-Service and unified subscription. So there's a greenfield aspect there. I think existing customers now have choice, whether they want to continue to grow and expand their Evergreen subscription services and continuing to buy CapEx? Or do they want to expand their footprint using the unified Pure as-a-Service subscription. So they have choice from that perspective. The other greenfield opportunity for us over time, around the subscription services, is going to be Portworx. And again, that's going to be incremental as well. So it's not going to be a choice really of would that customer have gone a CapEx route versus subscription, Portworx will be completely incremental as we layer on these subscription services.

Got it. That actually leads well into my next question. And maybe, Charlie, back to you. So on Portworx, I guess, as the world starts shifting to more of a sort of hybrid multi-cloud approach, I guess what role does Portworx play in that move towards Kubernetes or maybe containers more broadly? And how do you think about Portworx in the integration relative to the rest of your portfolio?

Right. Well, it actually, in some way, completes a major puzzle piece in our overall strategy. So if you look at what we've done already, right? We're able to place our software in addition to our -- obviously, our equipment that goes on-premise, our software runs now today, natively on AWS, right? On top of EC2 comes right out of the AWS marketplace. We are doing the same thing in Azure. We're currently in beta today. We should be GA within the next quarter or so. And so it's a multi-cloud capability for traditional workloads, that is VM-based workloads or bare metal workloads. We had already been supporting container-based workloads on our equipment on-prem. And that -- under something we call the Pure Service Orchestrator, but it did require our products on-prem. What Portworx delivers to us is 2 things. One is they provide a so-called software-defined storage capability that works both on-prem and in the cloud. So again, it's a multi-cloud capability where customers can start very small with storage that operates either in the cloud directly on top of their EC2 or Azure Instance or Google Anthos image or it can operate on top of their own servers or by the way, it can also operate on top of Pure arrays. And in addition to that, a Kubernetes layer above that, that orchestrates data management workloads above it, such as disaster recovery or back up or a variety of other capabilities, replication, et cetera, which is also something we've been working on internally for traditional workloads. So what Portworx brings to us is that ability to extend our presence under a consistent user interface, consistent set of APIs for both so called cloud-native container-based workloads as well as traditional workloads.

Got it. And maybe going back to the demand environment that you're seeing and a little bit back to that, kind of yin and yang that you mentioned earlier. I guess it feels like the demand environment is still a little bit tough near term, particularly looking at what's going on in your product side of the business. I guess maybe expand a little bit more on what you think is holding customers back and how that translates into maybe potential for some pent-up demand going into next year or how that plays out from here?

Yes. Well, I think we have 2 really good examples in our business as to why we feel the way we do. One was what happened to our international sales over the last several quarters. We had weakness in our international sales in Q1 because, well, basically COVID hit international earlier than it hit the U.S. market. And we saw that slowdown in international in Q1. And then international came back in Q2 quite strongly because we had seen, again, that it's hard -- it's easy to forget now, but Europe exited their -- that early part of the COVID crisis earlier than the U.S. did, right? We saw weakness in the U.S. And then going into Q3, we saw a strength in -- initial strength in Europe, and we saw that weaken through Q3 as Europe again went into lockdown. So what we see is that buying patterns follow the COVID lockdown quite closely, right? The second aspect of what we saw is the take-up in our Pure as-a-Service offering with COVID. That picked up very strongly as customers didn't want to make long-term commitments and wanted the flexibility to be able to move between on-prem and the cloud. And we saw that pick up quite a lot during the -- starting with COVID, it really accelerated our use of Pure as-a-Service with our customers. What this tells me is that there is pent-up demand, there is -- customers are driving towards this digital transformation that we spoke to earlier, but they're holding back because of uncertainty. The last thing I'll mention is our net new logos. So Pure has been very strong as a growing company in adding net new logos every single quarter. And almost every quarter, given our seasonality, we see year-over-year increases that are quite significant. The last couple of quarters were the first 2 quarters in our history where net new logos were down year-over-year. Now, we're still quite proud of it because they're only about 20% down in a market, and the reason why is because customers are more reluctant to try either new vendors or new products. And we believe that as soon -- when the COVID crisis is over and customers are able to reengage once again, we'll see that pickup in net new logos. So all this things -- all these things, you put them together, gives us confidence that once the COVID crisis is over, we're going to see a good pickup.

Yes. And maybe if I can...

Go ahead, Kevan. Yes, please.

Can I add just a couple of things to Charlie's point, specifically for Q3, when we're thinking about the demand environment that I viewed as particular highlights. Look, our FlashBlade offering in our FlashArray//C second generation record sales in the quarter in Q3, nice pickup in terms of what we're seeing in the demand environment, both sequentially as well as for those solutions on a stand-alone basis. We're quite pleased with the performance there. We're also really quite pleased with what we're seeing in the enterprise business. And that's broad-based. We mentioned that a little bit on our earnings in terms of the growth that we're seeing with our enterprise customers. As you might recall, that was kind of an investment we made back a couple of years ago, really looking to penetrate the enterprise customer base, saw some nice strength within the demand environment on that front, which was quite pleasing as well. And so those highlights, I think, are, in particular, new and incremental to what we've seen sequentially as we've navigated through COVID. And then the subscription services themselves. I mean that's been the light through the storm of COVID where Evergreen and the unified Pure as-a-Service has really delivered some significant momentum for us. So hopefully, that adds a little bit more context as well, Matt.

Yes. No, it does. Thank you, Kevan. And Charlie, to sort of the point that you ended with about once we get to more of a post-COVID normalized demand environment, I guess how do we think about the steady state for Pure? I guess, is this still a business in your mind that's a sort of double-digit top line? Or what is that kind of return to the new normal look like longer term?

Yes. All of our investments in the entire company is focused and we believe it is a -- we go back to a double-digit top line growth company. For a very -- a couple of very simple reasons. One is, we exist in a huge market. And despite our growth and success, we're still have a lot of market share that we can gain on. And remember, every one of our sales, every one of our net new logos, for the most part, comes at the expense of our competitors environment. Secondly, we also expect, at the same time, to be transitioning more and more to a subscription business. Not 100 -- I want to be very clear, we're designing this to -- for our customers to be able to buy the way they want to buy, whether that's capital or subscription. We just find that the economic value and the flexibility that our Pure as-a-Service offering provides to customers is so great that many of them will choose to go that route, especially with the unified subscription where customers can choose where they want to place their storage, whether it's on-prem or in the cloud.