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

Great. Thank you, everybody, for joining us this morning or afternoon, depending on where you're at. I'm Aaron Rakers. I'm the senior analyst here covering the IT hardware and semiconductor spaces for Wells Fargo. Pleased to have with us Charles Giancarlo, the CEO of Pure Storage; as well as Kevan Krysler, the CFO. Before we kick off, Charles, I think you wanted to just make a few quick comments, and then we'll jump right into questions.

Yes. Thank you very much.

Thank you for joining us.

My pleasure to be here, Aaron. Thank you for having us. It's a great pleasure to be able to meet with so many investors and analysts in the same environment. So I very much appreciate it. We -- just very fortunate timing in that we were able to announce our quarter last week, our most recent quarter, Q3 for us. Revenues roughly just slightly down year-over-year. But underneath that, a -- almost a 30% increase year-over-year in our Subscription Services, which is largely made up of our Evergreen subscription, which allows our customers to have their systems and environments continue to be brand new throughout not just the lifetime, but through many decades of transition as well as our Pure as-a-Service capability, which brings things cloud-like consumption and usage of our products, both on-prem and in the cloud to the multi-cloud. So very much pleased with that overall. Gross margin holding steady, of course. And I think what the increase in subscription revenues really shows is the progress that we've been making in terms of our overall strategy of delivering cloud-like services for our customers of data, for data storage and management to a multi-cloud environment. And what we mean by that is not just a consumption model or a subscription model, which at the end of day, a financial construct. But frankly, more of the technical capability of customers to be able to utilize their -- or, if you will, subscribe to storage and data management services, whether on-prem or in the cloud, as a consistent set of services that their developers get access to via code. If you think about the way that AWS or Azure work, the developer simply goes online, is able to engage with these services through scripting, through code or through a buoy service. We provide the same set of capabilities increasingly on-prem with our equipment in the cloud with our cloud block storage or Portworx code, and the customer is able to engage with those services through code and be -- if you're a developer unaware as to whether it's on-prem or in the cloud, and it allows IT environments to create cloud-like services on-prem or in the multi-cloud as a consistent set of services. So we're very pleased with the progress that we're making here. Portworx was a key acquisition for us. They had a great quarter, coming in well above their preacquisition plan. And we're making great progress on the integration, integrating what we traditionally had delivered, which is the ability to provide data management services for traditional workloads so-called bare metal or VM-based, and now with Portworx being able to do so for our container-based workloads both in the cloud and on-prem. So I think this is something that people that are -- that have been following Pure for some time, this is quite -- this is a relatively new direction for us. And it's really focused around the advantages that we have with our -- with the software that we've been delivering over the years.

Right. And aside from -- clearly, the subscription growth in the motion, I'll touch on a little bit, recently, a new hire, Chief Revenue Officer, with some subscription background. But are there other attributes as you think about your engagement, and Kevan, definitely jump in here, too, with investors that you just feel like are fully understood or appreciated in a Pure story? I mean I have some of my own thoughts, but I'd love to hear your thoughts.

Yes. I think there's been always oddly too much of a focus on flash and flash dynamics, almost treating us in a sense as a hardware company along the likes of western digital and not enough on the software value-add that we've been providing to customers in terms of simplicity, in terms of ease of operation, in terms of the way that we have always been very API-based and allowing our systems to be in order to be installed, utilized, managed through code, through orchestration, software and so forth. And the fact that our data management and storage management software is very, very new. It allowed us, for example -- and very moderate, it allowed us, for example, to port our software to both AWS natively as well as now Azure natively and so that customers can have the same experience across clouds. And we're the only vendor whose software enables primary use, high-performance enterprise applications to operate, not just on-prem, but in the cloud as well, without having to be refactored for the different types of environments that one sees in these different hyperscale environments.

Yes. That's perfect. And you mentioned at the beginning, you just reported results. You had a little bit of a year-over-year decline. I think product revenue is down 15-or-so percent. We've seen some of the others come out here over the past week or so, report their results. But one of the things that was pretty clear in your conversation last week was that you do have confidence that you're in a competitive positioning and the ability to kind of return to growth as we think about a pre- or post-COVID recovery. So I guess, what are the key tenets that you're seeing in the demand signals right now as well as the product positioning portfolio that gives you that confidence as we start to look into next year?

You bet. There are several things. First of all, as people that are -- follow us have known, we started out as primarily a commercially oriented sales operation, that is sales into the mid-market environment. And over the last 2-or-so years, we've been putting major investments on the enterprise space, which has been growing rapidly. A lot of the product decline really can be easily identified in 2 areas: one is the slowdown worldwide in commercial customers as well as in the higher conservatism of customers for trying new systems and new vendors. So -- and that shows up for us as net new logos. And those 2 items alone, that is the slowdown in commercial and net new logos, which is a global phenomenon for every vendor, explains the slowdown in product revenues. On the flip side, we have had a significant improvement overall, even in the net new logos in enterprise. We have been penetrating further with larger and larger deals in the enterprise space. And then finally, what I'll mention is that the uptake on our new products, even within this COVID environment, is really quite substantial. FlashBlade continues to grow. Our FlashArray//C continues to grow. Pure as-a-service has been really an incredible grower during the COVID environment. And on top of that, the -- as I mentioned before, the Portworx easily exceeded, it's a preacquisition plan. So this has been a really strong area for us, and we believe that even during COVID. And so we believe that after COVID, once commercial starts to return to growth, once we're able to re-engage even more strongly in -- with net new logos and net new opportunities, we're going to see a good return to growth.

As you find -- go ahead, Kevan. Yes.

Yes. I'll just jump in a little bit. In terms of validating Charlie's points, we're also seeing that translated in terms of the strength of our pipeline going into Q4. So I did make some remarks as part of earnings that we did see some improvement, not only in the sequential growth of our opportunities, all in the areas that Charlie was describing but also those opportunities are further evolved in terms of where in the stage they are. And that was a challenge we had going into Q2 and Q3, where the -- we started to see some improvements with our demand gen, but they were earlier stage opportunities. Going into Q4, we see the maturity of those opportunities, and that's another good signal for us in terms of our confidence going into Q4.

That's very helpful. Thanks for adding that. You talked pipeline opportunities. The other thing, Charles, that you've been working a lot on, and we've seen it both from a product execution side, but also go-to-market focuses this motion around our portfolio effect, right? The ability to have a FlashArray footprint and then going in and selling FlashBlade or now FlashArray//C, can you give us some metrics or qualitative commentary around the success that you're starting to see in that portfolio motion for the company?

Yes. A part of the improvement and the growth that we have in enterprise is simply that we're able to address more and more of their needs. I recall, when I first came to Pure a little over 3 years ago and started to engage with the customers, I was -- the enterprise -- large enterprises I was familiar with, they'd say, look, Pure, you've got a great product for one of our primary use cases, and we love it there, we wish you could cover more of it because we simply have to buy from some of these other companies and because you just don't fill in those other areas of our business. Now with FlashBlade, which really goes into high-performance analytics, AI, machine learning. And now even into backup, which was a big surprise, I think, to everyone, in the area of rapid recovery. And now FlashArray//C that can actually go after secondary workloads that have still -- up until now, still been the province of disk simply on a price performance basis. We're really able to go after a very -- a much broader 60% to 80% of most enterprise customers' storage base. The other part of this, of course, is that we've made our capabilities available, not just on-prem, but in the cloud and made it easy for customers to migrate from one to the other as well, by the way, as to be able to balance those to move it at any time without having to worry about financial risk of stranded assets. And that's been a big boom to us and part of the reason for the growth of Pure as-a-service.

Of your 8,400-plus customers that was reported last week, exiting the most recent quarter, is there -- I'm sure you guys tracked it, but is there a percentage of that customer base that I would say, hey, they're buying more than just one solution, be it FlashArray, plus FlashArray//C, how has that evolved? Or any metrics around that percent of customers of [indiscernible]?

Yes, I can talk about new sales. I don't know that I have it on the full 8,400. But in terms of new sales now, a roughly half of our customers in new sales are buying more than one product category from us.

Okay. And would you say that, that was substantially lower just a year ago?

Oh, yes. No doubt.

Yes, yes. And if -- and this is probably a Kevan question, if you reported record results on FlashArray -- or FlashBlade and FlashArray//C, I guess the question that in turn comes that I get from investors is, does that mean that the FlashArray, the traditional flagship, FlashArray//X product is declining at a decent clip? And if not, what am I kind of missing in that?

Yes. Aaron, I think you're thinking about that right, but it all goes back to the points that Charlie was making around the fact that the headwinds we're seeing because of COVID really is around commercial and net new logo. And obviously, the core storage and our FlashArray core products with X are under pressure as a result of the COVID environment. When I break that down, though, between our existing customers as well as the strength in enterprise, we're not seeing that severity as much with our core FlashArray//X product line. But definitely, there's pressure because of the pressure we're seeing on the commercial segment of our business with our core FlashArray//X product line.

That's perfect. And you -- we touched on it a little bit earlier because I agree, Charlie, that the subscription motion, the subscription element of the Pure story is probably not fully appreciated, our focus -- focal point enough from investors. You just recently announced a new Chief Revenue Officer, Dominick Delfino, who came from VMware. You clearly are showing that you want to lean in more to the subscription attributes of what Pure is offering. So maybe walk us through how we think about that evolving from here? How big could subscription be? Is there other elements of subscription that we think about from a model perspective going forward?

Yes. The first thing I'd like to impress is that for us, the -- it's not simply a financial construct, it is, in fact, a technical change in the way that our customers consume storage. Going from -- you could think of, in one case, and for most of our competitors, they'll construct something that looks -- that is based on a lease of some type, make it look like a subscription, but the customer is still effectively buying an array, managing that array themselves, and it's no different than what it was yesterday. In our case, first of all, the focus is on delivering a cloud experience to the customer and more importantly, to their developers. In other words, the customer doesn't touch a piece of hardware, they don't interact with a piece of hardware. And in our case, the developers get access to storage services through APIs and code, right? So the fact that it's so very similar to, if not identical to the way they interact with storage in the cloud. But in this case, it can also be in their own private data center. Two, is a true subscription service, meaning the customer is not committing to any specific period of time of assets on their premise. They could start out today, where it's 100% adding capability on their premise. And tomorrow, they can move 100% percent of it to our cloud data services in the cloud. We manage the equipment on-prem, maybe take it out, if there's no more use for it. And the customer is not committed to that, to any asset per se. Now they may commit to a subscription for a period of time. And of course, like in the cloud, that amount of time will determine the foundational cost. But it is operating as a true cloud service. Now from our point of view, we want to make it easy for the customer to buy. If they prefer a capital purchase, we're certainly willing and obviously very familiar with doing that. But increasingly, customers are choosing to buy as a service, both because of that technical aspect that I just mentioned, which is that they really do consume it technically like a service. We manage the entire environment. And we're able to do that -- and I want to make clear, we're not substituting our professional services for their -- for their internal labor, we're able to do this completely remotely all through software that we're able to manage the environment. We're able to keep tabs on the environment, predict where it's going, make sure that they always have a buffer to be able to increase their needs, if necessary. We're also ready to allow them to reduce their needs as necessary. But -- and if they -- and increasingly, I think customers are choosing to purchase that way because over the long term, it's actually less expensive for them because they're only paying for what they use.

And Kevan, on that basis, from an accounting perspective, I mean, that customer, I don't know if you could share how many customers you have that have decided just that kind of motion, that as-a-service deployment model. But walk me through the accounting -- the accounting metrics, right? You're taking -- you retain ownership of that piece of equipment, even if it's sitting on their on-premise infrastructure, correct me if I'm wrong, and then you're capturing the subscription revenue. So is there not a negative effect on the revenue in that kind of model, if more and more customers go that path? Or just help me walk through that.

Sure, Aaron. And I think you're thinking about that right. So in terms of the infrastructure assets supporting those service agreements that we execute with our customers, yes, we would own the underlying infrastructure, manage that infrastructure and then work with the customer in delivering on those service-level agreements that were agreed upon. And then obviously, as the customer is utilizing our services, that's when we would recognize the revenue and generally, customers are also entering into minimum commitments with us as well as on demand. So we do have some flexibility there, which helps normalize the revenue a little bit in terms of our ramp on the unified Pure as-a-Service. But you're thinking about that right in terms of how we are owning the underlying infrastructure and then the revenue generally is being recognized as we are performing the service with an element of more of a straight-line attribute associated with the minimum commitments that customers may enter into with us.

And on that perspective, one of the metrics that we've kind of always been a little bit interested in on a quarterly basis, I think the last 2 quarters, you've actually reported with the results, is this expansion of not just deferred revenue, but the total RPO, right? And so remaining performance obligations that grew, I think the number was 47% or something this last quarter. So remind me, again, when I look at an RPO balance relative to deferred, what I'm really looking at there is the delta, that largely makes up that expansion that you're seeing in that, if you will, book of business, that backlog for the subscription business. Am I thinking about that correctly?

Yes. Again, you are, Aaron. And absolutely, with RPO exceeding $1 billion, that was a huge milestone for us. And obviously, that $1 billion will be recognized as revenue over time. And it's largely driven really by 2 components: one is our Evergreen subscription category, which continues to have great momentum. And I do think, back to your original question earlier on are some things that investors and our customers certainly get, investors may not understand the tremendous value that we receive and give to our customers through the Evergreen subscription. I mean it's truly a hardware as-a-service, software as-a-service bundled solution for our customers. And obviously, as we've navigated through COVID, we've seen the benefits of that model come through again and again for us. But to answer your question specifically in terms of the difference between RPO as well as deferred revenue, both are growing, and both are growing because of the combination of our Evergreen subscription as well as our Pure as-a-Service. But anything that we don't bill associated with our Pure as-a-Service unified subscription that are related to noncancelable contracts. That's the difference what you see between deferred revenue and RPO, and that's what's showing up, and that's due to the growth of our Pure as-a-Service solution.

Okay. That's helpful. Charles, you touched on it a little bit earlier, the acquisition of Portworx. You talked about integrating. Just walk us through the importance of that acquisition, how you're addressing cloud-native containerization, kind of app development and I guess the simple question is, what is Portworx? What do I think about that really competing against?

Right. So the way to think about Portworx is that it really helps to enable enterprise application environments, to really migrate to sort of the modern way of creating those application [indiscernible] containers. And to give perhaps listeners a very, very short tutorial on containers, applications were virtualized first over the last 10 years using virtual machines, the so-called VMs, right, with complete operating systems intact in the environment. Containers takes that one step further to where the applications can exist alone within a container. Containers are also designed to be very ephemeral to come and go and easily to be able to scale up and scale down workloads, micro applications and so forth. Now containers, however, were designed in such a way to be stateless. Stateless, meaning that they don't maintain the state of an application environment. And most enterprise applications actually require state. Part of that state relates to the storage and the data that, that application needs to work on. So what Portworx does and what -- before that at Pure, a capability we had called Pure Service Orchestrator had, is the ability to enable containers to have state and to operate with state, meaning to utilize containers for mainstream enterprise applications. Pure had that with Pure Service Orchestrator to enable container-based workloads to work with our storage but of course, many new applications start out with just a few developers as the proverbial couple of coders and a credit card. And of course, our storage is for large-scale storage environments. So to help out early developers, Portworx has a so-called software-defined storage for containers, that can operate either in the cloud or really just on top of a server that the developers are working on in-house. And that allows them to get started. It allows us to get started early in the development cycle, which was a key area that we were missing. The second thing, though, there's another element that was very important to us, which is the Kubernetes control layer that Portworx had on top of that, that allows developers to easily add data management services. Things like disaster recovery, things like data replication or even backup for containers. And this blended very nicely with similar capabilities that we were working on in -- at Pure for traditional workloads on VMs and bare metal. So all that together really created a beautiful marriage between the 2 companies.

That's perfect. So in 5 -- or 4 or 5 minutes I've got left, I'd love to kind of rapid fire through a couple of questions.

You bet.

So I'll try and make this really quick. So Kevan, product gross margin, a dip below 70% for the first time in the last 2 quarters. Has something changed? Is there some change in competitive discounting? Or should I -- is it just -- it's a minimal kind of dynamic and you expect that not to be a big issue?

Yes. Key message is there. So we're actually pleased with what we're seeing with product gross margins, Aaron. Obviously, last year, there was an outperformance with product gross margins due to the dynamic we saw with pricing of NAND. But that was unprecedented. We don't expect that to come through again. This is kind of within our long-term range. With our expanded portfolio of FlashArray//C and FlashBlade. I like where we're sitting in terms of product gross margins. So we're pleased with that.

Okay. And then on the competitive landscape, there's a lot of discussion, a lot of investor questions I get around Dell EMC, new midrange refresh PowerStore. It seems like that's not had a -- not been off to the races, like I'm sure Dell would like. So I'd love to hear how you currently view the competitive landscape?

Yes. PowerStore, we've not -- as I stated on our call, we've seen very few instances of PowerStore from a competitive standpoint. And often, it's rapidly replaced from a bidding standpoint, with PowerMax. We tend to really be competing with PowerMax much more than PowerStore. I think we -- our view is that PowerStore still has a long way to go to be -- it's a version 0.9 product. It's got a ways to go to be truly performant as well as have the features necessary and the reliability necessary to be fully competitive. They're probably also suffering. It's a commercial product and probably also suffering from the fact that commercial market is down a bit. But currently, we feel very confident about our competitive position vis-à-vis Dell.

Yes. And then a final real quick question just from a portfolio perspective. I mean you were first to market, still, I believe, are the first to market with a QLC-based product with FlashArray//C series. That's a 30%, 40% price discount relative to the mainstream X series product. So just remind the audience of the positioning of that. And again, what you're seeing as far as opening up of new opportunities, new workloads for Pure?

Sure. I want to impress on the audience that C is -- actually, it's a bit more than 30% or 40% below X. It's lower performance than X, but higher performance than disk and hybrid arrays. And it -- so it goes into so-called secondary workloads, which is a very large part of the overall storage market that up until now has been closed to flash environments. In addition to that, we've added file services on top of FlashArray//X, which is the first time we have a file platform operating at the lower performance, lower cost market, FlashBlade being at the higher performance end of the market. So now we really do cover a larger portion of the overall storage market with the addition of FlashArray//C. It's the only product that competes as an all-flash product at these price points. We think we've got at least another year or more ahead of the competition. I think we'd be -- it's a very fast grower for us. And I think it would be even faster if we weren't in COVID right now and expect to see it really take off when the COVID crisis is behind us.

So I'm going to slip one final one in because I think I've got a minute left and not to kind of put you on a spot. But you mentioned earlier you addressed maybe 60% to 80% of the workload needs for a lot of the enterprises that you engage in. Should I look at Pure and say over the next 12 months, next 18 months, whatever that time frame may be, that there's further expansion of TAM opportunity like you want to come in and be able to really address a full 90% to 100% of that?

Well, outside of mainframe, I would say, yes. I don't know that mainframes in our future, maybe a little bit further out. But I think getting to 80% or so in maybe not some of the really specialized environments. Yes. And I think that's enough, by the way. Yes.

Yes. Okay. Perfect. I think I hit my time window. I really appreciate both of you guys joining the conversation today. Thank you so much.

Yes. Thank you very much.

Thank you, Aaron.

Thank you. Bye-bye.

Take care. Bye now.