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

Hello, everybody. Thank you for joining. It's Tim Long here with a breakout session with Pure Storage. We're lucky to have with us both Charlie Giancarlo, CEO; as well as Kevan Krysler, CFO of Pure.

So we're going to dive right into it. Maybe let's start, Charlie, with you. Last quarter, you talked about a little bit of a shift that you were seeing from customers kind of from like emergency infrastructure type of strategy back to getting more onto the technology migration plan. Could you talk about that a little bit more? And do you think we're kind of out of the woods as far as the business kind of returning to somewhat as normal as we can call normal these days?

Sure. I'd be glad to. Actually, it's played out very much as we postulated. I don't know that we fully anticipate it, but we certainly postulated, which is in Q1, as we reported on our Q1, we did, in fact, see a significant number of emergency, I would call them emergency orders where customers who had to, all of a sudden deal with both work from home that they were not fully prepared for at 100% level, right, as well as generally enhanced amount of web traffic, really had to upgrade their environments to be able to support that sort of thing. And then as well, a number of the large-scale communications providers, same thing, where communications, all of a sudden went through the roof, having to upgrade their environments. And so there was a bit of it oddly, a tailwind in Q1 because of that. As we -- and even on that call, as we started to enter Q2, we indicated that we were concerned in Q2 that customers now, after catching their breath, needed to replan what their IT investments were going to look like. And so we did see that pause in Q2 as customers instead of, let's say, actually putting things in production or in moving forward with plans that they had already put together, were rethinking are their plans. As we exited Q2, we thought we would see some solidification, if you will, of those plans and a return to actually implementing those IT or digital transformation plans. And if anything, we saw a real commitment to making digital transformation -- or digital transformation became real to many customers because they couldn't live without it now. It wasn't just a nice to have or something for the future. It was something that in order to stay alive and to thrive in the new environment -- within a pandemic environment they needed to put into place. And in fact, we started to see that and did see that unfold as we went through Q3. And I believe there have been questions, well, how did we see these things? What was it that allowed us to -- or to take these walkaways, what was the evidence? And for us, it was really 2 things. One is just direct conversations with customers. We speak to them directly. We get a sense of what they're doing in the month in the quarter. And these were things that customers told us. But secondly, we also saw it in the behavior of pipeline. We saw a massive shift out of pipeline at the end of Q1 and Q2, which is well beyond what's ordinary in any one quarter. But then we saw a solidification of the pipeline in Q3 or going through Q3. So these are some of the signals that give us confidence that at least the way that we believe this is playing out is, in fact, playing out. And you had asked as well what's our general view at this time. And what I would say is that the companies that are still operating in this environment, of course, we have sections of the economy that are just not participating in this economy, right? But for the ones that are, their plans have really firmed up. And I think with the vaccine backstop that will occur, mid to late next year, they're confident in their spending plans at this point. So while I don't expect to see a massive increase in the economy until at least mid next year, what I -- what we do believe is that companies' IT investment plans have solidified, and we should see increasing progress or improvement in that.

Okay. Great. You did just following up on that pipeline. Is there -- it sounds like it was a strengthening pipeline through the quarter looking into Q4. Is it the type of thing where there's still concerns given the macro situation of the virus? Or do you think we're now at a point where there's you can have a little bit more certainty even in the near-term demand drivers?

Yes. I would say that, as you say, as we went into Q4 in our earnings call, we saw strengthening in the pipeline overall. I think without the vaccine backstop, I think we would have a lot more concerns than we do today. That being said, the rise in COVID cases is certainly very concerning. And if anything, we've -- what we've learned is that the effects are somewhat unpredictable. But what I will say is, I do think that given the backstop that many companies will choose to continue to invest.

Yes, let me add on to that, if I can, Charlie. A couple of things that I would add on to that is I do think that we, as a company, have gotten more comfortable on our selling motion in this environment, remote selling, digital selling. I also think buyers are more comfortable making purchasing decisions in this environment compared to when we went -- first went through this COVID crisis. So I do think that mitigates the risk somewhat. But to Charlie's point that, that risk is still there. And frankly, that's the resurgence of COVID is the reason why we did not provide formal guidance coming into the quarter. The other thing I would say is that the enterprise business continues to do well. And frankly, the enterprise business has frankly done much better and fared much better than what we've seen on the commercial side. And given the investments we've made back in the beginning in 2019 with our enterprise segment, that's obviously helped us. And I think that's mitigated somewhat of the risk as well with COVID, especially compared to what we've seen in the commercial sector. The last thing I would highlight is really around our international business, which, frankly, has been a good indicator or a indicator of kind of what we have seen in terms of when countries are going down in lockdown versus coming out of lockdown. And so we'll see if that is representative of what we see coming out of this resurgence. But obviously, when we first went into the COVID environment, we did see the international business being heavily impacted. Coming out of lockdown, we saw a really strong recovery, 20-plus percent growth in our international business in Q2. And then we saw the international business going back down on lockdown early in the quarter, and we saw some impacts of that, again, as a headwind. So that's another factor to consider as we're navigating this COVID environment, Tim.

Okay. Great. That's helpful. I do want to touch on some of the diversification of product, which is something you highlighted last quarter, and it's been obviously a pretty big positive for the company. So could you just talk a little bit about kind of where we are with FlashBlade and also FlashArray//C? It seems like the second version of FlashArray//C is really gaining traction. So maybe touch on both of those. And particularly on FlashArray//C, maybe talk about the migration of that product because it seems like a really large TAM opportunity.

Yes. Thank you, Tim. Well, first of all, both products continue to grow very well and well above the average of our company overall growth rate. FlashBlade continues to expand its market reach. For example, by adding a few features over the last couple of quarters, we've been able to deeply penetrate into the computerized design automation market. So that's -- and also given the rise in ransomware, that's also been a major area for growth in the FlashBlade market. We see continuing opportunities going forward. We're very positive on that product. FlashArray//C is one of the fastest growth, if not the fastest growth product we've ever had. The second-generation in your -- as you described it, there was -- when we were able to leverage the economics of so-called QLC flash to where now that product can actually cost less than hybrid disc arrays. So it's a very compelling product. Not only does it cost less, it takes 1/10 the space, 1/10 the power and cooling. So it's a very compelling product. And I'll just state that it's growing at a very rapid clip despite the fact that in the COVID environment, it is more challenging for customers to test and deploy new products or new vendors. And so we're very pleased with the growth that we have there. Now what I would say, though, is that one of the fastest growth areas that we've seen is our Pure -- what we call our Pure as-a-Service offering, which is now where our customers can get the benefit of data storage and management entirely through subscription, regardless of whether it's on-prem or in the cloud. We have a unified subscription that allows customers to only pay for what they use when they use it, and where all of the storage is managed by us, regardless of whether it's on-prem or in the cloud. So it truly is -- looks like a cloud service to the customer, and that's been growing very rapidly. And I would say this is our major initiative as a company is to enable our customers -- what we talk about with our customers is cloud is not a destination. It's an operating model. And so we want to enable our customers to really have data management that is multi-cloud in nature and where they are able to operate that data management entirely through code and through SaaS-based user interface. So whether it's on their premise or in the cloud, where their applications do not have to be refactored for data in those 2 different environments and where they can do so for both traditional applications, which are largely VM-based as well as bare metal as well as what's called cloud-native or container-based. And with our Portworx acquisition, we're able to do just that, is that give them one environment for both cloud-native as well as traditional applications that can be managed across a multi-cloud substrate.

Okay. Great. Yes. Talking on subscriptions, and maybe this one's for Kevan. Obviously, you have a new Chief Revenue Officer coming in as well. Just curious how you think about the services and subscription model, how that rolls out. How do you take that even further? It sounds like it's really a directive of the company. Is it something that the sales force is compensated more on -- how do we think about how far this as a service offering can go through the portfolio?

Charlie, let me have you take that off first with the CRO. We're really excited with Dom coming on board as well as our strategy with subscription, then I can get a little bit more detail. But do you want to take that first, Charlie?

Sure. I'm so pleased to have Dominick come on board for a wide variety of reasons. One is you're correct, Tim, of course, that we're migrating or, let's say, we're enjoying great growth in the area of subscriptions, and that's a significant change for any organization. But just 4 years ago, we were a one product company. 2 years ago, we were a 2-product company, and we just talked about 2 great new products with you Tim, not including Pure as-a-Service. We're now a multiproduct company. That basically has a platform of data management as a service. What's great about Dominick coming on board is Dom has decades of experience introducing new products into multiproduct companies. And every new product is a new learning curve for our sales organization, and it's important to have the experience of what it takes to train that sales organizations, train the channel, develop those motions. Dom has, as I said, decades of experience in that area. Not to mention, he is experienced in every component of a data center. Networking experience, compute -- from Cisco, compute experience through VMware, storage experience through VMware. He ran the software-defined data center, global leadership at VMware. So we're really very, very pleased to have him on board. We do expect -- our subscription revenues have been consistently increasing year-over-year, now representing about 1/3 of our overall revenues, and we can expect that to increase. Kevan, do you want to go into greater detail?

No, I think that's perfect, Charlie. Thanks.

Great. Along these lines, maybe discuss a little bit the partnership or the role that the public cloud players will take the AWS and Azure as you get more involved in kind of these hybrid multi-cloud type of environments.

Yes, absolutely. So we are -- our code is available today on the AWS Marketplace. We are in beta currently, but expect to soon be general availability on Azure as well. We've gotten numerous accolades and awards from AWS in terms of the design of our product, the utility of our product. AWS customers are able to use their AWS commitment against our product, which is very strong. We're expecting very similar things when Azure goes general availability. We are, without a doubt, I think -- everyone who watches this industry knows that we are the innovation and the quality leaders in the storage market. I might refer you to the most recent Magic Quadrant by Gartner, who has us on the coveted upper -- highest and furthest right position. We're very pleased to be there. We've always been furthest right, but now being highest level in terms of ability to execute is a welcome sign. That -- those skills that we have are second to none anywhere, including in the hyperscalers. And our code are running on the hyperscaler environment allows our customers to have the highest resiliency, highest reliability, highest performance. And very importantly, highest consistency for their traditional apps in the hyperscale environment. Hyperscale environments when designed natively or designed directly are very good in, let's say, cloud -- nontraditional cloud-native application design. But not -- they've not been designed for the lift and shift operations of traditional enterprise, whether that's VM-based or bare metal, and that's where we excel with our Cloud Block Store. Nor is the cloud design so-called cloud native good for applications that require state, such as databases and so forth. And that's where our Portworx acquisition comes in, where the Portworx data store allows for applications that require state, which are a large number of enterprise applications that require state to be able to get the kind of storage services that they need to be successful in the cloud. And Portworx, like Pure now, works both on the hyperscalers as well as on-premise. So again, it gives that multi-cloud capability to customers.

Great. Just wanted to touch on kind of profitability, investment in the business. It does seem a lot like we're talking about, obviously, you guys are best-in-breed gross margins, telling us products differentiated, and there is a hefty software component to it. But it does feel like we are moving even more towards software-based solutions. I know you're kind of bumping up the top end of the gross margins. But maybe just do you see the business evolving to have a different mix over time? And what's the impact? And then Charlie, I know you get this question all the time, but always been a lot of sales investment here, and you guys are doing pretty good with the limited wine dinners. So is there kind of a different cost basis? And I'm assuming on the R&D front, if you're going to run with these 3 or 4 product categories now, there could be some leverage there. But if you're going to continue to innovate with some other products, I guess that would be a put and take. So...

So let me start with that, and I think Kevan might have a few comments on that as well. So currently, our subscription products have a very consistent margin with our hardware products currently. Although as you identified, 95% of our engineers are software engineers. So our customer -- we get a premium for our product and higher margins than our competitors, I believe, largely because of the quality and the unique characteristics of our software. Inclusive on that is our Evergreen model, which is based on our software, which is that our customers never have -- our products are always new in our customers' environment. They never have to take their applications down. Year after year, we upgrade the software and hardware in what's called a nondisruptive fashion. So the customers never need to replace their system once it's been put into place. And that's all enabled by our -- by the software characteristics of our company. It's a promise that we have to our customers going forward. I would say though that as we migrate more and more of our business to Pure as-a-Service, and right now, as I mentioned today, that has a very consistent profitability -- gross margin profitability, I believe that over time, that gross margin can increase. But it's -- right now, we're very comfortable with our current medium-term guide on gross margins overall. Why don't you go ahead, Kevan, if you got something, and then I'll go into overall company profitability.

No. I think you're spot on. I think just a couple of smaller things, and this is probably a little bit more longer term, but as Portworx continues to grow and obviously, I think I put that in the intermediate to long-term framework, that's going to be incremental, I think, to our gross margins on subscriptions. And then to your point, Charlie, as we continue to scale Pure as-a-Service, a unified subscription offering, I do think there's some continued opportunity to expand gross margin longer-term on that offering as well. And to your point, Tim, on the product gross margin, I am kind of pleased with where we're sitting on there. It's a nice balance. Definitely being recognized for the value and the differentiation of our products and technology. Obviously, last year, I think we were a bit -- there's an overperformance element, if you will, really being driven by the pricing dynamic. And so when you take that out, I kind of like where we're sitting in terms of our product gross margins.

In terms of overall company profitability, we've been direct that we were -- as we went into this year, pre-COVID, we were expecting roughly a 20% growth and roughly 5%. This is what we did in our first call of the year and roughly 5% operating profit. Obviously, that got sidelined with COVID. But we do expect that with growth that, that growth will inure to the bottom line, that we will not be growing expenses at the same rate as top line growth. So we are expecting to put more points on the bottom line as we exit the crisis.

Great. We're running out of time here, but maybe just one quick one, Charlie. It's obviously done the company very well, the diversification. You walk us through kind of 1 product, 2 products, and that's really been beneficial. Do you think we're at the point where you're reaching the level of offerings that you think are enough for you to enjoy continued high growth in this market? Or do you think we might see other adjacencies emerge as we look out over the next year or 2?

I believe in products, we -- the answer, in a sense, to your question is yes and yes which -- by which I mean that we have 2 hardware products, FlashArray and FlashBlade. We believe those products will suffice to really address the 80% or 90% of the storage market that we think is of interest -- overall interest to us. Now FlashArray//C is a variation of FlashArray. So we'll have further value -- file on FlashArray is additional software on FlashArray. And as we broaden our Pure as-a-Service offering, that will be additional software and capabilities on top of those platforms. So we do think that in terms of hardware platforms, we're, for the most part, where we need to be. Those 2 platforms, one being scale up, the other being scale out, cover really the bulk of the customer base and use base that we're going after. Continued software innovation across the board, both hardware -- both on that hardware as well as in the cloud and software-only, we will continue that. But to your -- but perhaps to your larger point, as I mentioned before, with scale will come leverage. We will turn it -- as it is now, we're investing just under 20% in revenue in R&D, which is a high number. We expect that to come down certainly over time.

Okay. Great. I think we are at the end. So Charlie and Kevan, really appreciate your time. I appreciate the insights. Have a great rest of the day and stay safe. And thank you, everyone, for joining.

Thank you very much, Tim.

Thank you, Tim.