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

Good afternoon. Thanks for joining us today. I'm Jack Andrews. I cover the data analytics and infrastructure software space at Needham. We're very pleased to have with us today Kevan Krysler and Rob Lee from Pure Storage. Kevan is the CFO; and Rob Lee is VP and Chief Architect. [Operator Instructions] But just -- maybe just starting out, I was wondering if you could just give a quick overview of Pure and your position in the marketplace. From my perspective, a lot of people keep asking me about your company, is it a -- are you a hardware company? Are you a software company? Are you sort of a hybrid solutions company? So how do you think about yourselves? And what is the core value proposition of the problem you're trying to solve for customers these days?

Absolutely. Thanks, Jack. And I'll get started and maybe Kevan can jump in as well. So the short answer is yes, all of the above. So Pure provides -- so we provide market-leading storage and data management solutions, which is to say we help customers really modernize their data storage. If you look back to the beginnings of Pure, really, we saw an opportunity to fundamentally disrupt and modernize the way that companies were storing and working with their data. And so part of that was certainly about bringing new technology into the fold. And so that's, for example, making use of flash, driving the benefits of the performance, lower power, cooling savings and space savings that can come from flash. But mostly, it's a whole new approach to the software that drives storage systems that really makes this possible. And it's that software that really leads to ultimately the values we're able to deliver from our products, which is, to say, lower operational overhead. That's both hard and soft costs to managing storage infrastructure. That's allowing customers to drive consolidation. So our software is really able to meet the needs of customers, both customers, traditional as well as modern, high-performance and newer cloud-native applications and be able to power all 3 sets of those types of environments. And it's also our software that really makes it possible for our products to be deployed and managed in a wide variety of environments and more flexibly and more sustainably over time. And because this is mostly software-driven, as I mentioned, we're able to deliver these benefits to customers across a wide variety of environments, whether that's on their premises, whether it's in the public cloud, whether it's in a hybrid cloud deployment or commonly across multiple clouds -- multi-cloud. These product elements -- and really, say, the ethos that binds them together really also drives our highly differentiated Evergreen offering. And this is really founded in our desire and really our ability to drive consumer-like simplicity into the enterprise and enterprise infrastructure. Our modern software approach really means that, for example, our arrays, our products are completely auto tuning, self-driving, cloud monitored, if you will, and really constantly improving, right? The arrays themselves are really designed with 10-plus -- over a decade -- kind of lifetimes. And they're designed more importantly to be constantly upgradable and upgraded both software and hardware without creating any sort of disruption, right? So non disruptively, completely in place. And so from a customer's point of view, what this means is a couple of key things we're able to drive through our Evergreen subscriptions. Customers never having to rebuy an array. So once an array is in place, Evergreen is really what allows you to continually evolve that asset and evolve that data management solution over time to suit your needs. It provides customers access to future software capabilities. As a customer, never kind of stuck in this position and forced to play the waiting or timing game of, hey, do I buy now or do I wait for XYZ feature in the future? That's all part of the Evergreen subscription. And lastly, Evergreen also provides you access to periodic hardware upgrades to the latest and greatest. And really, the ability to grow and flex your deployment to larger capacities or consolidate your usage over time. So when we step back from it, what all this really translates to is unparalleled customer satisfaction, right? A key metric we look at is our NPS score or what's known as the Net Promoter Score. And what this really is, it's a measure of how satisfied customers are, how likely they are to recommend a particular product or solution to a friend or a colleague. And this is an area where we consistently have one of the highest NPS scores, I believe, the latest one is 83.5 in the industry. And when I say the industry, I'm not just talking about storage or enterprise, which we're heads and shoulders above the crowd, but really the technology and really consumer space as a whole. So hopefully, that gives you a sense for our ethos and where we started and came from. As we look forward, a couple of thoughts. One is we continue to improve and continue to focus on improving how customers are interacting with really their overall data management infrastructure. And as I mentioned, initially, a lot of this was about bringing the lessons from the consumer space into enterprise, into infrastructure and into enterprise data management. Now we're really focused on bringing a lot of the lessons and attributes from the cloud space and cloud management into the enterprise as well. And so that's really turning our attention to delivering storage to applications and developers, really in the way that a cloud service is meant to be consumed, which is to say, completely automated, completely and natively integrated and tied into applications delivered to apps and developers in API-driven ways and delivered and connected across a wide variety of environments, whether that's prem hardware, whether it's in the cloud, across clouds, really capping off on each of those. And so lastly, I wanted to highlight -- as we navigate forward, I wanted to highlight a couple of -- several of the key growth drivers we see as we look forward. Number one, what I'd say is this transition of the traditional data center over to flash from magnetic spinning media continues. And if anything, we see signs of acceleration. And so that's where being able to -- with our software IP, with our core products and making use of new technology such as QLC, being able to drive that transition with FlashArray//C in particular, and being able to take flash to compete against midrange hybrid disk systems and midrange disk systems in general is a key growth driver. Number two, what I'd highlight is FlashBlade, right? And so this is our high performance product, really targeted at modern unstructured data needs. We all know that data is growing tremendously, particularly in the unstructured space. And that's where FlashBlade really is well positioned to capture that trend and really grow on it. Number three, I'd highlight is really the influence and effect of cloud and cloud-based technology in consumption, right? And so this is -- we see this in the growth in our storage and cloud subscription services, but also in the rise of cloud-native applications. And so that's where you see our offerings such as a Pure Service Orchestrator or Portworx now as well, really layering in as well. So a couple of key growth drivers there. So this is a bit of a whirlwind overview, but gives you a sense of how we've really evolved over the years from a single product company really to where we are today, offering a wide set of highly differentiated solutions, really to meet the entire spectrum of customers' data needs.

Right. Well, I really appreciate that overview. And you touched on so many different angles that I would love to follow up on. So maybe just sort of starting off.

I think on your most recent earnings call, you talked about customers are increasingly looking for things to help them with digital transformations, in particular, and that's sort of a common initiative that we hear about all the time these days. So could you maybe put it in terms of real-world terms? Like how can Pure's solutions really help with somebody's digital transformation? Or is there sort of a recent example of a customer win you could provide along those lines?

Yes. So I'll get started and again, invite Kevan to jump in as well. What I'd say is customers want to drive outcomes from the data, which is to say get to the valuable insights, drive business decisions and not just have products to manage. There's a couple of key ways that we help customers get there. Number one is oftentimes step 0 or step 1 is just needing to modernize together, right? If you're spending all of your time, managing rigid and legacy systems, you don't have time to spend on the valuable parts of data analysis and data management. So that's where really just the benefits of our core products, benefits of flash, benefits of performance, efficiency, lower TCO we can drive is really a key starting point. Number two, I'd highlight is the simplicity and flexibility that we can drive. And so this is where again, both allowing customers to spend more time on their more strategic data initiatives rather than just managing, keeping the lights on and the care and feeding is super important. But also the flexibility that we offer with our solutions to, for example, start small, grow very quickly over time, being able to do that completely in place. Not having to plan for downtimes, not being locked into rigid lanes of consumption or performance, drives a lot of flexibility and ability for customers to consolidate multiple workloads onto the same set of assets. And then number three, what I'd say, is the benefits of our software and really the performance and consolidation that our software can drive for customers and applications also makes it -- makes our solutions very differentiated in being able to enable more complex analytics pipeline. So whether this is traditional analytics, whether it's AI, scientific computing, whether it's genomics, a lot of these end-use cases have a wide variety of data needs and being able to address all of those very uniformly and very seamlessly gives customers a tremendous amount of flexibility. And so ultimately, it's the combination of those things that drives a ton of customer value. And we see this in a number of modernization wins, right? So we've highlighted a few in the past, but there's 1 that jumps out in my mind. When we look at one of the customers we referenced in the last quarter, we had a large chip design company choose our solutions across the board really because at the end of the day, the combination of those 3 attributes, the performance we could deliver through the products, the simplicity, the flexibility, and the flexibility of the subscriptions offerings that they could consume through meant that this customer could improve their time to market, essentially drive more R&D productivity through their company and save money and save operational costs all at the same time.

Got it. Well, I appreciate that. So I wanted to dig into a little bit more on the technology side of things. You clearly have some best-of-breed technology across your core FlashArray and FlashBlade products. So how does this technology advantage evolve as you broaden into some sort of -- some of the new lower range, cloud-based -- Pure as-a-Service file services and things of that nature?

Yes. No, it's a great question. So if we look at our key technology differentiators, there's a couple that I would highlight. And I think these have been important in the company's history, but they become ever more important as we look forward. So number one, I've highlighted that the software aspects of our products. It's really the software/hardware co design that makes our products and puts Pure and well -- positions Pure to take advantage of a lot of the newer flash technologies out there such as QLC. And so the fact that all of our products are really powered by software that's designed for flash from the ground up. Ultimately is what allows us to deliver the benefits of the hardware to market a lot faster, more effectively, be able to do it a lot more efficiently, essentially get more bang for the buck, if you will, out of the underlying hardware both from a storage efficiency capacity delivery perspective, but also performance and lifetime and durability perspective. So that's kind of the #1 differentiator I'd highlight there. Number two is, again, coming back to simplicity and flexibility, right? The idea that our software really allows and is designed to power products for decades-long lifetimes, really forces a number of product attributes that become very important as we look forward. Number one is this idea that if something is going to live for 5, 10, 15 years, well, it's got to be designed from day 1 to be constantly upgradable, to be -- and be taken through these upgrades and different evolutions in size very nondisruptively. And so that fluidity, that ability to be constantly upgraded is -- it was important in the past, it's ever more important now. And certainly, as we look to more fluid environment, such as cloud environments becomes ever more important as we look forward. Number three is, again, coming back to this idea of consolidation, right? This idea that our software and the performance and really wide dynamic range of environments that we're able to handle through our products. It allows our customers not only to simplify their footprint, standardizing a smaller number of discrete products, but also allows them to deploy more and more complex or expressive or varied environments or software stacks on top of our products. And so this was important -- again, this was important in the past in terms of helping customers just wrap their hands around their entire storage of state. But as we look forward, as we see how customers are deploying open-source software packages, open source technology, cloud-native applications, these are environments that are very highly varied in terms of the software that's deployed and so having a single or very simple and seamless and flexible infrastructure stack to be able to serve all of these needs becomes very, very important. And again, this is true, whether it's on-premise, whether it's in the cloud, whether it's across the premise and cloud or across clouds.

Right. Got it. So just to follow up on that, particularly on the cloud side of things. I mean how do you view the advantage of Pure delivered as a service over AWS relative to the cloud vendors in-house storage offerings?

Yes. So I think, ultimately, customers want a seamless and modern data experience, so to speak, which is to say, they want to be able to manage their data. They want to be able to do it seamlessly, efficiently and as I mentioned before, natively connected to their applications, their developers. And they want this, whether it's in the public cloud, whether it's -- they want it on-premise, they want it in a hybrid and multi-cloud deployments as well. They need to be able to run in multiple environments. And they need to be able to do this more importantly without having multiple different software stacks or sets of processes or teams of people managing this. And so I think that's where the key advantage of Pure's cloud solutions come in. A couple of things, right? So number one, it's 100% software delivered, as I mentioned before. And so because it's the same software that's powering our on-premise products or appliance-based products and our in cloud products. It gives customers that portability and flexibility to run the same way regardless of the environment they're in and really be able to make that decision on other grounds. Number two is, we've really focused on enabling the Tier 1 mission-critical workloads, and these are the hardest workloads to move. And frankly, These are the hardest workloads to provide for in the public cloud environment. And that's where we really set ourselves apart even from the native cloud provider solutions. Number three, what I'd say is we focus on it and really address customers' needs, both in terms of traditional and for their cloud-native workloads. And so for customers, in the enterprise, more often than not, we see them trying to balance these 2 worlds of, hey, I've got my net new applications and development efforts. I might be looking to the public cloud for those, but I also need a way to modernize my traditional applications. And so we're really the only ones that are able to address both of these sets of needs. And then lastly, I'd say, we're able to address these needs across a variety of environments, across a variety of types of workloads. But we're also able to offer this through a unified subscription, right? So giving customers not just the flexibility and uniformity in how the products behave, but also in how they're consumed as well. So a customer can start on-premise today, it started in the small size, grow very flexibly within that subscription. They could move to the cloud down the line, move across clouds and be able to do this, knowing that this is all wrapped up and provided for under the same unified subscription. So I think if you look at those key attributes, very, very differentiated, both in comparison to the public cloud providers as well as the traditional enterprise providers.

Right. No, thanks for the perspective on that. So shifting gears a little bit. You recently closed on the acquisition of Portworx, you're sort of following on the theme of application modernization. What role does Portworx play in terms of just the push towards the adoption of containers and Kubernetes? And how does this fit with your existing portfolio of solutions moving forward?

Yes, absolutely. Yes. I mean Portworx is a highly strategic acquisition for us and really a great fit for our modern application and cloud strategy, right? If we step back a little bit, cloud-native technologies such as containers are really the way that modern applications are being built. In that realm, storage and really data management needs are critical -- utmost critical needs. And really, that's where Portworx fits in as the market leader. And so from -- through that lens, the combination here in Portworx is really a great fit in a couple of key ways. Number one, I would say that, first and foremost, this is about combining 2 market leaders really both with innovative and differentiated data management solutions, now being able to cut across, again, traditional business applications, modern, high-performance unstructured data and analytics needs as well as now adding cloud-native or containerized applications, being able to serve that entire breadth of workloads and environments. Number two is, I'd say, this is a huge step forward in Pure's cloud strategy, which is to say helping our customers better connect to the cloud and bringing some of the cloud attributes to our customers. What Portworx adds to the fold in that strategy is really being able to serve containerized applications, being able to take customers with these types of applications, be able to connect them across prem and cloud environments. And you combine that with Pure's Cloud Block Store, and you now have a very compelling set of solutions, again, across both the traditional and the modern applications. And then lastly, I'd say that from a customer and a go-to-market lens, I think this is a very strong portfolio addition that at the end of the day, also allows all of our sellers -- all of our existing sellers, I should say, to just have much more strategic conversations in pretty much each 1 of our customer accounts, right? Almost every enterprise customer has some sort of container project at various stages of development. And really just adding Portworx into the fold to a degree just allows us to have much more strategic conversations with these customers about these modern initiatives and allow us to get into the game really at any stage of where they're at. So hopefully, that gives you a sense of where the Portworx acquisition fits in and why it's such a strong strategic fit on a couple of fronts.

Sure. No, I appreciate that commentary. So Kevan, I wanted to bring you on the conversation here. When we think about your push towards Pure as-a-Service, how should this shift play out from a financial perspective? How do we think about the impact on the P&L? And sort of what are the kind of the key metrics that investors should be focusing on as you move on this journey?

Yes. Thanks, Jack. And again, just as a reminder, right, we've got kind of 3 categories of subscription offerings. One being more at scale and the other 2 are ramping very, very nicely. It'd be our Evergreen subscription model, and that's the model that where I just think Pure was so innovative years ago in developing out and really that subscription model is running at scale. So in terms of headwinds specific to the P&L, on those subscription services, I wouldn't highlight anything specific there. Whereas on Pure as-a-Service and a unified subscription that Rob was talking about, obviously, with the traditional sale of software, you're going to get about 70% of that revenue coming on delivery on a traditional sale. With a unified subscription, Pure as-a-service, all that revenue is being now recognized over time. So day 1, you're going to have some headwinds on revenue recognition. But look, as the offering is growing, which we've seen significant growth this year. That will help mitigate any day 1 offsets as we go into and we think about the continued momentum for next year. And then obviously, Portworx will layer on to that over time as well. And again, that's more of a longer-term driver for our revenue growth of subscription offerings. Today, when we're kind of looking at data points of the continued traction we're seeing with our subscription service offerings. I'd break it down right now just to 3 primary elements. One is really the continued monitoring of how much revenue, recurring revenue we're driving as a percentage of total revenue is something to look at. Obviously, we've introduced RPO, and we've been talking a lot more about RPO in the last couple of earnings releases continue to do so as long as -- as well as with deferred revenue. But both of those data points give you some nice color in terms of how we're doing across the board with our recurring revenue streams. And then as we look out to next year, we'll look to see if there's some other data points that would provide more value for our investor base, specific to our recurring revenue streams, Jack.

Sure. No, I appreciate that. And just a follow-up, how should we be thinking about gross margins, in particular, as this Subscription Services mix is changing over time?

Well, sure. I think, again, our Evergreen subscription model is really running at scale. So I want to -- I think there's opportunity there, but I don't think it's significant, and we'll continue to monitor how things are going from a gross margin perspective on our Evergreen subscription services. We're investment mode really on Pure as-a-Service, early days. And so I would expect that over time, we're going to get more and more scale and optimization in our gross margins for Pure as-a-Service. And then longer term, as I've mentioned, with Portworx growing and being part of the subscription category, obviously, that's all software, and we'll have a nice contribution for us to gross margin.

Right. So just to follow up on that. So just again, given sort of the moving pieces that are currently in place, what sort of framework should investors be thinking about in terms of balancing investments in the business versus some potential margin leverage over time?

Yes. I think there's a real opportunity, Jack, for both, really immediately, and that's how Charlie and I have been driving that. I think there's significant opportunity across the board for continued revenue growth, and Rob's highlighted many of those elements where we think we can get significant differentiation and value and growth from the revenue side. But at the same time, I think there's opportunity for us to look at operating margin leverage. We're really focused on what we can do, especially in sales and marketing to drive more efficiencies. I think we've had a lot of learnings, especially as we've navigated through COVID that we'll be able to leverage those learnings post-COVID as well to drive those efficiencies and sustain some of those efficiencies.

Got it. And then just following up on the management front, you've made a couple of organizational changes, recently. You have a new Chief Revenue Officer and new Chief Product Officer. Could you update us on what's happening there, and the strategic rationale for some of these changes?

Yes. Look, we're excited to have Dom on board and Ajay, our Chief Product Officer coming on board. And look, this is just really all about building on our past successes and momentum. When you look at both of these leaders, Rob described how much of our value and differentiation really resides in our software layer. When you think about our new leaders with Dom and Ajay and their experience with software and making sure that the value that we're providing to our customers is well explained and delivered. I think the idea that our platform is expanding both in terms of our technologies and business models, both Dom and Ajay have great experience with multiple platforms and expanding technologies and how those technologies are delivered and sold to our customers. Really, with the experience, both Dom and Ajay have great experience both within DevOps and ITOps. DevOps is becoming much more critical for us, especially with our strategic acquisition of Portworx. So great value from my front on that perspective. And then lastly, just the knowledge of the different business models and being able to navigate these business models that work best for our customers and drive the best outcomes for our customers in a multi-cloud hybrid environment with -- and again, both Dom and Ajay, have great experience in that front. So we're really excited to have them on board at Pure.

That's great. Great to hear. So just thinking about moving forward, how do you think about the storage market and kind of this -- your end market, I should say, in this postpandemic world, do you think that your solutions are being prioritized more? Or how do you see the importance of any changes to your overall importance relative to your customers in sort of, hopefully, a more broad-based and, hopefully, more normalized macro environment in the coming year?

Yes. And I'll start and Rob, please feel free to jump in on this. But I think we're well positioned. And going into this COVID environment, Charlie and I made a decision that we would invest and continue investing, especially on innovation. With the objective of being -- positioning ourselves with strength coming out of this COVID environment. As we've looked through and navigated through the COVID storm, obviously, I've talked about the learnings that we can get in terms of selling motions and delivering from a marketing standpoint, the importance of digital versus physical, and how that can be leveraged, which I think is really important. We've talked in our previous earnings around the strength of enterprise. We made some good investments back in 2019 around the enterprise markets, and that's helped us a lot navigate through this COVID storm. And so when you think about the technologies that we have and that Rob's kind of walked through that we are really excited about in terms of being growth drivers. And then with the assumption that we're going to get the reacceleration and market share capture that we had pre-COVID with these expanded technologies and the resurgence that we expect coming back from the commercial business as well as more customers now I think freeing up their decision-making to move to more efficient technology platforms such as Pure. And I think that's been more challenging as we've navigated through COVID, especially you've seen that through our net new logo metrics, which we continue to bring on new customers, but not at the same level pre-COVID. And we do expect to see some strength there post-COVID. Rob, is there anything else you would add on that front?

Yes. No, I think, I definitely agree with all that. Only other -- a couple of things -- points of color I'd add is. I think, Jack, at the end of the day, customers' data needs don't stop, right? If anything, post-COVID, I think the data needs become more magnified. And look, in some cases, more urgent. I think what does shift a bit is we see customers giving more careful consideration to where their dollars are being spent. Customers are taking this opportunity, I think, to really focus on making sure they're getting all the value out of every dollar they spend. They're focusing on things like flexibility, things like simplicity and agility, right? This idea that -- and I think the pandemic brought this front and center this idea that, hey, I can -- it makes sense to design and configure and stand up infrastructure for bespoke needs that can't be flexibly repurposed -- turned on a dime, I think, is becoming antiquated. This -- instead being replaced this idea that, hey, my infrastructure spend needs to be ultimately flexible, needs to be simple, needs to be agile so that it can flex and grow and evolve to changing business needs very, very quickly, I think, is coming front and center. And so to Kevan's point, I think as we look to our continual customer adds, why customers are looking to Pure even in this time when, if anything, continuing to buy from your existing vendor is kind of the easy button. I think it's really that they're recognizing that our technology really can enable and is highly differentiated in being able to enable this type of flexibility and agility. And then you pair that with the flexibility we can additionally drive through our subscriptions offerings, I think, positions us very well in a post-COVID and postpandemic type of environment, as Kevan said.

Sure. No, that makes a lot of sense. So we've got just a couple of minutes left. So I just want to ask each of you sort of in the brand new calendar '21 year here, what is the hardest problem that you're trying to solve over the next year?

I think the -- from my lens, the most important component in terms of navigating, whether it's calendar '21 or our fiscal '22. It really is about navigating through this remaining storm of COVID and exiting in a position of strength, which we fully expect to do so. And what does that timing look like? When do the backstop of the vaccines really take hold, and we really see a recovery taking shape and making sure that we are capitalizing on that in every way possible is really my focus at this point.

Yes. And I would add on to that. I think from a product road map and product strategy perspective. I think coming out of looking forward in this year and coming out of the pandemic, I think we've got a lot of opportunity in front of us. And I've highlighted a number of our key growth drivers. And so I think it's really about continuing to maintain and drive a market-leading position in our core businesses as well as growing very significant new opportunities in front of us when we look at, again, the rise of the application sets and environments that we're addressing with FlashBlade, taking QLC with FlashArray//C into the disc market where flash is really before Pure never gone before. And then certainly, with Portworx and the whole container space and the rich kind of ecosystem and growth there. It's about really being able to capitalize on all the opportunities that are ahead of us.

Right. Appreciate that. Well, I think we are just about out of time. So I think we'll sort of wrap it here. And thank you very much for joining us this afternoon.

Appreciate it, Jack. Thank you.

Thanks.

Yes. Take care.