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

Welcome, everyone. I'm Katy Huberty, Morgan Stanley's IT hardware analyst, and I'm pleased to be joined by Charlie Giancarlo, Pure Storage's CEO; and Kevan Krysler, Pure's CFO. Charlie has led Pure Storage since 2017 and has an impressive record of driving growth and innovation at leading technology companies over the last 30 years. Kevan joined Pure as CFO in 2019 from VMware, where he was Senior Vice President of Finance and Chief Accounting Officer. Both Charlie and Kevan have driven the company's move into cloud and the shift to an as-a-service business. And so I'm looking forward to spending a lot of time on those 2 initiatives today. Before we begin, for important disclosures, please see the Morgan Stanley Research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please don't hesitate to reach out to your Morgan Stanley sales representative. Charlie and Kevan, thank you so much for joining us today.

I wanted to start with a question for Charlie. Just thinking about the positioning and the forward growth drivers for the company. If we look back, Pure Storage came public several years ago. Clearly, a very disruptive force in the storage market around flash. Since then, competitors have spent a lot of time, a lot of money trying to play catch up. And -- while Pure remains the clear leader in flash storage, the market is becoming more mature and the competitive landscape a little bit more full. So talk about what you view as the next wave of growth for Pure? What does Pure Storage look like in 3 to 5 years? And are there market adjacencies that you think are attractive where Pure can really be positioned strongly, like your move into cloud over the last couple of years?

Thank you, Katy, and thank you, by the way, for having us here with you today. We appreciate the time in front of our -- in front of the investor community. We -- as you stated, we really made our name with -- by being the disruptive leader in flash. But the key thing that was different was our software. We designed it specifically to take advantage of the first and really only -- and I apologize for the phone in the background, for the first time that a semiconductor solid-state was used in the storage market, whereas before it had all been based on magnetic. And that software continues to evolve. We -- as you mentioned, we put that software directly on top of AWS and most recently, Azure, so that we have a very consistent environment between clouds. And then even more recently, we have used it to address the most recent version of flash, namely QLC. So one of the things that we believe will be equally disruptive to our first product that we introduced 8 years ago is we now have the first and truly the only product right now that can be an all-solid state, all-flash solution that competes in what's called the secondary storage market. So flash has completely addressed and has completely taken over the primary storage market. But frankly, the much larger secondary storage market is still all magnetic today. And with our FlashArray//C, we can now address that at prices that are even less than hybrid disk arrays. So that's a big new market opportunity. Another one is customers typically had thought of unstructured data as not requiring a lot of performance. And so they would put it into data lakes or data warehouses, expecting that it could -- they could do analysis on it at a relatively low speed. What they found out is no -- modern data analytics requires very high speed. So we have the first and only unified file and object of portfolio that allows customers to both store data at price competitive rates, but also to be able to analyze that data now, utilizing the latest in machine learning and advanced analytics. Finally, and I'm sorry to go on, but we're very excited about our portfolio. The thing that we're very excited about is our ability to be able to deliver our storage truly as a service. And as a service, both on-prem and in the cloud. And as a service doesn't mean just a financing methodology by which customers can subscribe to storage. It actually means customers interacting with their storage in the very same way that they would if they were using storage in the cloud. That is to say that it is able to be managed entirely online. That there -- we provide their -- the ability of their developers to be able to configure it and to be able to manage it. And frankly, for the companies themselves to only pay for what they use, when they use it, regardless of where they use it. So a significant number of opportunities we believe we have to dramatically expand our market.

That's a great foundation for the discussion. I want to just touch on the near-term because you just put up really strong fourth quarter results and growing revenue, significantly sequentially -- over 20% sequentially and growing year-on-year as well. Talk about what drove the strength in the business last quarter? What segments are you seeing the greatest improvement? And what are some of the parts of the business that are still lagging and sort of waiting to see the recovery later this year.

Absolutely. Well, the major signal, as always, is the macro right now. We are in the COVID economy. And of course, we do see -- so having a strong Q4 was very promising for us. It's showing that the world is starting to come to terms with the new normal and with the prospect of vaccines and other therapies coming online, the promise of continuing improvement in the year and years ahead. So that's very promising. But underneath, there is a lot of very strong signals that we have that are completely unique to Pure. And in particular, we saw great strength in our -- in the enterprise segment, which we started investing in just 2 years ago. And that strength in -- not only in terms of new logos, but in terms of penetration of existing logos holds great promise for us as we go forward. And just as an example of that. We had $8 million, $10 million or 8 -- as I like to say, 8-figure deals that occurred in just Q4, which indicates the strength of enterprise and the growing strength of enterprise for us as a company. So in addition to that, we started to see sequential improvement in the commercial space. And of course, commercial is a very big, important area for us. And it had been weak -- it had been much weakened in the COVID environment. So seeing sequential growth was important. The last thing that I'll mention is we saw great strength in our new products. And frankly, in a COVID economy, there is a little bit of reluctance by customers to try new things, being unable, of course, to be able to address any problems that they might have by being able to go in the office. And the fact that we saw strength in those new products, bodes well for -- as people start coming back in the office, we think that might be able to accelerate. So lots of good signs in Q4. We're hoping that there are signs of better things to come.

That's great.

And Katy, maybe I can just add on to that if that works?

Yes, sure.

I mean the new products -- yes, the new products that Charlie alluded to it, in particular, FlashBlade. Again, that was a record year for us for FlashBlade. We had 2 consecutive quarters of sales and really helped us in terms of what we saw in terms of our Q4 results. FlashArray//C, again, a record quarter for us, consecutive -- not to the scale yet of FlashBlade, but we're really impressed with what we're seeing on that front. And then really, the overlay on top that really has been spurring a great momentum for us is really our subscription services. Really on the backs of Evergreen as well as Pure-as-a-Service. And so I think all those together are really what you're seeing in terms of the reflection of our Q4 results and the growth drivers that are impacting that.

Yes. And I just wanted to point out that your optimism is notable because Charlie and Kevan, you were rightfully cautious when COVID hit last year and even into the summer as you looked out to the back half of the year. And so the fact that you're seeing that inflection and you're confident in improving demand is quite notable. Kevan, I just wanted to drill down a little bit more on this near-term inflection. Just from a CFO's perspective. You guided to 14% to 15% revenue growth for the year. That was above Street. You talked about some confidence in the second quarter being an inflection led by commercial recovery. And so just give us a little bit more color on what's driving that conviction? And also, how much of a rebound are you really baking into that outlook? Or are you still somewhat erring on the side of conservatism, given where we are in the world?

Yes. Thanks, Katy. I mean, first of all, when we think about exiting Q4, we've talked about the growth drivers and the successes we saw with Q4 that will lend itself as we look out to next year as well as Q1. So we expect those growth drivers in that this momentum, whether that's enterprise, whether that's subscription services, whether that's FlashBlade or FlashArray//C. We expect that momentum to continue through FY '22. The impact on COVID, for us, really is around timing of when the impact will really start to lessen and is really focused on the commercial part of our business, which really was our bread and butter for many years until, as Charlie mentioned, we really started focusing on enterprise a couple of years ago. And so the recovery of the commercial business is what we're looking at. We think that we'll start to see that sometime in Q2. We saw a little bit of that strength, as Charlie mentioned, in Q4. You saw with our Q1 guide at 10% growth, really against a strong compare because our Q1 was not negatively impacted a great deal by COVID last year. So back to double-digit growth in Q1, but the real reacceleration with the commercial business, we're really like looking to have that take effect somewhere in Q2 in the second half. If that helps with how we're thinking about it, Katy.

Okay. That's great. And Kevan, on OpEx, you also mentioned that you expect some sales compensation and travel and entertainment spend to come back as you move through the year, but not necessarily to pre-COVID levels. Just talk about how that impacts your operating margin outlook for the year? And then more broadly, as the business becomes more recurring, how should we think about seasonality changing for either revenue or cost?

Yes. No, that's great, Katy. I mean we've talked about the fact that we want to achieve near $90 million of operating profit next year, which is an expansion of our operating leverage from FY '21. When Charlie and I kind of embarked in this COVID -- the new COVID environment, we -- we're intentional about continuing to invest through the COVID environment. Innovation, especially around R&D, was extremely important to continue that journey. So we traded off, in essence, the savings we were seeing from travel as well as moving to digital interactions versus physical interactions. Traded that off with continued investment in headcount, and you saw that in FY '21. And the principle behind that is we expect that growth to come back double-digit in FY '22. And so we view that as kind of a pre investment, if you will, in terms of that growth curve that we expect to take form in FY '22. And so as we do see some increases in travel, obviously, that's going to be moderated by the fact that we've made some of these key investments in FY '21. So we want to continue that balance as we're navigating through FY '22. And expand, as a result, our operating profit to near $90 million. As we continue around our journey specific to subscription services, we definitely expect to see, over time, margin expansion. And frankly, we've seen that with our Evergreen subscription services, which really is operating at scale. I'm very pleased with the margins we're seeing with our Evergreen business. Pure-as-a-Service, great momentum in terms of growth, but obviously, not the same margin profile that I would be expecting to achieve with our Evergreen subscription. But that will come with scale and -- as we scale both Evergreen and Pure-as-a-Service. And then the longer term, Portworx, I would expect to see continuing expansion of our operating margins.

Okay. And just drilling into the subscription strategy a bit more, something that came up on the call last week, was just the different metrics that the Street needs to look at. RPO grew 24%. Year-over-year deferred revenue growth was stronger than reported revenue growth. Kevan, what are the right 2 or 3 metrics for investors to track the business? And then as we come out of COVID, do you think that the uptake of subscriptions will be sort of more or less robust as companies shift back to a CapEx cycle versus cash preservation?

Yes. Thanks, Katy. And Charlie, I'll take this. And if you want to add on in terms of your view of the momentum on subscription, that would be great as well. But let's first talk about our view specific to subscription services and the momentum we're seeing really post COVID. I don't see that going away whatsoever. And frankly, what COVID did was actually bringing a light to how differentiated our services are against our competition, frankly. And that's whether or not it's the Evergreen subscription or our Pure-as-a-Service. Both offerings are very differentiated, and that was validated by our customer base. I think the model and flexibility around being able to consume our technology, whether it's performance-driven or capacity-driven as a service really resonates with our customer base. And so I see that momentum continuing. Charlie, do you have a view on that as well?

Yes. Absolutely. I think one thing for our investors to be thinking about as we educate our customers is we're continuing to invest significantly in the as-a-service offering. And when I say that, it's -- the important thing to understand is that this is not merely a financial construct. We are enabling our customers to really interact with their storage service as a service. One of the advantages that we have for creating this and for making it, which our competitors cannot replicate, is the fact that we can do in-service upgrades. We can do nondisruptive upgrades of our product at any point in time, right in the middle of the day with no disruption to our customers' environment. Just like, for example, if you use a web service of any type, you don't notice when they're changing hardware underneath, you don't notice when they're upgrading their software. The service just continues to operate. That's what a cloud service looks like. And with our subscription services, whether it's Evergreen, where the customer owns the product or whether it's Pure-as-a-Service, where we own the product and deliver it to the customer as a service it's just consistently updated and upgraded month by month, year after year to where 10 years later, the entire structure underneath has been fully replaced. It's brand new. The customer's environment has never been affected negatively. That's an important part of a cloud service and what we're able to deliver with any of our service offerings.

And, Charlie. Go ahead.

And Katy. Well, I was going to hit your question on metrics for subscription, but continue that...

No, no, no. Walk through that, and then I have a follow-up for Charlie.

Okay. That sounds great. So your question was, we were pleased in terms of new metrics that we've been talking to our investors about, really to get a feel of the strength and momentum on our subscription services. One is around sales or bookings. And we're looking to make sure that our sales are outpacing revenue. And that's an indicator in terms of the momentum we're seeing with subscription services. We continue to focus on the sequential growth of deferred revenue, which in large part is driven by our Evergreen subscription services. And then obviously, we've transitioned and are speaking more about RPO, which also includes unbilled noncancelable orders, which really are driven by our Pure-as-a-Service. And so you're getting a good feel when you look at the sequential growth of RPO. That gives you both the feel for deferred revenue as well as unbilled momentum we're getting as Pure-as-a-Service. And so we're pleased with those new metrics that we've talked about with our investor community. As we look at the continued momentum next year, we will look at some additional metrics to bring forward. And we will have an analyst day this year. We're working on the timing of that, and we'll bring that into the conversation as part of our Analyst Day, Katy.

That's great. Charlie, I was going to ask you about Pure as-a-Service driving penetration of new customers and potentially new workloads. Why is it that, that service, in particular, is driving such great uptake with new customers to Pure.

Yes. Well -- and we saw a dramatic uptake at the beginning of this year as COVID hit. And really, we felt for 2 reasons, which I think, identify the reasons why new customers are interested. The first was -- and probably the most important was the uncertainty that customers faced. As we went into COVID, many of them needed immediate additions to their on-prem footprint to be able to deal with workers at home, to be able to deal with doing business on the web more than in person. But at the same time, they might have had plans to move to the cloud in a year or 2 time. And so the prospect of buying a new array on-prem only to have it be abandoned in a year or 2 was a daunting prospect for them. What Pure as-a-Service allowed was for them -- because of our unified subscription, was for them to be able to subscribe to capacity on-prem immediately, but with the option of moving to the cloud at any time at no additional cost because of our cloud Block Store. So from that standpoint, it dramatically reduced the uncertainty that our customers faced. At the same time, COVID, again -- especially at the beginning, customers were concerned about preserving capital and preserving cash because they didn't know what the economic downturn might look like. And again, Pure as-a-Service, you're only paying for what you use as you use it. And therefore, again, it presented a lower cash outlay to begin with. And I think what -- as we go forward, what customers really appreciate about Pure as-a-Service is exactly that. They're only paying for what they use when they use it and it gives them maximum optionality to be able to move to the cloud at any time, while preserving all of the features and capabilities that they have, including things like encryption and data protection, preserving those capabilities that they have on-prem in the cloud.

And Charlie, what does Portworx bring to Pure. The record sales in the fourth quarter, I assume the momentum is building. How do you think about the differentiation that brings? And then -- and what's the revenue contribution over the next couple of quarters?

So Portworx brought 2 things to Pure. The first -- in no particular order. The first was the ability to have -- for customers to be able to smart -- start small with their container-based storage capabilities. So we had been -- we had -- Pure had been supporting container-based storage on our both FlashArray and FlashBlade product. But the starting point was about $50,000, if not more. And many new so-called cloud-native applications are starting with 2 developers and a credit card. And whether that's on-prem or in the cloud. And so Portworx brought us a software-defined storage capability for container-based storage that starts off basically with a freemium model, so very inexpensive. And like Pure, it's available both on-prem and the cloud. The second thing that it brought, though, which was really icing, for us, on the cake and matched our development plan was a Kubernetes-based storage management or data management capability on top. This allows for data management applications, such as backup, such as disaster recovery, such as the ability to add on things, such as search engines or data analysis engines to be added on top by a developer, simply with a few lines of code. They had already had that in place for Portworx. And we're extending it to all of our storage across Pure over time. So the ability to do -- to provide for a sophisticated data management through Kubernetes, which is where the world is going. And at the same time, the ability to start small and grow with our customers in their cloud-native app development. In terms of revenue, why don't I hand that over to Kevan. Kevan, do you want to take the revenue piece?

Yes. We'll be -- when I think about it from a revenue standpoint, revenue contribution, Katy, that's more from a long-term perspective before that's going to be meaningful to our top line. So very excited for all the reasons Charlie talked about from a strategic standpoint and more to come, I think, in contribution to revenue, which I think we'll be talking about more -- about that contribution in FY '23 and beyond.

Okay. That makes sense. I want to spend the last few minutes, coming back to the strength that you saw in the core flash storage business, starting with FlashBlade, where you saw about 50% of sales coming from new customers. Charlie, talk about the workloads that are driving that new customer demand for FlashBlade. And I think you mentioned earlier that you expect that strength to continue through fiscal '22, correct?

Correct. We do. FlashBlade, frankly, has had strong years really since its beginning about 4, 4.5 years ago. So it's been a very strong product for us, continues to grow very well. It's well into the double-digit percentage of our sales now as a company. The strongest workloads for FlashBlade are in the analytics space and then an area that was actually somewhat -- it was not expected at the beginning, but has grown very well, and that's in the data protection, data recovery space. So the interesting -- let me start with that first, and I'll go into the data analytics. In the data recovery space, what's been interesting is, of course, many of the people listening to this webcast know that customers regularly do data backup. What most people don't think about is the whole purpose of doing backup is to recover from failure. And if that -- and data backup typically would take days, literally days to recover. And for many companies, you can't be -- you can't have your traders idle for days. You can't have your programmers idle for days. The cost of idle talent or idle business is very high. And especially with ransomware, what customers have been saying is, no, they need to recover within hours, if not minutes. And our FlashBlade provides exactly that capability. The ability of our customers to recover very, very rapidly from any kind of data loss, including ransomware. And so that's been a very strong market for us. But data analytics and machine learning has been a very strong market for this product. It's the reason it was built -- was for the ability of -- to give the ability of customers to really analyze their unstructured data at scale and at speed to be able to make business decisions. And that's been a very good strong market for us as well.

Great. And then you mentioned QLC and the success of FlashArray//C. I wanted to ask you how the adoption has accelerated since you launched the second-generation of the product. And you get this question all the time, are we at the tipping point with this product being 30% less expensive than disk that sort of removes the remaining hurdle, and we really start to see more widespread replacement of secondary storage. But then I want to add one more -- it -- because that came through the webcast. And that is, is there an argument that this focus on ESG actually gets companies to -- in addition to the cost advantage, to really start to accelerate the shift to flash because you often talk about the significantly reduced footprint and power requirements that come along with your product versus traditional storage? So I know there's a lot there, but just talk about the traction of FlashArray//C, and if we're maybe at a tipping point from a price and an ESG standpoint.

So Pure was started in the belief that flash would replace all disk. And that was 10 years ago. Frankly, I joined 3 to 4 years ago, 3.5 years ago in the belief that flash would replace all disk. It's very simple. You just look at the exponential curves of cost reduction of flash relative to magnetic disk, and you know those curves are going to converge because these long time frame, exponential drops in costs or improvements in performance don't change over the years. And so we believe that time is now. We've already shown that now in the secondary tier market that flash is more price performance than disk in a very significant way. So yes, we believe this is the beginning of the end. Now once you reach that economic point, it does take a bit of time for customers to do all the testing and proving that they need to do to make sure it fits their specific use cases and workloads. But we believe that has started. As we've said before, FlashArray//C is the fastest growth of a new product we've ever seen. And that's in the COVID period when customers are naturally less forward leaning in terms of trying new products in new use cases. So we're -- let's just say, cautiously optimistic that as COVID recedes, we're going to see even greater strength and growth in that area.

That's great. And I hate to end on a tactical question, but I know you get this often, and so do I. So I'll ask Kevan about just the supply tightness and the component cost increases that are being projected, maybe for the second half of this calendar year? How do you see that impacting the business at all? Do you think the industry can pass-through higher NAND prices, if that's how it plays out, so that there's not a significant impact to gross margins?

Yes. That's a great question, Katy. And frankly, I'll speak to Pure as opposed to the industry because I think we're quite differentiated in terms of how we leverage raw NAND. And it's to our advantage, especially in times when there's supply constraints. But look, we see some tightening in terms of what that looks like. But feel quite comfortable that we can manage that effectively through FY '22. And we have a fantastic supply chain team who have been all over that and really demonstrated that even through the initial COVID onset and really managed through the constraints we were seeing on that front as well. So we're monitoring it, but no significant concerns from our perspective with what we're seeing on the constraints or potential increases in NAND pricing.

Okay. That's great. Thank you, both for joining us. It was really a great discussion, lots of strategic growth drivers. And as I noted before, really nice to see the shift towards optimism for fiscal '22. So thank you, again. Have a great day, everyone.

Thank you, Kate. Thank you. Thanks everyone.

Thank you, Katy.