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

Good afternoon, everyone. Before we get started, if you are a member of the press or media, please disconnect at this time. Any unauthorized party in this meeting or any unauthorized use of the information communicated in this meeting is subject to prosecution to the fullest extent of the law. Any unauthorized person, including the media, that is on the line at this time, please disconnect. Please note, today's call is being recorded.

Perfect. Thank you, everybody, for joining us this afternoon. I'm Aaron Rakers. I'm the IT hardware and semi analyst here at Wells Fargo. Extremely excited to host a quick discussion, I promise, a quick 30 minutes with the Pure Storage team. We've got Charles Giancarlo, the CEO, and we've got Kevan Krysler, the CFO. Company just recently reported results. Obviously, stock's performed well. The company continues to deliver both top and solid bottom line upside.

I'd like to start the actual discussion with maybe an open-ended question, which is, as you've had discussions with investors, sell siders over the past week or so, is there anything that stands out that you'd say, look, maybe The Street still isn't really wrapped their arms around as far as the Pure Storage story and strategy? And maybe we'll jump right into questions after that.

Thank you, Aaron. And it's a real pleasure for us to be here, and I want to thank everyone for joining us today, and I look forward to chatting with you. And it's an interesting question, Aaron. We do believe that, in fact, there's something that really is missing from the way that we're covered. And in particular, our subscription revenues now, which are 1/3 -- roughly 1/3, actually over 1/3 of our total revenues and growing very rapidly, are not appreciated for what they are, which is true, long-term, very sticky of subscription revenue, where we effectively provide customers a service level agreement for their storage so that it is always modern, always new, never needs a replacement, and really creates a -- we never have to compete for a refresh cycle of one of our products, whether that's done as a capital purchase, in which case, it's our Evergreen model, or whether it's done as our Pure as-a-Service model, which is 100% OpEx. And many -- there are still investors out there that view it like a service agreement or like a support agreement. But no other vendor provides consistently new products and services once the capital is put into place without causing any kind of disruption to our customers' environment. So we don't think that -- as I said, that our subscriptions aren't really viewed yet by -- because most of our competitors have support agreements, and so we're lumped in with everybody else. But actually, what we provide is much more like a SaaS environment. And in a SaaS environment, customer always expects the service to be working and always expects it to be at its latest level, both the infrastructure as well as the software, and that's what we provide.

And Kevan, anything from a financial model perspective?

No. It's really just more complementing off what Charlie said, Aaron, which is really around the software piece as well and really getting a deeper appreciation of how differentiated we are with our software, whether that's our Pure1 software or our Purity software, that lends itself to the value we provide in the Evergreen subscription or Pure as-a-Service. And frankly, what's helping us, even though it's still challenging for us in the supply chain environment, the ability to source and have our software directly interact with NAND is really helpful for us as we navigate through the supply chain constraints that we've been seeing.

So I wanted to go write off of that. And I want to actually throw it out there because it popped in my memory that, at the Analyst Day that you guys held not that long ago, one of the things -- one of the numbers that I thought was interesting is that 97% of the systems that you shipped 6 years ago are still actively in the installed base, right, speaking to that Evergreen model. So as you think -- as you look forward the subscription motion of the story, help us appreciate -- you outlined a north of 30% CAGR for subscription revenue. Last quarter, you grew 38%, and actually accelerated a little bit. So does that 30% CAGR that you're looking at, does that reflect the business model as we see it today? Or does that -- how much of that is reflective of additional opportunities to sell subscription?

Right. It actually reflects both. Continued growth of our Evergreen model as customers -- as those customers that choose to buy based on a capital acquisition going forward. But secondly, upon the higher level of growth that we have, both with our Pure as-a-Service, which is where Our customers have hybrid storage provided as an SLA, regardless of where they place it, either on a hyperscaler or in their premise as well as our foray, if you will, into containers and Kubernetes with our Portworx set of capabilities. So we expect those to have higher-than-average levels of growth, and those will be adding a lot to our subscription revenues. But frankly, continued growth in our sales of our traditional operating model, we expect to see growth there as well.

And I think -- and just to clarify too, Aaron. The 38% you're referring to is the subscription revenue. Our subscription ARR was also -- it grew at 30%, which we were very pleased with, for the quarter as well. And to Charlie's point, over the longer term as we see acceleration and as well as the CAGR views that we provided on Analyst Day for a subscription ARR, a large portion of that accelerated growth will be driven by Pure as-a-Service with Cloud Block Store and Portworx, Evergreen still being a strong contributor.

Right. And that 70 -- I think it was $788 million, if I'm correct, on ARR coming out last quarter, I think it's $650 million coming out of the fiscal year. Double-click on that. I don't know if you can quantify it -- or how much is Evergreen? And I know I'm getting at -- to the point that you're making, which is the other pieces will grow faster. But how do I decompose that a little bit? Or help us appreciate that.

Yes. Look, we're keeping this at a higher level in terms of our subscription category with the 3 major drivers being Evergreen and Pure as-a-Service with Cloud Block Store and Portworx. Clearly, at scale is Evergreen, and we continue to see that for the short to intermediate term, with Pure as-a-Service growing and really being meaningful to both our subscription ARR as well as our top line subscription revenue. Portworx, again, would be kind of the third level, doing and performing very well for us. But in terms of meaningful driver, still in terms of intermediate long term is where I expect those contributions to be more meaningful for us.

And for those that aren't familiar, Evergreen, just remind us of the mechanics of that. After you pay your 3 years, and just trying to drive over that appreciation of that subscription attribute of that business.

Right. The mechanics of Evergreen, it works with customers that choose to buy their storage as a capital item. And you can think of Evergreen as a subscription contract that adds about 15% of the original purchase price of the hardware per year, roughly speaking. But what it entitles the customer to is the ability to upgrade, have that product be upgraded consistently to our latest model without disruption to their environment, both software but also hardware. So think of it this way. It's sort of like driving your car down the highway. And starting off from your home, and before you get to your destination, you're in entirely new car before you get there, and it never interrupted your travel whatsoever. And we're able to do that with our customers, whereas traditional in -- not just in the storage business, but in any hardware business, it's after 4 or 5 years, depreciation cycle is over. And now you have to sell them an entirely new product, which disrupts their current environment. Takes it down, over the weekend, scheduled overnight. In our case, the customer's environment never goes down. And automatically, it's at the latest product. And the reason you've mentioned this before, the reason why 97% of our -- it's not just that 97% of our array sold even 6 years ago are still operating. But they're literally our newest arrays now. They've been upgraded all along the way to our latest product and -- without, again, taking the customer down. So this is -- if you think of a SaaS service or any service that you might use on the web, your expectation is that it's always running. And your expectation is that it's better today than it was yesterday. And of course, behind the scenes, that company is not just upgrading software, but they're replacing equipment as well, right? They're not running on 6-year-old servers. They're running on relatively recent capabilities. And that all took place behind the scenes without you being aware of it. That's exactly what we do with Evergreen. And so for the customer, it's the last time they actually buy storage. From that point on, it's just subscription. And that's what makes it very different than everything else out there.

And that -- and I apologize for keep going down the same vein. But that starts with the architecture, right? That starts at the way that you...

It's so fundamental.

Adhered in Purity? Yes.

Yes. Having been in the business for decades, if you don't start the software development with the idea of nondisruptible or noninterruptible operation and upgrades, you'll never get there, and you can't engineer it in reverse.

Well, I think another important point on that, Aaron, is the same architecture that we're using from a software standpoint, which we refer to as Pure1 and Purity, it's the same architecture that we're using as Pure as-a-Service. So if a customer has invested in us and is leveraging our Evergreen subscription, and then in the future decides that they want to move to a Pure as-a-Service model, we can enable that without shifting out the equipment. And we've done that in several instances with our customer base. So a huge advantage for us over time for customers who may want to move fully to as a service with our infrastructure and technology.

And then under that model, you take on that equipment, you carry the capital cost of that equipment, and you just offer that to your customer?

Yes. That's correct.

Well, and it goes beyond that, to be clear, which is that what we offer the customer is a service level agreement. So they're not aware in a sense of the hardware at all. We're managing it. We're upgrading it, downgrading it as appropriate, changing the -- upgrading the software as necessary. And they're just paying for capacity and performance.

Shifting gears, and I might go back to subscription, I promise. But shifting gears over to the other topic that's really become more visible over the last quarter or 2 is the cloud opportunity, right? And I don't think anybody a year ago would have thought like, hey, there's an opportunity for Pure to really sell into a hyperscale cloud environment. So maybe I'll start by saying just help us appreciate the opportunity that you're seeing, number one? And number two, this last quarter, you announced Microsoft Azure for EDA. But that's separate. That's actually additive to actually the cloud revenue that you generated this last quarter. So just maybe help us appreciate that cloud opportunity a bit more.

Yes. We think we have multiple opportunities in the cloud, but the one that you're speaking -- let me identify several. One is that as flash pricing starts to get closer to magnetic, because historically, its price declines over time, exceed that of magnetic, and the 2 are getting closer. As that happens, we should expect everyone and including the hyperscalers to start moving more and more of their storage environments to flash. By far, we have the most advanced flash management software in the business. Literally, almost everyone uses SSDs, whereas we manage the raw flash ourselves. And this gives us a huge benefit in terms of price performance at every level when it comes to Flash. The hyperscalers in particular are very dependent on magnetic for the most part. That's where they've built their software. They've actually not spent much time with flash and flash management. And so for example, with the hyperscaler that we -- where we shipped the product last quarter, a little bit this quarter, they were looking to go forward in that implementation with the software and the magnetic storage that they have done in the past, but found that it didn't meet their needs in a number of respects. So they went out to the market, tested everybody else's systems, both flash and magnetic. And our system was literally the only system that would meet their needs from a price performance standpoint. This was FlashArray//C. So what we're seeing is the beginning of the penetration into Tier 2 magnetic storage, even in hyperscalers, starting with their systems that require the highest performance, but it will continue down in terms of the performance level, allows us to compete at that level even beyond what very capable hyperscalers have developed themselves. And so it does give us a great opportunity. And then secondly, this example with Azure and EDA shows also that not the lowest price levels but at the highest performance levels, there are advantages to hyperscalers working with us because, again, we provide systems that operate at the highest performance levels for things like EDA, where they want to have an advantage.

And so what I'm hearing from you is that, oftentimes, when I've thought about the cloud deployments is either their compute and storage resides on an x86 server or just a bunch of disk kind of architectural approach. There's not just a bunch of flash architectural approach in those environments, so they have to turn to somebody like you that's got that management, that Pure operating system to manage that. Am I categorizing that correctly?

Generally correct. Now to be clear, your listeners that follow this more closely will know that the hyperscalers do offer flash, but they don't -- but they operate at a very high level. They basically use SSDs. They charge a lot of money for it. It doesn't -- they don't compete at a general purpose storage level with flash.

Okay. So this opportunity, what you've won is actually a general-purpose storage just replacing hard disk drive?

That's correct.

Yes. Okay. Kevan, to you, I mean, last quarter, from a model perspective, as you brought in this cloud customer, we did see product gross margin come down. If the opportunities present themselves more meaningfully in the cloud space, should I think about a different gross margin profile? Or are you still comfortable with that 70% plus gross margin that you outlined, I think, at the Analyst Day?

Yes. Well, look, and again, it's a great question. And you're right. When we think about last quarter in product gross margin specifically, you had 2 drivers, the biggest one being the hyperscaler. And we were impacted, obviously, on the supply component side as well. But that was a much lesser impact, if you will, than what we saw with the hyperscaler. As we continue to scale FlashArray//C overall, we will expect improved margins, both on the product side, and frankly, on the subscription side. And that will hold true as well with opportunities if we're fortunate to get those with additional hyperscalers. And so over time, I do think that we'll see improved margins overall, including with potential opportunities with hyperscalers in the future. That answers your question, Aaron.

Yes. That's perfect. So same discussion, cloud, but different kind of line of discussion, which is integration with the cloud guys, right? So you've got Cloud Block Store. Given the opportunity, I mean talk a little bit about the competitive landscape. I hear a lot of, one of your closest competitors has native integration with some of these cloud guys, be it Azure, Google, et cetera. How is Pure's strategy of integrating with the cloud guys, your software stack differentiated? Or how would you compare and contrast? It's a little bit harder for us to see the competitive layout there.

Yes. I don't believe to be -- to make things, I think, clear at the very highest level, I don't know that we compete directly with -- in the case of the company you're mentioning, NetApp. There were lots of opportunities in the cloud. We're not competing for the same business for the most part. They're providing cloud volumes -- or sorry, cloud files, basically taking their SMB strength, which is, just to be clear, that's the -- what used to be called CIFS. It's a protocol strength that they have for file shares, and placing that in the cloud. And that's driven a lot of their cloud-based revenues. For us, it's several things. One is we do have native integration with both AWS and Azure using our Cloud Block stores. We have native integration with Portworx for container-based and Kubernetes-based workloads on all 3 of the hyperscale -- of the public clouds. So -- and those are going well. We feel confident with that. CBS is a very fundamental foundation of our Pure as-a-Service offering. But in addition to that, we -- about a -- roughly again, 30% of our sales go into cloud companies. The majority of them being SaaS and MSP today, although as you see, we're looking to see -- we believe we're going to penetrate more into the hyperscale environment with this also. So we feel -- and then we had the AWS, which may not be a cloud sale. It goes into Equinix to connect to a cloud, but we see multiple opportunities to integrate with the cloud.

Okay. Very helpful. Charlie, I think I've asked you this every time that we've spoken because I think it's important for the business model evolution of the company, is that Pure has evolved to a flash array product provider to a FlashBlade, FlashArray//C. So the portfolio motion, I think I've asked you about this all the time, is that -- help me appreciate as you think about the growth profile relative to the algorithm of driving operating income expansion, to how important or what you've been able to achieve of selling the portfolio across the customers. And I'll kind of end on this question. Maybe tied to this is that, can you help -- can you share us of how many of your customers, your 10,000 or so customers are actually purchasing more than just one of the systems from Pure?

Yes. Absolutely. So you're identifying what we -- what I believe to be the most important strategy that we've put into place over the last 3 to 4 years, which is becoming -- the best way to phrase it, is becoming a broad -- having a broad capability to support enterprise customers. And that requires multiple things. One is you could sell into an enterprise and have a small footprint if you have a very specialized and high-performance niche product. But you're not going to be able to become a broad-scale supplier. Enterprises want partners that really fulfill a large fraction of their needs. And so the broadening of the product line was a key aspect of that. As long as we were only in the high-performance block storage category, we could supply maybe 10% of their needs, but that wouldn't make us a strong partner. Today, we can supply over 50% of their needs. I think within the next couple of years, it's going to be in the 70%, 80% range. These are all very rough figures. But we're now looked upon -- and let me add to that. We also had to add to our support capabilities. We had to add to our partner capabilities. We had to add to our sales capabilities to really become an enterprise quality provider. And we've done that. And now what we're seeing is tremendous growth in the enterprise segment as well as growth in the commercial segment where we started out. But that also gives us now scale, and that gives us leverage in the rest of our business model. We made a very large investment in enterprise sales starting about 3 years ago. It was very expensive. I definitely -- we appreciate our investors' patience with this. And now we're seeing the fruits of that. And we're seeing good scale and leverage out of our -- within our sales and marketing operation. We continue to make big investments in the R&D sector. And I think there are some continued investments that are going -- that will allow us to get to that 70%, 80% level in terms of supplying our customers' needs, but we see increasing leverage in that area as well. So yes, becoming -- having -- being able to supply a large fraction of customers, especially the large customers in their needs is really what's going to allow us to put even additional leverage on the bottom line.

And any metric -- well, any metrics you can share more than one?

Yes. First of all, we're now -- I think when I first started reporting, we were over 1/3 of our business in the Fortune 500. Rather, we supported over 1/3 of the Fortune 500. We're now supporting over 50% of Fortune 500. When I look at our top 20 list in any one quarter, it used to be the ones on the top were single-digit millions and ones, lower down, were 3-digit thousands. Now all of them are in the millions and the top ones are in the double-digit million. So it's a big shift in terms of the way we're looking at it. Kevan, any additional color you want to provide on that?

No. Do you want to expand a little bit on margin expectations, Aaron? Is that kind of...

I was going to go there. I mean you laid out low to mid-teens operating margin by, I want to say, it was fiscal '25, if I remember at the Analyst Day.

And actually starting the journey in '24, so -- where we want to hit the low teens, right?

So -- but your guidance suggests kind of that level this next quarter. I know that there's seasonality attributes of the business model and stuff like that. So I guess -- and this -- what's been impressive is these last 2 quarters, I think you beat revenue by $60 million relative to the guide. You beat EBIT by roughly $60 million, too. So you're driving that leverage to the model. So why -- if the momentum continues, why wouldn't I expect that, that -- you wouldn't let that drop more quickly through the P&L? Why not be talking fiscal '23 in that mid-teens or low teens operating margin? I'm just trying to push you a little bit on.

Yes. No. Happy to do walk through that, and actually been very pleased. Overall, as a company, we've come together and are really focused on, hey, top priority is revenue growth, but we absolutely believe we can drive increasing operating leverage. And we've got good alignment across our leadership team on that front. When I think about going from this year to next year, the one tailwind we've had that I've been trying to highlight and make sure we carve out is really the effects, as I call it, relating to COVID, right? So less travel, physical marketing events. And really, from a hiring perspective, we're not where we want to be in terms of headcount. So we want to definitely catch up on that. And I do think we will intend to catch up on that next year. So you have that as a potential headwind. But when you account for that headwind, we still expect to get incremental operating leverage, really driven by a couple of factors. I think the sales organization has done a tremendous job, as evidenced in what you've seen this year. I think we can continue improvement, not at the same rate, but continue improvement on that front, especially given the productivity that we've seen both with our field and the contributions from our channel. And then over time, I think we can continue to scale and get leverage on the R&D side. And in Analyst Day, I talked about the subscription margins as well that we would expect to drive further leverage for us in the future as well.

When you talk about incremental leverage, are you talking year-over-year EBIT percent? Is that how you think about what you just said, the incremental EBIT margin leverage? Is that how you...

Yes. That's a good way to be thinking about it. Absolutely.

Okay. A couple of minutes I got left. I have to ask about supply chain because you're -- you sell systems, and systems require components, that seem to be in short supply. Your architecture is differentiated, which I think is to your advantage. So just walk us through what you're seeing today. Do you anticipate that your forecast assume any supply chain constraints, limiting your ability to fulfill demand? Anything down that vein of discussion?

Sure. Let me start. First, our guide contemplates everything we're seeing in the supply chain today. So we -- now, of course, there can be surprises. But based on -- and we've had surprises, to be clear, so we're not -- we're very cautious in terms of the way we think about the supply chain. But our current guide anticipates everything we know currently in the current supply chain. What we stated in the call was that this past quarter was -- the supply chain worsened in terms of its -- just the surprises and costs. Overall, we've mentioned in past calls, we expect costs -- overall costs, so including everything from components, to transportation, to logistics, and what's called transformation, to increase roughly about 10% over the year before. So nontrivial, certainly, but again, incorporated in our guide overall. What I would say is that we believe that it has bottomed out. In other words, the next quarter may not get better, but we don't believe it's going to get terribly worse at this point. And the main problems at the moment tend to be in the area of semiconductor availability and changes in semiconductor -- mainly changes in semiconductor availability.

Not in the context of your ability of procuring flash?

Actually, flash has not been the primary -- it's actually been small components. It hasn't been major components. But a capacitor could theoretically stop you from shipping. So it's been the small components that have been more difficult.

So Charlie, in a minute I've got left, I'm going to ask -- I think I've asked you this every year that you've come on here. Pure has done a good job of being ahead of differentiated architecture. I think you were first to NVMe, you were first to QLC. What's the next 12 months or 24 months look like? What can Pure share with me to the extent you will, what's the next architectural things that I should be considering?

Yes. I really think it's about -- I'll put it into 3 categories. One is unstructured data. The growth of unstructured data is absolutely incredible. We're touching a small part of that today. Our expectation is we're going to be able to be very influential in a broad spectrum of unstructured data as we go forward. So that's something we're very much looking forward to. Secondly, for -- we believe that containers, Kubernetes continues to grow in a very strong way. We're in the very early innings, early, early period of that growth. We've got a great starting position with Portworx, and we're expecting to see that grow. And then finally, what we introduced with Pure Fusion is really a first for storage, for enterprises and for the hybrid cloud. And that is allowing customers to create a hybrid -- excuse me, a cloud operating model for their entire enterprise, such that they can provide storage and data services to their developers just like on the cloud. In other words, to do so through code and through GUI interface for their entire -- across their entire enterprise, with all the rules that the enterprise wants to put in place for their data already in place: protection, data sovereignty, reliability and so forth. And so that's been a first. We expect that to grow very strongly as well.

That's perfect. Guys, I think we're out of time. I really appreciate it. And really appreciate the discussion. Thanks so much.

Thank you, Aaron.

Thank you.

Bye.