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

Welcome, everybody. We're delighted to have Pure Storage here today, Charlie Giancarlo, CEO; Kevan Krysler, CFO; and Rob Lee, the CTO, and our new addition or plus 1 for the day. For those of you who don't know me, I'm Meta Marshall. I cover the enterprise networking and storage names, taking over kind of enterprise storage with Katy moving to the director research role. If you guys have any questions on disclosures, go to www.morganstanley.com/researchdisclosures or talk to your sales representatives.

So maybe jumping into it. You guys had a fantastic fiscal Q4 print last week. So maybe probably the best print I saw of all of the enterprise names. You're seeing very consistent demand kind of across the quarter, but can you just maybe refresh the audience on kind of what led to or the components of the 12% beat that we saw in fiscal Q4?

Absolutely. Well, we have been identifying all through the year that we have been seeing improved performance and improved demand to the company, right? And we have been -- for quite a few years, been investing in a number of areas that we felt was going to allow the company to expand at greater rates over time. In particular, we invested in broadening our portfolio. I mean when we went public, which is only about 6 or 7 years ago, and even 5 years ago, we were largely a one product company. It was a great product, but for enterprises to bring you in for larger and larger portions of their wallet share, you really need to have a portfolio that addresses the majority of their needs. So we invested in portfolio. We also invested in driving a set of capabilities and skills that enabled a more mature enterprise business model to be able to service all the needs of a large enterprise as well as improving the productivity inside our, what we call, Commercial or mid-market activities by investing in our partners that they could be more independent and therefore, drive greater productivity for us as a company overall. And it's interesting that -- we had -- we did have 2 challenging years. Our FY '20 and '21, which it ends in January. So think of it as calendar '19, obviously, in '20, I'm sorry, calendar '20 in '21, that -- no, '19 and '20, sorry, '19 and '20. It confuses me as well. That hit some of the progress that we were making. But all the while, we saw demand improving, continued -- more and more acceptance by large enterprises of our value proposition. And it really just all came together. I wouldn't say just in Q4, I think Q3 was a great quarter as well, but Q3 and Q4. And these are things that are not one quarter only. We're building strength, building our reputation, building our brand as a company and these are things that are going to continue to work for us as we go forward. And frankly, I think there's more leverage ahead.

Got it. We will dive into more of that later, but perhaps kind of most impressive on the quarter is that you delivered all of this with kind of the supply chain environment that we're all living in. Can you give us some context for why you guys have been able to navigate supply chain, maybe better than peers or just a lot of infrastructure in general?

Yes. I want to say it's not because we are working any harder than all the other vendors. I mean, we are seeing any fewer challenges. I mean the challenges are weekly. And just one hit after another. But I will -- so you might say -- and we enjoy very good relationships with both our suppliers and manufacturers. But I'm sure our competitors do as well. I have to break it down to the fact that we are actually in control of our building materials. We're the only vendor in this space that designs right down to the semiconductor itself. The rest of our competitors, for the most part, use SSDs, they use standard servers for their controllers. So they're building it from fully assembled parts. And we have more flexibility. We can simply -- well, simply -- it's been not just our supply -- our operations team, but also our engineering team that has been rapidly substituting parts, redesigning boards to take advantage of -- to take advantage of parts that are available, when other parts become suddenly unavailable. So it's been a very integrated approach. As I said, it's -- every week poses a new challenge. But I think we've been -- and I don't want to discount luck. So we've been lucky, but we've also worked hard and had a really good team behind it.

Got it. I think one of the concerns that a lot of enterprise investors have is just how much pull forward we're kind of seeing in the demand environment? And you guys haven't really had shortages that needed to pass on the price increases that would make you see that most visibly. So just where are you thinking about kind of the visibility that you're seeing in the marketplace versus before? And just what kind of gives you confidence that this is a more safest environment?

So lead times, of course, are a signal to the market and -- as to whether or not they should be concerned about receiving product. And our lead times have been fairly stable. They have expanded a little bit, but they've been within the quarter for our customers. So we have anecdotes for push out, but they're also and/or for pull-in, but they're also anecdotes for push-out, because if you're building a data center, and you can't get your power supplies and you can't get your servers, why buy storage earlier than you need to. So we don't think it's -- we don't think pull-in is a factor in terms of our quarterly performance. We think it's been pretty balanced.

And in [indiscernible] for us it isn't...

Yes. And that's another sign.

Another data point that we see. Pipeline strength continues to be strong for us. Now I would say that first half continues to look stronger for us than potentially second half, but it's still early days. But right now, that's how we're currently thinking about it.

Got it. [ Orders are unbroken ]. There's ideas that we're moving to a post-COVID world. Just what are you seeing from customers about how we think about -- how they're thinking about cloud? And has it meaningfully changed kind of pre-COVID, post-COVID? And how does that change the opportunity set for you guys?

Well, pre-COVID now is 2 years ago. It's a long time. And the view of cloud has changed over time, I'd say, maybe partially because of COVID, but frankly, it's changed from being -- I do remember even 3 years ago, that largely you'd hear the phrase repeated, we're going to all cloud. And that's really -- that has -- one is, we never really believed that, that would be truly the case, but for a variety of reasons, including economics and compliance and controller and other reasons. But largely now the phase is hybrid that there's going to be some amount of on-prem, some amount of in the cloud. And really, customers that have started to become very scientific about, okay, what workloads are we going to place in the cloud? What workloads are going to be on-prem? What workloads are going to be hybrid? And so there's just a lot more thoughtfulness, if you will, as to what customers are going to do.

It's all about...

Go ahead.

It's all about flexibility as well, right? And we've been pushing a lot on our cloud operating model, which allows flexibility with Cloud Block Store to go access the cloud if you need to do that in terms of [ peak ], but at the same time, you know what your infrastructure is. You know who to call, if there's an outage. Focusing on the service level attributes of our service is really compelling. And I think those are the reasons why we're starting to see some real traction with our Pure as-a-Service offering with Cloud Block Store. Sorry, Rob.

Well, I was going to make the same point. I think that the cloud discussion has become a lot more nuanced. It's no longer -- what our clients is no longer about is it my [ fortiles ] or is it a cloud provider's [ fortiles ] can I get the flexibility? Can I consume my infrastructure, my services in the most flexible agile and in the manner that gives me the highest [ area of ] optionality? And I think that we saw that start to pick up at the beginning of COVID as folks had to replan and look at, hey, how do I adjust my infrastructure to deal with changing business demands. And I think we continue to see that as certainly a drag to things like Pure as-a-Service and some of our subscription models that really do cater to delivering that type of flexibility.

I'll just add one additional thing, which is just over the last several quarters, I'd say, but increasing -- I mean increasingly hearing from customers is they don't want to be tied to correlated outages in the cloud and didn't hear that at all about a year ago. And now with some well publicized cloud outages, they want some -- they don't want to be tied to that. They want to -- it's not that they won't go into the cloud at all, it's that they want alternatives if the cloud goes down.

Got it. And would you say that all customers are there. I guess I'm just trying to get a sense of that we should expect this wave of greater transition or greater architectural changes from larger organizations and just getting a sense of is it the small customers that kind of made these decisions and the larger customers will come or maybe vice versa?

Well, there's been a lot of change over the last couple of years, including COVID whereby enterprise customers were the ones to start to reinvest in their IT infrastructure are under quoted. So I would say actually it is -- from our perspective, it's large customers that are driving this hybrid cloud environment a; and b, and just as importantly for us, looking to provide similar services in their private cloud to their developers that their developers see from the public cloud. And that's being driven by a certainly large enterprise.

Got it. Subscription services, you kind of just mentioned being a major kind of component of some of these architectural changes, currently about 30% of Pure's revenue largely to Evergreen. As you guys work to increase your ARR just what are the contribution of the Portworx or Cloud Rock store to that next leg of growth?

Yes, it's a great question. I think the contributions as we scale our subscription services or ARR and grow our subscription ARR is really going to be driven by a combination of Pure as-a-Service with Cloud Rock store and Portworx. And when you think about our cloud strategy and discussion hopefully we will have a little bit of time to talk about Portworx as well. But at this point, those are our 2 largest drivers that I'd view as growing at an outpaced level compared to our overall company growth rates.

Got it. You made an announcement a couple of weeks back with a new partnership with AWS for cloud-native solutions. With every storage vendor kind of having a cloud solution of some form, where does Pure think that they are already ahead of competitors or where areas where you'd still like to develop?

Well, and I'll start, and I'd like Rob to chime in. So the announcement with AWS was, in fact, specific to our Portworx product. Portworx -- and perhaps maybe just a little bit of background on what Portworx does. So as customers start to develop more with containers and Kubernetes, when that first got started, it was developed originally by Google. It was really designed around what are called stateless application environment. So it's great for websites and for a variety of other things. Not so good for enterprise applications. I generally have very stateful application environments. You can think databases or transaction processing systems or maintaining relationships with customers and so forth. So those stateful applications and wins where data is really where the loss of data is catastrophic. Those types of application environments are stateful. So -- but customers want to move those applications as well to containers and Kubernetes. What Portworx provides is an easy standardized, consistent way of doing that with all of the data services that customers expect from stateful applications, things like backup, recovery, replication, disaster recovery, back -- the ability to provide consistency across application environments. And instead of application developers having to develop all those capabilities on their own and probably different from their weathering down the hall, we provide a consistent environment for that with Portworx and one that is consistent across clouds as well, whether it's on-prem or any one of the hyperscalers. And because it's so easy to use and customers can get it up and running quickly, even with respect to -- and because it's multi-cloud, AWS has partnered with us to deliver it to their customers that want to develop on what's called EKS or their Kubernetes [ in ] container environment.

Okay. But just in terms of are there any other areas where we see further development in kind of on cloud solutions to...

So our clouds -- we have a multipronged cloud strategy. One is to continue selling and we do have a very good business selling into Software-as-a-Service companies such as ServiceNow, selling into MSPs, such as Equinix for their services, selling it to the cloud portion of enterprise customers. So for example, I'm bringing those Epic as healthcare software, but they also provide the Epic cloud, which is 100% on Pure Storage. So that's one portion of our business. Second portion is providing services on the cloud. So example, a lot of Portworx, as I described, but also our Cloud Block Store, which is the same software that we use in our arrays that are on-prem. Also, operates on AWS and Azure. And when customers subscribe to Pure as-a-Service, that's all one of subscription for them. And then finally, and this is the example of Meta selling into the cloud for their standard data store environment, which in Meta was the one where we were able to -- Meta made it public, so we were able to talk about it. And we're talking with other -- hopefully, we're looking forward to being able to do the same with other hyperscalers.

I just want to get back to Portworx for a second and just touch on why that's the beginning of such an impactful transition on how software is built, right? If you look at the drivers for why containers, while cloud native architectures are taking hold at a high level, truly 2 things, right? One is that technology allows people to build applications to run in multiple environments, especially multiple clouds, on-prem, without having to redesign the application. And second is it affords access to software developers to be able to make easy use of lots of different pieces of, for example, open source ecosystem to be able to build their applications faster. Now the issue is that without support, you can't realize both of those things, right? If your data substrate, if your storage services aren't portable, then your application isn't portable. And on the second front, if you just let a whole bunch of software developers go and pick whatever open source packages they want to use, without any sort of control, without any sort of management, without any sort of oversight, that becomes unyielding to manage it, it becomes unworthy to build the production environment around. And so when we step back and we look at what's the overarching thesis and strategy for Portworx, it's really to deliver the storage and data management capabilities to satisfy those to key drivers.

And Portworx is the leader in this market. So -- and we're enjoying very good growth with it.

Got it. Charlie maybe mentioned that we are in a start of hopefully multiple relationships and I'm sure we're really seeing that many that many inbound calls your way. How do we think about the hyperscaler opportunity? Is that largely going to be around specialty use case as well as the AI? A lot of those type use cases or are we just getting to the point where the price point of Flash is reaching...

Well, this is what's exciting to us about the Meta use case. Now when I think most audiences look at the Meta use case, they see AI super cluster and they think, okay, this is an AI use case. But if you read down the first several power graphs, what you see is we sold 2 products to Meta in this environment. One was our FlashBlade product, which is the AI product. It's the product that's capable of just delivering blazingly fast data to these data-hungry GPUs that are used to provide all the number crunching. But -- and that was 10 out of 185 petabytes. 175 of the 185 petabytes was our FlashArray product, which is just a data store sitting behind that, a standard data store that is a common use case in many enterprises as well as all the hyperscalers. So the way we think of that is a standard just median performance data store. But on the other hand, it has more performance than hard disk as 1/10 the space power and cooling of a hard disk-based system. And that, for the first time, really, in a hyperscale environment was able to meet the price requirements for the customer and the cost requirements for us to make it a viable transaction. And so it's the beginning of what you referred to, which is Flash now starting to get to the cost and price performance of what's necessarily is start wholesale replacing hard disks, which is 95% of the hyperscale data environment today.

And maybe, Charlie, you can go into a little bit more detail on why with the QLC technology...

Yes.

That's pretty compelling for us.

So this is where we have very unique intellectual property. So for 8 years, we've been designing our systems and our software in particular, to speak directly to the semiconductor. The semiconductor is so-called NAND Flash. All of our competitors and all the hyperscalers for that matter, but all of our competitors have made -- took their decade old -- own 2-decade old software and systems, and substituted SSDs for hard disks. SSDs, which use Flash, but they're designed to appear to their software, to look like a hard disk. And therefore, they underutilize the value and the capabilities of Flash technology. Because we speak natively to the Flash and to develop that software over many years, we are able to drive much better price performance, lower overall cost of our systems, smaller size, higher reliability. On the other hand, we're 10x more reliable than competitive products. Compared to other Flash products, we're 2 to 3x smaller and have 4 to 5x better power, space and density. And it's a -- as I said, it's years of intellectual property put into place. The hyperscale similarly just use SSDs. They've not put any investment to date into utilizing all Flash.

And that's also giving us a significant advantage on the sustainability side as well, especially against the competitive landscape.

Got it. I'm going to jump over with some questions for Kevan, but I want to make sure just given time if there's any questions from the audience. Perfect. Let's talk for a second just about the Pure path to Rule of 40. And clearly, you exceeded that kind of in the last quarter. You set out a goal of achieving this by fiscal '25. Where will you be investing most? Where are some of the levels to be achieving that over the next couple of years?

Yes. Well, one is we did a great job exceeding that threshold, obviously. But it's all about sustainability against the Rule of 40 framework. Priority is still growth. We absolutely are prioritizing growth and innovation, which we believe will continue the momentum on the top line. But we think we can do that with modest expansion on the margin line. And we saw a big step forward on that this year. Part of that is some tailwinds with COVID that will be headwinds for us next year. But even with the headwinds in fiscal '23, we're still expecting some modest expansion. So as we grow our subscription ARR and our subscription net dollar retention as well as the overall growth with our expanding portfolio and our reach across our customer segments, that gives us a lot of conviction in terms of our road map on the Rule of 40 framework.

Got it. And then just a question we're kind of ending everything with is just any impact for Russia and Ukraine, just kind of either on sales or R&D?

Yes. We have a relatively small amount of business in the affected areas. So we have no change to our guidance, because of that. Yes, we did indicate that in our earnings call, we've stopped all shipments and support in Russia. But I would say that from a financial -- and then on the supply chain side, there's the far upstream issue of rare earth elements and so forth, a little bit too far upstream for us to be able to make any predictions about that. But outside of that, no real effect on the supply chain at the moment other than we're going to see -- it's more pressure on upward costs, especially in the logistics area.

Yes. Got it. Okay. With that, we're basically out of time. Congratulations again on the fantastic fiscal Q4. And then Charlie, Rob, Kevan, thank you so much for being here today.

Thank you. My pleasure. Thank you so much for having us.