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

Okay. Great. I think we're ready. Welcome, everyone. I'm Rod Hall [indiscernible] already seen me a couple of times today. I'm the infrastructure technology analyst at Goldman Sachs, among other things. And have a great pleasure having Pure Storage here with me today. One of my favorite stocks right now. I'll maybe say a word or 2 about that, but we're really interested in the fact that you guys are starting to supply hyperscalers and particularly Meta. So that, to us, is a super exciting opportunity for the company. Charlie Giancarlo, the CEO of the company is here; and Kevan Krysler, CFO. Welcome, both of you.

Thank you.

Appreciate it. So let me -- I guess, let me just jump right into it. Let's talk about demand.

Why do we want to talk about demand just now?

And could you give me a macro forecast as well? But yes, could you talk a little bit about the demand environment you're seeing and what you're hearing back from your contacts as well?

Yes. Well, this may surprise some people. We're seeing a healthy demand environment. We did see some slowdown in decision-making last quarter, but we haven't seen any demand disruptions. In other words, those deals might have been slowed down, but they continue to close. I don't think we've seen any deals where customers have said, though, we're putting a permanent pause or semi-permanent pause on that decision. And if anything, we're seeing strong pipeline for the second half so -- and good visibility into that pipeline. So demand overall remains with a bit of a slowdown in decision-making.

Right. You called that out. And you said that large enterprises is where you're seeing the slowdown?

Right. Not so much. Commercial remains a -- well, let me rephrase it. Commercial is still recovering from the pandemic period, but we're still seeing that recovery take place. Strong demand there.

I thought it might be interesting too, for you to just recap the conversation we had on the SMBs that -- or the commercial account market.

[indiscernible] market. Yes.

If you're buying Pure and you're an SMB, you're really doing something.

Exactly, you're growing.

Large enterprises and what you've -- which comes first and why?

Yes. Well, in economic slowdowns, all -- both 2001, 2008, we really saw the enterprise clamp down first. That is CFOs taking the reins of the business and really stopping or dramatically slowing down the amount of investment taking place, whereas commercial was more of a slow burn, if you will, more resilient in the early phases of recession. During the COVID crisis, a bit different. Mid-market got hit very hard with COVID. Enterprises after an initial -- well, an initial spending, while they ready their infrastructure for work at home, that lasted about a quarter. And then after that, a pause of almost 6 months while they reassessed what their plans were. And then getting back into the market as they decided that, wow, in this COVID environment, we need to be virtual and the companies that are virtual are more resilient. So we need to invest in digital transformation. And so enterprises came back where what we call commercial mid-market stayed weak for quite a while and only started coming back about 3 or 4 quarters ago.

Okay. Thanks for that. Subscription, let's talk a little bit of that. Revenue mix has grown from 20% from '17 -- 2017 to 2019 on average to about 35% in this current fiscal year. So huge growth in subscription services. We know that Evergreen is, I think, you've even said publicly the majority of that today, but [indiscernible] Portworx in there and so on. And I just wonder if you could talk a little bit about how some of these non-Evergreen elements like Portworx might contribute, what kind of opportunity there is to?

Let me start, Kevan, if that's okay because Kevan has his lens on this. So with Evergreen now, really, all of our storage products with the exception of Portworx. So the Portworx will get there as well. our Evergreen -- we have Evergreen technology involved in that. And what that simply means is, regardless of how the customers buy our product, the products can be consistently upgraded both software and hardware without disruption to the customer's environment. So it looks like a SaaS-like service, even if they purchase the CapEx. But we also offer it in such a way where it can be completely utilization-based where the customer can just subscribe to a service offering regardless of whether it's on-prem or in the cloud. And so we call this all Evergreen because it's the nondisruptive nature of constant upgrades and constant improvement in the offering that gets customers excited about the subscription service. Portworx is a product that provides for storage, both data storage as well as data storage services for containers and Kubernetes environments, and we offer that also as a subscription service. And of course, that whole environment is still rather new. It's the basis of the vast majority of new software development areas, but revenue really comes into place once it goes into production and that's still in its earliest phases. We're seeing very good growth in that area. It's -- I mean every quarter becomes an increasing proportion of the overall subscription services, but it's starting at a low level.

We've also got a lot of growth traction with the Evergreen offering itself, right? So the offering itself is expanding. We're early days with Evergreen//Flex, which I think the timing of that offering in the market right now is perfect timing. Early days on Evergreen//One, which is the full managed service offering in terms of the traction there. And then in addition, with FlashBlade//S, really, we didn't afford FlashBlade the opportunity to really take advantage of all of our Evergreen features that come with the upgrade, both on software and hardware. And so with the Evergreen what the FlashBlade//S offering, it now comes with the full features and capabilities of Evergreen//Forever as well. And I think that's going to expand our attach rate and growth rate in terms of our Evergreen offerings overall.

I've got a follow-up on that for you, Kevan. We've always been -- I was always sitting around waiting for Evergreen to kick in more, and we had these models, we try to see when it was going to kick in and thinking the margins would take a hit, but it never happened. There was never a margin hit.

Well, it should never be a margin hit.

Right, and...

It's the other way around.

I think it's worth like explaining to people why that is the case. We did finally realize, but I'd just love to hear the explanation for that because I think it's -- I just think it's interesting.

Well, look it started out with Evergreen//Forever, which is really attached to our CapEx sales, and that's running at scale. So obviously, as our CapEx sales grow and our attach grows on the Evergreen//Forever, what we're doing in terms of margin capabilities, we'll get a little bit more juice out of that over time. But frankly, it's pretty nice in terms of what we're doing from a margin perspective on that core offering. And then you take the scale we're getting with Evergreen//One, which I believe that the gross margins on Evergreen//One, and we're seeing it, frankly, are going to outpace what we're doing on Evergreen//Forever. But also, if we look at Portworx, it's a complete software subscription. And so when you think about Portworx growing over time and at scale and as a software subscription, obviously, the contribution to gross margin will be more meaningful than what we typically see on our more core Evergreen offerings.

The best way to think about whether it's Evergreen//One or just the Evergreen//Forever, the reason why gross margins on that should continue to accrete is that from a customer standpoint, it allows them to continue -- because it allows them continuous upgrades without having to transition or migrate data or rebuy the same storage all over again. Remember, we're competing against companies that replace -- that force their customers to replace their entire environment every 5 years, okay. And it's a messy change to go from one to another, would you rather do that and buy it all over again or just pay for Evergreen.

Right. Yes, it's a no-brainer. I just -- when we've initially looked at it, we had expected something different and a very pleasant surprise. FlashBlade//S, I wanted to maybe come back and talk a little bit more about FlashBlade//S. We're always pretty optimistic about that high-speed spinning disk replacement opportunity there. Is that -- are customers responding to FlashBlade//S the same way that you thought that they would because it feels like that's morphed into from a customer interest point of view, something a little bit different than maybe it started as and I'm curious kind of how it's evolving with customers?

So it's early days, right? We're not even a full quarter of release of the product yet. So -- but the response has been very good. We were able to say that in the quarter in which we released it last quarter, it was already 20% of orders already going from a new product, right. Now it is the second generation. So it's a replacement product. I'd expect within a year to be almost -- to be close to 100% within a year or so. But that being said, what's exciting about FlashBlade//S is that for the spinning disks, you're right, the large unstructured data market, really, there are 2 things that are important. On the one hand, you want performance to be able to process that data at pretty high speed. And on the other hand, you want to just store a whole bunch of data in a so-called data lake at relatively low cost. And FlashBlade//S gives us that opportunity. In the same product, you can have both high performance and lower cost under the same umbrella.

I always had a pet theory though that it might foster flash adoption for that buyer that was a little more cost-conscious that isn't necessarily trying to do the same thing as a high seed spinning disk, but kind of a budget way into flash. Is that -- are you seeing anything like that or...

I would say if all they were looking for is a budget way into flash. That's what we're accomplishing with FlashArray//C, that's where C is going. If they want some combination of performance and scale and density and low cost, that will be FlashBlade//S.

Right. So you talked about the Meta opportunity. You won this RSC AI project. Can you talk about how involved with Meta you are outside of RSC? Are there other opportunities there? Anything you could say about that?

Yes. Well, there clearly are other opportunities at Meta. And our conversations within Meta are broadening across multiple groups. Every group, as you might imagine or every infrastructure has its own design team, their own plans going forward, both with respect to timing as well as design. So each one of them, think of it as a design win, which is also true in other environments. What was very exciting for us in terms of the RSC win, which, as you point out, is an AI win. But if you really look at what we provided, we provided both of our products but for very different purposes. So there was the FlashBlade product, which you can think of as being the product that provides the really high-performance for ingesting of data into the AI engine, which are the GPUs, right? And you need like gigabytes per second of performance to deliver there. But then there's all the data sitting behind it sort of waiting to be processed, which is a standard data store. So our FlashBlade product was 10 petabytes out of 185 petabytes and 175 petabytes, which was the data store was our FlashArray//C product. And that is like any other data store. The reason why we are able to win in this environment versus Meta just doing it themselves, which they would have done with their software on hard disk is we were the only product that they -- and they tested all the different products that fit both from a price standpoint and power space and cooling so they could actually fit it in the data center. They would have had to have built another data center in order to fit the amount of storage necessary, both from a power as well as a space standpoint to fit what they needed in RSC.

So given all that, are you -- it's far enough along now you would think other cloud players have noticed. Can you talk a little bit about the pipeline? What kind of conversations are you having on this stuff with other similar types of people, similar types of applications?

So it's a little bit difficult to talk about this because they are design wins, right? By nature, design -- you don't win the design until you win the design. And up until then, it's a constant set of conversations. So the conversations are continuing. They're expanding, all of which is good. And as soon as we get a design win, you'll be the first to know.

Okay. And are things at Meta performing the way they had hoped, how the performance is going there?

The performance is very good. No complaints.

Okay. So better than expected.

Yes, actually, better than expected, reported to be better than expected, yes.

Yes. So Portworx, at your Analyst Day last year, you talked about Portworx, the TAM growing to $14 billion by calendar '24 from 7% in calendar year '20. So pretty good growth there. Can you talk a little bit about the types of services you need to add to Portworx in order to drive that expansion? Or does it just with what it's got today grow into that?

I wish products were like that. No, products always need to be developed further and faster. A few things there. One is that we're finding that what we're calling Portworx Data Services, which is this easy ability for developers to attach data services, what are data services. Databases, popular databases like Mongo, et cetera, or search engines or data management such as backup or disaster recovery and ability for those developers to be able to attach it easily in a standardized way, standardized for their enterprise. So we've delivered that. That's driving a lot of expansion, but now as we see it. But another thing is what we really care about is attach rate, early -- getting attached in early development cycles. And so one of the things we -- that we're expanding into now is adding more ability to have a free offering for developers in the early phases of development so that we can expand the attach rate overall. So there's still a lot of work to be done to continue to expand in that area, but we're seeing good expansion of the product as it is. But our real focus, to be really clear, and I've told the team [indiscernible] I love the revenue expansion, but I want to see attach rate grow even faster.

When you say making it easier for developers to attach, you're talking about an API layer or what? Can you explain that a little bit more?

The interest of IT managers to manage at scale production levels of storage are different than when developers are first developing an application where they could care less about what IT has to do afterwards at scale. And so what developers want is basically the easy button to be able to add something that makes their life easier from a development perspective. So it goes into tooling for developers.

Okay. So you've done quite a bit of work on developer tooling...

We're continuing to do work in that area. Yes, commercial workflow area.

Yes, because we do a little development on my team, and we'll just throw stuff up in AWS and then we're like, well, it's getting big. What do we do now?

Yes. Now what do we do. That's exactly right.

We need a program. So let me expand on that a little bit. So the DevOps community, what are you guys doing from an educational perspective? Are you -- how are you interfacing with the DevOps community, this development community, doing anything different to kind of...

It's interesting because we all -- especially conferences like this, we talk about the DevOps community. That's a really small community. Most companies don't have DevOps. That takes someone who has both a really good understanding of development and a really good understanding of operations, and those people are expensive and few and far in between. You generally have developers and you have IT. And so how do you expand -- how do you educate developers, and that's -- so now we're getting into really the core of this, which is our expertise and even the Portworx before we bought them, their expertise was in educating the IT organization. And now we're adding this ability to be able to educate the developer community, and that's in its early phases.

Yes, I was going to say because we literally do some development on my team, we do some data science work and so on. But we often don't know what's over there.

That's right.

And it takes a lot of work to try to figure out what's available to leverage and...

And the tools for the 2 different sides are very different. In the developer community, it's all open source discussions. It's discussion groups. It's a variety of different things. So we're expanding our presence.

So you are working on that. Are you hiring people to do it? Or what...

Yes. We've expanded Portworx by, I think, a factor of 3, Kevan, since we've -- from a headcount standpoint. And that's across the board, development, marketing.

Okay. All right. Interesting. Cloud Services. Let's talk about that a little bit. So you've launched offerings like SaaS storage management, Pure Fusion, other solutions, data services. Can you talk a little bit about how strategic these products are? And how you differ from companies like NetApp and other storage companies who say, Hey, we're doing the same thing. So help -- I think help us and investors understand how Pure is different from some of these other people that say they're also doing all the same kind of stuff?

When you get past the words of SaaS and cloud and you go down to the next level, we're doing very different things. And in our case, we're trying to bring to our customers what we call a cloud operating model, which is enabling them to manage their far-flung data environment, both within their data center, but across their properties in the hyperscalers as well like a cloud that is like a pool of storage that allows them to manage their data across that entire environment in a completely orchestrated way and even more importantly, then offer it to their developers or their internal customers or their external customers in the case of an MSP through APIs and software. Today, it's all managed very manually. If a developer wants a new development environment inside an enterprise, they have to call IT, ask them to set it up. IT has to evaluate the application, procure the product, test it, put it in place weeks or months go by. That's why developers flock to the cloud is because in a matter of hours, they can define the infrastructure they want through a set of [indiscernible] or APIs, that infrastructure is set up automatically in a way they go and they pay by the drink. We're doing -- with Pure Fusion, we're doing the same thing for enterprises across their multi-cloud environment. So that's a unique -- no other vendor that I know of is doing that. They might be offering their products as a subscription, but they're not making them work any better together from that standpoint. They're not offering the ability for their customers to offer their developers API services to be able to get offerings. And then secondly, on the cloud front, we believe we'll be the first to be able to sell infrastructure into the hyperscalers, replacing effectively their own software and commodity disk. So that's, again, a rather unique strategy.

[indiscernible] FlashArray//C...

It will be some variation of our intellectual property, probably customized in some way for the hyperscalers environment.

Do you think they would be open to letting you -- or maybe it's something different that you're saying that you sell them that technology with your software stack in it, did they then provide the API layer on top? Or you're providing with that as a turnkey...

In that case, it's more of an Arista model where we sell to them and they offer services and customers don't even know we're there.

Okay. And how soon do you think that kind of an opportunity might develop?

Next year at the earliest, possibly a little later.

Okay. More hyperscale stuff. Every time I talk to you, there's something else. Go-to-market, let's talk about that a little bit. What are you guys -- you've talked about penetrating enterprise customers more deeply. Talk to us a little bit about the investments you're making there, the actions you're taking to accomplish that? It's not an easy place to operate, as you know.

Yes. Well, to be able to be a credible vendor into the enterprise takes a number of different things, as you well know. One is it takes a product line that appeals, that has the fit and finish features and capabilities necessary to fit into the enterprise, but it also takes an enterprise sales team that understands how to navigate an enterprise. It takes a support organization that can be able to support at that high level of expertise that's expected by enterprises, takes everything from contracts to financial capabilities to be able to support the way that those customers want to do business, which we started out as a commercial selling organization, meaning a mid-market, which is a very transactional base. And we've been building this over the last 4 years. I wouldn't say we're mature yet. We have a lot of opportunity ahead of us, both in terms of expansion in the enterprise as well as improving our business model from an efficiency standard and an effectiveness standpoint.

So you get about a direct versus channel balance in that you'd eventually like to achieve?

Well, we're 100% fulfilled through the channel. And we have...

You're going to stay there or just augment it with a sales capability...

So we're direct touch, like the other great technology companies in this space, meaning that we do communicate directly with the customer. The fulfillment is through the channel. Well, and the channel does a lot of work. I mean there's a lot of integration and support services that are necessary. So we never really want to bypass the channel. That being said, we want more efficiency out of the channel. We want to be able to spend more of our direct selling effort with larger and larger customers. We want the channel to be able to transact very independently. And ideally, we'd like them to do brand building, but we understand we'll have to do the brand building and expect the channel to be able to support the products once installed.

Yes. I think when we look out to next year, we're really going to be focused on net new business at the enterprise level because I think we've done a really nice job. Once we get into an enterprise and expanding it, our team is doing a terrific job. You've seen that in terms of productivity improvements across the board in terms of our sellers, but I think we want to make a concerted effort because I think the opportunity is there with our portfolio around new enterprise business. In addition, we're in early days on FlashBlade//S. And I think penetrating FlashBlade//S across our installed base is going to be a significant opportunity for us.

What about the cost side of that, Kevan? Does it require more investment? Or is it just a repurposing of...

There'll be some investment associated with that, but then that's been contemplated, right? So when you think about -- Charlie and I have been very aligned that the top line growth is our priority. Innovation is our priority. But we think we can do that with steady improvement in our margins, which includes incremental investments in the areas that we've talked about, especially around the enterprise.

Yes. Okay. International, maybe talk about that a little bit. It was 23% 5 years ago, 28% last year. What opportunity do you see in ramping that up, international situation depending on where you look a little uncertain right now?

Yes, absolutely.

Maybe looking past that?

I was going to say it. If we look past that, which is hard to do at the moment, but and in fact, there's one thing that I'll come back to in that area where I think we have an advantage. But international should grow on average on a long-term basis faster than North America, but North America is growing very strongly right now. When North America grows, it's hard for, frankly, international to keep up. North America is an early adopter of new technology, early adopter of new companies, frankly, less tied to -- somewhat more aggressive in terms of using new to begin one way or the other. That being said, a mature company in our space should be about 40%, 45% international. And as you point out, we're closer to 30%. So a lot of opportunity there. I think in the short term, the fact that our energy performance is so far superior to both disk and to the competition even in all-flash, that it gives us a very unusual short-term opportunity to really expand and get over some of that conservatism because of the nervousness, not so much about energy prices as much as it is about energy security, just being able to have the energy gives us a short-term advantage. I think we're going to very much focus on taking advantage of it.

Have you seen incoming phone calls I mean, given what's going on in Europe and...

I've been at the company for 5 years. For the first 4 years, I used to talk about [indiscernible] power space and cooling and it was a very short conversation. Nobody cared. Literally, nobody cared.

I hate to say it, but we didn't really care.

You didn't care, yes.

We knew it didn't use to drive sales. It's an interesting thing.

Well, exacerbated by the fact that the IT people don't pay for power. So it was on someone else's budget anyway. So why should they care? And frankly, I think if it were just power energy pricing, it still would be ho-hum. It's energy security that's driving the interest in our product right now in Europe and actually in Asia as well, which is why I think we have a unique opportunity right now.

Okay. That's interesting. So we got a few minutes left. I want to see if anybody in the audience has a question. So anybody out there have a question for Pure? Yes, here in the middle. I'll maybe let the mic come to you so that everybody can hear.

You're talking about the teams, Meta as an example, did you quantify roughly with the one team, what the revenue opportunity was? And then the second question is how many other teams are you talking about the similar revenue opportunities?

Right. Well, the first theme is now public information, which is the research supercluster, so the RSC, which is both -- it started out -- I mean, it's somewhat of a misnomer now. It started out as a research operation. Its first instantiation was focused on improving the overall performance of the entire Facebook network. And now it's also being used as the basis for their metaverse set of activities. Their virtual reality AR/VR environment is now part of the research supercluster. I've not been specific on the other groups that we're talking to inside Meta, but we've expanded beyond early discussions with other groups in Meta now.

Equivalent or larger...

I'd say certainly potential -- the reason why I'm finding it hard to answer is because the early instantiation may be smaller, but the larger potential is larger.

I see. And then just one last question is the -- how is the strength of the U.S. dollar impacting you think about sales and revenue? How are you managing that strength?

Well, it's part -- I mean, obviously, we're impacted by the strength of the USD on our top line. We've talked about it. We haven't quantified it in part because our international business is not as large. So that's been favorable to us in terms of how we've navigated that. And in some cases, with our international customers, we're billing on USD as well. So for us, it's been an impact, but it was noise to us in terms of the impact on our growth rates, and that's why we didn't quantify it. But I think if you think about it in terms of 1 to 2 points on the top line, that's a good way to be thinking about it.

That's so much on the bottom line because we have international costs and they tend to balance.

Well, yes, frankly, if you look at it in terms of profitability, they net out basically in terms of the tailwinds we're getting on the operating expense side.

Yes, we got one over there. Yes.

I just want to clarify. I've heard you guys say energy security a couple of times, and I actually don't 100% know what that means. That means like a customer forward-looking, they're only going to have access to like this power budget. And so now they're trying to figure out how to work within that envelope. They don't care really so much about the pricing, the power flipping around. It's just more that reality, sorry, just to make sure I understand it.

Well, I mean, of course, they do care about price, but I think what's really gotten their attention now is, yes, what I call energy security, which is that they're looking forward to very limited power budgets. Yes. So I don't know if you know this, but Ireland is told by hyperscalers no more data center build-outs because they don't have any [indiscernible]. Just take that as an example.

Could you talk about, I guess, first, whether you're encountering vast data in the large enterprise space that much or you're still kind of segregating customer segments? And then second, compare the value prop of kind of you versus them?

Yes. Well, we don't see them very often. It's a very small percentage of deals, but we do see them. And they exploited a niche that we weren't really focused on early on with our FlashBlade -- original FlashBlade product. And now with FlashBlade//S, we think we cover that segment. So I think our value proposition is going to be Evergreen consistency across our product line. And also they're a cashed product, a so-called cash product. So they can provide higher performance for a period of time, and then they run out of that performance. We provide sustained performance level. So we think we're going to be able to compete with them quite well as we go forward with FlashBlade//S.

Great. I think I'll finish up with recession thoughts, just get your take on the macro economy kind of getting on that.

I don't think this audience wants to hear from you, Rod. I got my opinions, but...

What I would be curious about is what your planning assumptions are that I think a more digestible way to ask the question, like what -- how are you planning or how do you intend to run the business as we go through a period here, really a lot of uncertainty. Nobody really knows how it's going to come out.

Well, we're planning on flexibility, first of all, right? And so we're making sure that as we go through our planning process, that we understand the levers that we have in place to manage through an environment like this. During COVID, we made a decision to invest through the downturn, and we think that's working for us now. And on -- I would say our philosophy as a market share taker will continue to be to invest through what we might see as temporary downturns. But that being said, we're not going to die on our own sword here. We're going to certainly moderate our spend depending on the nature of this -- of whatever we see in the economy over the next 18 months. I think in general, we're planning on it being a moderate downturn, not a major downturn. Kevan?

Yes, nothing to add to that.

Is your -- is the way you'll manage it when I see it, then I will adjust my cost to it or are you trying to get ahead of it a little bit or I'm...

We've already adjusted. I mean, given what we saw in the first half, we probably would have gone beyond our original plan in terms of investment, which we didn't -- which we've not done. Instead, we're more moderate. We are continuing to invest for sure, but at a more moderate pace than we might have had we just had the first half.

So would just be a little bit more cautious [indiscernible] data points come that kind of approach?

Yes, exactly.

Great. I don't have anything else for you. We're almost out of time. So I think it's a good place to draw a line in.

Thanks, Rod. Appreciate it.

Thank you guys. Thank you, everyone.