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

Hello, everybody. Thank you for joining us for Pure Storage here on day 2 of Barclays TMT Conference. Tim Long here, IT hardware, comm equipment analyst at Barclays. We're happy to have Kevan and Rob here from Pure. So thank you so much for attending and talking with us here. First, I'm going to read their safe harbor here. Statements made in these discussions, which are not statements of historical fact are forward-looking statements based upon current expectations. Actual results could differ materially from those projected due to a number of factors, including those referenced in Pure Storage's most recent SEC filings on Forms 10-Q, 10-K and 8-K. Thanks.

Thanks, Tim.

Thanks, guys. So yes, maybe we'll just kind of start a little bit high level here and talk a little bit about kind of priorities. You guys have had a really good run over the last few years. Strategy is playing out really well. So just curious, as you look out the next year or 2, kind of what are the 2 or 3 priorities for the company maybe from each of your perspectives?

Yes, I think that sounds great. And I think the momentum has been really strong for us as we look to close out this year. When we think about next year, look, I think it's continuing what we're already doing. Our enterprise strength continuing to penetrate the enterprise environment. We're still early days. Great momentum, though. And obviously, we invested in that back in 2019 and really seeing the benefits of that as we continue. Really focusing on the portfolio sale. Given the fact that we've got a widening portfolio, FlashBlade//S, which we've got early momentum on. Being able to now sell the entire portfolio to our customers, including enterprise, whether that's FlashArray family, FlashArray//C, which is getting a significant amount of momentum. FlashBlade//S, that portfolio sell is still early for us and a lot of potential in terms of how we're thinking about it. We've talked a lot, especially this last earnings around nearline disk takeout opportunity, and I'll let Rob spend some more time on that. That's a really exciting opportunity for us, especially as we see the complement of our portfolio with leveraging flash QLC, our leadership in flash management software with the NAND pricing coming down really creates a significant opportunity for us on that front. And the last thing I probably would highlight is our subscription offerings and the momentum we're seeing across the board on our subscription offerings really being driven by our entire Evergreen offering, which is Evergreen//Forever and Evergreen//One.

Okay. And I'll layer on top of that kind of 2 additional strategic priorities that we've talked a lot about with the community over the last couple of quarters. So certainly, the hyperscaler opportunity, very, very strategic for us and key area of focus as well as really driving what we're calling the cloud operating model, right, taking the core benefits that we deliver with our products and services today, marrying them with what we're hearing from customers in terms of what they're looking for out of the public cloud experience but maybe on their own premises in private cloud deployments. And so what we're doing with Pure Fusion and Portworx to really go and deliver that.

Okay. Excellent. Excellent. Maybe, Rob, we'll start with you. I think one of the things that's been impressive with the company over the years has kind of moved from 1 or 2 products to many. So talk a little bit about kind of the -- how you guys have been able to do that with the broader engineering and tech resources that you have, and where do you bring that portfolio set from here? I mean, you still have a lot of businesses that are still pretty new and ramping. But when we look out, what else are we going to see from Pure to keep this growth engine going?

Yes, absolutely. So Tim, I think the first part of your question is, hey, so the portfolio has expanded, how are we able to do that so quickly. I'd just point back to the fact that our IP, really our engineering staff, our IP is all -- is 95% software, right? And so the fact that our secret sauce is in software, that's really what allowed us to break onto the market with FlashArray, grow the way we did and really take over the footprint in the Tier 1 block space. That really allowed us to take that same software base and then go and repeat that recipe as we went and looked at other parts of the market, whether that's unstructured data and what we did with the first version of FlashBlade, then take that technology, marry it with evolving technology around QLC and flash management to now be able to go after the Tier 2 space with FlashArray//C, right, as you've seen that product grow and then now bring that technology back together with FlashBlade//S. And so really, I think what's allowed us to do that is, again, the fact that our core technology sits in software. Number two, the fact that we've really invested in R&D in creating the leverage in terms of developing the technology that's shareable across the portfolio. From a customer's lens, I think this is incredibly compelling, right? We're able to go into enterprise customer's footprint today and solve the vast majority of their data needs on the back of 2 core architectures powered by the same software base, the same hardware technology, and that really shows through. It shows through in either management experience, the ease of use, customer that is used to FlashArray, they pick up FlashBlade, it's like hand in glove. And so it creates benefits for us internally. It creates benefits for customers, and certainly creates benefits to Kevan's point earlier in terms of driving portfolio sales and sales synergy.

And maybe we could add just a little bit more on Fusion and Portworx in terms of how you're thinking about that as well from a technology standpoint.

Yes. Yes, absolutely. So I think the other piece of what we're doing beyond the core software within the arrays bring the portfolio together, right, and really expand the market and set of use cases we're addressing is with Portworx and Pure Fusion, right? And really, the strategy there is to create value for customers that span and go beyond the boundaries of a single array, right? Today, historically, storage has been configured by customers workload by workload, right? You have one application, you configure the compute, networking storage. You move on, you configure the next one. What we see with larger customers is as they go to the public cloud, they are introduced to this mode of usage and management where storage infrastructure is available to them, highly automated, delivered as code through APIs and virtualized in some sense, right? They don't have to think about physical arrays, physical storage units. We're creating that same experience. We've already created it in Portworx, and that's why we see such great adoption within Portworx from customers running both on-prem as well as 100% in cloud. And we're creating that with Pure Fusion for traditional workloads sitting on top of FlashArray and then later FlashBlade. And so again, it's really a strategy of -- with the core platforms being able to address a wide set of data workloads and then layering on top of that cloud management software to simplify the delivery and consumption of that for customers.

Okay. Excellent. Excellent. I Apologize. We got kind of a CTO and CFO. So we're going to bounce...

Perfect bounce.

Not exactly next [indiscernible]. Kevan, curious 2-parter here. One, everyone here is concerned about macro, concerned about enterprise spending. Are we in a budget flush now? So maybe talk a little bit about your view of kind of macro impact on the business. And then if you could layer on top of that, you're adding all these other products. You're getting more into enterprise. So deal size is getting bigger. So maybe under that lens, talk about Pure specifically and how you guys are probably a little bit more insulated as a share gainer with bigger deals and whatnot.

I think that's great, and we can spend some time on that. I think let's start back with what we spoke about in our last or most recent earnings around the macroeconomic environment. Certainly, we're not immune to it, navigating through it, but we also have a lot of opportunity that we can go capitalize on as well. But what did we see specifically? Well, obviously, we did see a lot of activity where the approval processes are getting extended. We are seeing sales elongations. The amount of approvals that we're needing to get from customers, that's increasing. We did see a difference from Q2 to Q3, where that -- more approvals, more inspection. We saw enterprise really getting affected in Q2 from a sales elongation perspective. That continued into Q3, coupled now with a little bit on commercial as well. And how do we navigate that? I think we do have some significant advantages in terms of how we're navigating. The first that we've talked about, frankly, is the energy savings and the energy security, really all predicated and driven off of our architecture, our flash management software, where we've got such a significant lead in terms of what we're doing on that architecture and how that is benefiting customers in terms of reducing their energy costs as well as using just, frankly, less energy, power and space. But then you then layer on to that the overall total cost of ownership argument. And I'll tell you, that discussion has become -- folks are interested in that now much more than they were going into the macroeconomic environment. And we're coming out of that with approvals. When these deals, larger deals that we're seeing that they're requiring more approvals, more inspections going up to the CFO levels walking through the TCO and how compelling that is, we're getting approvals for it. So that's a great thing. I think the opportunity we have on nearline disk is a significant opportunity that we see, again coupled with the TCO conversation, and layered in with energy as well. The last thing I would say is as we navigate this environment is the subscription business. Our subscription business really powered by Evergreen. And whether an Evergreen subscription is attached to a CapEx sale or whether the -- our customer wants to consume our technologies through a service level agreement with Evergreen//One, they've got a lot -- our customers have a lot of flexibility in terms of how they choose to consume our technology, where their pain points might be as they're navigating the macroeconomic environment and how we can help them while still accelerating their digital transformation journey.

Okay. Perfect. Both of you mentioned hyperscale and QLC. Look, to dig into more, obviously, you had your second tranche of Meta last quarter. But maybe, Rob, if you could start and talk a little bit about how you're able to use the software enables QLC and how much closer from a price point do you get. And is more of that the TCO and energy savings than the raw NAND versus disk? And how much did the softer ESG angles play into it? So maybe how do we continue to narrow the curve from a pure commodity cost? And then what are the other elements that close that gap?

Absolutely. So I think there are about 6 questions in there. I will try to take them one at a time. So yes, so let me start with what we refer to as really our structural advantage that we have with our flash management technology. And this really goes back to the beginning of the firm, right? This idea that we designed software specifically to treat the flash media the way that flash media was meant to be treated. Unlike all of the other competitors, the incumbent competitive set as well as the upstarts at the time who really were relying on SSDs to do that translation. And so that difference in approach, the software that we've built has always given us an advantage over SSDs, over consuming flash through SSDs. Now what's happened is that over time, as flash generations, as technology and flash has evolved, that advantage has widened, right? So said more simply, with SLC, MLC, even TLC flash technology, we had an advantage, but you could get by using SSDs. You would just trade off a lot of efficiency. As we start to look at a lot of the capacity optimized flash out there, QLC as well as the road map that we have visibility ahead of us, the approach that we're taking really is requisite to unlocking the potential of QLC and that flash media. And I think you see a couple of proof points of this, right? So number one, we've been selling FlashArray//C, all QLC array into the enterprise. I think it's coming up on -- I think we're actually just past 3 years now. You've seen the growth in that product, the massive uptake. And we're still out alone, driving flash into those use cases, right? And again, I think the reason for that is that none of the other competitive set really has our technology. They're not able to take advantage of QLC through the SSD form factor, and it really does come down to that additional efficiency advantage. And so the reason I kind of put in on this is really for 2 reasons. One is that, as the component cost of NAND declines, right, we realized an advantage through our software, our integrated hardware and software technology in direct flash to deliver that flash more efficiently. Our competitors are effectively paying a tax on top of that because they have to consume through enterprise SSDs. So we have a structural advantage as those cost curves decline. The second aspect that comes into play is that as the overall cost of media declines, to your point, Tim, the other costs of operation definitely start playing an out weighted effect, right? So in a day where you're spending maybe $1 on storage and $0.05 to power it, that $0.05 factored into the TCO, would it swing your decision day 1? Maybe, maybe not. If now all of a sudden, it's $0.10, $0.15 in the storage, and hey, by the way, power is getting more expensive and it's $0.10 or $0.15 to power it, your TCO equation starts shifting dramatically. And so those 2 factors, I think, are really what creates a massive opportunity we have in the nearline disk takeout opportunity, but then also play a very important role in the hyperscaler because if you look at where the hyperscalers are, they're largely in disk today. They've got to get to flash. Enterprise SSDs aren't going to give them the benefits they need. And they don't have the technology and IP that we've amassed to get the most efficient use out of flash. And so we saw that play out in the Meta engagement, and that's really where we see our forward-looking opportunity as well.

Okay. Kevan, maybe following on that. From a financial standpoint, the first Meta deal came out and we did the math, back-of-the-envelope math, and obviously, gross margins were a lot lower. And then the second tranche was a different structure. So does that ability to sell to cloud players in a different consumption or financial model, does that change the outlook of how aggressively Pure wants to go after this business? Meaning if it was all going to be 40% or 50% gross margin business, maybe you want to be careful about how much you do. But now that you might be able to have a financial model with more gross margins akin to the corporate average, you guys get even more aggressive going after this end market?

Yes, it's a great question. And look, the way I look at it is from Pure's lens, the hyperscaler opportunity is a compelling opportunity for us. And so we're going to go chase that, work with that, have the right conversations. And again, this -- right now, it's primarily in the engineering side in terms of design wins, which is really where the focus is. So then you then move that to a business model lens. And I think it's really important for us to understand what flexibility and optionality we have in our business models and what's ideal for us in terms of a profile with a focus on ensuring that we land the right to operating profit, operating margin with these types of opportunities. So I think it's less about being aggressive in terms of going after those opportunities because we will be aggressive. We will be pursuing those as we see that as a real opportunity for us. But then it's really important as we go downstream to understand what optionality do we have? What do these different hyperscalers need in terms of flexibility in terms of how they want to consume our IP? And this was one data point for us where we have a lot of optionality to explore. And I think it's also important for us as Pure to continue to demonstrate our differentiation that data storage, data management is not a commodity. We see that really day in and day out through our gross margin profile. And I do want to be sensitive to maintaining that edge in terms of that. We're innovating. We're being disruptive. And so from a gross margin profile, you see that, and that's an advantage for us.

Right. Yes. Rob, if you want to replicate what you guys are doing at Meta [Indiscernible] hyperscaler, what are the development is going to be needed? Or is it a heavy lift to launch Google or AWS or Azure or whatever? Or do you have kind of the pieces you need, and it's pretty seamless?

Yes. No, it's a great question. I'll just go back to the wording that Kevan used. It really is a design win process. And what does that mean, right? It starts with, A, having the best building blocks, right? We've got the best LEGO bricks, but each of these environments has different needs. Each of these environments are trying to build 2 different services, the hyperscaler end. They've got different constraints. They have very different software stacks. And so really, the process is very much working closely, engineering team to engineering team to understand, hey, so not unlike any other customer, just more engineering-focused, what are your needs? What are the constraints and guardrails that you're kind of operating within? What are you trying to optimize for? And how can we best work with you with our IP to go and accomplish that? Now I think some of the differences that you see as you talk about the hyperscaler set versus the traditional enterprise customers, obviously, much more technologically sophisticated environments, a lot more software that they own around that. So got to go understand that. Scale, obviously. You're talking about very, very large footprints, which then brings in certainly cost optimization and efficiency, but also power and footprint. Those 2 elements were key attributes or key factors in the original Facebook or Meta win. In that they simply had data centers footprint that they had built out, they had limits to power that they put into those buildings. And we were one of the -- really the only options that we're going to be able to meet the balance of what they needed in terms of capacity, performance, but also what they can power in those buildings. So net-net, it's a design win process. It starts with getting the engineering teams together, understanding what they're trying to solve for, and then working together to see how best to fit that.

Okay. Excellent. Maybe staying on the customer front, a few quarters ago, you mentioned the large Telco win, which is another area, which your traditionally hardware-type vendors aren't huge in the Telco vertical. So curious if you could talk a little bit about kind of the deployment there, the upside to it, maybe how it fits in with just that same technology discussion you were having and the opportunity with other large Telcos.

Yes, absolutely. So again, multipart question. So I think in a lot of ways, the Telco environment and specifically speaking to 5G environments share a lot of similarities with hyperscaler, very large scale, the need to be highly automated and remotely managed, need for reliability, right? Service availability and reliability are of utmost concern but also agility and flexibility, right? If you look at where the 5G spaces today and the technology and the software stack that surrounds that, very, very fluid space, lots of software, lots of software changes. And so when you net that out to an infrastructure set of decisions, that now drives you to, again, looking for a lot of the same things, the technology stack that's reliable, very dense, very efficient, easily managed and is something that's going to be able to grow, scale, flex and give you that agility, all playing to our core strengths, right? And so we've seen that. I think we called it out in 2Q. We called it out again this last quarter, I had a couple more 5G deployment wins. And again, I think the use case space fits our technology very well. I think we're overall in the early innings of 5G deployments. And so I think the opportunity set is large, and we're going to go keep working with those service provider customers as they grow and scale the services.

Okay. Kevan, maybe we'll go back to you. We got to ask about the model and op margin leverage and things like that. So maybe just talk a little bit as we look longer, you guys have -- last year, the past year was very strong. Margin leverage here, a little bit more headwinds facing upcoming fiscal year. But talk a little bit about kind of how mix and much more as a service and software in the mix going forward is going to play into the kind of the operating structure of the company.

It's a great question. And frankly, I think our increasing enterprise business as well as our subscription business overall will be the primary drivers in terms of our operating margin expansion. If you take a step back as a philosophy, Charlie and I have been very much focused on this balance of prioritizing revenue growth with modest expansions on operating margin. This year that we're in now in terms of what we're looking at for completion, we saw significant, frankly, expansion in our operating margin. I think going from 10.8% last year to expected 15.6%. And that's significant for us. And to your point, when we look at it for next year and look at the headwinds and given how far in front of where our expectations were from a road map standpoint, that 14% to 15% expectation that we set for next year is a good expectation. But our overall long-term philosophy is that we expand modestly operating margin every year with -- complemented, obviously, with expected revenue growth.

Okay. Maybe one more product. You mentioned FlashBlade//S in there. Maybe just talk a little bit about kind of differentiation there and what customers are seeing about that as it's ramping.

Yes, absolutely. So FlashBlade//S, as you know, second generation, really next generation of the FlashBlade product line. A significant step forward in a number of dimensions in terms of power -- sorry, performance, capacity and scale. But the other thing that FlashBlade//S brings into the picture is a greater degree of configurability and modularity. And so that's really where we're seeing how that plays out is customers are now able to configure FlashBlade//S either for their highest performance workloads and get up to 2 or 3x more performance than they could before. We're seeing that in chip design, EDA space, technical computing, AI analytics. We're also -- where customers are also able to configure that product to much higher capacity, much more cost optimized configurations. And we're seeing that in, for example, rapid restore, the backup part of the business. So that flexibility is great. That flexibility is also bringing in the full power of Evergreen, right, and the ability for us to now go and drive Evergreen//Forever attached to FlashBlade//S. And we're only 1.5 quarters in the shipping FlashBlade//S, but we gave you some color on the call. Uptake has been tremendous, and we're seeing great initial signs of Evergreen//Forever being chosen by customers as well. The other point I'd make is we're seeing customers really take advantage of the combinations of these things. The access to larger scale and capacity, the optionality and flexibility they get for Forever. And we're seeing that translate into larger initial purchases, right? We're seeing customers electing to choose -- electing to purchase larger configurations and capacities right off the bat, again, because they're able to go and do so much more with that. So off to a tremendous start.

And I do think it's important, too, when we think about our opportunity on the nearline disk takeout and those workloads will be driven by a combination of FlashArray//C as well as FlashBlade//S, given the configurability that we've got with FlashBlade//S. So that's going to be a big driver for us as well in terms of capitalizing on that opportunity.

Okay. Great. We've got like 1.5 minutes left here. I'll just leave it to you, maybe, Kevan, anything. We went over a lot of stuff here. There's a lot of moving parts at Pure these days, a lot of positives. But anything you kind of want to leave the audience with key takeaways?

I really think the key takeaways for us is -- and Charlie has been driving this vision of data storage, data management is not a commodity. We're innovating. We're investing in that innovation for disruption. And we really are seeing the benefits of that across the board. And then I really think that's going to be powerful for us as we, one, go and take over larger portions of the market in terms of gaining market share as well as navigating some of these near-term economic challenges.

Great.

Yes, appreciate it.

Okay. Excellent. Thank you, everybody. Thank you, guys.

Thank you. Appreciate it.