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

Thanks, everyone, for joining on, I think, the second last session. I'm Jason Ader from William Blair. I'm pleased to introduce Rob Lee, who's the Chief Technology Officer for Pure Storage. Before we begin, I'm required to inform you that a complete list of research disclosures or potential conflicts of interest is available on our website at williamblair.com. And from a Pure perspective, statements made in these discussions, which are not statements of historical fact are forward-looking 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. This feels like a day we should be having class outside, but we're going to do it in here. Rob is going to do about 10 minutes of slides, and then we'll have time for Q&A.

Sounds good. Thanks for the intro, Jason, and thanks, everyone, for joining us. I know it's the last session of the last day of the conference. Hopefully, it's been a great conference from you. I wanted to just spend a few minutes upfront and set the stage. I know a lot of you have been with a Pure story for a number of years. Some of you might be newer to the Pure story. I wanted to just set the context -- what we've seen over the last 10 years, more importantly, the opportunity set we see looking forward. And if I were to summarize it in a nutshell, right? Pure has really been about delivering the most modern data storage technology. We pioneered the use of Flash. We use that as an entry point to disrupt the enterprise storage market. And we have seen ourselves over the last 10 years, be consistent share gainers in the enterprise storage market. Now you might ask, well, why is that, right? And I can give you a couple of answers and I'll start from a customer's lens, quite simply, it's because we give customers the most modern technology that's out there. We do it in a way that saves them a ton of headache along the way in terms of management, in terms of operations. And at the end of the day, we save them a ton of money as a result that you can measure, you can see that in a couple of different forms. We're 2 to 5x as efficient from a power space cooling perspective. And even more so up to 10x. If you compare that to the systems, we're generally replacing, which are hard disk-based. And you can appreciate given energy costs, given space costs, how impactful that is. We're over 10x as reliable. And actually, that's understated, right? When we state reliability, when we state availability, we're looking all in. Our competitors will go to a customer and say, "Hey, this is our availability." We're Five9, they'll be proud of that but there's an Asterix and the Asterix is except for planned downtime. We don't have planned downtime. We don't force customers in that position. So we're 10x reliable. If we look at a hardware component basis, we're 10, 20, 30x more reliable. Happy to talk more about that. When we look at operational savings, we look at labor, we look at saving people time and headache, 5 to 10x as efficient to operate. A lot of that is, frankly, just taking lessons from the consumer space. You don't -- you pick up a phone, you buy a new phone -- you don't read the manual, you know how to use it. We've designed that ethos into our products. We've supercharged that with automation, what we're doing in the cloud operating model, makes our products bar none, the easiest in the industry to operate. All of this translates to a dramatically lower total cost of ownership, driven by more efficient hardware upfront, more efficient labor costs, lower power space, energy costs to go run and operate. A lot of the reason for that and really one of our critical advantages is we have the most consistent product line. We're able to now meet all of the customers' needs in terms of data storage. Really based on 1 consistent set of technology, 1 software technology, 1 hardware technology, 1 management platform. Now why is that important? Well, if you're a customer, if you've got 5 different things, you've got to go learn to manage to operate, that's a lot of headache, right? If you're a customer and you're buying from a vendor that has to bring 6, 8 different products out to meet your needs, that's a lot of mouse to feed from an R&D perspective, right? We can go channel our innovation into 1 set of technology, deliver that across our platform, that sets us apart. And last but not least, our products are never obsolete, right? Our promise with Evergreen, I'm going to dive into this a little bit is once a customer comes on to Pure, once they've made that initial purchase, we keep that system modernized. We keep it always up to date. That customer never has to rebuy that equipment, that never occurs, that customer never has occasion to think about choosing a competitor, and that sets us apart. And so if you were to boil this down from a technology lens to what we see as our 4 critical and sustained competitive advantages, really the 4 I would call out. Number one, is our ability to work directly with a Flash, right? Folks look at the industry, you look at hard disk, you look at Flash. That's only part of the picture. You have hard disks, you have SSDs and then you have what we do, which is working directly to the Flash. The last 10 years have been about Flash taking over from disc. But what we see now is that with our software advantages, our ability to work directly with the Flash, we're able to drive significant benefits in terms of efficiency, in terms of performance, in terms of reliability, that ultimately accrue to us accrue to the customer. This is what allows us to crack into the deepest tiers of disk-based systems, go address those at an upfront acquisition cost parity, and we're unmatched in being able to do that with Flash technology. Hard disks, as we've been very clear on the calls, we believe our dead, SSDs are not that much better, and we're really starting to break away with our direct to Flash technology from the SSD road maps. I mentioned before, we have a highly consistent portfolio that's what we would see as our second unique competitive advantage. And that's frankly one that you can't go and -- once the cat's out of the bag, you can't go on and undo. Once you have 6, 8 different products, you can't unify those into one. And so I think what we see from customers, what that drives is certainly ease of management, lower kind of operating overhead, but it allows us to innovate faster, right? I mentioned before, because we have 1 software technology, 1 hardware technology every piece of innovation that we put into the products, I can go and deliver those across the entire portfolio. And so from a customer lens, are you going to be able to get an easier, more fluid, more agile and flexible experience or a vendor who can satisfy all your needs with 1 set of technology or 6 or 8, I think the answer is pretty clear. And that's something, again, that once you let that cat out of the bag, you really can't undo that. We talk about ease of manager, right? We've always been about simplicity. We took kind of the consumer approach that you see perhaps from your phone and when we brought that into enterprise technology. We've, over the years, invested heavily in automation and supporting our customers in terms of how they're managing orchestrating. We're now taking that to the next step in delivering the cloud operating model and really what this means is we took a look at, hey, what is it the customers like from the experience of operating in the public cloud. Flexibility, the agility, the ability to not have to manage down to the hardware, but just say, "Hey, this is what I need. I need this much performance, this much capacity, I wanted to behave like this. Go make it work." We're delivering those attributes in our products with our fusion control plane and our cloud operating model. And then last but not least, Evergreen, this is the technology, the architecture and the subscription set and business model that allows us to deliver on that promise of non-obsolescence. A customer buys with us day 1. That customer will stay with us and be constantly modernized over time. It's like getting in your car and driving to work by the time you get to the end of the block, you've got new wheels in the car. You get to the freeway on ramp, your engine is upgraded, you've got more horsepower you get to work and your entertainment system is all modernized. You never had to pull over, we're delivering that same experience with Evergreen into enterprise storage. And so that's a clear driver of our NPS score, our customer satisfaction. It also helps us with customer retention, right? We love refresh cycles. Every time a competitor forces a customer to disruptively have to forklift upgrade, jump through old equipment, buy new equipment, that customer has a reason to go put that a state out for bid. That's a buying -- that's a selling opportunity for us, right? We never returned the favor and that's a huge advantage for us. So hopefully, for those of you who have been with the Pure story for a number of years, these have been the advantages that we've had all along. I think I'd argue that we have certainly increased them over time. For those of you who are new to the story, hopefully, that sets the stage for where we see ourselves today, but also why we're so bullish about the opportunity set ahead of us. And so with that, maybe...

Have a seat. Great. Thanks, Rob. Okay. That's going to help frame some of my questions. I think first off, just on Evergreen, I think it would be helpful for the crowd to just understand like how the ownership experience has changed? Like what do people have to do in the past with Storage, the whole forklift upgrade cycle and how you guys really kind of disrupted that?

Yes, absolutely. So historically, you have to remember, the Storage industry was built around hard disk technology. Hard disks generally don't last longer than 3 to 4 to 5 years. Our competitive set have built entire product lines, business models around that concept. So a customer day 1 would go buy equipment almost immediately day 2, day 3 is starting to plan for what does it look like? What's -- what do I have to do in year 3 or 4 when that equipment goes end of support no longer becomes economical to run. I'm going to be forced to buy the latest version. It's going to be a large PS undertaking to go migrate my data from my old systems to my new systems, it's going to take me 6 months. And so that sounds bad, right? Now multiply that by 10, 20, 100, if you're managing lots and lots of arrays, a larger footprint we talk to customers that are constantly on that treadmill. There's always some piece of equipment that they're having to kind of manage through that refresh cycle versus with Pure with Evergreen, being able to go to the customer and say, hey, day 1, once you're on Pure, we will continually modernize that estate. If you have to grow, you can grow in place. As we produce faster controllers, better software, you get the benefits of that. If we produce sensor drives, you want a better consolidate your footprint, get better density, efficiencies, we can go help you do that. It's a completely different experience.

Yes. It's almost like -- I remember you guys talking about you don't have to rebuy your storage it's like in every 4 to 5 years, historically, you had to kind of rebuy storage effectively, right?

Exactly. I mean it's like if you buy a house and year 3, the tax guy comes along and says, hey, Jason, your property taxes are now 4x as high, it's the cost of buying a new house down the road. You're going to kind of look, you're going to buy a new house, you're going to spend 6 months packing up, moving your stuff, you're going to lose half the boxes. That's been the historical experience. It's terrible. And it's something that we set out to change from day 1.

Great. I've often called you guys sort of the best house in a rough neighborhood. I'm sure that's not a huge compliment to you, but I think it's a reality just in terms of the investor on the stock market. But just because you guys are primarily an on-prem data storage player, how do you counteract the kind of argument around on-prem storage being challenged by the migration to cloud? And where does that leave you guys long term?

Yes. So I think the -- what we've seen from the customer base, especially over the last 3 to 5 years, definitely a maturation in the thinking around cloud, where that fits in the IT strategy. 5, 7 years ago, you had a lot more companies that were all in on the cloud, "Hey,I'm closing down my data centers, I'm heading there." I think what we've seen over the last couple of years as folks have tried that route, they're running into a couple of barriers. One is cost awareness, right? That's a big one. The second is technology limitations. The cloud was built around a different set of applications. Lift and shift isn't as easy as it seems. And the third is skilling, right? And so you net that all out and then certainly, more recently, the focus on cloud costs. I think that's forced customers to reevaluate that. And that's why we're so invested in delivering the cloud operating model, right? We believe that the public cloud has certainly created a management model that makes a lot of sense. I think customers benefit greatly from that. It suits our product lines quite well. And so we aim to deliver that to customers. Whether they're running in the cloud or on-prem, our job is to be the best provider in both of those environments.

And can you talk about your sort of cloud capabilities in terms of public cloud and some of the specific offerings you have there and also some of your customers in that space?

Yes, absolutely. So we view the cloud really along a couple of angles, right? Number one, we're helping customers to run better when they're in the cloud. Number two, we want to help them run like the cloud, like they do in the cloud everywhere and the number three, build for the cloud. And then certainly, we can talk about how we're trying to help power the cloud directly. And so if we look at how we help customers run better in the cloud, primarily around Cloud Block Store and Port Works. This quarter, we talked about a large Cloud Block Store win. For those who may not know, Cloud Block Store is essentially our Purity operating system, the software that makes our FlashArray products hum. We've re-platformed that targeted optimized it for AWS and Azure environments. And what we found is that customers who value the enterprise features, reliability, need mission-critical storage for applications in those cloud environments and need a very -- need a very efficient way to go and manage that cloud infrastructure are turning to Cloud Block Store. This customer we called out after deploying Cloud Block Store was able to save into the 7 figures in terms of their overall cloud infrastructure spend because of the efficiencies that the software was able to deliver. And so across the traditional workload sets with Cloud Block Store, delivering cost savings and mission-critical capabilities that may not exist in the cloud as well as Port Works which is helping customers who are architecting typically net new applications built on containers, Kubernetes. We believe we have a strong portfolio to help customers in terms of cloud storage.

In Cloud Block Store and Port Works are software-only effectively, right?

That's correct. That's correct. And both of those are offered as part of our subscriptions portfolio. Cloud Block Store would be a piece of our Evergreen//One unified subscriptions and then Port Works being a component of the overall subscription portfolio.

Got you. And then maybe talk about the -- I think historically, you guys have talked about percentage of your revenue coming from kind of public cloud customers. I know it's SaaS its sort of the big component of that. But maybe just talk about how that's played out.

Yes. So historically, and this is going back several years, I think we've identified about 1/3 of the business as of several years ago, I was coming from what we define as the cloud, SaaS, MSP segment. We haven't updated that metric and really don't track that along those segmentation anymore, mostly because as the larger -- as we get deeper into the large enterprise, as you especially look at service provider telco type environments, the lines between large enterprise and SaaS and MSPs and cloud providers definitely starting to blur. We're -- from my lens, we're very much focused on where can we add the most value to those workload sets. And I think we've seen a very steady expansion of how we're being used whether that's in 5G environments. We talked about a win there a couple of quarters ago, whether it's certainly Meta. It's been well talked about or whether it's with some of the other SaaS providers, ServiceNow is a big customer of ours. We're really focused on broadening how we go after that segment. And again, it's hard to parse the lines between enterprise and cloud. We're just focused on the workload sets.

Okay. Great. Well, you brought up Meta, so we got to go into the requisite Gen AI question. How does Gen AI benefit Pure Storage over the long term?

That's a great question. So...

We never heard it before.

Never. First time in 20 minutes. So look, I think Gen AI, the biggest impact it has is actually going -- is actually that it's making everybody across the industry, and I mean the broader enterprise set pause, take a look and say, "Hey, technology is really promising. How can I leverage that? How can I make use of that?" Not everybody is going to go and build trillion parameter models themselves and hire thousands of machine learning scientists, but pretty much everybody out there is looking at, hey, how do I take advantage of that. So when I step back and I look at the AI opportunity really look at it in 2 categories. The first is how do we go support the folks that are building AI systems or the AI training environments? And the second is the enterprise set, how do we go support people that are looking to connect their data into AI-powered applications. And so if we look in the first category, AI training environments, we've been -- I think we actually opened that space many years ago, working with Meta. We've expanded that quite nicely across a number of verticals, whether it's self-driving cars, financial services and public sector security across the board. That segment continues to grow nicely for us. I anticipate that continuing to grow. But when I look at the second opportunity set, the broader enterprise trying to understand how do I go make use of this technology. It's clear -- a couple of things are clear. Number one, technology is going to evolve pretty quickly. So -- and we're early in cycle. So it's hard to kind of say exactly what that's going to look like. But number two, data is going to be super important, right? The key to being able to take advantage of AI-powered applications is the data that enterprises have in their firm. And then number three, people are going to have to change how they're thinking about storing that bulk data. Historically, the only consideration, the prime consideration has been cost, right? If you're being tasked with storing data, but there isn't a usage requirement for it, you're going to put it off in the corner on some disk-based system because you're just optimizing for cost. But if now you're considering, hey, how do I connect this to an AI-powered application? Well, it's got to be accessible. It's got to be warm, right? And so I think that transition from large amounts of data being cold data to needing to be warm data, I think, plays exactly into the opportunity set that we conceived FlashArray//C, well, our QLC technology overall, FlashArray//C and then now FlashBlade//E are to go after. So I think that's going to be very constructive for us.

Great. And why did you win Meta? What was the -- maybe give us some sort of back story there on how that deal played out and when and whether competitors will you use it a bake-off and why you ended up winning?

Yes, great question. So important to realize the Meta environment, we really think of it as 2 use cases in 1, the smaller portion of that is supporting the direct training environment, providing data directly into the GPUs. The larger part of the environment is really more of a bulk data storage, the large corpus of data that they're pulling from to do that work. We started in the training environment at a much smaller scale. We were chosen there for a balance of really, really high performance, but also reliability. These are mission-critical environments, very expensive resources waiting on the other end of those jobs, whether they're machine learning scientists or GPUs and reliability and performance were key. We made them very successful in that environment. As they went to scale, the challenge was really achieving a balance of performance power space efficiency. And frankly, at the end of the day, being able to fit into data center footprint, right? GPUs are also incredibly power hungry. If you have a fixed power budget, you want to try to get as much of that into the GPUs as possible, that's more that you can deploy. If we can offer 3, 5, 10x savings on the storage side, that's very meaningful. And so it's really the balance of those things.

Great. Let's turn a little bit to go-to-market. I've written about you guys as sort of crossing the chasm in the enterprise over the last couple of years. Maybe just talk about the evolution from a go-to-market perspective. and how that's kind of -- how you've gotten to where you are?

Yes, absolutely. So I would say -- I would call it 2 things in terms of crossing the chasm to borrow your words. Number one is really the broadening of the portfolio, 5 years ago, we were largely a 1 product company. Today, we're able to address the entire set of a customer's needs. That makes a very big difference, right? If you -- especially the enterprise, going into a customer and saying, I can address all of your needs. You can compete for the entire footprint. If you can only address a small portion of those workloads, well, the customer is forced to buy from other vendors. The channel partner is forced to bring in another vendor -- we're now -- after a very intentional expansion of the portfolio able to address all of those needs. Coupled with that is number two. We've had a very intentional focus on growing our enterprise sales force to take advantage of this broadened portfolio when Charlie came on board, Charlie, Kevan, the entire management team. We've really invested in focusing our enterprise direct touch sellers -- direct touch sellers into the enterprise and leveraging more of our channel partners to drive the commercial business. And I think you're seeing those 2 things working nicely together.

Okay. Great. Let's talk about the macro environment and just -- I mean it's been a weird 3 years, I guess, but...

You could say that.

Yes. Maybe just talk about how -- like what happened with COVID. Does that impact you guys and then post COVID. And then now we're into sort of this macro crunchiness. Maybe just talk about how you guys have adapted, navigated through those choppy waters over the last 3 years?

Yes. Well, so definitely a lot of changes. I think the biggest one is really on what we've seen ebb and flow from a customer kind of buying decision process and dynamic. I think entering into COVID and as well in the last couple of quarters, we've seen customers who are definitely more cash conscious, who are definitely more cost aware. And I think that's really benefited us on the subscription side of the house, right? Customers are now realizing and being able to see the benefits that we can offer in terms of not just our subscription portfolio, but the products as well. With Evergreen//One, being able to pay as you use, retain that optionality, not have to over by day 1, is been a huge benefit, and we've seen that in terms of Evergreen//One performance. But then now, especially as we have FlashArray//C and now FlashBlade//E, right, the ability to go help customers address different price points -- cost points. And especially with the energy savings, right? If you look at the elements of cost to acquire versus cost to operate, cost to acquire, it's pretty clear. We're going to keep driving that efficiently down over time. Cost to operate, what are the elements, power keeps going up, right? Space keeps getting more expensive. Labor isn't really getting any less expensive. And so I think you're starting to see customers really understand and value those elements.

Great. As you've met with investors, I know you've been on the road a bit. Paul is letting you out of your office. So what do you -- from your perspective, what do you think is the most underappreciated aspect of the Pure Storage when you meet with investors and you talk to them and they say, like, they don't get this piece. What do you think that is?

Yes. I think there's 2 things. I think number one is investors and the industry at large is still thinking in terms of disk versus Flash and I think it's -- I think the differentiation we have between how we deploy Flash, what our software is able to drive versus SSDs and the competitive set that's trapped there, I think is underappreciated. I think the second is how impactful Evergreen is, right? And what that looks like from a customer journey, what that looks like from customer retention and what that means from an ability to go drive customer satisfaction and incremental opportunity. I think those 2 things are the biggest misunderstood elements of the Pure Story.

Okay. Excellent. And then you've been with the company for about 10 years. You mentioned that earlier. Maybe just talk about culture and what makes Pure like a good place to work. I was just talking to somebody in the hallway and they said their friend works at Pure as a salesperson, and they're really happy there and just seems like a good place to work, but what's behind that?

Well, a couple of things. I think, first, culture evolves over time. I think we've grown considerably. We've grown in multiple sites. And so it's not about holding culture static and stagnant. It's about preserving the best properties. And I think it comes under our values, right? We've always had a laser focus on serving the customer. It's a great rallying point for everybody across the board. Pure has always been a place where new ideas are incurred. So in fact, I often find that the most disruptive, best innovation comes from somebody challenging the way things are done. If you look at -- you followed Pure for a number of years, decisions that we made 5 years ago, 10 years ago might have been the best decisions given technology given the market at that point in time. Well, when the market moves 10x or technology changes or price points change 10x, you need to make new decisions. We've always had a culture. We will always keep a culture of encouraging challenging status quo because that's how you evolve. Otherwise, you stagnate. It's almost by definition.

Yes, I remember actually, when you guys came out with Direct Flash all of the trade rags and all the so-called experts really said like, what are these guys doing? Like the whole industry is moving in the exact opposite direction. Maybe just in the last minute or so, talk -- I think the SSD stuff may kind of go over some people's heads. But just talk about the difference in terms of Direct Flash versus SSDs and why that's so important to you?

Yes. I mean -- so our software is able to drive significant advantages. And maybe the best way by analogy is to describe most of the software out there in the industry is meant to work with hard disks, hard disks are spinning media mechanical technology. Flash is a semiconductor works very differently. There's a lot of translation that has to happen. Thank you, Paul.

There we go.

All right. I want to take more than the 30 seconds I have left. So most of the software in the industry is built to work with hard disks. You can see quite a bit of metal there. Flash at a semiconductor level works very differently. And the issue the industry had in the beginning was software wasn't built to deal with Flash, Flash needed to market. What do they do? They adopted, right? The industry developed SSDs. SSDs are translation layer. They're meant to make semiconductor Flash solid state, look like a mechanical device. It's like making a personal computer, look like a typewriter, right? Okay. So not hard to see that, that's inefficient. And I think the -- what's less clear to people is that though the last decade has been about Flash overall, setting itself apart from disk. What we're able to now drive with SSD -- sorry, with our Direct Flash software is pulling us apart from SSDs as well. We've always made the long-term bet that the consumer wrote about 10 billion of these iPhones and tablets and consumer devices, we're going to drive the commodity road maps. We made the investment to make sure we could utilize this technology. Because of our software, because of our hardware as the semis build denser chips, we just lay them down on the boards, our software can manage those. Folks that are stuck in SSDs have to rely on the SSDs, getting a lot breaking through technology barriers to incorporate newer Flash. They have to break through barriers in terms of how much flash they can pack into the SSDs. And they have to break through supply-demand barriers. Again, 10 billion consumer devices are clearly driving a need for denser and denser chips. We can go take advantage of that. It's less clear that there's going to be a volume market developing for 300 terabyte SSDs that are going to cost you an arm and a leg for your home video server. And so this gets back to the long-term bet that we made starting the company, which was for us to succeed long term, for us to capitalize, we wanted to set ourselves up on the long-term product road map and the economic curves that are driven by the consumer industry. And I think with Direct Flash with our software, you're seeing the manifestations of that.

Okay. Awesome. All right. We're going to do a quick breakout right now in this room. So anybody that wants to stay and ask more questions for Rob.