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

Okay. Hi, everybody. Thank you for joining. Tim Long here, IT hardware analyst at Barclays. Happy to have Pure Storage with us. Charlie and Kevan, thank you for coming. Really appreciate the time. I'll start with the safe harbor here. Statements made in these discussions, which are not statements of historical fact are forward-looking statements based upon current expectation. Actual results could differ material from those projected due to a number of factors, including those referenced in Pure Storage's most recent SEC filings on Form 10-Q, 10-K and 8-K. So thanks again, guys. Appreciate the time here.

Maybe Charlie, we'll start off kind of a high level, talk to us a little bit about how Pure is differentiated. What are you excited about looking into the future? It's been a pretty successful journey looking at revenue growth over the last 5 to 8 years. What gets you excited and what do you think differentiates you guys?

Absolutely. Well, we're really one of the newest, as certainly in the general purpose storage market, the newest player in the industry. We started out a little over 10 years ago as a leader in flash storage. We remain that way today in terms of all-flash, really second only to Dell EMC, who had been the historical leader in storage overall. And we've shown very good growth over that 10-year period. Really, what differentiates us going forward is partially based on where we've come from, which is the all-flash heritage. The all-flash heritage, we're the only vendor in the world in any industry that has software that operates on direct flash, meaning we don't use SSDs. Rest of the world uses an SSD, which makes -- has a translation layer to make flash look like a hard disk, which dramatically reduces the overall performance of that semiconductor. Our software manages flash on a system-level basis, giving us tremendous both cost efficiencies but also performance enhancements. Having a very modern software stack, we also do a number of other things that no other vendor does. For example, we have our Evergreen program, which in its most simplistic form, means that our products never get old. It means that a customer, once they bought our product, is consistently and constantly updated without any disruption to the customer's environment, meaning their applications keep working. And the system is constantly brought up to a modern state, both hardware and software. So to give you an example, you may have a Tesla or an iPhone. And every now and again, it gets a software update. In both cases, the phone and the Tesla stop working while the software update is happening. Not with us. While the software update is happening, the system keeps working for the customer. Furthermore, every 3 to 5 years, you may replace your Tesla. It gets -- it physically gets old. You bring it in, you buy a new one. Never happens with us. With us, this is the hardware of the system, not just the software, is constantly updated again without disruption. So the system that's -- now we have systems that are -- that we sold 10 years ago and without a single dollar of -- additional dollar of capital spend by the customer, they look like a system that we sold last year, both hardware and software at the modern level. And that's the basis of our overall Evergreen program. Okay. So fast forward, we've been doing this for approximately 10 years. Flash forward to today, we have a number of differentiating strategic advantages. One, of course, is that DirectFlash that I spoke about before, which gives us dramatically higher margins, better performance than competitive systems. It means we have between 1/2 and 1/5 the amount of power space and cooling than competitive systems do, so dramatically more environmentally-friendly, but also if you're running out of power in your data center because of the increase in GPUs, we're able to dramatically reduce the power used by storage overall. Because of our modern software, because we started with all-flash, we introduced early this year the first all-flash systems that can now compete at the cheap disk level. So right now, today, more than 60% of storage is still hard disk, believe it or not. The only mechanical system that still exists inside computers outside of the fan. We can now replace that with a semiconductor system, a flash system, 1/10 the space, power and cooling, 5x the performance, same price as disk. We just introduced that system, but we introduced it on the same software that we run all of our other systems on. So for the first time in storage now, we have 1 operating environment for the entire enterprise. Whereas before, they'd have 5, 6, 7 different systems, even if it's from the same vendor to be able to run the same wide array of different workloads. We can now do that with 1 environment. And then finally, we operate that as a cloud of storage as opposed to individual arrays. It looks like a cloud of storage. The customer manages it as a fleet or with our Evergreen//One program as a subscription to storage that we manage entirely. So really, we're really at the forefront of changing the entire concept, if you will, of hybrid, of enterprise data storage, taking it from old-school, mechanical, highly physical environment, really to a modern cloud operating model where the customer is able to subscribe to their storage, to operate their storage the same way they would in the cloud.

Okay, great. Great. Good stuff. That was a lot.

I'm sorry. Okay.

No problem. One of the things I'd love to get both your perspective on is kind of macro impacts on the business. We're seeing it across different product categories and enterprise is a bit of a challenging time now. Could you just talk a little bit about macro impacts, visibility? Obviously, you've got some share gain dynamics that's a little different than many of the other companies playing in the area. But just curious how you see the backdrop now.

Yes. The macro certainly hasn't made anything easier this year in the -- and certainly in our environment in storage. On average, the storage market is a bit down this year. Not unusual in the early phases of a tough economy where customers will generally sweat their assets in the storage space first. But nobody ever throws out their data. So eventually those arrays fill up, need to be replenished. So that eventually catches up. In the early phases of a poor economy, you do see the storage market tend to suffer a little bit more than others. Now on the positive side, it's accentuated our sales of Evergreen//One. Evergreen//One again is our subscription model. So -- whereas traditionally in a CapEx world of storage, customers would buy an array at a scale that would last them about 5 years. With our Evergreen model, they just subscribe to a service-level agreement, it's a purely consumption model. They only pay us as they use -- as they start to consume storage, whether -- by the way, whether it's on-prem or in the cloud, we operate in both environments and it's a pay-as-you-go. But of course, since it's a consumption model, the revenue is realized over the term of the contract, which tends to be about 3.5 years.

And the only thing I'd add on the macro that's been helpful for us well is coming out with our FlashBlade//E series. It's price, performance solution. So now we -- for customers who are a little bit more sensitive coming from a pricing standpoint, as they're navigating a more challenging spending environment, we've seen some really strong traction on our family, including our FlashBlade//E, which has just been recently [indiscernible].

Great. Maybe digging into the kind of as-a-service offerings, obviously, last quarter, the last few quarters have been impacting the top line. As you said, Charlie, it's instead of a CapEx upfront, it's amortized [indiscernible] I think you said 300 basis points impact this year. Could you talk a little bit about how you see progressing? A lot of the storage world and hardware world is CapEx. But do you think this is the beginning of a really major trend? Maybe you could take that, and then Kevan, walk through your view of the dynamics on how this is going to impact the model over the next few years.

We do see it as the beginning of a trend in the following senses. We've had a variation of this, we call it Evergreen//One. We've had actually several names over the last 5 years. But this as-a-service model, we started about 5 years ago. And we've been consistently investing in improving it, making it more cloud-like as we went along. It did start out primarily as a financial model. That is our customers to be able to pay over time rather than right upfront. But intrinsically, it's a cloud service or operated as a SaaS service for our customers. They no longer either buy, rent or lease a product. They subscribe to a service level agreement. The products belong to us. We are in complete control of the way they're configured, of the way they operate. The customer manages it entirely through a web interface. So it is now a storage as a -- fully storage-as-a-service model. I will say that for the first several years, it was very new for most customers inside their own data center to think about doing anything as a consumption model because they were buying everything else CapEx, they're buying processors, CapEx, they're buying store -- sorry, networking CapEx, power supplies, everything else. And so really, we were the first into those markets saying, "Well, you should consider doing this on a consumption basis." And frankly, in many cases it was the finance department that said, we're not really set up to do that. So we'll go through the CapEx. Again, 5 years later, we're seeing -- and especially as the tough economy comes in, and the finance organization is saying, "Well, we don't want to spend the cash or we don't want to commit to so much depreciation." And so -- and we saw this in the last, like at the beginning of COVID, with the downturn of the economy, we saw a progression towards Evergreen//One. And then when, as you know, the whole supply chain, the economy picked up, the supply chain, with all the stimulus -- the supply chain challenges came into place, and we saw the customers go back to CapEx. So as we went into this year, our year starts in February. As we went into this year, we saw or we imagined, because the economy has taken a downturn, we imagined that Evergreen//One would grow faster than we had seen the year before. We were just surprised later in the year by -- let's just put it another way, we underestimated significantly the take-up of Evergreen//One.

Yes. And I'll go into a little bit more detail on it, Charlie. I think the other thing to highlight, though, is the focus we've had on service-level [indiscernible]. Do you want to provide some color on that and then I'll get a little bit more on the economics.

Yes, like most SaaS environments with the hyperscalers, customers do not buy, lease or otherwise rent infrastructure. What they do is they negotiate a service level agreement that is how much performance, how much capacity over what time frame and what are the guarantees in terms of those items that the vendor is providing. We do the same thing. And we've upped those service level agreements. We guarantee no application downtime because of any change management that we might take on. We guarantee power, space and cooling. In fact, we pay for power, space and cooling now even if the product is on the customer premise, just like any SaaS service pays for their own infrastructure and labor. We guarantee reductions in labor of the customers because when they buy CapEx, they typically manage the entire environment. Well, we guarantee that we manage that environment. We guarantee performance in terms of resilience and no downtime. So there are a lot of guarantees now that we provide standard.

Yes. I appreciate that, Charlie. And then when you think about it from a transition period. Look, I mean, our foundation, again, is built on the Evergreen architecture that Charlie talked about. And so when you think about a traditional CapEx, it's always been attached to an Evergreen subscription. So a traditional CapEx arrangement, it's kind of about 30% of its value attached to subscription. And that's why nearly 40% of our total revenue is subscription today, because it's really been built on the Evergreen subscription and the Evergreen architecture. What we've done is evolve now to a full service level agreement with Evergreen//One, which is complete services and there's no ownership of the asset. We own the asset. And that's where we're seeing this inflection point in terms of a preference, especially this year on choosing a complete service level agreement to consume our technology versus a traditional CapEx. And that's why we've talked about it. And this is -- obviously, we've had the storage-as-a-service offering for some time several years now. This is the first time we've really seen an inflection point. I think to Charlie's comments, piece of it's macro but also a piece of it is really around the technology, the service level offering, the guarantees we're making, the idea that a customer just does not need to worry about operating the storage environment. We do take care of that for them. We have a ton of experience doing that as a result of our Evergreen offering that's in place for over a decade. So then the question is, well, what is that bias? And do you prefer Evergreen//One storage-as-a-service over traditional CapEx? Absolutely. [ It's a great ] offering for Pure. It's a great offering for our customer. We've always been looking to make the Evergreen offering a preference to our customers. We entered into this year. We revised our incentives to ensure [ sellers ] pay a little bit more money to sell an Evergreen//One offering versus the CapEx. But to Charlie's point, the growth just completely outpaced our expectations this year. As I look at it next year in terms of what we're looking to do, we're going to continue to emphasize our storage-as-a-service offering with Evergreen//One. We'll again step up the incentives. We'll work with our channel partners to have them get paid a little bit more money to preference the Evergreen//One over traditional CapEx, given the value we see on both sides from our perspective and from our customers' perspective.

And [indiscernible] you really think about our sales today, the majority of our sales are traditional CapEx versus Evergreen//One. So there will be some time as we're working through that transition. But it will never be 100% in terms of moving completely to storage-as-a-service. We have a lot of customers who will always consume our technology through CapEx, [indiscernible] customers, SaaS customers, hyperscalers. These are the types of customers that will always consume the technology generally via traditional CapEx. So what we'll do next year as we've seen this inflection point is give you a view not only on what we're expecting for revenue growth next year, but also what we're expecting our Evergreen//One as well as our Evergreen//Flex sales to be next year and then translate that to a traditional CapEx. You've got a nice view of what our company growth rate would be expected to be next year if it had been all traditional CapEx. And that just gives you a nice feel in terms of the health of our business and the momentum of our business.

Great. Maybe we've got to talk AI anytime we're doing a tech conference. So talk to us a little bit about it. I know you've talked about wins in the past. What's the differentiation there? How do you see flash working its way into AI data centers and particularly branded non-white-box flash [indiscernible]

So just to provide some context, we've been in the AI market for about 5 years. We have a consistent business in the AI environment. Now of course, ChatGPT, GenAI is a relatively new phenomenon, and that's all just starting to play out now. We're in -- our involvement in AI really spans, and this is, I think, what is most surprising. I think the audience is -- our involvement in AI spans the price performance range. It's not just the highest performance systems. And we have our FlashArray -- or sorry, FlashBlade//S 500 series, which is one of the highest performance file systems in the world. It is what feeds the massive number of GPUs at Meta Research Supercluster and continues to do well in training environments. But even in that Meta example that I just gave, only about 15% of the roughly half of an exabyte that we've sold into that is that high-performance system. 85% of what we saw that half exabyte is actually what you call a warm data system. It happens to be our FlashArray//C could easily be our E-Series, except that we did this some years ago before the E-Series. And this, I think, really is an example of how I think AI is going to affect the storage market. And that is, yes, there's going to be an exciting piece at the highest performance level, but there's going to be a much larger piece at upgrading everyday cold storage to warm storage. You were talking about a vast majority of storage still being not at the speed that is required for the GPU. But since you want to get access to your data across the board for inference and for answers to your [ thoughts ], you need that data to be available. A disk-based storage environment, barely able to keep up with what it's connected to. In a flash environment, all that data becoming ready. So we see AI as the opportunity to upgrade storage across the board. And you're talking about a [ $50 million ] market, a lot of which, majority of which has to be upgraded from hard disk to flash. So we think it opens up really intense 2 opportunities for us. One is to continue to grow in the training environment with high-performance systems. But in some ways, from a revenue standpoint, even more exciting, up-leveling the capabilities of the general purpose storage market.

Okay. And how broad -- you mentioned Meta but how broad are your wins that you would qualify as AI? How big is that business or customer base? And is it kind of inflecting now or is it still...

I would say it's a little bit early but we see inflection. It's a good, steady business for us. We haven't really given metrics on it. But it's a good segment. I wouldn't say it's one of the larger segments.

Okay. Maybe if we could talk Telco a little. It was one of the other hiccups last quarter, but it sounds like you're second, very large. Maybe just talk a little bit about what you're seeing in the service provider environment and how your kind of trends in that end market.

Service provider is a really good segment for us. It's one of our 4, 5 largest, if you will, verticals. And more recently, I think the last 2 years, we've been making really good progress in the 5G space. So typically, we had sold it during their IT environment. Now we're actually getting engaged in their network environment, specifically 5G. And a number of the advantages I mentioned early on really play well for us in that environment. I mentioned 1/5 the power space and cooling. That works out really well in a highly distributed 5G environment where they don't really want to be selling people to the -- on location to be making upgrades. The fact we can manage it all remotely, again, very, very good in that environment. I did mention the fact that we have literally over 10x more reliable than our competition. That's very good. 1/10 the amount of labor required to manage the same amount of data, again very good and highly distributed part in the environment and all of it [indiscernible] to our natural advantages.

Okay, great. Great. You mentioned FlashBlade//E and FlashArray//E. Just give us a little update on how initial feedback on FlashArray//E and how much of a ramp we've seen in FlashBlade?

Yes. So what I'll just characterize now as the E family. We only just introduced FlashArray//E a few weeks ago this last month. So that's just getting started although pipeline looks very good. We just talked about the E family. It has the highest growth of any new products we've introduced so far. Only 2 quarters of -- we only have 2 quarters of sales really in place but still very fast growth. It's a very new motion for our customers. They're used to buying disk-based systems in this environment. So convincing them that flash is ready for their environment, actually, if you don't mind a small anecdote. Two quarters ago, I did something I never ever thought I would do on an earnings call. And that is, I announced the price of a product. And the reason of -- our selling price of product, not even the list price, the selling price, you never want to do that on an earnings call because what you've just done is identify your ceiling, right? You got to negotiate below that. Why did we do that? We determined that nobody would believe that we could sell flash at that price in the marketplace. And we had to really shout from the rooftops that we can now have flash at disk pricing. And that's why we made that announcement. So we're seeing very, very good traction, although early traction. I think next -- again, we introduced it after budgets being spent for the year so I really think next year is we're going to see continued good growth in that area.

Okay. Maybe talk a little -- margins for a little bit, both gross and operating. We're seeing some good leverage in the gross margin, particularly last quarter is really, really strong. So how do you see the gross margin line working with commodity costs, et cetera, and the move to as-a-service? And then what about the operating line is obviously a lot of investments still in go-to-market and R&D with all the products you [indiscernible]

Yes, I'll take that. I mean, look, when we think about gross margins, obviously, we need to talk separately about product gross margins versus subscription services gross margins. Product gross margins are very strong, and that's really a testament to the architecture, leveraging our purity with native flash and our DirectFlash modules. This marriage that we've created between our software and our hardware really creates that advantage. And we see the benefits of that. Now obviously, pricing of flash helps as well, including the fact that we're negotiating directly with flash vendors, multiple flash vendors. Obviously, the majority of our capacity shipped is QLC, so we also have TLC. So we have the ability to arbitrage to the extent we need to, to maximize cost. The 1 area that we do want to accelerate, obviously, is the penetration and take-out of a disk with our E family. And we do plan to be aggressive from a pricing perspective to accelerate that trend. And that's an area where that may have a little bit of an impact, which is good from our view on product growth margin. So I would see that down slightly would be our ideal view on product gross margins, and I've said that for the last few quarters. And Charlie keeps asking me what's going on so we've got some work still to do on that front. But again, I really want to see that acceleration because to Charlie's point, our E family and primarily so far, FlashBlade//E has been our best-selling product, both from a bookings and selling perspective but also from a pipeline perspective.

From a growth perspective.

Yes, from a growth perspective. Okay. So then if I take subscription services, that's why I think I've got some upside over time in terms of modest expansion. We have terrific margins that we've developed on our Evergreen subscription attached to CapEx. That's generally our Evergreen//Forever service offering. We do expect that we'll continue as we continue to scale Evergreen//One, those margins will be, in fact, better than what we can actually do with our Evergreen//Forever that's attached to CapEx. That will be over time as we scale. But generally, we're taking the leverage that we're getting on the product side because it's our infrastructure. So we're taking full advantage of that as well as scaling and automating the service capability around Evergreen//One. I look at operating margins in totality, Charlie and I have been very aligned in terms of our goals, which is, hey, we want to prioritize top line growth. That's our priority and will continue to be our priority, but with modest expansion in terms of our operating margin is modestly looking at 1 to 2 [indiscernible] is how we're thinking of it.

I'd just add, I think if you go through our historical quarters, you find that -- and you try to correlate to NAND pricing, that it doesn't affect our gross margins that much. What it does affect is top line. And so -- our top line growth, I should say. And so we don't expect the NAND price changes, which has been fairly substantial over the last couple of years, we really don't expect it to affect our gross margin very much.

Okay. We've got like a minute or 2 left. Maybe -- you mentioned Meta Supercluster. I think in the past, you've talked about other kind of large-scale hyperscale opportunities. Where are we in adding some others to that...

It's always difficult to talk about these things. It's like talking about a potential acquisition. You don't know until the ink is dry whether something like that is actually going to happen. So I want to make that as a clear caveat here. But the goal I set in front of the team, and I think -- and I'm pleased with the progress we're making is to see some type of design win within the next year.

Okay. And is the expectation that would be as-a-service or probably a CapEx or...

It's going to be a very different model from what we have today. Hard to qualify at the moment.

And that's what's really important to understand is our business model can be very flexible. We can go to a full solution. We can do all software. We can do a combination of both. And however that business model gets shaped with the hyperscaler, we have that flexibility but based on [indiscernible]

To be really clear, we're not going to do a deal that's not operating margin accretive, right? And that's really the test. However, we structure it, operating margin accretive.

Okay. All right, great. Thank you, guys. Really appreciate it.

Thank you.

Thank you.