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

Great. Thank you, everyone, for joining us today. My name is Mike Cikos. I'm the lead analyst here at Needham covering Pure Storage. We have 40 minutes set aside here for a fireside. I have some drafted questions on my side and -- to keep it interactive, I know that some people are tuned in, you can submit questions on your side as well. Before we dig into it, I'll go through some prepared remarks, and then we'll just start on the questions. With that, 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. Awesome. Fun stuff is done, right? So thank you very much to CFO, Kevan Krysler; Founder, Coz, and then both Paul and Sandra for joining us today from Pure Storage. Really appreciate having you guys as part of the conference today.

Good to be here.

Thanks for having us.

Very simple. But just for people who are less familiar, can we just start, what does Pure Storage do? And what is the market you are addressing?

Well, so Pure Storage, we've been around 15 years now. And we've really been focused on three main things: leading the industry transition to all-flash. A key part of our founding thesis was that flash was going to replace all-disks and now with the hyperscale design win, which I'm sure you'll ask us some questions about, it should be obvious to everybody that all-disk is going to be replaced by flash. The second thing, and we're addressing the enterprise storage market. The other hallmarks of our products are being really easy and simple to use. Again, something that we've completely changed the storage industry in and our Evergreen business model. And Evergreen really is two things. One is when you buy a product from us, we can update all of the hardware as well as the software nondisruptively, effectively forever. So when you buy, you never have to rebuy. Our very first customer from December of 2011 is still running the same array they bought them. The array is bigger. It is faster, and it looks like a brand-new array. And they have never had to do a data migration, never had to replace it. And then, of course, we have our Evergreen storage service where not only does the box stay fresh forever, with hardware and software, but we guarantee the SLAs, and we, in effect, run the storage for you. And so mainly focused on the enterprise storage market and revolutionizing the entire industry.

Excellent. Thank you for that. And I apologize for the background noise. The radiator in our office is going a little haywire right now. But just to Kevan, again, on the interested dusting off the story for some folks who are trying to think back to what feels like a lifetime ago with the October quarter earnings. Can you just hit on the quick highlights from that quarter? Just to bring people up to speed on how the numbers have been progressing?

Yes, I can. I mean at a high level, we achieved expectations, slightly overachieved, frankly, and guided up a little bit on revenue for the year, and that guide increase was really the result of seeing a little bit more activity of Evergreen//One, which is our Storage-as-a-Service offering, seeing more of the velocity opportunities converting to a traditional sale. And as a result, that created some short-term tailwind for us on revenue for the year, and that's really what drove us to increase our revenue guide for the year. We continue to get very strong traction on our FlashBlade//E offering and now FlashArray//E. That offering is continuing to -- or those offerings are continuing to get really nice traction. And then obviously, the design win was a significant milestone for us as well, which was part of our announcement.

Great. And I'm sure we'll be hitting on all those. But just one of the things that we received from folks, too, it's a question more on competition. Are you, in any way, seeing new entrants more frequently? Have there been any changes in win rates? Any comment on those two points?

Yes. No, we're not seeing -- I mean, obviously, the competition continues to be very strong, but that's not any change than what we've seen. And then frankly, it's the players that you'd expect on the legacy side. Dell, HP, NetApp. Every once in a while, we'll see some new entrants, and we'll compete against them. But nothing that I would view as significant nor changing and altering our win loss. Our win loss is relatively consistent as we've seen over really an extended period of time.

Great. And then the hyperscaler design win. I mean, that is the #1 thing that we are fielding questions on for Pure Storage, right? So congratulations with this most recent quarter. You guys were able to announce that design win with a top 4 hyperscaler. I just want to go big picture for a second and just stress test this, but you guys have had this effort now underway for some time. And so what has been the path that finally got you to be able to make this announcement with that design win? Are there other hyperscalers that you guys are currently quoting as well in addition to this first design win?

So okay. So to just go over the history of the engagement. We started talking seriously to these guys in, let's call it, the fall of 2023. And the key thing, hyperscalers, they're very different in the way they think about data centers and build data centers. They want to build them uniform. Again, they're at massive scale. The simplicity of building uniformity is critical to their ability to be at that scale. And so they've all built their own environment, their own software layers and things. And what they really want to buy is not storage arrays like we sell to enterprise customers. They want to buy the lower-level commodity components. They buy hard drives, put them into servers that they have designed, and use software layers on top to serve out the storage. So we did not approach them as selling a traditional product. We approach them as selling a drop in replacement for those hard drives. And so that's our DirectFlash modules and the DirectFlash software to control it. The key thing was being able to fit into their environment. They have certain ways in which they monitor the systems, report on them, deploy them, purchase them. And all those things are at massive scale for millions of units, and we had to fit into that. What we -- the leverage that we're using is that DirectFlash is so much more efficient than hard drives and so much more efficient than other off-the-shelf flash drives. And so I mentioned at the beginning, Pure has been about all-flash from day one. Starting about 11 years ago, we started working on what we call DirectFlash. So whenever any one of you buys an SSD, that is a solid-state disk, that is flash pretending to be a hard drive, so that just drops into your laptop or drops into your whatever other system. And that's inefficient. Hard drives and flash are different technologies. They have different needs. They have different ways that you want to access them efficiently. And that layer of software in those SSDs makes them more expensive. It uses up more flash. It actually burns out the flash faster, lowers the performance, and it has lots of bugs, okay? If you've ever had a solid state disk fail, it's not because some moving part wear out. It's because there was a bug in the software they put in. And DirectFlash, it's the same hardware. We didn't invent some new hardware. We basically -- we procure flash chips, common flash controller, all standard pieces, put it together. The magic is we've taken all the complexity out of the firmware in those drives, in those solid state drives, that's we call them DirectFlash modules. And that's the technology that flash management of the DirectFlash software and the DirectFlash modules. That's what we're, in essence, selling to the hyperscaler. And being able to fit that into their environment is what led to that. Now we started having the conversations. They got very excited about the possibilities over the course of the first 9 months of last year. They spent testing, what we were talking about. And we spent time working together on exactly how we would fit into the data center. And that culminated in them recognizing that by deploying Pure DirectFlash, they can make massive power savings, thus enabling them to put more GPUs into their data centers. They can have a standard layer. It will fit in. They'll monitor the systems the same way. They'll manage them the same way. They'll be able to go through all the same procurement and they've sort of validated all that, and that led to the design win. From this point forward, what we're now doing is we're doing testing at greater scale. So if you think about how this is going to go forward over the next year or so or few years. So they've now decided, great, we're going to take this gigantic business, and we're going to shift it to DirectFlash. And this is their AI storage, their disk storage, all of it, right? Again, a uniform layer. They're going to do testing now over what you'd call several hundred petabytes, which may seem like a lot to most of our customers. But to them, it's a small amount. And think of that as a basic product validation tests or PBT kind of thing. And then after that, they'll say, great, passed all our tests. And we already kind of know it's going to pass the tests. We're just working together still. If we didn't know, they wouldn't have gotten to the design win point. Let's just be clear on that. And after that, they'll basically say, "Okay, now we're building a new data center. We're going to take one of the zones in that data center, and we're going to deploy all the Pure stuff. So that will be some number of exabytes. And then after they do that successfully, we'll then go and say, "Oh, now we're building a new data center. We're going to deploy the whole data center as Pure. And after they do that successfully, then it will now be all the new data centers we build or period, right? So it will sort of ramp up in that way, and that's why we talked about the ramp in number of exabytes over the next few years.

Got it. Got it. Okay. And I know you had spoken to it in your comments, but just to further hash it out, like there is this thought that Gen AI is changing demands on these data centers from a power consumption perspective, the energy requirements, right? Was -- how much of a push -- how much were -- was the hyperscaler pulled in that direction because of Gen AI or no, this was just -- this is on their radar way before Gen AI -- Gen AI might have been a catalyst, but there was enough of an economic reason for them to make this decision even before that?

It's on their radar independent of the Gen AI, but Gen AI pushes it further. I mean, you see it in the news. I just saw something around, oh, hey, Bill Gates or something got a new nuclear power plant approved for 345 megawatts and a few gigawatts of molten salt energy storage. Every hyperscaler -- indeed, enterprise data centers, power is their biggest problem and power density. You go back, like go back 30 years, and I remember when we were talking about having like a kilowatt per square foot kind of thing in the data center and 2 kilowatts and now they're talking about a rack having 100 kilowatts. And you pump chilled water into these things on the front of it and blow the air over, you're taking sort of direct cooling there, and they can cool 100 kilowatts a rack. It's -- power is the biggest problem for just about every data center right now. And so they're all thinking about it. The hyperscalers most of all. Their disk storage is much, much larger than their AI storage and consumes amazing amounts of power. So by replacing all that, yes, we free them up to put more GPUs in the data center, that's great. But we solve their data center power problem, right. I didn't say we solve it completely, but we're a giant part of the solution. And that is what would drive the disc replacement independent. Now the way the hyperscaler thinks, they want, as I said, a uniform, consistent environment, right? That's how they scale. Everything is simple, everything is the same. So one of the things that they find very attractive about the DirectFlash solution, they can run our biggest, densest DirectFlash modules with a lot of them in a server behind one network and replace their cold, cold storage. They can take that same design and just use smaller DirectFlash modules, which have the same performance, but because they have fewer terabytes, it's more performance per terabyte. And put more CPU and DRAM and network in front of it, and thus get the higher performance for the AI workloads. So they're looking at it and saying, one consistent layer with just slightly different amounts of ratio of DirectFlash to memory to CPU to network can hit their cold, cold storage needs and their ultra hot AI storage needs. And that's extremely attractive to them.

Excellent. Thank you for calling it out specifically. I think that there's also been a debate out there, because you had built out this initiative with Bill Cerreta's team. Let me ask now that you have this design win in place, is there still more investment needed for the sales effort behind Bill Cerreta's team? Or no, is the predominant focus now on this R&D initiative, like you were talking about that, I guess, the scale testing that's going to be taking place now. Is that where we should think about most of the effort is for this design win?

So there's still R&D effort on that. And it's things -- it's not challenges that are hard. For example, okay, the software we wrote, it reports all the performance data and other statistics in our format. And they're like, no, no, we want it in the format that we use with everything else. So we're just sort of, okay, we've got to just do the software to print it out in that format instead of the other format. So there's still stuff we're doing there to fit into their data center. But then remember, this is the first hyperscaler. We want to get the second and the third and the fourth. And there's, say, depending on how you count 5 to 10, some number in there that are really, really, really big and matter. And we're talking to all of them. The first win has helped spur conversations. I mean, we're already trying to talk to them with varying degrees of success, and we just are now having more success in getting deeper engagements because they all have evidence that someone besides us thinks this is a really good idea. So there'll be software efforts with that because each one will be a little different. Not big software efforts, but there'll still be investment there. We need to accelerate our NAND road map, okay? We've got to push on our NAND, more NAND supply, and that means more NAND suppliers that we'll want to bring on board. It means pushing the density road map as fast as we can. We are already pushing it pretty fast, but we're going to accelerate it even more as we can here. And it's highly, highly leveraged that work. We'll get great, great returns on it, but we do still need to do that. Beyond those top hyperscalers, others would get a version of this that is more standard. Sort of it's like here's our standard thing, "Oh, you want the reporting to be different or the logging to be different. You do that yourself, here's the API. You know what I mean, sort of the difference between us doing it then. But you'll still see a set of work on NAND fall. There'll be some CapEx that goes with that too, as we bring in more types of NAND to test with. And that's kind of where the major investments will be. And when I say major investment, a major portion of that compared to our total R&D, it's not some gigantic thing that's going to bloat it up.

But from a sizing perspective, I think it's just important to understand, we're -- and we've talked about this in our prior earnings, where our operating margin, we're expecting that to be flat next year with our expectations that we set for this year. Generally, we're expecting a moderate expansion year-over-year specific to our operating margin. And so when you think about that potential expansion, that's really getting absorbed with the scale and driving the hyperscale opportunity as well as other opportunities in the hyperscale environment.

Excellent. And great to hear as well as far as -- I mean, that is the other thesis. Once you get that first design win, there should be some sort of increased activity or conversations taking place with the other hyperscalers that you've been quoting. So good to hear on that engagement. Following up on some of the NAND comments and some of the testing that you guys are going to be doing with suppliers. Great to see the expanded collaboration with Micron. Between the announcement with Micron and the Kioxia agreement, is it fair to think that you guys are now ramping up capacity in vendors to support the hyperscaler design win? Or is there something else that we maybe need to consider?

No, it's largely to -- for the hyperscaler design win. I'll also say our E family drives more NAND and as well, where we sell to the enterprise, the E being the really large-scale systems designed to go after sort of hybrid and hard disk in enterprises. But you do the math, we get a number of hyperscalers. We're going to need -- Kioxia has been a great partner for more than a decade. Micron has been a partner for like 9 years or something like that. And we've expanded those, but we're going to go after other NAND supply, too. If we get to where we want to be, which is replacing all of the hard drives, we're going to need a lot of NAND.

Yes. Yes. I shift gears for a second because I know that the platform has some key offerings that I think you guys are just architected differently, which allows you to deliver them to the market in the first place. One of the things that we've really been highlighting for folks is Fusion, right? And so Fusion became available to free upgrade for all existing block storage arrays and a standard in all new block products and services. I know it's still very early, but what has the feedback been thus far from the field?