Everpure (PSTG) Earnings Call Transcript & Summary

All right. Perfect. So afternoon guys. Day 1 here at the Morgan Stanley TMT Conference. My name is Erik Woodring. I am delighted to host Everpure CFO, Tarek Robbiati today for a fireside chat. Before I start, a few disclosures here. So please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your sales representative. And then from the Pure Storage side, statements made in these discussions, which are not statements of historical fact are forward-looking statements based upon current projections. 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 Form 10-Q, 10-K and 8-K. So for anyone that doesn't know Tarek, Tarek joined Everpure last year. He brings over 25 years of financial, strategic and transformational leadership experience. Obviously, coming from HPE, but also RingCentral, Sprint, et cetera. So Tarek, thank you for joining us today.

Thank you, Erik, for having me. I'm delighted to be here with you and so with the audience.

So maybe before we get into earnings and everything that comes after that, you are no longer Pure Storage, you are Everpure. Help us understand kind of the significance of the name change. What that means and kind of what you're trying to message to all of us with that change?

Well, thank you for the question. I think the name change fundamentally represents the evolution of our strategy. And if you really want to understand what the core idea is we firmly believe that the future is about the data and data becoming the most important asset that any company has. And therefore, for us, as a provider of data solutions, it's not about just storing bytes of data, it's about making sense of the data. And we are moving into this direction because of the world we're living in, particularly with AI. And there is a greater and ever greater need to make more sense of the data and prepare the data for ingestion by AI models. And this is why we also concurrently acquired a company called 1touch, which is all about data contextualization, cataloging and making sense of it. And so that's were we're moving. It's an evolution of what we do. And also, it is ingrained in the strength of our past. We didn't drop the word pure because we are a pure flash company. We also leverage the word ever because of our evergreen model and the fact that our solutions are constantly upgraded for customers and we felt it was right to combine the 2, and we now call ourselves Everpure.

Perfect. So let's follow up with that. And kind of talk about earnings that you just reported last Wednesday. You ended the year on a strong note. You guided to -- and I'm using the midpoint here, 18.5% year-over-year revenue growth, 26% year-over-year operating income growth for fiscal '27. Both of those an acceleration from fiscal year '26. Can you just unpack for us at a high level and we'll then get into the details, but at a high level, what exactly is driving the acceleration in revenue and profitability growth this coming year?

So thank you for the question, and thank you very much, Erik, for noting that it is an acceleration relative to our past fiscal year, fiscal year '26 that ended on the 31st of January. For those who don't know, our fiscal year starts February 1 and finishes on the 31 of January of the following year. So we finished fiscal year '26 extremely strongly. We had a wonderful fourth quarter. Our top line was at 20%, our operating margin was at 21.3%. By the way, we touched Rule of 40 in a quarter, a data point doesn't make a trend, but it's pretty good in my book because when I joined the company, I could see a path to that and we are on our way. But that has to be grounded in the strength of our core business. And our core business is really doing extremely well, and there are many elements that contribute to it. First and foremost, we are positioned in the portion of the storage market that grows the fastest. So if you really look at the storage systems market it's about $60 billion, 50% of that is all flash. And for the first time, at the end of calendar year '25, all-flash became the dominant segment of the systems storage market. And that is growing at about 8%. Hybrid flash, which is a combination of hard disk and flash is growing at 0.5%, and then hard disk drives are on the decline. And this is for the next 4 years, and the numbers I just quoted are not our numbers, they are IDC numbers, and I'm sure you can verify those. So we are positioned in the highest portion of the market that is growing the fastest. And we are the company that has always looked at storage as a high-tech solution to provide to customers, not so much a hardware commodity. And that has to do because we go and tackle the market by way of our software. So our -- now you know that, that's a market that you know a little bit about our business and how it's performing. In our earnings announcements, we discussed the strength of our core. We're moving from what we were traditionally known for as some -- a company that focused on commercial segments to more and more into the enterprise. And I gave snippets of the quality of our execution there. Our enterprise deals in excess of $5 million grew 80% year-over-year. So we're really making headway, really moving forward into the enterprise segment, and we're very, very pleased with that. And it's actually -- you would imagine it's actually natural. If you want to scale up the business, you have to go for bigger deals. It's -- the signing of a small deal resource-wise and time-wise, roughly is equivalent to the signing of a bigger deals. You might as well go for a much larger ticket. And that's why we're doing. We continue to grow across commercial, we grow across enterprise. And also our offer is becoming much more sophisticated. We are bidding for larger portions of the estate in enterprises. So don't expect the number of our customers to grow. We have 14,500 customers worldwide. It's not the way we intend to grow. We intend to grow in the right category, in the right segment of customers, much more higher tickets in the enterprise, and that's doing very, very well. So key growth in there, Erik. And then, of course, I'm sure you will ask about it. There will be growth coming from hyperscalers. We've been generating revenues with hyperscalers in fiscal year '26 for the first time. We did very well as far as I'm concerned in that segment. It's a very different sale. It's not a system sale. I want to remind everyone. And for those who don't know, that we don't sell systems to hyperscalers for their production environment, we sell the software that enables them to manage the NAND that they procure through their supply chain. We'll come back to that for sure. But we do expect, and it's baked in our guidance, a very strong growth from hyperscalers this year, accelerating from fiscal year '26. And also, we are very confident about the prospects of that business for fiscal year and beyond. So hopefully, that gives you a high-level view of the sources of growth, Erik.

Perfect. Yes, we're taking notes here while I'm asking questions. I want to get the memory questions out of the way first and foremost, just get them out of the way, so we can talk more company specific. So first, kind of a once-in-a-generational memory cycle just at a high level, as you guys are thinking about that, what's the impact on the storage market? What's the impact on your customers and pricing elasticity, again, from the perspective of pure -- excuse me, Everpure.

Everpure, thank you. So obviously, we all know that with the unprecedented build out of AI systems, there is an imbalance between the demand and the supply of certain components. And this affects the storage industry and the compute industry to different degrees. It really hinges in my mind on the value add that each provider who plays in the industry provides to their customers. And if you think about our position at Pure Storage, we are a software company. We -- yes, we do sell appliances and we manage those appliances by way of software, if you want to put it very, very simply. But it affects us less, the movement of commodities affects us less than other players in the industry. And this is really, really important to understand. So why does it affect us less? It's because our margin structure gives us a lot of leeway, if you want. We have 71% gross margins driven by our software. And you know, because we reported that we practiced a 20% price increase across our portfolio, on average, okay? Some prices went up more than 20% others went down, went up less than 20%. And so if you do the math, if you really look at a system, let's say, costs $10,000, now it costs $12,000, we protected gross margin. The gross margin remains the same as we price because we price rationally to protect gross margins. Then you have to ask yourself, knowing the increase in input cost in commodity prices, what is the proportion of our cost of sales that is affected by commodity prices going up. And if you do the simple math there, you will see very little because of that 29% that represent cost of sales, a portion of it is support or subscription, if you wish, subscription cost. This is labor. It has nothing to do with commodities, and the rest is obviously commodities. And in terms of magnitude, commodities can increase quite dramatically. We can absorb those increases or decide to price them into what we offer. So you will -- if you do the math again, conclude that -- the proportion of our cost of sales that is subject to commodity price increases is relatively small. And this is the reason why we're more immune to commodity input costs rising than the rest of the market. It has to do with our software. And therefore, it has to do with our margin structure. The second observation I would make is even though the price hikes or the input cost increase has been sudden and of a high amplitude, it doesn't immediately affect our P&L. The reason why it doesn't is that we have acquired commodities over the past few quarters at reasonable costs. And those commodities are blended with higher cost equivalent commodities. So this blend effect materializes in our P&L, just like on the revenue side, you have new pricing blending with old prices. And so over time, this plays out to find a new equilibrium. So for us, commodity increases matter relatively given our margin structure, and we can navigate this period as long as commodity costs are stable. It's input cost stability matters more than the hike itself. And even if there are further increases in commodity costs, which we cannot exclude for obvious reasons, we can always change our pricing again, and I won't exclude that. And operationally, we can change our pricing over a weekend across the entire portfolio. So we can very quickly react to the change, and we monitor this very, very rigorously. The other observations that I want to highlight to you is why were we able to only increase prices by 20%, where you know that the competition has increased prices 35%, 40%. It has to do with what I discussed with you before, which is the proportion of our cost of sales that is impacted by input costs. And we were able, therefore, to also increase prices. We were the last player increasing prices because we wanted to see what was going on. So that gave us an advantage from a timing standpoint. I would also say to you that other conditions attached to orders are really important. So how long are quotes ready and available for Erik. Our quotes are available for 60 days, unchanged. And we honor the quotes for 60 days. This matters a lot for customers. Because if you ask what other players are doing in so far, validity of their quotes, some of them have quotes that are valid for 14 days. Now that is -- I would not advocate to have quotes valid for 14 days for a very simple reason. If you're in sales, it would be your worst nightmare. You have to re-quote every 14 days. And if you re-quote every 14 days, the first quote you're going to try and do is going to be the one that is going to be accepted. Therefore, you're going to be not necessarily optimizing the margin as you sell. So that's a very important consideration to be had. The other operational consideration to make is also in terms of our delivery time frames, we have not seen a substantial elongation of delivery time frames. We deliver somewhere around 45 and 60 days. It may be a little bit more, but it's not something that customers are not willing to accept. And I want to finish with -- on this question about customers in saying, look, we have an 84 NPS score. This is not common in the industry. And we are very jealous about it. So we work with our customers. We don't gouge our customers in circumstances like this. And we have a business model with Evergreen. I'm sure you would want to talk about that, that allows customers to make different decisions as to how they want to acquire solutions for the data.

And extremely thorough. So thank you for that, Tarek. Just one point to follow up on quickly before we move on is just the point of supply, just the concerns that some would have on second half supply availability. Recognize you talked about acquiring commodities in advance over the last few quarters, just comfort around the ability to procure supply.

Look, we do have long-term agreements with suppliers with whom we partnered over time. Suppliers are as important to us as customers are. We work with them, and we have consistently worked with them over time. Those agreements helps us mitigate but do not eliminate supply risk. I won't say we are completely immune, but we are probably less susceptible. But nonetheless, nothing comes for easy in this environment. We have to work hard to make sure that we can stand by our delivery deadlines and provide the services and the products to the customers as they want.

Okay. Perfect. So when I kind of go back and dissect your '27 outlook, kind of back out the hyperscaler, at least our estimate for the hyperscaler. You are embedding a pretty significant deceleration in what I would call the core of your business. And so I guess the question is how much of a result of that is kind of pull forward and maybe not so much certainty in the second half of the year versus hey, there is uncertainty. So we're just being conscious in taking kind of a prudent approach and making sure we don't kind of overstep because there are still questions about the second half.

Yes. I really like the way you've asked the question, Erik, because it's really very, very much balanced. A couple of observations. First, we finished Q4 very, very strongly. Our top line grew 20% or in excess of 20% and the linearity in the quarter was back-ended. I mean I was not expecting to finish January 2026 as strong as it is. That's the honest answer. And so you know that we book orders and then we recognize revenue upon shipment. So most of what we booked in January and a few weeks before that, in December, will shift into fiscal year '27, Q1. And so that's why we guided -- as we guided for Q1, we are at the 28% growth in Q1 versus 20% in Q4. So if you would like to estimate the amount of dollars that were pulled into fiscal year '27 from orders placed at the end of fiscal year '26, a good estimate, a reasonable estimate would be to look at the difference in growth rates. So 20% for Q4 and 28% for Q1. That's 8 points more or less majority of that is pull ins. So even if you were to take the conservative view and say 8 points is all pull-ins, that's $80 million. It's not an extraordinary heavy amount. The demand remains steady beyond that point, and there is a rebalancing of the demand as the new pricing takes hold. So we also have to be -- answer your second part of the question, Erik, relatively easy compare in Q1 over Q1. And we also have tougher compares Q3, Q4 '26 on Q3, Q4 '27. And so that is also part of the equation. And finally, the third one, allow me to say it because I have to say it, there's an element of the tyranny of the spreadsheet here. And what I mean by that is what we've seen happening is the fact that, of course, the street locks in the Q1 estimate, locks in the Q4 estimate, a full year estimate and everything that is in between is derived by difference. Correct. Arithmetically correct. I can't hold anyone for that. I would simply say don't make the wrong inference about it. Right now, as you pointed out very well, I don't have visibility on what happens in Q4. It doesn't mean that it needs to be interpreted as I don't know what's going to happen in Q4. I am casting out on what's going to happen in Q4. It simply means I don't manage the business that way. We have visibility a couple of quarters-and-a-half, maybe 3 ahead, but we know how to solve where we get to, and we have a 2,000 strong sales force that is there to really work and find new opportunities and get those opportunities materializing in the second half of the year. I am only in my first innings of fiscal year '27 and still have a long way to go. So far so good, we stand by our guide for Q1 and obviously, our guidance for the full year.

Okay. Perfect. Let's transition to FlashBlade//EXA, new high-performance, parallel processing, you're targeting Neo clouds, GPU clouds. At earnings, you highlighted your first major win with EXA. Just like how long did it take to get that customer? Is there a way that you can help us understand the size of materiality or even sustainability of that win? And then you mentioned in your earnings call you got the customer to switch from an alternative vendor. What did you do to get that switch? That's like a 4-part question, but...

Yes, yes. No, no. But it's excellent, it's perfect. It's very comprehensive. So thank you one more time. So EXA is a brand-new offering. It's a high-end architecture aimed at typically Neo clouds and larger scale deployments in the enterprise. It was made -- I was reminded this morning that it was made available in general availability in June 2025. And so from general availability to the sale, we had 6, 7 months that passed, and we were able to have the first win with EXA. And yes, you're correct. We were able to persuade a customer to use us and switch from an alternative provider because what is very apparent are 2 things. One, the performance of EXA is materially better than anything else available in the market. Is visible through third-party benchmarks like the MLPerf publication, which shows that we are 2x faster than the next competitor. And two, it's also the ease of deployment. That plays a huge role when you consider those Neo cloud, we have to put online, an enormous amount of infrastructure and fire it up and make it working. So that was a key differentiator. Now we have a few things to do for EXA to really take off. We have a couple of features that we're missing that we have to build. They are on the road map. And we are confident that in fiscal year '27 will have further acceleration of EXA, everything that we have now in mind expectation-wise, is factored into our guidance.

Okay. And just a quick follow-up. On the call, you also mentioned dozens more in advanced solutions again, just framing if we take a big step back or even multiple years of step forward, the opportunity size for kind of this TAM, which is clearly kind of incremental, what I would say, to your core 60 billion systems TAM that we talked about.

Yes. Yes. So I would say directionally, it's -- we believe it's a large opportunity, probably not as large as hyperscalers, but large nonetheless, and it's good so.

Perfect. All right. So let's move to the hyperscaler side of the story. Obviously, you've guided to your first major hyperscale customer ramping pretty significantly in the second half of this year. I would love to better and maybe we would love to better understand just like the sustainability of the growth story with this customer, not -- feel free to give us as many numbers as you want to, of course, but just how do we think about the sustainability beyond what you've kind of already outlined for fiscal '27?

All right. Let me try. So in fiscal year '26, we -- it was first year where we're generating revenue. And I think your own estimates probably speak about a few tens of millions of dollars there, which is, I would argue, pretty good for a business in the first year of operations. We do believe that this year, fiscal year '27, we will accelerate that quite substantially, and we are very confident about the outlook in fiscal year '27 and beyond fiscal year '28. And there are many reasons for that. One is obviously need. And we discussed that over our earnings call, Charlie, our CEO said, it's obviously a bit of a tailwind that we have a bit of a crunch in commodities, which is making it helpful for our conversations with hyperscalers. But every vendor is also having to reckon the dependency on commodities and therefore, in the short term, we'll have to navigate that. Having said that, if you really think about what a hyperscaler buys for their production environment, they buy 3 things: hard disk drives, SSDs and now they buy Everpure DFMs. Capacity in hard disk drives is not going to increase. There is no rational business case one can make to say we're going to put more capacity on hard disk drive. The reason being it's a technology that is way too old, way too inefficient from a performance standpoint and increasingly costly from a cost of ownership standpoint. Then you're left with SSDs who are obviously better than hard disk drive. They use NAND. But they are also a mini system by themselves because there's a CPU, there's control as a whole heap of things that involve their own technological overheads, and therefore, an SSD doesn't exploit the full capacity that the NAND it is built on provides. And so if you are a hyperscaler today and you have those extraordinary buildouts, you're keen on finding a third solution. That's where we come in. And we feel very good about this because we're gaining more and more acceptance as an alternative in our conversations with hyperscalers and it's just a matter of time to break through that. And we've geared ourselves to do so.

So let's talk about that. The -- I hear a ton of confidence from you guys about the hyperscaler pipeline. The confidence in expanding that customer base, maybe the question is, what are you finding is the biggest friction point in getting those types of customers over the finish line? Yes, maybe let's just go with that. Where does the confidence come from? What's the biggest friction point?

Brilliant question. So to make it work, we have to solve 3 dimensions. The first one is the technology and this is what we call the qual process, making sure that the NAND that we provide in the hyperscale environment is qualified and tested to work with their software, the binary software that they use in their environments. And that is an incredibly lengthy technological test process. It's akin to testing a plane before its first flight, right? That's effectively the analogy I could best give you. So the amount of testing that goes through is very, very thorough and lengthy. And once accepted, then you make it into the next generation, the next road map of the hyperscaler for data centers, their data centers. That's the first thing we have to crack. But in many of the conversations, we made great progress. The second thing is the business model. And to remove the friction, as you say, we've simplified and standardized the business model. We provide our software to manage the DFM. We also provide some componentry that effectively is -- that provision of that componentry is designed to eliminate friction points, drive greater adoption by hyperscalers of our solution overall, right? So the only thing that hyperscalers have to worry about at that point is the procurement through their supply chain of the NAND, right? And then effectively, everything else works fine. And the economic implication of us providing that componentry is that we will generate relative to what we started doing the same gross profit dollars, but that componentry comes at a very small gross margin. We have probably a little bit more revenue and practically unvariable -- invariable gross profit. That's why the gross margin ranges from 75% to 85% versus the 90% we flagged in the earlier model. So the model standards, we provided componentry. It's just really to drive the ease of use and adoption by hyperscalers. And the third thing we have to crack is everything else that is operational, for example, support, who provides support, what is our role in providing support, spares. Do they require spares or they not require spares and so on and so forth. And that's the third bit we worked through in the past few months, and we found solutions for it. So now really, we have made it a lot more standard to move forward with us. The continued long haul and intent is testing, but we're confident we will crack that moving forward.

All right. Perfect. I want to talk to gross margins quickly, which is and specifically, product gross margins. You've kind of talked about the improvement in -- we should expect an improvement in gross -- product gross margins through the year. Obviously, the ramp of the hyperscaler business in the second half helps that is accretive. If you took that away, how do we think about the product gross margin for, again, core product? Or what gives you the confidence that you'll be able to improve those product gross margins through the fiscal year, just in light of the headwind and some of the things we've talked about on memory?

Yes. So our product gross margins are estimated to range from 65% to 70%, excluding hyperscaler, excluding also Portworx term license revenue. And so what gives us confidence that we can see them improve. And by the way, at the end of the fourth quarter, they were at 67%, so we are pretty much in the middle of what we said we would be. We do believe that, as I explained before, pricing will take hold and that also we will have a better matching of commodity costs with new prices. But also, we have other levers to pull. So remember, we provide a number of products, and they all have different degrees of commodities built into them. So product mix is a very important lever we can pull. High-capacity products in the solutions we provide have more componentry than others. High performance have less and so on and so forth. So we can pull the lever of product mix to really make sure that we tilt it towards the right volume mix in favor of higher gross margins. That's also a very clear lever we can pull. And we've done so in the past and we continue to do so moving forward. So these are the things that give us confidence beyond the fact that we do have Portworx revenue, and we also have hyperscale revenue.

All right. Perfect. Last 2 for me before we wrap. Just free cash flow for a long time, free cash conversion was greater than 100%. It's dipped closer to 90% the last few years. Does that return back to 100% plus? Has something structurally changed where there's maybe working capital investments you need to be making just understanding kind of where that should go from here as you ramp new businesses, touch on new customers, et cetera?

Yes. So our free cash flow tracks very well. Our operating profit margin is between the free cash flow margin and the operating profit margins, there are 50 basis points difference in favor of the operating profit margin. That's what you can expect. And it's really pleasing to see the free cash flow growing the way it has. We are also within that calculus. We're estimating CapEx to be between 7% and 9% year-over-year. There are things that we're investing in -- in R&D and in various aspects of the company as we continue to grow and expand. But expecting free cash flow to be in line with the operating margin with a small delta is probably a good assumption moving forward.

Okay. Anything on capital allocation that's changing in terms of priorities as we just look ahead into fiscal '27?

No. Pretty much the same. We have a buyback program. We have about $300 million on that buyback outstanding. We -- if you just take the effect of the buyback on dilution, we've offset about 56% of the dilution, thanks to the buyback program. We're roughly at about 50 -- some part, I mean, we dedicated 56% of our free cash flow to the buyback program, which is roughly what we flagged. On top of that, we do withhold to cover for stock-based compensation, which offset the dilution even further. So no change to the capital allocation that we have practiced in the past, and we'll continue like this moving forward.

Okay. Maybe last question as we wrap, just a final word. You could give us what do we not appreciate? What do people not understand? What are you excited about? Kind of you get the last word here.

Well, thank you for giving me the opportunity just as the clock was passing 0, which is great. So I'd say to you, look, I know there is a tremendous focus on hyperscalers, and I completely understand why. But please do not oversimplify our growth and neglect the growth that happens from our core. Our core is humming. If you really put things in perspective over the past couple of years and what we guided this year, we started last year guiding 11%, finished 15%. We're guiding 18.8% for this fiscal year. The vast majority of that growth comes from the core. And we are the share taker in the industry, and we will continue to be so because we have a -- we believe with our software, a significant advantage.

Perfect place to end. Thank you, Tarek.

Thank you, Erik. Thank you very much. Thank you.

Thank you.