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spk05: Good day, ladies and gentlemen. Thank you for standing by and welcome to the Peer Storage second quarter fiscal year 2023 earnings release conference call. At this time, all participants are in listen only mode. At the conclusion of our prepared remarks, there will be a question and answer session. If anyone should require assistance during the conference, please press the star zero on your touchtone pad at any time. As a reminder, this call is being recorded. I would now like to introduce our host for today's conference call, Mr. Sanjot Khurana. Mr. Sanjot Khurana, please go ahead.
spk18: Thank you and good afternoon. Welcome to the Pure Storage second quarter fiscal 2023 earnings conference call. My name is Sanjot Khurana, Vice President of Investor Relations and Treasurer at Pure Storage. Joining me today are our CEO, Charlie Giancarlo, our CFO, Kevin Chrysler, and our CTO, Rob Lee. Before we begin, I would like to remind you that during this call, management will make forward-looking statements which are subject to various risks and uncertainties. These include statements regarding the COVID-19 pandemic and related disruptions, our growth and sales prospects, competitive industry and technology trends, our strategy and its advantages, our current and future product offerings, and our business and operations. Any forward-looking statements that we make are based on facts and assumptions as of today and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted and reported results should not be considered as an indication of future performance. A discussion of the risks and uncertainties relating to our business is contained in our filings with the SEC and we refer you to these public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenues, remaining performance obligations or RPO, and cash and investments. Reconciliations to the most directly compatible GAAP measures are provided in our earnings press release and slides. Additionally, when we refer to sales in our prepared remarks, we mean total bookings excluding cancelable orders. This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Pure Storage. With that, I'll turn the call over to our CEO, Charlie Giancarlo.
spk14: Hello, everyone, and thank you for joining us today. Once again, we are very pleased with Pure's continued success as demonstrated by this quarter's strong results. Pure's Q2 revenue grew by 30% year-over-year, with our subscription ARR up 31%. Our growth was balanced between the U.S. and our international markets, highlighting the broad and durable appeal of our portfolio and Pure's continuing ability to deliver simple, sustainable data storage and management solutions that every organization needs. Data is the modern linchpin of business transformation, and Pure is the innovation and customer experience leader in one of the largest segments of technology investments. Building on our momentum, we introduced a number of major advancements in our portfolio during our annual Accelerate conference in Q2, generating strong excitement from current and potential customers. We unveiled FlashBlade S, our next generation FlashBlade, a significant step forward in performance, density, and capacity, providing a modular architecture for increased efficiency and flexibility. FlashBlade S significantly expands the use cases for this product line, including a wide price performance range of file and object workloads, such as computational analytics and AI, image search and recognition, electronic design automation, media special effects, high performance computing, and data protection. FlashBlade S was designed with full evergreen capabilities, enabling the system to be continuously upgraded without disruption. With its launch in mid Q2, FlashBlade S comprised 20% of all Q2 FlashBlade orders, and customer feedback on the first installed units is excellent. In Q2, our Evergreen subscription portfolio was extended with the addition of Evergreen Flex, a new fleet-level Evergreen offering. Evergreen Flex provides customers additional flexibility as they optimize their data infrastructure. It provides utilization pricing across a customer's entire storage environment with the ability for customers to purchase inexpensive storage hardware and consume capacity on a pay-as-you-go model. Evergreen Flex joins Evergreen Forever and Evergreen One, formerly known as Pure as a Service, and is available across our Pure portfolio. We also released our PureFusion service for general availability this past quarter. PureFusion enables customers, managed service providers, and cloud service providers to implement a cloud operating model for data storage management and offerings. The industry sometimes refers to this as infrastructure as code. Customers can use PureFusion to orchestrate and manage their entire fleet of pure storage, reducing costs and complexity, and also offer storage services to their customers or developers through APIs, dramatically increasing developer productivity and corporate agility. While Pure Fusion is still in its early days, it has generated great interest from our largest enterprise and MSP customers. Pure Fusion is yet another example of how Pure continues to drive the data storage and management industry forward. Pure's Portworx software was chosen by GigaOM Radar Reports for the third consecutive year as the leader for enterprise Kubernetes storage and cloud native Kubernetes data storage. Their in-depth analysis awarded us the highest scores among all market segments, deployment models, and evaluation metrics. Portworx's ability to empower developers to deliver superior outcomes on every cloud, both public and private, is the reason that a large global credit card company dramatically expanded their use of Portworx this quarter to support their hybrid cloud data strategy. Portworx Data Services, released just three months ago, has likewise generated great interest, including many POCs and its first sales in Q2. Customers valued its simple one-stop shop for modern database operations its rapid time to deploy and scale database as a service for developers, and ability to avoid cloud lock-in due to its multi-cloud compatibility. As I have said before, Pure believes data storage and management is high-tech, a fundamental component of critical infrastructure, and we invest in it accordingly. We are reaping the rewards of delivering leading products and services in a massive market that was written off as a commodity by legacy competitors. In this uncertain macro environment, customers are especially looking for solutions that speed their digital transformation roadmaps while reducing their overhead and total cost of ownership. I've just returned from two weeks of customer and partner visits in Australia and Japan, including hosting a very successful Tokyo Accelerate event. In our Asia-Pacific theater, as elsewhere, customers are simply blown away by the superior performance, reliability, and simplicity of our products, and they rave about their entire experience with Pure. One customer who installed Pure to replace a competitor's all-flash product reported a tenfold improvement in performance while also significantly reducing their labor and energy expenses. And now, for the first time, I increasingly hear from international customers that they actively consider Pure specifically for our ability to drive down energy usage and e-waste. The demand for solutions that reduce customers' environmental footprint is now top of mind in a majority of international enterprises that we speak to. We added more than 350 new customers this past quarter. In addition to sustained growth of new customers in enterprise and commercial segments, we also saw very strong interest from public sector customers this quarter. Many of them cited sustainability and energy reduction goals as equal to their performance, price, and reliability targets. One example is San Luis Obispo County's IT department, which reduced their data center storage footprint by 75% and power consumption by 59% while substantially increasing their storage capacity. By replacing a competitor's all-flash systems with Pure, They also reduced their time dedicated to storage administration with Pure One and enabled safe mode to protect their data infrastructure against cyber threats. Now I will discuss the business environment as we see it today. I'm pleased with our ability to deliver on our strategy of strong growth while increasing operating profit, all while navigating the external inflationary and supply chain environments without raising list prices. Our customers are continuing to expand their data storage with Pure and we continue to expand our customer base. We do, however, see signs of increased diligence of purchases by enterprise customers resulting in some lengthening of sales cycle. Overall, I remain confident in our ability to take market share and to grow faster than the market. As reported last quarter, our hiring remains strong. Our attrition rates are below the rest of our industry peers. and are reduced from the highs experienced this past spring. As companies around the world adjust to a post-COVID normal, we believe that investment in critical data infrastructure will remain central to their growth plans and that the dedication of our talented technology, sales, customer success, and other core teams will enable Pure to outperform the market. Next week, we are officially kicking off our new hybrid work policy, Which will have full teams come together in the office on specified days to collaborate enhance creativity and increase employee engagement. Many of our development teams are already at over 50% in office occupancy. Like everyone else at pure. I'm excited about our new Silicon Valley campus that we will be moving into this coming spring. I'd now like to hand the mic over to our CFO, Kevin Chrysler, for a detailed review of our numbers.
spk17: Thank you, Charlie, and good afternoon. We delivered strong financial results once again this quarter. Our ongoing commitment to innovation, including our recent introduction of FlashBlade S and our expanded Evergreen subscription business models have enabled us to deliver highly differentiated solutions that our customers are leveraging to accelerate their strategic objectives. The power of our technology and software enables our customers to grow and increase productivity. Our customers also deeply appreciate our ability and commitment to deliver our products with short lead times, not increase prices, and substantially lower their energy requirements. These factors, among others, are why we believe demand for our solution portfolio continues to be strong despite a turbulent macro environment. Our US business continues to deliver strong revenue growth, growing 31% with particular strength this quarter in both commercial and public sector. Revenue growth of 29% from our international business was also strong, even with FX headwinds due to the strengthening of the US dollar. We continue to be pleased with meaningful contributions from new business. Our total customer count reflects the acquisition of more than 350 new customers this quarter and 56% of the US Fortune 500 customers. Performance of our Evergreen subscription businesses and Portworx were solid as subscription annual recurring revenue or ARR grew 31% to $955 million. Remaining performance obligations or RPO grew 25% to $1.5 billion. Similar to the remarks we made last quarter, our RPO growth compared to Q2 of last year reflects a reduction of approximately $32 million relating to product shipments for an outstanding commitment with one of our global system integrators. Excluding these product shipments, RPO grew 28% year over year. Our headcount has increased to 4,600 employees. as our investments in talent continue to be disciplined and focused around our key business objectives. Now turning to specific financial results and discussion. Total revenue for the quarter grew 30% to approximately $647 million. Product revenue grew 28% and subscription services revenue grew approximately 35%. Subscription services revenue represented approximately 36% of total revenue. We continue to drive solid gross margin at 70.4% this quarter. High performance, reliability, simplicity, and sustainability of our solutions are factors contributing to both our strong product gross margins of 69% this quarter and subscription services gross margins of nearly 73% this quarter. Importantly, We were also able to deliver these gross margins without passing price increases on to our customers. We achieved favorable operating profits of $106 million and operating margins of 16.4% this quarter. Now let's turn to the balance sheet and cash flows. We ended the quarter with over $1.36 billion in cash. Cash flow from operations was over 159 million, resulting from the combination of strong sales, collections, and increasing profitability. Capital expenditures were approximately 25 million during the quarter. We returned over 60 million of capital to repurchase approximately 2.4 million shares during the quarter. We have approximately 123 million remaining from our 250 million share repurchase program. Now turning to guidance. We are pleased to have established a track record of strong performance in a dynamic and challenging environments. Demand signals for our solutions are solid and our visibility of opportunities is healthy. We estimate revenue in Q3 to be approximately 670 million, growing approximately 19% year over year. And we expect operating profit to be approximately 85 million in Q3. representing approximately 12.7% operating margin. We are also raising our annual guidance for the full fiscal year. We now expect that revenue for FY23 will be 2.75 billion, growing approximately 26% year over year. Operating profit is estimated to be approximately 390 million, representing approximately 14% operating margin. Also, as a reminder from our remarks last quarter, approximately 60 million of product revenue in the first quarter of this year was forecasted to close in the second half of our fiscal year. This impacts seasonality when comparing growth rates in our first half compared to our back half of this year. Our Q3 and updated annual guidance contemplates, based on our visibility, macroenvironment conditions, including factors such as demand signals, foreign currency, and inflation. With time being such a critical asset for our customers, we continue to expect to deliver our solutions with short lead times, despite supply chain challenges that have reduced slightly but still exist. In closing, our data storage and management technologies and software are critical to accelerating our customers' digital transformation objectives. Customers continue to depend on us to innovate, to be flexible, to meet their needs quickly, to not raise prices, and to reduce their energy consumption and e-waste. With that, I will turn it over to the operator so we can get to your questions. Operator?
spk05: Thank you. Ladies and gentlemen, if you have a question, please press star 1 on your touchtone telephone. In the interest of time, we ask that you please limit yourself to one question and one follow-up question. Once your questions have been answered, please jump back in the question and answer queue. We'll pause for just a moment to compile the Q&A roster, and I'll turn it over to Sanjot for Q&A.
spk13: Our first question is from Aaron Rakers with Wells Fargo.
spk05: Your line is now open.
spk07: Yeah, thank you very much and congratulations on the solid results. You know, you guys raised the guidance for the full year, strong guidance in the fiscal third quarter, but clearly there's a little bit of kind of commentary around the macro. You know, I think Charlie had mentioned that you did see some signs of lengthening, maybe sales cycles, et cetera. So I'm curious if you could kind of expand a little bit upon what you're exactly seeing from a demand profile in your pipeline. Have you seen kind of coming out of this quarter any kind of extension and deal cycles, just any kind of incremental clarity you can provide on how you factored in the macro environment currently looking into this quarter?
spk14: We're very pleased, obviously, with the financial results we had this quarter. And frankly, demand signals continue to be, you know, quite healthy. So, you know, we wanted to make sure we were very measured in the way that we were reflecting what we are seeing. While we are seeing, you know, a little bit of, let's say, second looks by companies, you know, finance perhaps stepping in for a second look at a deal. And that is lengthening some of the enterprise sales cycles. But it's not changed the closing of the deals later in the process. And as I said, demand and pipeline looks very healthy. The way we look at this is we are market caretakers in what is a very large market. Slight perturbations in the growth of this market shouldn't affect dramatically our ability to transform pipeline into sales. and continue to grow our pipeline. So we feel like we're very well positioned. We have a very broad portfolio. Our differentiation is only increasing right now. We're still the only player that can now take on hard disk at the secondary tier level, which continues to be a strong area of growth for us. And now, honestly, our ability to provide a more sustainable product is in greater demand on a worldwide basis. So we're very bullish from from the standpoint of being able to weather some amount of economic uncertainty.
spk07: Yes, very good. And as a quick follow-up, I wanted to touch maybe on some of the points you brought up there, portfolio differentiation and just portfolio expansion. The FlashBlade S product, you started off your prepared remarks just highlighting it sounds like out of the gate, very strong traction, 20% of your FlashBlade volume. Where are you seeing exactly the most momentum from that product? And, you know, has that seen – have you seen any cannibalistic effect of your existing product portfolio? Or is this – what I'm trying to, I guess, get at is how expansion – how much expansion of your existing TAM does that bring to the table for Pure?
spk14: Yeah, well, it is the next generation product. So I don't know that cannibalization is the right word. It's our next generation product. You know, in several quarters it should be – you know, full replacement for the existing, the Generation 1 FlashBlade product. But it's a very significant expansion of the price performance range that the Gen 1 product provided. So it scales both up and down better in both capacity as well as in performance. And in fact, it's capable of multiple levels of performance in the same implementation. So we really see it as dramatically expanding what our share of the original TAM brought out. And it really represents a broadening of the family of FlashBlade. Very good. Thank you.
spk18: Thank you, Aaron. Our next question comes from Simon Leopold from Raymond James. Hi.
spk17: I wanted to see if maybe you could help us characterize how your customer base might be evolving. And what I'm getting at here is you've talked in the past about moving up market and doing more business with larger enterprises and larger deals that I imagine could offset some weakening from smaller businesses. Is there some metrics you could share with us to help us understand the change in the profile of your customers?
spk14: Well, I think we continue to expand on all fronts. There's no, you know, this quarter commercial, what we call commercial and public sector were the stars of the quarter. But, you know, we continue to expand into enterprise and large enterprise, which, you know, was a process that we started a little over three years ago. My expectations is that we'll continue to optimize each of those market segments and our business model to support each of those market segments as we go forward. But my expectations over the longer term is that the percentage of enterprise in our sales will continue to increase simply because we started out as a commercial player and enterprise was something we had to grow into. And our brand is continuing to build among those enterprise players. So, you know, on a longer-term basis, I'd expect the percentage of our sales in enterprise and, frankly, cloud to continue to increase, not because of any lack of success in commercial and PubSec, just because of the size of those markets in general.
spk17: Yeah, and Simon, I think this is Kevin. I'd add on just a little bit more in terms of the traction we're getting with new business and new customers. And we saw some meaningful contribution to revenue from new customers across all customer segments this quarter, which was definitely a plus. And just as a quick follow-up, your architecture, which is basically leveraging raw NAND rather than buying solid-state drives, could you talk about whether you're seeing some benefit from maybe lower prices in the marketplace for that raw NAND because of weakness in verticals like PCs or smartphones? How much sort of shifting of production capacity and trends are you seeing, even though there may be different products? Is there any flexibility or fungibility of the manufacturing that is benefiting you?
spk14: Well, Simon, this is something that's been a hallmark for Pure since almost the very beginning, ever since we started building our own digital flash modules, which is that we have a wide variety of suppliers for the raw NAND, We're able to leverage different levels of quality of that raw NAND without affecting the quality that we deliver to our customers. And that gives us a large degree of freedom in terms of the cost that we pay for the NAND as well as choice of supply. And it also tends to allow us to be able to take advantage of price declines on the NAND market faster than the rest of the competition. So, yeah, it's given, and lastly what I'll mention is that it's also given us a tremendous energy advantage because we make better use of the flash, which allows us to produce products that require far less power. than the competition. But I'm going to invite our CTO, Rob, to chime in.
spk12: Yes, Simon, just to add a couple things there. You know, like Charlie said, the direct flash technology definitely opens up a much broader menu of NAND options for us to go and evaluate and incorporate into the products. We do drive a significant amount of efficiency, more efficiency than others would be able to achieve through SSDs out of our direct flash technology. The other thing I would point out is that now with the introduction of FlashBlade S, As we've gone over the years and standardized our technology on the same Direct Flash modules across the entire platform, we're going to realize some pretty significant benefits from this. One is certainly, you know, the kind of scale and leverage that we have in terms of the development of the technology. But number two, this is also going to allow us to move, you know, a bit more nimbly and intentionally, even more so than we do today. as we navigate future NAND parts and generations. So net-net is a significant advantage for us, you know, all around.
spk17: Thank you very much.
spk18: Thanks, Simon. Our next question comes from Shannon Cross from Credit Suisse. Shannon, please go ahead.
spk10: Thank you very much. Charlie, can you take a step back and talk about your thoughts regarding margin? And, you know, you obviously have a very leverageable model where revenue growth sort of flows through very quickly and drives a higher operating margin. But I'm wondering how you think about investments in the business to continue to drive the strong revenue growth versus trying to increase your cash flow or over time see the operating margin go up as it is. Because clearly you have a good product that's well received that I don't know if you could invest even more. Maybe you could you know, either accelerate or at least continue the rapid revenue growth. And then I have a follow-up. Thank you.
spk14: Yeah, thank you, Sharon. We're actually always looking at this, you know, in terms of, you know, pricing and growth. Frankly, you know, we believe we provide, you know, a very high-value product, and we do get a return. We think we get a premium of 10% or more in general in the market for the product and the value that we deliver in our product. I would say that we're generally fairly happy with the product margin in the range where we've been over the last multiple quarters. We think it gives us a lot of flexibility to be able to win deals, especially new customers. We do invest in winning new customers without a doubt. Existing customers over time really understand the total cost of ownership that we deliver. and are, you know, and I think we receive the value accordingly. So I think we have the right balance of investment versus margin at this point. Kevin, do you want to add?
spk17: Yeah, Shannon, I think I'll add just a couple things, right? So when we think about the full year from an investment standpoint, and we're talking about 20% in terms of additional operating expense investment, And, you know, when we entered the year, we were very much committed to disciplined investment as well as addressing some of the inflationary impacts we were seeing. And those business objectives really haven't changed. Now, our talent team has done a wonderful job this quarter. We had some great success in hiring talent. We're not where we'd like to be, frankly, with our quota sellers, our quota-carrying sellers. And so that will be an area of focus for us in terms of hiring talent. for the remainder of the year in investment. So we are expecting to see some higher investment levels really within our sales organization in the second half. And, you know, there's always some seasonality with our OPEX, especially in the fourth quarter as a result of our sales reps starting to earn their accelerators. So hopefully that's helpful context for you.
spk10: Okay, yes, thank you. I'm sorry if I missed it. I don't think I did. Can you give us an update on the meta relationship and, you know, opportunities with other hyperscalers? Thanks.
spk14: Sure. You know, meta relationship continues. We, you know, it wasn't terribly significant this quarter, although there were some shipments. And we continue to make progress, you know, slow and steady with other hyperscalers. You know, obviously you'll be the first to hear, you know, when, you know, assuming that we actually are able to solidify something solid.
spk09: Thank you.
spk18: Thank you, Shannon. Our next question comes from Tim Long from Barclays. Tim, please go ahead.
spk02: Thank you. Yeah, two questions if I could. First, on the subscription services side, another strong quarter. It sounds like some of the new platforms are really working. Maybe just give us a sense as you kind of transition some of the solutions towards more subscription, what are the pushbacks and what do the customers like about that? And then secondly, I did want to follow up with a pretty nice win with a large Telco customer, I think for 5G. So just update us on that larger deal and also similar to the last question, are there any other large opportunities that seems like it could be a nice large new TAM for you guys to go after? Thank you.
spk14: Absolutely. The numbers I think on the subscription side pretty much speak for themselves. I'd say the largest hurdle that we have with customers is just that it's a very new way to buy. And it may very well be that other parts of their data center build, they build with CapEx so it's a bit different from that standpoint. So I would say it is largely the fact that it's new and different is the largest hurdle. You know, in terms of the terms of the service capability, no, one additional one actually is the channel. It's also a new way for the channel to sell. And, of course, the economics, like any company going through a CapEx to OpEx transition, It takes time for them to adjust how they pay their sellers and for their sellers to adjust as well. So I would say in general it's just the newness of the OpEx model versus CapEx both with customers and the channel that is probably the biggest hurdles. But we are seeing steady, as you can see, steady growth and steady interest in it.
spk17: Two additional things I'd add to that, Tim, and maybe Charlie or Rob, you can jump in. The expansion of Evergreen with Flex, you know, I think that's going to be a big opportunity for us early days at this point. But then even more so with FlashBlade S and the additional features now with Evergreen that we've enabled, I think it's going to be pretty powerful as well. And I don't know if you want to add some commentary on that.
spk12: Yeah, absolutely. This is Rob. Let me answer that. I think one of the biggest impacts that we have with us, Charlie talked about in his prepared remarks, significant step forward in performance, capacity, density, lowering of power consumption. That's all true. One of the biggest other impacts that we haven't covered yet is the additional flexibility that we've introduced to the platform. By separating the compute and the storage elements, Not only have we allowed customers to configure that really family of products at this point for different performance and capacity levels on day one, but we've also now opened up the path for that customer as they evolve to grow independently performance or capacity as they need. And that flexibility now allows us to introduce the full benefits of Evergreen Forever to FlashBlade. And so we look at that as definitely going to be a tailwind as we look forward.
spk14: On the 5G question, you know, that, as you may know, you know, we've already made shipments against that account. They're being deployed. The commentary that we're receiving back from the customer is excellent. So, you know, I expect more of the same in the future. But it does tend to be ordered in, you know, ordered episodically as they build out.
spk02: All right. Thank you.
spk18: Thank you, Tim. Our next question comes from Chris Sankar from Carbon and Company. Chris, please go ahead.
spk04: Hi. Thanks for taking my question. And Charlie and Kevin, congrats on executing really well in a very tough environment. So kudos to you and your team. Thanks, Chris. Charlie, my first question is today. You can talk about it. How should we think about enterprise demand beyond the January quarter? I know it's still early, but the main concern within Nestle seems to be that storage could be the next shoe to drop. So I'm kind of wondering what you're hearing from your customer base about their IT spend budget for next year, and then I'll follow up with Kevin on operating margins.
spk14: Well, that's a tough question. I'll pull out my crystal ball. What we're generally hearing from the enterprise customers is general optimism around the IT budget, meaning that they also see the questions around the economy, questions around recession. And I don't think we can answer this question uniformly around the world. I think Europe, and in particular the U.K., is different from Asia-Pac and different from the U.S., But in the U.S., I think general optimism that with digital transformation and the need for companies to really be able to compete in the new world, that they have to continue investing in their IT environment. Data is the core of that, being able to leverage their data. And so data infrastructure is important. So we're seeing general optimism there. I think Europe is going through somewhat different challenges with energy, you know, pricing and inflation. And, you know, that could be affected a bit more. And then, you know, Asia-Pac is a tale of many different countries. But, you know, I'm expecting Asia-Pac, absent some kind of geopolitical issue, to continue to be a strong growth engine for us.
spk04: Got it. Very helpful. I'm going to follow up with Kevin. On the operating margin, congrats on reaching the off-margin guidance from 12% to 14%. I'm just kind of curious to figure out what are the key drivers for it. I'm just trying to understand the sustainability of an operating margin. And Kevin, if I can extend the question a little further, if hypothetically speaking revenues are up 10% next year, how will off margins look? And conversely, if revenues were down 10% next year, how will off margins look?
spk17: Yeah, thanks, Krish. I mean, you know, let's first talk about the performance around op margins, which, yeah, we're very pleased with. And again, when we think about our strategy and business objectives, it's really about growing our top line and balancing that with increasing profitability in a sustainable way. And we're doing that, and we feel very comfortable with that. This year is a fine example of being able to grow both our top line while seeing some expansion in terms of our operating margin. And we believe that's sustainable as we look out beyond this year. And we've got a track record of that. And it's not without investing heavily. You know, I view a 20% increase in investment this year, very healthy. And we're really driving that across our innovation with our engineers. I've talked a little bit about our sellers. We've got more work to do to invest in our selling organization, and we'll look forward to doing that in the second half. And then on scale and infrastructure, we're doing a nice job continuing to invest in that area. And so without getting into details beyond this year, I would just say that I have a lot of confidence that it's sustainable.
spk04: Thanks a lot, Kevin.
spk18: Thanks, Krish. Thank you, Krish. Our next question comes from Nihal Chokshi from Northwind Capital Markets. Nihal, please go ahead.
spk08: Yeah, thank you. Great quarter and really very impressive guidance given the trends that everybody's citing. I'm not going to beat that dead horse. Clearly a very strong pipeline that you have. A couple quick things, though. Dollar-based net revenue retention rate on your ARR, you did give some color a couple quarters ago. That was a Has there been any material change on that?
spk17: You know, high level, no material change, and we update that once a year.
spk08: Okay, great. And then I do want to double-click on the sales hiring environment. It does seem like things are improving, but, you know, your sales hiring has not improved in a material way yet. Why is that, and why do you expect that to be able to improve going forward?
spk14: Well, I think our sales hiring has improved, but we're continuing to scale. And we are a bit behind, no doubt. We're a bit behind where we'd like to be or behind plan. But we caught up quite a bit in Q1.
spk08: uh to where plan had been so we're narrowing that delta if you will between uh where we are in plan i do agree with you i think the environment is getting a bit better on the sales hiring side okay and then finally just follow up to that is that clearly you've been putting up very strong results that imply that your sales productivity has been improving massively is there room for further sales productivity improvements here
spk14: Short answer is absolutely. I think we still have a ways to go to become best in class there, and we have plans in place that we think are the elements that will allow us to continue to improve sales productivity.
spk08: Great. Thank you. Congratulations. Thanks, Sahil.
spk18: Our next question comes from David Vogt from UBS. David, please go ahead.
spk16: Great. Thanks, guys, for taking my question. If we just kind of go back to the... Can you guys hear me? Yes, we can hear you. Go ahead, David.
spk14: Uh-oh. He can't hear us, though.
spk13: Hello?
spk14: Why don't we move on to the next question, and if he comes back on, we'll
spk16: Hey, guys, I'm here.
spk14: I just got static. Can you guys hear me? Okay, good.
spk16: Yeah, we can hear you, David.
spk11: Go ahead.
spk16: Yeah, so just want to go back to the macro and the conversation around elongated tail cycles. When you talk to customers, are you seeing any – again, it just – Please go ahead, David.
spk17: Yeah, let's move on to a minute if we can.
spk18: Our next question would come – Our next question comes from Amit Daryanani from Evercore. Amit, please go ahead.
spk03: Thanks for taking my question. I guess the first question I have is you beat July quarter by about 12 million, which is what you folks initially said, but you're raising the full year by like 90 million or so. So you're clearly taking the back half expectation up a fair bit beyond just the B. And despite, Charlie, all the macro commentary you had, I'd love to sort of understand You know, what are the levels of the upside you're seeing? Is it better share gains? Is it more of the hyperscale or meta ramps that are happening, or it's something else? I'd love to just understand what's enabling you to raise your numbers well above and beyond what you're being priced.
spk14: Yeah, I'll start, and I'm going to invite Kevin to join in. You know, we do a very bottoms-up fundamental analysis of, you know, everything from, Everything from pipeline to deal to the field forecasts and so forth. And it's really based on that. So if I were to up level it towards more of the macro, I would say, yes, it's continued share gains. And as I said, I might have mentioned earlier in this call, you know, we are still, you know, roughly a $2.5 billion, $2.75, knock on wood, vendor in a $50 billion market. Our opportunity is based on, you know, gaining share and less on the overall size of the market at any particular time. So, Kevin, do you want to?
spk17: Yeah, I mean, I think I'd add a little bit here. So, you know, we continue to have relatively good visibility of beyond just one quarter out. I think our sales leadership team has done a really nice job focusing on demand gen and pipeline beyond one quarter. The sales team's really got a good pulse on the business right now around our pipeline, our opportunities, ability to convert, what that looks like. That, in combination with our track record, both with our existing customers and be able to expand our within our existing customers as well as the continued traction we're seeing with the new business. This is just really how the second half shapes out based on what we saw exiting Q2 and looking out to Q3 in the rest of the year. So hopefully that's helpful for you.
spk03: That is super helpful. I know there's a bunch of moving parts over here. Kevin, I guess from your perspective, I think the question that folks will probably have is, In the back half of the year, you're sort of implying, you know, low double-digit kind of top-line growth versus the 40% you saw in the first half. I know there are a few moving parts to compare to that, but maybe just help contextualize what's driving the deceleration in the back half versus the first half.
spk17: Yeah, it's a great question. And obviously, we've had a fantastic first half and, you know, leading to raising our annual guidance to 26% year over year. But you're right. As we think about growth in the second half, there's a few things to be thinking about and a few factors to keep in mind here. One is that the second half is impacted by seasonality of that deal we mentioned previously around $60 million. There's actually a couple deals that we delivered in Q1, really contemplated for second half. And so that's going to impact second half growth by approximately six points. So that's important to consider. I think the next factor to consider is our comps are getting much tougher in the second half due to the substantial growth and the additional week we had last year. Just a reminder in terms of our growth last year in Q3 and Q4, we're 37% and 41% respectively, which was just outstanding. And then lastly, as we mentioned, we're navigating some incremental headwinds. as we think about the elongation of the sales cycle, but we've contemplated that in our guide. So that, with FX, I feel pretty good in terms of how we're looking in terms of second half growth.
spk03: Perfect. Thank you, and congrats on the great quarter.
spk18: Appreciate it. Thank you, Amit. Our next question comes from Meeta Marshall from Morgan Stanley. Meeta, please go ahead.
spk09: Great. Thanks. Charlie, you mentioned it again on the call, but I just wanted to get a sense of on the power consumption advantages that you guys have or just the kind of green energy angle, where or what type of customer type is that having the most success with? You mentioned Europe last quarter. Is it having any increased prevalence or acceptance with cloud customers? And then maybe second, You guys have clearly talked about a little bit of elongation of deal cycles. Just wondering if there is any difference in deal types, whether you're seeing customers want to move more towards evergreen or kind of pay-as-you-go versus kind of whatever purchasing model they were looking at before. Have we seen any changes in what type of purchasing they're looking to make? Thanks.
spk14: Yeah, great. Thanks, Mita. On the energy side, there are several different customer types that are focused on energy. One, I would say are large reporting companies that are now needing to report on their own ESG environment, and that's been pushed down. into their data center operations, which tends to be a very large part of their energy utilization. The second I would say is countries now with energy insecurity. So that covers a lot of Europe right now. It's not just the price of energy that's causing them to take a look at their energy bills and so forth. It's now also the availability of energy, making them quite nervous about how much energy you know, their entire environment takes up, but certainly a big part of that, again, is in their data center. And then third, I'd say, is it's government. You know, government worldwide, governments worldwide now are very focused on energy reduction, and so we're seeing a lot of it there. You know, in Japan it was palpable, you know, and it also fits if you will, the Japanese ethic for smaller, more compact, more efficient, more reliable capabilities, which we fit really quite perfectly. So I'd say the energy sensitivity is large and growing, probably not surprising to this audience, larger internationally currently than it is in the U.S., but growing in the U.S. as well. On the deal cycle perspective, standpoint, you know, we started to see it earlier. I'd say, you know, starting around mid-quarter, we started to see it. And then it increased through the quarter. The deal cycles were just taking another week or two. Generally, all those deals closed. So it wasn't a demand issue. And so far, the approvals are still going through. But there definitely was, on average, a lengthening of the deal process.
spk17: Yeah. And I would say, this is Kevin, I'd add a couple of things. I think the elongation, I'd really point that more to the enterprise, larger enterprise segment. We didn't see a lot of that, frankly, on the commercial and PubSec side. So I think that's an important clarification. I think the other thing you had asked, which we absolutely are saying and we're well positioned for, is our customers looking for more flexibility in how they structure their deals? And I would say absolutely. And I think our timing of Evergreen Flex bringing another option for customers and how they might want to consume our technology and solutions is really resonating. But we are having a fair amount of conversations with our customers around flexibility.
spk09: Great, thanks.
spk18: Thanks, Meera. Our next question comes from Wamsi Mohan from Bank of America. Wamsi, please go ahead.
spk19: Yes, thank you, and congrats on the solid results. If we look at your guidance here, it sort of implies product revenue will grow about 20 or a little bit higher, and when we look at your long-term model, that really implies software or subscription growing at 30% plus and becoming more than 50% of revenues. So as we look into next year and further out, should we be thinking that product meaningfully decelerates or is a 20% product revenue growth sustainable from share gains? And I will follow up.
spk14: Yeah, my opinion, Wazi, is that product growth will continue. Again, we're still a relatively small player in a very large market, and so share gains, you know, continue to be a major growth item for us, our growth sector. Plus, there's the option or the opportunity to start selling more into the hyperscale environment, you know, the top 10 hyperscalers. And if, you know, each one of those that gets cracked really would be a meaningful revenue accelerant. So, you know, on the product side. So, no, we're looking at both as meaningful growth sectors for us.
spk19: Okay, thanks, Charlie. And then if we think about your operating margin performance in the quarter, you know, relative to your expectation, you had a $12 million top line beat, but you had a, you know, multiple of that on your operating income dollar delta on your beat. And I'm just wondering if there was anything that you would call out specifically around the operating margin performance. As we look at the back half of the year, I know the revenue growth is decelerating, but generally speaking, when you think about the margin profile there, anything you can help us to bridge the sequential margins would be helpful. Thank you.
spk17: Well, yeah. Thanks, Swansea. I think the primary factor I probably want to highlight around our investments for the second half and then overall when we think about our operating expenses for the year and the growth is really around continuing to invest in our sellers. And we've mentioned that before, but that is an area where For Q2, arguably, I would have liked to have been further along in terms of where we are with our investment profile on the sales side with our sellers. But we'll make that up. I feel confident on that, and we'll see that through our investments as you look at the second half. Okay, thank you so much.
spk18: Thank you, Bamsi. Our next question comes from Matt Sherid from Stiefel. Matt, please go ahead.
spk06: Yes, thank you. I have a follow-up, Charlie, on your comments regarding customer expansion. In addition to the new logo ads, can you comment on the progress you're seeing in increasing spend within existing customers, particularly large enterprises, due to the expanding products and services within your portfolio and the opportunity for that going forward?
spk14: Absolutely. That is another major growth factor for us is simply the number of large enterprise logos that we have you know, I think it kind of hides a big opportunity for us in that, you know, our wallet share on average in those large enterprises is still relatively small. I mean, obviously, there are a handful of them where we are the majority of their spend in the storage area. But for the vast majority of those enterprise logos, we still have a lot of opportunity ahead of us. And frankly, with our customers, to know us is to love us. Their experience with Pure is very, very good. And because of that, we get, I think, exceptional opportunities every time another one of their storage properties comes up for renewal. So it is a major area of growth for us, and I expect that to continue to pay dividends for quite some time.
spk06: Okay, thank you. And just for my follow-up, could you just comment on the supply environment? You really haven't called that out. as an issue relative to your competitors. I know you've got a smaller footprint in terms of components and you've managed that very well, but any sort of hiccups or incremental pluses or minuses or negatives there?
spk14: I would say that in general and on average, the situation has ameliorated somewhat. That is, it's not quite – it hasn't gotten worse. In fact, if anything, it's gotten a little better. But it's very uneven. In other words, there are some components that have become much more widely available, shorter lead times, but many others that are still on allocation, and we still get decommits every now and then. The number of decommits are down. Things are a little bit easier, but it's still, I wouldn't say that we're out of the woods yet. That being said, you know, we expect it to continue to improve.
spk17: Yeah, and I think it's all about, you know, our confidence and our track record of delivering timely to our customers, which is so critical for them as they're kind of working through accelerating what they need to do from a digital transformation standpoint. And we don't see that changing. And again, the challenges we are having would be outside, obviously, of NAND and DRAM, to be clear as well. Got it. Okay, thank you.
spk18: Thanks, Matt. Our next question comes from Jason Eater from William Blair. Jason, please go ahead.
spk15: Hey, good morning, or good afternoon. This is Sebastian on for Jason. I just wanted to ask a little bit more about the Evergreen Flex offering. What is sort of the target customer for that offering, and what has been the initial reaction from the channel or from customers that are looking to adopt it?
spk14: Yeah, thanks. So Evergreen Flex is really targeted at those customers that were open and interested in a subscription model that is a pay-as-you-go model, but whose internal financial philosophy was really based on CapEx. So you can think of, in some cases, managed service providers, You can think of a large enterprise where I had mentioned on an earlier question that the model for the rest of their data center is CapEx, and they just couldn't make the full jump over to an OpEx model, or at least not yet. And this gives them the ability, it gives them several things. One is it gives them the ability to buy on CapEx, but to really reserve a lot of their spending for when they actually start using the product. The second, and this one is more subtle and more important to many customers, Flex is really calculated on a full fleet environment, you know, across their entire environment rather than on an array by an array capability. And what that means is it gives them greater economics, more efficiency, and it gives them much greater flexibility, ergo the name Flex, you know, as they build out their data infrastructure.
spk12: Rob, do you want to add? Yeah, I just wanted to jump in and add here for a second. You know, we introduced Flex at the same time that we rebranded and renamed some of our other subscription offerings to bring them all under the Evergreen umbrella. And that would be Evergreen Forever, Flex, and then Evergreen One, formerly known as Pures of Service. And one of the reasons that we did this is it really is, you know, a spectrum of ways that customers can get the benefits of the Evergreen architecture and the services we're able to deliver there. And just to put this in perspective, right, we look at this as a spectrum all the way from one end where you've got, as Charlie mentioned, a more CapEx-oriented customer, more traditional hardware sale that's seeing the benefits of Evergreen through the Forever program where, you know, those assets are being constantly modernized, hardware and software, non-disruptively. They get access to future evolution and growth, you know, without worry there. On the other end of the spectrum, you've got customers that are fully bought into the cloud operating model, want to effectively turn the keys over to Pure to go and run and manage and say, hey, we just want to interact based on a performance SLA and capacity basis with full consumption level flexibility. And then in the middle, you have customers that are more in the camp that Charlie was discussing where, you know, either as a stepping stone to get to the full cloud operating model, you know, they see the benefits of Flex, owning title to the hardware up front, but seeing the benefits that Flex can offer in terms of flexibility to grow, evolve, as well as redeploy assets across their fleet. And so what we really see with this enhanced and more I would say consolidated Evergreen family is introducing a variety of ways for customers to realize the benefits of the core architecture wherever they are on that journey to the cloud operating model.
spk15: Got it. That's really helpful. Maybe just a quick follow-up on that point. I guess now that you have sort of middle offering, is this going to be a big driver you think of new customer additions or was this something that existing customers were asking for and it's going to be a big driver of expansions within those accounts? Can you help me think about how you're thinking about those aspects?
spk14: Yeah, I really think it's both, that certainly for existing customers that, and we've reported this in the past, that we're looking at Evergreen One, but at the end fell back to CapEx because of their unfamiliarity with that buying model. We think Evergreen Flex now gives them that opportunity to get into a capacity-oriented subscription model. And secondly, no doubt, for customers that, or for prospects that, that want to try pure but want to do so on an as-you-go basis, I think it can open up new opportunities for us.
spk15: Great. Very helpful. Thank you.
spk18: Thank you, Sebastian. Our next question comes from Tom Blakey from KeyBank Capital Markets. Tom, please go ahead.
spk01: Thank you, Sebastian. Couple questions here. I think just listening to, you know, Rob talk about the change in product. I mean, going forward, is it fair to say that the strength that we're seeing in product and obviously early in share gains, Charlie, will be coming from more of a subscription-based sale? You know, maybe, you know, this kind of software model-esque questions here, just the precursor. You know, holding back product growth, you know, so strength in long-term deferred here in the quarter. So going forward, we can expect some mechanisms there, you know, just going out maybe to fiscal 24. Is that something we can expect in terms of the product revenue growth and have a follow-up on the services side?
spk14: Well, we definitely believe that subscription should outpace, you know, product growth. That's our long-range plan and certainly what we believe. But I would also remind, you know, everybody on the call that, in fact, our evergreen subscription, the entire range of it, Even the Evergreen Forever, which is attached to a CapEx sale, does in fact over time reduce the CapEx sale. And that's because we never have to replace an existing – the customer never has to replace an existing system. So many – the storage industry, a significant portion of their sales is just selling a new system to replace an old system. We always see that in our subscription line. We don't see that in a – you don't see that in a product sale line. You see that in growth and subscription. So it's a different way to sell a product. We only sell it once. The customer never has to buy it a second time.
spk01: Okay, great. I thought the upfront portion of the subscription sales was recognized in product, not all in services. And then so – Not to be –
spk17: You're right. It's subscription. So when we do an Evergreen 1 transaction, the entire value would be reflected as a subscription. Evergreen Flex, the hardware portion, obviously would be in product, but the consumption piece would be in subscription. And then for Evergreen Forever, all of the Evergreen Forever attached for that subscription is reflected as subscription revenue. Hopefully that's helpful for you.
spk01: Very clear, Kevin. Thank you. And then second question, I guess really more to the services side. We know this is where the data services and Portworx and basically your overall software portfolio is there. Any commentary you can give in terms of maybe getting a little bit more steeped here? Any type of upsell callouts you can call? Maybe an attach rate of software to new enterprise deals now? Any type of help you can give that can that can give us comfort in terms of continued strong growth here on the services line as well as the software would be helpful. Thank you.
spk14: Absolutely. Well, we're seeing a large fraction, probably more than 50% of the software sales are going to existing customers, but a significant amount are going to new customers as well. And I would say that also, even within existing customers, it may be a new buyer within that customer account. I would say that a large fraction are into enterprise customers, more so than on the commercial side, and a small but increasing amount coming from channel source.
spk01: Very helpful. Thanks, Charlie. Thank you.
spk18: Thanks, Tom. Our last question comes from Rod Hall from Goldman Sachs. Rod, please go ahead.
spk00: Hey, guys, thanks for squeezing me in. This is Bala on the road. Congrats on a good quarter. I want to double-click on the guidance, really strong guidance for the second half. Implied Q4 guidance, it looks like it's up meaningfully from what you were thinking before. I'm just wondering if there is any large deal. I know you mentioned the telco deal, quarter SPAC, and then... Meta ramp, I know you said Meta could be lumpy and then it didn't do much business this quarter. So could one of those large deals be helping in queue for dust weatherizing guidance? I have a follow-up.
spk17: Yeah, thank you. A couple things. Meta hasn't changed in terms of our remarks earlier. I think when we were coming into the year and our view on Meta. So that hasn't changed meaningfully. And then in terms of how we're thinking about the second half, you know, walk through that a fair amount in terms of how we're thinking about it. You know, our approach hasn't changed. We continue to evaluate and analyze our pipeline and opportunities. We're staying very close with the sales leadership team who have a very good pulse on the business. I wouldn't call out anything specific as we think about implied Q4 on any particular deals. It's just where we're falling out based on the visibility we have over the next two quarters or the remainder of the year.
spk00: Okay, thanks, Kevin. Follow-up. Product gross margins at 69%, still very strong, but down slightly, only slightly from last quarter. I understand a flash grade new product, flash grade S, that could carry lower margins, so maybe it's that. I'm just wondering, given your commentary about not planning to increase the list prices for your products, I guess I'm wondering what are you seeing in terms of competition? Are you seeing any increase in intensity at all?
spk17: Look, we're having some great success in terms of the opportunities we're in and winning those opportunities. You know, I've said and been very consistent with my remarks on product gross margin that, you know, the high 60s is our sweet spot, and we continue to be in our sweet spot of product gross margins. Frankly, when I start getting into the 70s, it's a bit hot in terms of sustainability and what we can do with our customers. So I actually like where we are. in terms of our product gross margin profile, if that's helpful.
spk18: All right, thank you. Okay, thank you. All right, thank you, Badam. This concludes the question and answer session. At this time, I'll turn the call back over to Charlie for closing remarks.
spk14: Well, as I hope we've been able to convey, we believe Pure Storage is well positioned to grow both in the near and in the long term. You know, we have this unique combination of product portfolio and operational rigor to continue to lead our industry. And we continue to improve our game every quarter. We enable organizations everywhere to build a cloud operating model for their private and hybrid cloud infrastructure. We lead in solutions for the all-flash data center. We have the most advanced services and tools to automate data management for both traditional and modern cloud-native applications. And we're definitely the clear sustainability and energy reduction leader now. I'm deeply appreciative to all of our employees for their innovation and their diligence, to our partners and suppliers for their ongoing partnership, to our customers for entrusting Pure Storage with their mission-critical data storage and management needs, and to all of you that follow us so closely each and every quarter. Thank you all very much, and have a wonderful rest of your day.
spk13: That concludes today's conference call. You may now disconnect.
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