Pure Storage, Inc.

Good day and welcome to the Pure Storage first quarter fiscal year 2024 earnings conference call. Today's conference is being recorded. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star 1 on your telephone keypad. At this time, I'd like to turn the call over to Paul Zietz, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Pure's first quarter fiscal 2024 earnings conference call. On the call, we have Charlie Giancarlo, Chief Executive Officer, Kevin Kreisler, Chief Financial Officer, and Rob Lee, Chief Technology Officer. Following Charlie's and Kevin's prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at investor.purestorage.com. On this call today, we will make forward-looking statements which are subject to various risks and uncertainties. These include statements regarding our financial outlook and operations, our strategy, technology, and its advantages, our current and new product offerings, and competitive industry and economic trends. 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 some 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 revenue, remaining performance obligations, or RPO, and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. 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. Our second quarter fiscal 24 quiet period begins at the close of business Friday, July 21st, 2023. With that, I'll turn it over to Charlie.

Good afternoon, everyone, and welcome to our Q1 FY24 earnings call. Thank you for joining us today. We were pleased with our Q1 performance and what continues overall to be a challenging IT environment. Highlights for the quarter include the highest all-time sales for Evergreen One, our first sales of FlashBlade E, which is experiencing the fastest first quarter pipeline growth for any new Pure product, our largest single order since inception of almost eight digits for our cloud block store product, and the release of a major upgrade to our FlashArray unified block and file software. We are especially pleased with the customer response to our E product line. The E line is the first and only all-Flash storage system that can address the secondary storage market at competitive prices to 7,200 RPM hard disk systems, but with only one tenth the power, space, cooling, and labor requirements. As I've stated in the past, the days of hard disks are coming to an end. We predict that there will be no new hard disks sold in five years. But beyond the benefits of the e-product line itself, it enables Pure to now compete for our customers' entire storage environment. It enables Pure for the first time to be our customers' complete storage partner, something that our customers have been asking for for years. The operational and economic benefits of Pure's comprehensive storage portfolio are clear and overwhelming and are based on sustainable technology and business model advantages. In March, we gathered our sales team for our annual sales kickoff, an event we had not held in person since 2020. Everyone was energized by both the event and the training we conducted there. This ongoing training focuses on honing sales skills with our expansion into the secondary storage market, advancing our as a service offerings, and selling in today's environment of constrained IT spending. This valuable training is already bearing fruit and enabling us to reach new customers, better support the needs of current customers, and reduce sales cycles which have lengthened in this economic environment. It's clear that our continued innovation strongly resonates with our customers, whether it is for AI machine learning, rapid recovery from ransomware, high-performance databases, electronic design automation and video editing, traditional or cloud-native applications, and now also for secondary storage environments such as content and media stores, enterprise imaging, and even traditional backup and archive. We deliver unique outcomes that are highly valuable to our customers in every environment. Compared to our all-flash competitors, we are 10 times more reliable. We are two to five times more power and space efficient. And we require five to 10 times less manual labor to operate, resulting overall in at least 50% lower total cost of ownership. Also, our products never become obsolete and never require forklift upgrades because our Evergreen program provides continual hardware and software upgrades non-disruptively to the customer's application environment forever. Products we sold 10 years ago are not only still in service, but have been continually modernized to our latest models without disruption or additional customer expense with our evergreen subscription. These capabilities are based upon four unique and sustainable competitive advantages. One, our Purity software uniquely works directly with Raw Flash, while other competitors use more expensive less efficient, and shorter-lived SSDs. Two, Pure's highly consolidated product line, consisting of our common operating system, Purity, and one management system, Pure One, operating on both a scale-up and a scale-out platform, utilizing common direct flash modules, while competitors require many disparate software and hardware platforms to cover the same breadth of use cases. Three, Pure's unique evergreen technology and services, which guarantee that deployed products never become obsolete, never need to be replaced, and enable non-disruptive upgrades. And four, Pure's cloud operating model, which enables customers to operate their storage the way that cloud customers operate theirs, highly automated, orchestrated, and available as a service. As we expected, Evergreen One is thriving in this economic environment. Sales of Evergreen One more than doubled year over year. As a reminder, Evergreen One is Pure's storage as a service offering that enables customers to access storage entirely through service level agreements with no capital expenditure, only paying for capacity as they use it. Customers can place their data on premise on Pure owned infrastructure or on AWS or Azure with Pure's Cloud Block Store. The customer only pays for what they use under a single contract for enterprise class capabilities for less than what they pay for raw cloud storage. This past quarter, we saw the largest individual sale of Pure Cloud Block Store at almost eight figures. A Fortune 500 healthcare organization purchase Cloud Block Store because of its ability to securely store data in the cloud with enterprise features, reduce management overhead, and lower TCO. By using Cloud Block Store, the organization is able to significantly reduce their cloud storage spent while getting the most out of their data. Our extraordinary lead in driving power, space, labor, and e-waste reduction both on-prem and in the cloud, has also garnered attention amid increased customer focus on these selection criteria. The continued strength of FlashArray C and interest in FlashBlade E speaks to our customers' demand for the TCO benefits of pure all-Flash products over competitive offerings, now including both their Flash and hard disk systems. In particular, FlashBlade E consumes approximately one-tenth as much power and space as similar capacity hard disk systems that it replaces, requiring up to one-tenth the labor and generates less than one-tenth the e-waste. Only Pure's direct flash management and operational simplicity is able to deliver this operational performance. As I mentioned, early interest in FlashBlade E is off the charts for a new product, FlashBlade E is the second in a series of products that can compete for the secondary tier and soon lower tiers of the storage market entirely dominated today by hard disks. Prior to Flasher AC and FlashBlade E, all Flash products were only price competitive for high-performance systems, and therefore Pure could only provide products for our customers' Tier 1 storage needs. With the introduction of our e-product line, Pure can now compete for customers' entire storage estate, enabling Pure to become their complete storage partner for the first time. For years, customers have asked us for products that could address the remainder of their storage estate. I have now had many customer visits since our introduction of FlashBlade e with senior IT executives, describing our key advantages and our ability to provide Flash solutions for their entire storage environment. A common question from these senior executives is why aren't we doing this already? In April, we announced a major update to our FlashArray unified block and file software, representing a significant expansion of our broader file strategy and portfolio. I'm proud to share that we're now able to address customers' file needs across high-performance, general-purpose NAS, VMware over NFS, and dozens of other use cases, allowing us to compete for all of a customer's file storage estate. Best of all, FlashArray customers can simply upgrade to the latest software to get these capabilities without any additional expense. This unified offering was a key component in the largest individual international market win in pure history last quarter. Touching upon the most recent trends, Generative AI and chat GPT has brought artificial intelligence to the top of mind in all of our major customers and has become a focal part of literally every earnings script this quarter. Pure saw the AI opportunity years ago and started innovating in this area with our introduction of FlashBlade in 2017 and then with our AI-ready infrastructure, Aerie product, co-developed with NVIDIA. We've continued to advance FlashBlade's high performance parallel architecture and Pure continues to be the go-to partner for storage on AI projects. For instance, we support more than 10 leading autonomous vehicle development companies in managing and processing the massive amounts of data required for their machine learning activity. In addition to our very successful position with Meta in their AI Research Supercluster, or RSC, the largest AI supercomputer in the world, Pure is the chosen vendor for AI environments across a broad range of industries, including media and entertainment, pharma, healthcare, aerospace, transportation, and financial services. We expect our leading role in AI continue to expand. But we are equally excited that the requirements for big data will drive even more use of high-performance flash for traditional bulk data. As we mentioned last quarter, we expect the current macro environment to continue through this fiscal year. And we continue to operate the company with our usual diligence, improving productivity and focusing investment on meaningful innovation and growth. Our as-a-service offerings, including Evergreen One and Evergreen Flex, and our Pure financing vehicles provide customers with a wide range of economic alternatives to address their business needs. Pure's superior TCO and flexible Evergreen offerings are making a difference in this challenging IT economy. While we saw continuing caution by enterprise and cloud customers in Q1, similar to what we saw in Q4, We also experienced enhanced demand for our most cost-effective solutions, especially Evergreen One. Given all of our advantages, we remain confident that we will continue to increase our market share, outgrow our competitors, and pick up even greater momentum, especially as our new products and services gain mindshare. I am confident that we are gaining recognition with both customers and prospects that Pure is the company to trust for their future data storage architectures. We are years ahead of the competition in our ability to provide all storage needs with the most consistent, modern, and efficient storage solutions. We enjoy a highly sustainable competitive advantage based on the only direct-to-flash operating system in Purity, a simple, consistent product line with common management, our evergreen technology to continually upgrade our products non-disruptively to the current state of the art and our ability to provide our customers with a cloud operating model. Our new capability to compete for the full range of enterprise storage needs gives us even greater relevance to our enterprise accounts and enables us to deliver a full and far more integrated storage solution to our customers. In closing, I am excited to share that in just a couple of weeks, we'll be hosting our annual Accelerate User Conference in Las Vegas. We're looking forward to seeing customers, partners, and analysts from around the world to discuss the future of data storage and management. I'll now turn the call over to Kevin.

Thank you, Charlie, and good afternoon, everyone. In Q1, we achieved revenue of $589 million and operating profit of nearly $20 million. exceeding our expectations we also set an all-time record of evergreen one subscription sales this quarter as demand was exceptional we were pleased that our u.s enterprise business exceeded our expectations this quarter macro conditions continued to be challenging consistent with what we saw in q4 against this macro backdrop our sales force and leadership are actively monitoring deals to get ahead of challenges as well as continuing to focus conversations both on our business value and total cost of ownership advantages which are unmatched against our competitors our subscription services annual recurring revenue grew 29 year-over-year to 1.2 billion dollars and subscription services revenue of 280 million dollars represented 48 percent of total revenue remaining performance obligations or rpo grew 26% year-over-year to $1.8 billion. Similar to the remarks we've made in previous quarters, our RPO included an outstanding commitment with one of our global system integrators. During Q1, this remaining outstanding commitment was fully satisfied with Evergreen One sales. When excluding the impact of the past outstanding commitment from our global system integrator, RPO grew 31%. Our headcount increased slightly to approximately 5,270 employees in Q1, and we remain disciplined in managing our costs, including hiring. Incremental investments in headcount remains focused on quota-carrying sales capacity and critical business hires. As I previously mentioned, total revenue in Q1 was $589 million, and product revenue was $309 million. As we noted in previous earning calls, Q1 revenue last year included 60 million of product revenue that was contemplated in the second half of last year. Excluding this impact, Q1 total revenue grew approximately 5%. U.S. revenue for Q1 was $427 million, and international revenue was $162 million. We also acquired 276 new customers during the quarter. We were pleased with our continued strong gross margin performance in Q1 of 72.2% with product gross margins of 70.8% and subscription services gross margin of 73.7%. Q1 operating profit of nearly 20 million exceeded expectations and included higher year-over-year costs for salaries and our first sales kickoff event since 2020. Pure's balance sheet and liquidity remained very strong, including $1.2 billion in cash and investments. In April, we reduced our overall debt, paying off $575 million in convertible notes, using $475 million in cash and $100 million from our revolving line of credit. Cash flow from operations during the quarter was $173 million, and capital expenditures totaled $51 million. In Q1, we repurchased 2.9 million shares of stock, returning nearly $70 million to our shareholders, and have approximately $211 million remaining on our existing $250 million repurchase authorization. Now turning to guidance. We are reiterating our annual guidance for FY24 with revenue growth in the mid to high single digits and expect an operating margin of 15%. Our annual revenue guidance assumes that macro conditions will continue to be challenging and will be consistent with what we have seen over the last couple of quarters. We expect continued momentum of our Evergreen subscription services, in particular Evergreen One. The strength of our Evergreen One offering has been contemplated in our annual revenue guide as the recurring revenue for these services is recognized over time. Also, as Charlie mentioned, early customer response to FlashBlade E, which became generally available in late April, has exceeded our expectations. Our FY24 annual revenue guidance that we provided last quarter assumed a modest revenue ramp during the second half of the year, from sales of FlashBlade E. While we are very pleased with the early response of FlashBlade E, our FY24 revenue guidance continues to assume a modest revenue ramp during the second half of the year. Moving to Q2 guidance, we expect Q2 revenue of $680 million, representing an increase of approximately 5% year over year. Our Q2 revenue guidance implies continued strong subscription revenue growth and a slight year-over-year decline in product revenue. We also expect Q2 operating profit of $90 million as we remain focused on profitable growth and ensuring we are appropriately aligning our cost structure with demand. In closing, through our innovation, our competitive advantages are clear and aligned to our customers' focus on both performance and cost. We are uniquely positioned to deliver significant business value while reducing our customers' total cost of ownership, including labor, energy, and real estate. It's a pleasure to also invite you to join us for our product and technology-focused financial analyst meeting at Accelerate on June 15th, either in person at Las Vegas or virtually through our investor relations website. With that, I will turn it back to Paul for Q&A.

Thanks, Kevin. Before we begin the Q&A session, I'll ask you to limit yourselves to one question consisting of one part so we can get to as many people as possible. If you have additional questions, we kindly ask that you please rejoin the queue, and we'll be happy to take those additional questions if time allows. Alex, let's get started.

Thank you. If you'd like to ask a question, please press Start, followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered.

Hello?

Our first question for today comes from Amit Dayanani of Evercore ISI. Amit, your line is now open. Please go ahead.

Thanks a lot, and congrats on a really strong print here despite the tough macro environment. Charlie, I was hoping to talk a little bit more about, you know, what are you seeing from an AI infrastructure investment perspective from your customers? You folks obviously have a good engagement with Meta that's been doing well, I think. I would love to hear how your customers are thinking about their storage needs broadly and very specifically around Pure's product portfolio around these AI ramps. It would be really helpful to put any dimensions around it and how do you distinguish yourself from the broader storage requirements. Thank you.

Yes. Thank you, Amit. Good to hear from you. Well, we view AI, well, we've been doing AI as a great opportunity for us and representing a reasonable portion of our sales now for multiple years, especially with the introduction of our FlashBlade product five years ago. And we've continued to expand that area. We do believe that we are the go-to partner, as I mentioned, for AI projects. And we literally support well over a half dozen to a dozen companies different industries in their AI activities. The majority of AI now continues to be part of what we, as an industry and what everyone on the call, had known of AI for many years, whether that's genomic research or advanced analysis, financial analysis, or self-driving cars and so forth. Now what's happening, of course, is every company is looking at large language models, chat GPT, et cetera, trying to determine exactly what it means for them. We've seen some interest in that area, but it still remains a minority, the majority being traditional, if I can use that word, with traditional AI projects. What we're most excited by is both the opportunity for a high performance of FlashBlade systems, but frankly, We are at least as excited that customers now more and more are going to want to put their data that is in cold, hard-to-reach, hard disk systems and make that available for analysis by putting it in much more higher performance flash-based systems. And both our FlashArray C and FlashBlade E are perfect repositories for that. So we think it's coming out at a perfect time. And let me just, you know, let me go back to Meta. You know, we continue to have an excellent relationship around AI with Meta. They recently, you know, fully turned on the first two phases of their research supercluster, which they announced just a few weeks back. And we look forward to continuing to work with them on that project as they continue to build it out, but also on other projects that they are contemplating in the other parts of the company. Rob, anything to add?

No, yeah, I mean, I think a couple things. Number one, Amit, as Charlie mentioned, we're very excited about really what we see is two sets of opportunities that AI creates for us and I think are very constructive for Pure, supporting the AI training environments themselves, as well as supporting our enterprise customers as they look to connect their data sets to AI-powered applications. One set of demands, which Charlie discussed, is, hey, this needs to go and store larger and larger amounts of data. It can't be cold data, and so it's a perfect fit for C and our E products. But then equally so, enterprises are going to need to connect data from all across their organizations and all across different silos of infrastructure into these applications. They can no longer be islands of their own, relegated to silos that the infrastructure had held them to, And if you step back from it, those are the hallmarks of a private cloud experience for storage and is exactly what we're delivering with a cloud operating model. So net-net, we think this is very constructive for us, both in supporting the high performance and large-scale training environments, certainly with our secondary tier disk takeout product lines, but also in what we're delivering with a cloud operating model.

Thank you, Amit. Next question, please.

Thank you. Our next question comes from Amita Marshall of Morgan Stanley. Your line is now open. Please go ahead.

Great, thanks. My first question, you know, you noted that you had had some flashlight e-sales had begun. Just wondering if there was any kind of surprise and where that uptake has been? And then, you know, maybe as a follow-up question, you had noted kind of the eight-figure block store deal. Just wondering kind of how long that deal had been in the works and kind of what were the ultimate decision-making factors for that? Appreciate it. Thanks.

You bet. Thanks, Mita. You know, in terms of the – let me start with the cloud block store. As you know, we introduced that product about two and a half years ago, approximately, and continued to work with major customers in terms of their efforts to so-called lift and shift their traditional apps into the cloud. That progress of lift and shifting traditional apps to the cloud has probably taken longer than any of our customers expected, perhaps a bit longer than we expected as well. That being said, now that that has started and they're seeing some of the bills coming back from the cloud vendors for the storage of those large amounts of data for traditional apps, they now really start to become even more curious about Cloud Block Store. This particular deal, we had talked to them about a year and a half ago before they moved into the cloud. Um, and they, um, at that time they were so busy moving into the cloud and they didn't really, uh, I don't think they really appreciated what it would cost them as they started to deploy a production environment. As they, as they, uh, deployed that production environment, uh, and started to see the costs, they came back to us and said, we really would like to understand better the cloud block store. And I would say from that point where they came back to us to the sale was probably only about three months. So, a relatively short period of time.

Thank you, Mita. Next question, please.

Thank you. Our next question for today comes from Tim Long of Barclays. Tim, your line is now open. Please go ahead.

Thank you. Charlie, I was hoping you could talk a little bit about visibility, a lot of talk of macro. And obviously last quarter there was, you know, a little bit more challenging environment. But, you know, pretty positive that you guys are keeping the full year here. So can you just touch on, you know, kind of how your visibility compares to a few months ago? And what are the kind of, you know, factors that, you know, can kind of swing the numbers into the second half and into next fiscal year? maybe from a product standpoint or where there could be upside. Thank you.

You bet. What we saw, if I go back to Q4, we saw a fairly sharp degradation midway through Q4. And what we saw in Q1 was, if you will, a stabilization to what we saw at the end of Q4. So It didn't get any better, but it didn't get any worse either. The visibility is basically just the way we're handicapping, if you will, how – what we see in terms of – from our sales team and the length of time that we believe accounts will close. And I think our sales teams have become much better at really understanding what the full – gamut, if you will, of signatures and approvals that they're going to need to get in each account, and therefore have also become better at handicapping and staging, if you will, the deals. So I would say that, you know, in general, the current environment we see as stable. We would hope for improvement towards the year, but we're not counting on it at the moment. And I think that, you know, generally, we feel that this will be a somewhat, and I'm going to exclude, let's say, surprises in, you know, federal issues. But if we see, we're expecting stabilization through the end of the year, and hopefully an improvement towards the end of the year, beginning of next.

Tim, I probably would add a couple things. This is Kevin as well. You know, we did indicate the A fact that our enterprise business perform better than expectations and again I think that's a testament to to our field. Really adjusting to to our customers buying behavior so that that's a plus for us, I think you know the other two key highlights for us that came across as incremental strengths, if you will, would be evergreen one. performance, which we alluded to. Again, that strength was much stronger than we were even anticipating, and we were already anticipating in this environment our evergreen one storage of service sales would be strong coming into this type of environment. And then FlashBlade E, again, is a highlight for us. Early, but customer response has been fantastic. And Charlie, I don't know if you want to say a few words on FlashBlade E2 in terms of what we're seeing there.

Yeah, as we mentioned, it's a very fast pipeline build. I've been in front of dozens of customers now, and the excitement with customers around this product line and with the prospect of replacing their disks, which are troublesome with all Flash products, has been very high. And as I mentioned, I think what's most exciting is that we're seeing customers appreciate the fact that we can address the majority of their storage needs, you know, and to be able to do that with the simplicity, the power, the ease, and the reliability of pure products. So that's, I have to say, it's the enthusiasm that when any one of us go in with the new pitch, if you will, to our customers, that we feel coming out of it is really palpable.

Thank you, Tim. Next question, please.

Our next question comes from Pendulum Bora of JPMorgan. Your line is now open. Please go ahead.

Oh, great. Hey, thanks for taking the question, and congrats on the strong quarter. One question for Kevin. Subscription obviously is very strong and you kind of highlighted the potential headwind to revenue because of that. Is it possible to quantify that? You've kind of beaten the guidance by $29 million. You're kind of keeping the full year, which I appreciate, but I'm sure there is a little bit of conservatism there too. I'm trying to understand what, for the year, what did you kind of circle as a potential year of growth headwind from that evergreen one strength?

Yeah, look, we won't get into specifics there, Pendulum. You know, consistent with our practice of really talking about the subscription portfolio in total, as well as from a performance standpoint, we do the same from a product standpoint. But you are thinking about it, right, in terms of the fact that the Evergreen One strength, we'll see it come through on top line over time, which is a positive in terms of quantifying that. We won't... We'll let you do the math specifically on that. But again, you know, from a scale perspective as well, you know, we already have, you know, over a third of our revenues are subscriptions. So, you know, the headwind isn't as, you know, intense as one would expect, though it does have a consideration for us, and it has been contemplated in our annual guide, which we reiterated.

Thank you, Pendulum. Next question, please.

Our next question comes from Wamsi Mohan of Bank of America. Your line is now open. Please go ahead.

Yes, thank you so much. I was wondering, just to clarify, are you embedding anything from Meta in your guide? And as my main question, I want to ask you, we're hearing a lot of strategic bias that are happening now for some areas within memory, particularly NAND, and Wondering how you're thinking about it and potential impact to product margins for the rest of fiscal 24. Or maybe a different way to think about the same thing is you are going to see competitors particularly be able to take advantage of this low-cost manned environment for maybe a prolonged period of time. Do you think that closes any of the competitive gap at all or pressure to margins in the second half? Thank you so much.

Yeah, maybe we can talk about the competitive advantages first, Charlie, if you want to take that around our direct-to-flash management advantages, which really I think are sustaining. And we'll hit that first, then we'll hit meta.

Absolutely. Well, the interesting thing here, Wamsi, is that we believe that our advantage, based on the Purity operating system and our continuing advancement of what we call our direct-to-flash modules, is going to allow us to accelerate our advantage over SSDs. And I'm going to ask Rob to jump in and give you some detail there.

Yeah, absolutely. You know, Wamsi, I think we've been pretty clear with our view that disk is, well, a dead technology spinning, so to speak. But our view on SSDs, frankly, isn't that much rosier. We think it's, you know, SSDs are going to fall further and further behind. And that's really driven by our ability to distance SSDs with our direct flash technologies. If I step back, certainly SSDs have played an important role in making Flash more broadly available, but they're inherently less efficient, more complex, less performant, less reliable, and just have overall shorter lifetimes than the systems we can deliver based on our direct Flash software technology. And so while we get a lot of benefits today, the issue for SSDs and, frankly, our competitive set that are reliant on SSDs is that SSDs are going to find it harder and harder to keep up with the rate of improvement that we're forging down. If we think about it, NAND flash, it's getting harder and harder to work with. That's creating pressure for what the SSD has to do from a technology perspective. Trying to build larger capacity SSDs only exacerbates that. And then I think you have an economic barrier around, hey, is there consumer demand that's going to drive the same and follow the same type of roadmap that we're going to drive with with our direct flash technology. And so you net it out, I think, you know, we're very bullish here that we've got a three to five years structural and sustained competitive advantage over, frankly, the rest of the field that I think is trapped on SSD technology. And we're going to be pretty aggressive about going about going after that. And then bringing this back to meta, right, I think this, I think that, you know, our engagement meta is a great example and proof point of the value that we're able to deliver based on the technology. As we've discussed in prior calls, one of the, well, really the key reason that we won that engagement was our ability, our sole ability to deliver the balance of performance, cost efficiency, as well as power, space, and cooling savings. And that traces its roots directly back to the direct flash technology.

So then, Wamsi, I do think, you know, just to answer your question specifically around our product gross margins, look, I think the pricing environment, clearly we're seeing heightened competitiveness around the pricing environment, probably not a lot different than what we've seen historically. That's always been an area where our competitors compete with us. But even despite that, you saw the favorability in product gross margins, which again, is the testament to what Rob and Charlie were talking about, specific to our direct-to-flash management advantages, which, again, I think are sustaining, despite what the competition will do from a pricing competitiveness perspective.

Thank you, Wamsi. Next question, please.

Thank you. Our next question comes from Krish Sankar of Cowen. Krish, your line is now open. Please go ahead.

Hey, guys. This is Eddie for Krish. Thanks for taking my question and congrats on strong results. Going back to the AI question, of course, just at a high level, what is the predominant storage solution for AI today? Is it hybrid storage or flash storage? When you go to a customer already working on AI applications, What kind of systems do you usually replace, a competing all-flash solution or a hybrid storage system?

Yeah, I'll take that. Well, AI systems are typically new, so they're greenfields, so we're not generally replacing. What we're competing with are solely all-flash systems. Hard disk systems just can't provide the kind of performance necessary for sophisticated AI environments. Of course, you still have hard disk systems in there for some analytics environments where the performance is not generally as required. But for anything that's machine learning or real-time AI-oriented, it's only all flash systems. And we compete on the basis largely of our FlashBlade product, which has been in place for five years now and now augmented by the latest generation FlashBlade S.

Yeah, Christian, you know, just this is Rob, just to add on to that, you know, as Charlie said, AI earlier in cycle, generally in the training environments, you know, are net new and all flash. I think the broader brownfield opportunity we see is, hey, so what are the large corpuses of data that enterprises have been collecting for sometimes decades? They've been, you know, throwing in the corner on hard disk based systems that, you know, have generally been very, very cold and haven't had a need to access that data Well, now with AI technology, there's now a demand to apply AI or AI applications to those large data sets. Well, now all of a sudden, those large pools of data need to be accessible. They need to be to a degree performant. And I think that's where, you know, we see a tremendous opportunity for us with especially E in our FlashRace C line.

Thank you, Eddie.

Next question, please. Thank you. Our next question comes from Shannon Cross of Credit Suisse. Your line is now open. Please go ahead.

Thank you very much. I wanted to ask about operating income and margins. Given the outperformance this quarter, I know you didn't really change your guidance for the full year, but I'm wondering, assuming there may be some upside, are there areas that you would look to invest further Or is this something where, you know, if revenue upside grew, we should expect perhaps greater than 15% operating margins through the year given the opportunity for leverage? Thank you.

Yeah, Shannon, I'll take this and let Charlie comment as well. But yeah, pleased with obviously our Q1 results including, you know, better than expectations both on top line as well as operating profits. You know, we are continuing to be disciplined in terms of spending, really focusing on key hires and expanding sales capacity. And that focus remains. It's not changed from how we're thinking about Q1. So when we look at Q2, we're pleased with our guide. You see the expansion sequentially from Q1 to Q2. in terms of our operating profit. And again, reiterating the 15% operating margin for the year, which we feel comfortable with. Charlie, any other commentary you'd have?

Yeah, it's a bit early in the year to be speculating, I think, on this topic. What I would say is we think 15% really represents the best compromise, if you will, between continued growth and profitability. And we continue to invest in growth overall as a company. I would say that that's where our mindset is at the moment, but it's another long three quarters ahead of us. So we'll look downstream before we update you on that. Thank you, Shannon. Next question, please.

Thank you. Our next question comes from Sidney Ho of Deutsche Bank. Your line is now open. Please go ahead.

Great, thank you. I have a question on subscription revenue. So your subscription ARR and revenue has grown pretty consistently, 30% a year. Are there any risks that growth will start to slow down over the next few quarters when product sales are actually going through a correction in the last quarter and maybe in the next couple of quarters?

Yeah, it's a great question. And look, we don't specifically guide to subscription ARR, but we really do view this metric as important in measuring the overall health of our subscription businesses. And look, we've stated back in fiscal 2022 that our three-year CAGR expectations for subscription ARR would be around 30%, and we're tracking nicely to that expectation. Like we've noted in Q4, Q1, we saw just outstanding strength of our Evergreen One offering. And obviously that's really offset any reductions you might have on other Evergreen offerings that might be attached to CapEx sales. So look, I think we're continuing to see strength in terms of our subscription ARR growth. The value of Evergreen is really resonating with our customers due to flexibility that these offerings provide. And, of course, there's incredible value for customers in being able to use critical data storage infrastructure that, frankly, stays modernized and you don't have to pull out and refresh. So, therefore, yeah, I think we're continuing to see strong subscription growth and ARR growth.

Yeah, I tend to think of this number as, you know, a stabilizing element in our community. in our overall performance as a company in that, you know, when the economy slows down, customers are much more oriented towards these as-a-service offerings, you know, to be able to save on cash outlays and CapEx. And when the economy is strong and they move to CapEx, you know, we get it with the evergreen attached subscription. So, you know, I think there's some balance there, and it'll vary a little bit, but I think it's going to be – it's a fairly stable number. Thank you, Sydney.

Next question, please.

Thank you. Our next question comes from Jason Ader from William Blair. Your line is now open. Please go ahead.

Yeah, thank you. My question is on Portworx. I haven't talked about that one in a bit, so I'd love to hear thoughts on, I guess, two years in, something like that, how that product is doing, and just, you know,

what are some of the dynamics out there you know some of the puts and takes relative to uh the point in time when you acquired the asset yeah uh you know had a good quarter so we're very pleased with the progress overall of portworx i would say that the um the enterprise market uh for cloud native applications uh for stateful cloud native applications has probably progressed a bit slower in the last year than we had expected early on. But our expectation is that five to 10 years from now, all applications will be designed in a cloud native environment, you know, with containers in Kubernetes. So we're very confident about the future. We remain, you know, best-in-class product in that area. According to numerous analyst reports, as well as we track sales of competitive products, we're number one in that space, and we expect that to continue. So overall, please, maybe the market a little bit slower this past year than we might have expected, but overall very bullish on the segment.

Yeah, and Jason, this is Rob. Let me just add a few thoughts to that. As Charlie mentioned, we saw a strong quarter from Portworx, and I would call it in particular strength in seeing customers expand with us. I think that to a degree this is natural as we see this idea of platform engineering, the evolution of DevOps really starting to take hold. We believe this is driving more customers to look to Portworx for really the complete enterprise and scale-ready solutions for their cloud-native applications. I'll also point out that, you know, I think we're starting to hear stories back from customers that, hey, you know, Portworx is saving them, you know, a lot of money in terms of whether that's optimizing, helping them optimize their virtualization strategy, optimize their cloud storage and compute costs and spend or just speeding up their overall time to market. And so, you know, as we've discussed with other elements of the portfolio, you know, I think there's definitely a focus across the board value that customers are – essentially, our solutions that are able to save customers money in this environment. Thank you, Jason.

Next question, please.

Thank you. Our next question comes from Nihal Chokshi of Northland Capital Markets. Your line is now open. Please go ahead.

Yeah, thank you, and congrats on a strong quarter. I wanted to ask about the media again that you guys cited last week in a press release. And specifically, you guys cited the shortening the voice recognition modeling cycle from six months to two weeks, which is effectively saying an order of magnitude improvement. So, a few questions on this . First, is this applicable generative or recommendation AI case study? And then, is the voice recognition modeling another way of saying basically the training period? And then finally, is this the typical level of benefits customers are seeing, i.e., in order of magnitude of performance improvement? And it sounds like the typical texture that's being conveyed is indeed all flash arrays with the AI cases, if you can address those three.

Thanks for the multi-part question, Nihao. We're going to try to consider it a one question and condense the answer. Please go ahead, Charlie.

Yeah, as Nahal mentions, we actually had two press releases last quarter associated with or recently, I should say, recently with first quarter wins in the AI space, MediaZen and Crater Labs. You know, these were releases that these organizations themselves put out. So we're very pleased to see it. In each case, you know, dramatic improvements in the overall speed of training, of their various environments. I'm going to have Rob speak in more detail on MediaZen, which was the focus of your question.

Yeah, Nehal. I think what MediaZen saw is not atypical from customers that are scaling their AI training environments, which is as they started down the AI path, they're doing a lot of training on smaller data sets. Those data sets might be sitting directly on the GPU servers. You know, at small scale, that works really well. The issue, of course, is, as you know, to produce very good results with AI, you need to apply it to very, very large sets of data. And immediately what customers run into is this challenge of, hey, how do I get a subset of my large, large pool of data, which might be sitting on cold tier systems, over to my GPU servers so I can go and crunch on them and feed them to GPUs? And so I think what they saw was, again, not atypical. They were spending a ton of time waiting for data to move back and forth between these disparate systems. What Pure FlashBlade was able to do for them is essentially collapse those systems and allow them to train directly off of their shared storage, thus removing not just long manual steps, but just reducing the overall time to training. To your first part, or I guess maybe it was the third part of your multi-part question, you know, these types of results are, I would say, are not atypical as, you know, as AI projects start to scale beyond what they're able to achieve with small-scale infrastructure.

Thank you, Nihal. Next question, please.

Thank you. Our next question comes from Tom Blakey of KeyBank Capital Markets. Your line is now open. Please go ahead.

Hey, everyone. Thanks for taking my question here. I think I'm going to go back to Portworx as well, actually. Just the DB announcement that you had in the press release today, just wondering what the driving force there, just in terms of market demand was there, what does this incrementally bring to Pure and the Portworx data services platform? Any kind of updates on details you can link into the partnership, you know, is Mongo serving as a channel, you know, is this consumption-based, etc.? ? And if I could squeeze one more in, Paul, don't get mad at me, but I don't know if I heard the answer to Wamsi's question about meta and hyperscale in the fiscal 24 guide from Kevin, if that'd be helpful. Thanks, guys.

Appreciate it. Tom, I think we're going to need to take the meta question. We're running out of time, and we have quite a few people left in the queue. So I'm sorry, everybody, but we do need to stick to our policy. Great.

Yeah, and then, Tom, on meta, our annual guide continues to exclude new meta orders, and in particular, future phases, i.e. phases three and four of the RC environment. So no changes from our annual guide, which again, we have reiterated this quarter. Thank you, Tom.

Next question, please.

Thank you. Our next question comes from Simon Leopold of Raymond James. Your line is now open. Please go ahead.

Thanks for taking the question. I was interested in Charlie's comment about the demise of HART several years out, and just wanted to see what your thinking is or your take on the hard disk technology known as heat-assisted magnetic recording or HAMR, whether that's a competitive threat or how you think about that in the landscape. Thank you.

Yes, absolutely, Simon. Well, look, the density of hard drives will continue to increase. You know, that's a logarithmic curve that hasn't failed for over 40 years. Unfortunately, what's not going to increase is the I.O. speed on and off of these disks, which is now becoming more important. What's also not going to change, you know, is the overall weight and failure ratios of these devices. And as systems become larger and more dense, Flash is just accelerating its performance curve beyond hard disk at an amazing rate. So, you know, when we say that we're able to replace hard disk systems that exist today at one-tenth the space power and cooling, even with these new hard disk technology, we're still five times better, and we'll accelerate beyond that. So I think it's going to be very hard for the hard disks to keep up. One last thing to remember is, you know, the last refuge for hard disks now is in the secondary and tertiary tier. And now we're able to reach price parity with them at a procurement cost and yet have much lower total cost of ownership and be smaller and be more reliable. So there's no other markets that are going to hold revenue for hard disks that flash won't penetrate. And what that means is just lesser revenue and therefore lesser investment in ongoing development of hard disks. That's also going to be a problem for the vendors. So, you know, it's unfortunate. I don't hold any malice. But, you know, similar to markets in the past, you know, you're just, when these transitions take place, you know, CDs over vinyl or DVDs over VHS, there's just no stopping progress. Thank you, Simon.

We're going to actually run over by a couple of minutes. We're going to try to get in at least three more questions if we could. So next question, please.

Thank you. Our next question comes from Aaron Rakers of Wells Fargo. Your line is now open. Please go ahead.

Hi, this is Jake on for Aaron. Thanks for taking the question. I was just hoping you could talk a little bit about your views on component pricing for the rest of the year and maybe its effect on Flashable AD's ramp.

Yeah, I would say that, you know, obviously we've seen a significant drop in flash pricing over the last several quarters. We're expecting the same that, you know, the same that you're reading in analyst reports. We're expecting that to stabilize through the remainder of the year. But, you know, our economics on FlashBlade E are really strong and compelling, and we believe that's going to – as we said, we're offering it now at the same price as – as hard disk systems for near line, and we expect our improvements in density, regardless of flash pricing, to allow us to accelerate as we go into next year, meaning that we can penetrate ever deeper into lower and lower cost tiers of disk while maintaining the kind of margins that we expect as a company. So I hope that answers your question.

Thank you. Next question, please.

Thank you. Our next question comes from David Vogt of UBS. Your line is now open. Please go ahead.

Great. Thanks, guys, for squeezing me in. Charlie, I just wanted to go back to your product roadmap and how you're seeing it develop going forward. You know, I know you're shipping, you know, DFM solutions up to 48 terabytes today. But, you know, given the likely exponential growth in data going forward, Can you talk through how you're thinking about scaling your business going forward as some of the HDD guys are talking about 50 terabytes and up to 100 terabyte drives getting deployed over the next couple of years? Just would love to get your thoughts on how you're thinking about your product roadmap. Thanks.

You bet. You bet. And thank you for the question. Well, we're expecting to deliver a 75 terabyte SSD DFM. We provide direct flash modules, we'll provide 75 this year. We expect that to double next year and to double again by the year after that. So, you know, it's an incredibly, it's not, you know, we believe that that's not an ambitious roadmap. We believe that's eminently doable. And there's, if you look at the roadmaps for hard disk vendors, they can't get close to that. And certainly not at the same power weight, you know, power size space cooling envelope that we'll be fitting in. So,

Yeah, and this is Rob. Just to add on to that, to Charlie's point, that roadmap is we have very high confidence in it. It's based on effectively existing technology. No new physics needs to be invented to make that happen. And I think that's a roadmap that, again, to my earlier discussion, I think vastly distances us from the hard disk roadmaps but as well the SSD manufacturers, right? We just do not believe that the SSDs are going to be able to keep pace with where we're headed, and that's one of the reasons why we're so bullish about our advantage here.

Thank you, David. Let's take one more question, please. So this will be the last question.

Thank you. Our final question for today comes from Eric Martinuzzi of Lake Street. Your line is now open. Please go ahead.

Yeah, curious on the CapEx. I'm looking at it year over year there for Q1 versus Q1 a year ago. It looks like we're up about 18 million or so. I understand you called out the capitalized software investments up a couple of minutes. What else is driving that increased CapEx spend here Q1 versus a year ago? And then what are you expecting for Q2?

Great question. And really, there's two drivers for that. It's really around our test equipment for new product releases. Obviously, we've come out with FlashBlade E, and we've got a lot of stuff in the works. So we've got some test equipment investments associated with that. And then we're moving into our new headquarters. And so we've got some additional CapEx associated with that as well. But again, when I look at it in terms of our CapEx rate, we'll see a little bump this year against as a percentage of revenue, but around 6% to 7% is what we're thinking.

Thank you, Eric. Before we conclude, Charlie has a few comments to make.

Thank you, Paul. And thank you all for joining us on today's call. We continue to outpace the industry, I think, as you can see from our commentary and innovation and the advantages now in total cost of ownership, energy efficiency, price performance are really setting the pace in the data center and really make us the preferred choice now for global organizations. I do thank our employees for their dedication to our partners and suppliers for their ongoing partnership and to our customers for entrusting Pure Storage with their data storage and management needs. And as a reminder, we all look forward to seeing you at Accelerate, whether that is physical or virtual. so you can hear more about our continued momentum and the future of data storage and the data center. Thank you.

Thank you. That concludes the Pure Storage first quarter fiscal year 2024 earnings conference call. Thank you for your participation. You may now disconnect your lines.