Pure Storage, Inc.

Thank you. Good afternoon, everyone, and welcome to Peer's third quarter fiscal year 2025 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 in investor.peerstorage.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 today 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. The 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 gap measures are provided in our earnings press release and slides. This call is being broadcast live on the Peer 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 Peer Storage. Our fourth quarter fiscal 2025 quiet period begins at the close of business Friday, January 17, 2025. With that, I'll turn it over to Charlie.

Good afternoon and welcome to our Q3 FY25 earnings call. Pure Storage delivered solid third quarter results with both revenues and operating income exceeding our guidance. As I have discussed in previous calls, we have been engaged on achieving a significant hyperscaler design win by year end. And I am pleased to announce that we signed a design win with a top four hyperscaler in the last few weeks. This is the first ever design win to provide flash for standard hyperscaler storage, and it is the vanguard for flash storage, providing all online storage in major hyperscale environments in the future. For reference, the hyperscale market is responsible today for 60 to 70% of all hard disk drives purchased globally. In addition to providing cost-effective data storage, this top four hyperscalers use of pure technology is expected to free up significant amounts of power and space in their data centers. It is also expected to significantly reduce the failure rates and maintenance costs associated with legacy disk storage while doubling the expected lifetime of their storage infrastructure. Pure Storage, Purity Software, and Direct Flash technology will provide this hyperscale customer the necessary price, performance, density, and power to deliver the cloud-based services with unparalleled performance and energy efficiency. The close engineering engagement between the companies and extended testing by this major hyperscaler has proven Pure's Direct Flash technology is now capable of providing cost-effective data storage at hyperscale capacity, even at low-cost bulk data price ranges. To fully outline the opportunity here, we are working with hyperscalers to utilize our technology with a single consistent architecture for all of their online storage, inclusive of low-price bulk storage, nearline, higher performance storage, as well as high speed storage for their most demanding use cases, including AI. To support the expected increase in flash demand for the hyperscale industry, we also announced today a deepening collaboration with Kioxia, a global leader in NAND flash technology. Kioxia has been a steadfast partner in our engagement with the hyperscale community. Our design win signals that Pure's direct flash technology is now ready to replace hard disks everywhere, and NAND vendors are taking notice and planning their opportunity to address this 700 exabyte per year market. As data volumes continue to increase, our combined technologies enable hyperscalers to meet the challenge of increasing data volumes while reducing power consumption, labor, and the physical footprint of hyperscale data centers. The work for the design win we announced today started over one year ago. While we have had sales of standard product into hyperscale customers, hyperscalers have developed their own software for their storage services, which operates on commodity-hard disk drives and SSDs. Our early outreach to hyperscalers was first met with skepticism that we could achieve the price and performance necessary to replace cheap hard drive storage. However, this hyperscaler was open to investigating us further and working together, Pure optimized the design of Purity and our direct flash technology to fit smoothly into their compute and storage architectures and optimize the economics to fit their financial targets. With this win, Pure is entering an exciting new hyperscale market. The design win itself signals that this top four hyperscalers future data centers are approved to use Pure's technology as their data storage standard. We expect early field trial build outs next year with large full production deployments on the order of double digit exabytes expected in calendar 2026. which corresponds to our fiscal 27. We continue in our dialogues with other major hyperscalers as well. Given the significant opportunity that exists for this and other hyperscalers, we anticipate increased investment in our hyperscale line of business over the next year, for which Kevin will provide additional details. I would like to turn now to another significant area of opportunity for Pure, namely artificial intelligence. AI creates several key opportunities for Pure. First, we continue to provide leading-edge, high-performance storage for public and private GPU farms in machine learning and training environments. This past quarter, we were officially certified for the NVIDIA DGX SuperPOD architecture designed to provide turnkey infrastructure for the world's largest training environments. We recently announced a strategic investment with CoreWeave, a specialized GPU cloud provider to better serve our AI customers. Building on our successful existing supercomputing scale deployment serving thousands of GPUs, we partnered with CoreWeave to make pure storage available as a standard option within the CoreWeave dedicated cloud environment. Second, many enterprises are considering inference engines and retrieval augmented generation, or RAG, environments as they look to apply commercial large language models to analyze their proprietary data. This quarter, we introduced the Pure Storage GenAI pod, a set of full-stack solutions which reduce the time, cost, and expertise required to deploy generative AI projects. In the quarter, we signed a deal with a medical device manufacturer who faced multi-million dollar interruptions because their legacy storage technology couldn't support a real-time AI imaging system to catch defective products. With Pure, they can now run AI analytics, capture metadata, and train their machines to identify and prevent defects, significantly improving their operations and their quality assurance. Third, AI continues to drive customers to modernize and break down infrastructure and data silos to enable easier access to data. Unlike with other vendors, Pure customers will not need to manage different storage operating environments to meet their varied AI needs. This quarter, one of the world's leading suppliers to the defense and aerospace industry chose Pure for their AI data storage infrastructure. This Fortune 200 customer chose Pure's platform to support a wide range of training, inference, and fine-tuning, sharing many data sets and storage environments seamlessly across multiple groups and AI activities. The Pure storage platform will be used to develop multiple AI technologies to enhance human capabilities, improve aviation safety, reduce pilot workload, and develop human-centric autonomous solutions. Expanding on the Pure platform and turning to the enterprise, Pure is driving the biggest shift in enterprise storage since Flash. With Pure Fusion, we are transforming enterprise data by virtualizing data management and storage and enabling enterprises to create their own data cloud environment across their global enterprise. Pure Fusion will be available this quarter as a non-disruptive, free upgrade to all existing pure block storage arrays and will be standard in all new pure block products and storage service offerings. Fusion will be extended to our file and object platforms early next year. Our advances in data storage innovation for enterprises and now hyperscalers are transforming the industry. Our experience and technology in optimizing flash storage for enterprises has now enabled us to begin to penetrate the largest hyperscalers with our purity-based direct flash technology at the largest scale. Because of their scale, hyperscalers manage their storage far differently than traditional enterprises. Traditional enterprises manage individual storage arrays, which are dedicated to specific workloads. Storage dedicated to a specific workload cannot be shared with other workloads. Therefore, Data stored for a particular workload is generally inaccessible for other workloads. Traditional enterprise storage architectures and products create data silos. By contrast, hyperscalers only have a small handful of storage environments segmented only by price performance levels, low, medium, and high, for instance. All data from all workloads and customers utilize the same storage environments. This makes data access far easier. Different storage capabilities are enabled by software, not dedicated hardware. Our experience in working with hyperscalers has allowed us to bring the best attributes of data cloud architectures to enterprise data centers with PureFusion version 2.0, which will be released this quarter. Pure now makes it possible for businesses to build their own enterprise data cloud, seamlessly combining on-prem and cloud environments to stay agile and competitive in the age of AI. Pure Fusion automates data management, simplifies operations, and enhances the DevOps developer experience. Fusion empowers enterprises to build their own enterprise data clouds that federates storage across both cloud and on-prem environments, enabling effortless scalability, global accessibility, automated job placement, load balancing, and importantly, AI-ready data access. Fusion allows organizations to define and standardize their own customized global data management classes, inclusive of performance, cost, resiliency, recovery, and location, and to automate delivery of data services to users via API and according to enterprise policy. Fusion fully unifies, automates, and delivers the cloud operating model across the Pure platform on premise and in the cloud. We have also deepened our partnership with major public cloud vendors for enterprise services. With the official preview of the PureFusion powered Pure Storage Cloud for Microsoft Azure VMware Service, or AVS for short, we simplify enterprise migrations from on-premise VMware environments to AVS, enabling independent scaling of storage from Azure compute nodes. This first of its kind solution ensures a smooth, efficient cloud transition with minimal IT disruption. boosting cost efficiency, data resilience, and storage simplicity. Turning now to the market and broader macro environment, we have not seen any meaningful change in the overall landscape, which remains relatively consistent with the muted IT spending and heightened competitive environments we have seen all year. Customers continue to contend with higher software, SaaS, and cloud costs, as well as AI spending uncertainty. placing unanticipated pressure on operating budgets. While I would have liked to have seen more strength from Evergreen One in the quarter, we are confident that we are strongly positioned across all of our segments. The cloud is not a location. It is an operating model enabling self-service, speed, consistent operations, and faster scaling with greater efficiency at lower costs. With Fusion and our data storage platform, we're turning the vision of an enterprise data cloud into a reality for enterprises. Our consistent innovation in our industry has been recognized annually by industry analysts, such as our recent 11th time leader position in the 2024 Gartner Magic Quadrant for primary storage platforms. And our fourth time leader position in the 2024 Magic Quadrant for file and object storage platforms. Energy availability is a global concern and has become a critical risk to hyperscalers operations. Some are even contracting with nuclear power plants to secure a reliable supply of electrical power. Hyperscalers no longer seek low cost power. They're looking for power at any cost. Expanding electricity production cannot add significant capacity for many years. Alternatively, replacing inefficient hard disk drive storage with Pure Direct Flash technology represents one of the largest power sources presently available to hyperscalers. As power limitations increasingly hinder data center growth, Pure Storage is the only company that can simultaneously enable hyperscalers to cost-effectively upgrade their data storage while simultaneously freeing vast amounts of electrical power and data center space for other applications, such as AI. Overall, we are very pleased with our progress on our hyperscale opportunity and with the expansion of our enterprise capabilities. I am personally more excited than ever about Pure's opportunity ahead as we drive a new era in data storage management. With that, I'll pass the mic to Kevin.

Thank you, Charlie. We are pleased with our Q3 financial results, exceeding both our revenue and operating profit guidance. Revenue of $831 million grew 9% year over year, while also delivering strong operating profits of $167 million. Strong demand continues for our eFamily and Flasher AC solutions, enabling customers to move their cost-sensitive workloads to all flash. Additionally, renewals of our Evergreen subscriptions across our install base remained robust, demonstrating strong year-over-year growth. Total contract value, or TCV, sales for our storage-as-a-service offerings during Q3 was $96 million, reaching $253 million for the nine months of FY25. Conversion of larger evergreen one opportunities valued greater than 5 million is consistent based on our expectations that we reduced last quarter. Higher velocity evergreen one pipeline that we define as less than 5 million is strong, though in Q3 we experienced a meaningful increase in these opportunities converting to a traditional sale. This contributed to higher than expected product revenues in Q3 while also resulting in lower than expected TCV sales of Evergreen One. Subscription services annual recurring revenue or ARR grew 22% to 1.57 billion. Total RPO exiting Q3, which includes both subscription services and product orders grew 16% year over year to $2.4 billion. RPO excluding product orders and associated exclusively with our subscription service offerings grew by 17%. RPO growth is impacted by lower than expected TCV sales of our Evergreen One offering. U.S. revenue for Q3 was $562 million, and international revenue was $269 million. Our new customer acquisition grew by 340 customers during Q3, and we continue to serve 62% of the Fortune 500. In Q3, total gross margin remained strong at 71.9%, reflecting strong subscription services gross margin at 77.4% and solid product gross margin at 67.4%. As anticipated, product gross margin was influenced by our strategic efforts to help customers transition cost-sensitive workloads to our eFamily and Flasher AC solutions. This approach, while resulting in a modest decline in product gross margin, underscores our commitment to delivering cost-effective, high-value solutions for our customers across our data storage platform. Looking ahead to Q4, we expect continued strong growth of our eFamily and Flasher AC solutions. resulting in a sequential modest decline in product gross margin similar to the trend observed from Q2 to Q3. Operating profit of $167 million and operating margin of 20.1% during Q3 were positively impacted by revenue overachievement, strong gross margin performance, and continued operating expense discipline. Our headcount increased sequentially by nearly 140 to approximately 5,900 employees. Pure's balance sheet and liquidity is strong, including $1.6 billion in cash and investments at the end of Q3. Cash flow from operations during the quarter was $97 million and reflects a large upfront payment for new software technology that we licensed. Capital expenditures were $62 million and include significant investments to scale operations for our hyperscale opportunities. During Q3, we repurchased 3.6 million shares, returning approximately $182 million to our shareholders. We also paid $55 million of withholding taxes due on employee equity awards. which also offset dilution by approximately 1.1 million shares. We have approximately $213 million remaining on our existing repurchase authorizations. Turning to guidance, we are raising our FY25 revenue expectations to 3.15 billion, representing approximately 11.5% year-over-year growth. The raise to our FY25 revenue expectation is the result of seeing an increase in Evergreen One opportunities under 5 million converting to a traditional sale. While this dynamic increases product revenue expectations, it also reduces FY25 TCV sales growth expectations for our as-a-service offerings. With lower TCV sales growth for our as-a-service offerings we do not expect the growth of our consumption and subscription offerings will have a significant impact on our FY25 revenue growth. As such, we are not updating our FY25 TCV sales guidance for our as-a-service offerings. For Q4, we anticipate revenue of $867 million, reflecting 9.7% year-over-year growth. Now moving to operating profit expectations. Aligned with our increased FY25 revenue guidance, we are also raising our FY25 operating profit expectations to approximately 540 million, reflecting an operating margin of 17%. For Q4, we are guiding operating profit of 135 million and operating margin of 15.6%. Before closing, I'd like to share some preliminary thoughts on our first transformative design win with a top four hyperscaler to help inform your models. The commercial framework for this design win involves licensing our technology and delivering support services. Hardware will not be included as part of our sale to the hyperscaler. We anticipate meaningful revenue contribution and operating margin expansion from this win beginning in FY27. which aligns with our expectations for full-scale production deployments reaching double-digit exabyte capacities by that time. To capitalize on this milestone, we will increase operating investments in FY26 aimed at scaling operations and accelerating our opportunity to deliver PURES differentiated technology for hyperscale storage. When considering these investments, we expect FY26 operating margin will be approximately 17%, consistent with our FY25 operating margin guidance. In closing, as we look ahead, our strategic investments and innovation position Pure as a leader in transforming the data storage landscape. We remain focused on execution while navigating a persistently muted IT spending environment. The growth opportunities ahead are fueled by our advancements across our data storage platform, empowering organizations to unlock greater efficiency, scalability, and resilience in their operations. We are excited about what lies ahead and confident in our ability to drive sustained growth and innovation. With that, I'll turn it back to Paul for Q&A.

Thanks, Kevin. Before we begin the Q&A session, I'll ask you to please 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 as time allows. Operator, let's get started.

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by one again. Again, to ask a question, it is star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Your first question comes from the line of Daryanani of Evercore ISI. Your line is open.

Thanks a lot. Good afternoon, everyone. And congrats on the hyperscale win. I know you folks have been working on this for a while. Could you perhaps just touch on what drove the decision by this hyperscaler to choose pure storage versus building this on their own, given most of these hyperscalers do have a fair amount of resources? And then just in terms of the financial impact, I heard you folks talk about sizing it up a bit. but how big do you think at scale this revenue opportunity or time could be for Pure? Thank you. Thank you, Amit, and good to hear your voice.

As you know, we have been working on this a long time, so there are a number of different factors. At the end of the day, It was our ability to provide a number of different superlatives that got this hyperscaler to believe that our technology was the best fit out of anything they could do. And frankly, given our experience in this area, the fact that we had it ready for them right away and that they wouldn't have to develop it themselves. First, and in no particular order, really unmatched reliability at scale. First of all, we can scale to these exabyte levels. But secondly, our reliability now, we are pressing it to 0.15% failure rate per year. That's unbelievably low. That compares to failure rates five to ten times higher for SSDs and for hard disks. And that reduces overall labor costs and outage costs. Secondly, the massive impact on power savings. We have between a five and 10 to one improvement, or that is less power than hard disk environments. At that level, you see data centers saving perhaps 20% of their total power. That's a huge power source if you think about it. Think of it as a power source rather than power savings. It's power that's then available for them to scale out in other applications such as AI. Accelerated time to value. We can deliver this to them right away. There's no more R&D that really needs to go into, that they need to put into place for this to happen. It also fits their architectures very well. Our software, remember, is a processor-based architecture rather than a SSD-based architecture. which means it fits into their virtualized model of having all of their software operate on a processor. So really it's a much more software-defined model. And then finally, unparalleled price and performance. Getting to the same TCO capabilities as hard disks when everything is considered, and to do so with five or so times the performance of those hard disks, it's just an equation that's really tough to beat. You know, for the economic side of this, you know, let me pass it over to Kevin.

Yeah, thanks, Charlie, and thanks, Amit, for your question. A couple things I'd point to, just a high level for you on the financial front, including what this opportunity potentially could look like at scale. You know, Charlie mentioned that, you know, about 60 to 70 percent of all discs sold today is really driven by the hyperscaler market, and so I think that gives you a good David Wiltshire- data point in terms of what the opportunity looks like for us long term, obviously, that will result for us in terms of significant revenue contributions over time. David Wiltshire- As well as operating margin expansion over the long term as well in the shorter term I think there's a couple considerations I would highlight that I also included in my prepared remarks. In terms of operating margin for FY26, we're expecting that to be flat with this year's guidance that we gave at the beginning of the year of 17%. And that's really to enable funding for scaling operations and accelerating the hyperscale opportunity that's in front of us. We don't expect meaningful revenue contribution from this opportunity until FY27, and that would also include operating margin expansion. And it's also important to note that we are not going to include hardware in our sale to the hyperscaler, and that's an important consideration for us as well. And then lastly, when we're thinking about revenue contribution from this opportunity, and we think about it in relation to data storage capacity purchase, it'd be significantly lower than when compared to, say, a sale of our FlashBlade eSolution. So I think those are some important points for us to be considering.

Thank you, Amit. Next question, please.

Your next question comes from the line of Aaron Rakers of Wells Fargo. Your line is open. Aaron, your line is perhaps on mute.

Yeah, sorry about that, guys. Hopefully you can hear me now. Thanks for taking the question and congrats on the announcement as well. I guess just unpacking a little bit of what was just said there. I guess, Kevin, my question is, you know, the financial attributes of this, it sounds like it's a licensing engagement where are you licensing purity on a capacity deployed basis and also licensing the DFM module and therefore you're not manufacturing those? Just maybe unpack those mechanics of that. And then, you know, as we think about this, do you think that this hyperscale customer, as they move into next-generational data center footprints, that they decide to go 100% flash, or is it a mix of hard drives and flashes? Any thoughts around that would be helpful. Thank you.

Yeah, thank you. So let me start with that. So you're thinking about it the right way. We're effectively licensing both the two parts of the technology, that is the software as well as the hardware design, right? the customer will be buying directly from their integrator. They'll be buying the hardware, if you will, from their integrator. And so you have that correct. So for us, it comes in largely as licensing fees, software fees, and support fees. In terms of the... The way the revenue will roll out is, as we've indicated more in our FY27, next year is the ongoing development by this customer of their next generation data center design, which we're intimately involved in. Now, right now, what we had to prove ourselves in being able to do, being able to prove in at the price performance level of the majority of their storage, which has been true for all the hyperscalers, which is hard disk, but our expectations is that this will be a consistent architecture that they'll use across the vast majority of their storage, including their higher performance storage, which is generally provided by SSDs today.

Thank you, Aaron. Next question, please.

Your next question comes from the line of Howard Ma of Guggenheim Securities. Your line is open.

Great. Thanks for taking the question, and congratulations, guys, on the hyperscaler design win. I believe it's the game changer for Pure and a potential fee change in the industry. So, Charlie and Kevin, I want to ask a little bit more about the size and structure of this deal. So, I guess first is, you know, can you share what the deal length is? And then on the revenue opportunity, if I just do some back-of-the-envelope math, so double-digit exabytes in calendar 2026, even if you just assume If you send 10 cents per gigabyte and maybe half of that is recognized since it's software only, then you get to like $500 million in counter 26, which means that 2025 is something like it could either be zero or close to 500 billion. So any color you can share, assuming those ranges are right on 25 would be helpful. And if I could sneak in a follow-up on margins too, could you just comment if the deal will be gross margin accretive, and what exactly are the investments that you're making on the OPEX line? Thank you.

Yeah, thanks, Howard. Lots of questions embedded in there. Let me first start with the margin, gross margin impact. Look, I think the way we're, and again, we're still pretty high level in terms of what this looks like, and we'll provide more details as we go along. You're thinking about it right in terms of the fact that the majority of the value of the deal will still be hardware. And I think that's important to consider for your models. I think in terms of gross margin, what we've been tracking as company gross margin is a good way to be thinking about it at this point in time. And again, we'll give updates as we go along.

And then duration, it's a multi-year duration, although the volumes are TBD.

Great. Okay. Thank you, Howard. Next question, please.

Your next question comes from line of Pendulum Bora of JP Morgan. Your line is open.

Oh, great. Thanks for taking the question. Congrats on the quarter. Charlie, I wanted to ask you, how does this opportunity change or evolve as you kind of go through your motion of density expansion of the DFM modules? Is this currently based on the 75 terabytes or 150? As you move towards the 300 terabyte, how do you expect the volumes kind of evolve in this particular case?

Yeah, it doesn't specifically depend on any one of these things, although they do know our roadmap, and that played a big role in their selection of us. They understand that we tend to lead in the density game. I would say the bulk of storage... for most of the hyperscalers and certainly this one tends to be on the low cost side in terms of gigabytes and therefore having a solution that stays at the forefront of cost is very important to them. At the same time, they are impressed that they can also utilize exactly the same technology for higher performance workload environments and that'll be based on the lower density DFMs. So the real magic here is that it's one technology at almost every level of price performance. And if you're a hyperscaler, having one technology that satisfies all the different levels of what you need to run the operation is a big positive.

Yeah, and I'll just add one thing, Pendulum. As Charlie mentioned earlier in the prepared remarks, We've been working with hyperscalers to drive this technology into disk replacement for some time. I would say that it was really the introduction of the 75 terabyte modules that really got this particular customer to really pay attention. And as we look forward, as we look at the 150 terabyte generation we're shipping now and our roadmap ahead, each step along that path just makes a solution that much more compelling from really on the basis of all the superlatives that Charlie outlined earlier, including cost.

Thank you, Pendulum. Next question, please.

Your next question comes from the line of Mike Sikos of Needham & Company. Your line is open.

Hey, team. This is Matt Calitrione for Mike Sikos over at Needham. Thanks for taking our question. I wanted to clarify, is the commentary around Evergreen subscription, TCV, and revenue a reiteration of previous expectations? And is there any directional color you can provide on how you're expecting subscription revenue to trend as a percentage of the overall mix?

Yeah, it's a great question, Matt. And yeah, that's correct. It's really a shift that we saw this quarter, in particular with our Evergreen One higher velocity opportunities, where we saw those opportunities converting to a traditional sale, meaning a CapEx sale. And so what that meant is obviously we saw higher product revenue And that's really what drove our guide increase for the year.

Yeah. Mac, let me expand on this a little bit. I think what we're seeing in the market is that there's been increased pressure on customer OpEx budgets due to the increase in software costs, unexpected increase that came in software and SaaS costs this year, as well as AI uncertainty. And so we're seeing more customers than we had seen in the past who had been considering a storage as a service offering, which obviously comes out of an OPEX budget, moving then to a standard product purchase, which comes out of a CAPEX budget, which has not been under such pressure this year. You know, this market is still evolving. It's still in its early phases. We think this is a temporary phenomenon. You know, we would expect just because of the superior market uh, economics and the superior, uh, uh, capabilities that we bring in a storage as a service offering that we'll, we'll start to see growth again. But I think this has been a temporary phenomenon due to the unexpected high OPEX expenditures by, by organizations this past year.

Yeah. And I think that's actually really important as well, right? That, uh, when we think about selling data storage technology as a service, it's still early in its maturity. And with it, there's a tendency to default to what's easier, and that's, frankly, purchasing technology through a CapEx sale or traditional sale.

Thank you, Matt. Next question, please.

Your next question comes from the line of Simon Leopold of Raymond James. Your line is open.

Thank you. I wanted to check on this, the CoreWeave announcement that you released last month. So, Obviously, it sounds like that's not the big hyperscale opportunity. So maybe you could help us out in terms of describing the nature of that particular win and some of the color behind the use case and that opportunity. Thank you.

Yeah, Simon, this is Rob. I'll take that. Absolutely, you know, we're very excited to expand our partnership with Corweave, both with the strategic investment we made as well as the commercial partnership, which we announced, which will bring and make available pure storage technology to all of their customers in the CoreWeave dedicated cloud. As we mentioned in the release, we've been working with CoreWeave, who is the leading GPU cloud provider for over the last year in standing up one of the largest scale GPU storage deployments for a large joint customer. And building on the success of that environment, this latest partnership really expands that, takes those learnings, and makes that proven design more broadly available for our joint customers. So really excited to get that announced and already seeing early signs of interest and demand from the customer base.

And Simon, just so there's no confusion, we had announced a double-digit GPU cloud win about two quarters ago, I believe. It was Q4 three quarters ago. That was CoreWeave. We were not at that point in time able to use their name, but that was the deal. That's the infrastructure that's in place there now.

And Simon, one last thing. Yes, CoreWeave is not the top four hyperscaler that we have been discussing today.

Thank you, Simon. Next question, please.

Your next question comes from the line of Krish Sankar of TD Cowan. Your line is open.

Hi, thanks for taking the question. And Charlie and Kevin, congrats on the results on this exciting hyperscale event. Charlie, you talked about double-digit exabytes in calendar 2026. Is this based on the agreement in place or is that your estimate for how big this opportunity can scale? And also on the license, is it a one-time license or is it annually recurring and whether it's tied to exabytes or not? Thank you.

So that's our expectations for calendar 2026 based on coordination with the customer, but all sales, pretty much all sales, you know, are TBD. The design win is that we are the plan of record. However, just to be clear, they're designing around us. We're the plan of record for the storage in their next generation design. The licensing. Go ahead, Kevin.

Yeah, the licensing for the direct flash technology and purity software is will really be tied to the capacity that we'll be shipping.

Thank you, Krish. Next question, please.

Your next question comes from the line of Mehdi Hosseini of Susquehanna. Your line is open.

Yes. Charlie, in order to understand your reference to FY27 and the hyperscaler wind that would help you with double digit exit by shipment, can you help us understand what is the estimated exit by shipment in the current fiscal year, fiscal year 25?

No substantial shipments other than test systems this year.

Thank you, Mehdi. Next question, please.

Your next question comes from the line of Param Singh of Oppenheimer. Your line is open.

Yeah, thank you for taking my question. So really want to dive into your evergreen one opportunity. I know you mentioned the total in a more higher velocity sales move back to on prem direct sales. But now that you have more hyperscale opportunities coming in addition to the one you announced today, do you think customers might be more likely to move directly to a hyperscale with your purity platform and your DTF versus going for an evergreen one type of sale? Thank you.

Yeah, I'll take that. It's an interesting question, but I think the answer is mostly no. And the reason is the following. The infrastructure that we'll be selling to this hyperscaler, and if we were able to win others, similar hyperscalers, is the underlying storage technology, not the storage services that the customer offers to their customers. Those storage services are based on their own software. and therefore are some of the same software services that they offer today. What does that mean? Largely, enterprises move to the cloud because of considerations around their application deployment, much less around decisions around storage. And so we think those decisions are largely divorced from where they choose to put their data. So, to the extent that they decide to keep their applications on prem that's that's where we generally sell our standard product today. And when they decide to keep it on prem we give them the alternative of of using storage as a service that operates both on brand and in the cloud, so I really see those as two very separate things and I don't think that are offering. of storage for hyperscalers using our direct flash technology will dramatically affect enterprise decisions as to where to put their storage. On the flip side, I do think that we can bring some of the best attributes of cloud storage to the enterprise with the other announcement we made today, which is that we've released PureFusion for download this quarter. And what that allows companies to do is build their own enterprise data cloud that consists both of their on-prem storage as well as as storage that they put on our software in the cloud. And this allows them to operate very much in the same way that hyperscalers operate, which is storage as a service, storage as a cloud of data, rather than as individual arrays. So I see them as building upon one another, but I don't necessarily see our sales to the hyperscaler for their foundational storage as making a big difference in enterprise decisions as to where they place their applications.

Thank you, Param. Next question, please.

Your next question comes from the line of a CM merchant of Citi. Your line is open.

Great. Thank you for taking my question and congrats as well on the hyperscaler announcement. The evergreen TCV, you know, it appears that most of the customers are transitioning more to a product sale. And you mentioned this was probably a temporary phenomena given pressures and OPEX budgets. As you look at the pipeline of opportunity ahead of you, and as you look into calendar 25, You know, if you can help us understand what your expectations are for this evergreen offering and evergreen services, subscription services to ramp up again to double-digit growth. Thank you.

Yeah, I appreciate the question. And a couple of thoughts here is, look, when we look at the dynamic of our evergreen one conversions, over 5 million, there's really no change to what we've talked about. from last quarter. That was actually quite consistent with our expectations, again, that we spent some time walking through with our investors last quarter. Where the dynamic has shifted a bit for us is on the higher velocity evergreen one opportunities, and this would be $5 million or less. And that's where we saw a meaningful tick up, if you will, on conversions to a traditional sale. And again, we've talked about that looks to be not sustaining, especially given our industry-leading Evergreen One service offering. But specific to thinking and guiding or talking about next year, I want to wait to see how Q4 plays out and then have an update for you all next quarter.

Thank you, Asya. Next question, please.

James Fish of Piper Sandler. Your line is open.

Hey, guys. Just I'll echo my congrats on the cloud one as well. I did want to ask around pipeline first on the hyperscaler cloud opportunity. You guys keep alluding to potential to get other hyperscalers based on your comments. So, you know, what are you seeing with this similar licensing potential to other clouds in terms of conversations you have going on with, let's say, the top 10 cloud and AI providers? And second, maybe on the enterprise side, is the calendar 25 setting up to be a larger refresh year for storage or does that evergreen model uh kind of mute some of the uh impact thanks guys yeah actually i'm going to turn to rob our cto on the hyperscaler discussion rob yeah absolutely so uh you know as we said our our discussions with uh multiple hyperscalers uh continue to progress and

You know, I would say they progress because of the attributes which Charlie highlighted earlier are, you know, the reliability that's unmatched that we can deliver, the significant power savings, you know, certainly the performance envelope we can deliver, all driving TCO savings. I think those are the main drivers, more so than the specifics of the financial and commercial arrangement. But those discussions continue with multiple additional prospects. I do think that today's announcement, you know, with both our lead customer in this space, as well as, you know, our strategic collaboration with Kioxia to go and enable broader penetration of our flash technology into the hyperscalers, will serve to accelerate that. So we're very excited about the potential ahead of us. At the same time, as we mentioned, the design win is a very, very important milestone that puts us in the plan of record with this hyperscaler, but there's clearly more work to be done. And so we'll be working very, very closely with this hyperscaler over the next year as they continue to progress through typical move-for-production stages, as they ramp into ultimately what we're expecting to be double-digit exabyte capacities in the fiscal 27. Thank you.

As far as the expectations around enterprise, I believe your question really is, do we believe that there's demand being pent up because of a muted IT market. And I do tend to believe that there's some pent-up demand building. But, you know, we'll have to see what that looks like as we get into next year.

Thank you, Fish. Next question, please.

Your next question comes from the line of Wamsi Mohan of America. Your line is open.

Yes, thank you. Going back to the hyperscaler opportunity, Kevin, your comments around the revenue contribution in relation to data storage capacity purchases would be significantly lower. Is that just a lack of hardware as part of the mix, or should we think that the pricing of the software itself is also somewhat lower on a per-exabyte basis? And just to clarify, is the double-digit exabytes in calendar 26, is that from this one hyperscaler, or does that make additional wins in the future? Thank you.

Yeah, thanks, Wamsi. The double digit exabytes in FY27 relates to this hyperscaler design win itself and our expectations associated with that win. And what was your second, your first part of that question?

It's just that your comment on the relatively lower revenue contribution compared to a storage capacity sale. Is that just because of the lack of hardware being sold in the solution or is it that the pricing of the software itself is somewhat different from the way that you would traditionally be selling?

Yeah, thanks for the clarification. And it really is going to be that the primary driver of this will be the fact that hardware is excluded from our sale, and that would be really the primary driver. Now, when you also think about scale and order of magnitude, pricing will play into it, but it's secondary to the fact that hardware is excluded.

Thank you, Wamsi. Next question, please.

Next question comes from Mina Marshall of Morgan Stanley. Your line is open.

Great, thanks. Just wanted to, you know, on the volume being TBD, but kind of having a sense of what the architecture will look like. Is the TBD in that you don't know how fast they will roll out this new architecture, but you do know kind of what your percentage of that data center will be? Or just kind of what are still the moving pieces as you kind of centralize in on kind of what the true volumes will be in fiscal 27? Thanks.

Yeah, thank you, Mita. It's largely, you know, the exact schedule of the data center build-outs. It's a little bit of an unknown. I would say exactly what percentage we have of the data center is also a little bit of unknown, although we know that we have qualified for a very, very large portion of it. But we're shooting for even more. So I would say, though, that for the most part it's about schedule, which we're not in control of. more than anything else. They still have a lot of design, if you will, on their part for other components, including ours, but for many other components of their next generation design. Thank you, Mita.

Next question, please.

Your next question comes from the line of Eric Martinezzi of Lake Street Capital. Your line is open.

Yeah, I wanted to follow up on the change in the Keoxia relationship, given your comment about the hardware being excluded, I would think the hyperscaler would then be working directly with Kioxia. What's changed about that relationship? Because you talk about, hey, more manufacturing capacity and more cutting edge technology. It would seem like you guys are being disintermediated.

Yeah, thanks for the question. No, we're not being just intermediated. It is still our relationship with all of the NAND vendors. We're responsible for all the qualification. We're responsible for the design. We will also be responsible for the design of the direct flash modules themselves. So we're very much in control. The hyperscaler uses an integrator. It'll be the integrator that purchases the hardware modules and provides it to the hyperscaler. Think of it as a meat-in-the-channel model is probably the best way to think about it.

You know, I would also say that this is, you know, it's an expansion of a longstanding relationship that goes well beyond, you know, just commercial and capacity. You know, we've had a great collaboration with Keoxia in terms of technology roadmaps and technology design, and that's a key part of this collaboration as well, which is to bring you know, co-designed, if you will, as Charlie mentioned, co-designed direct flash technology with their bleeding edge NAND parts to this hyperscaler customer together.

Thank you, Eric. Next question, please.

Your next question comes from the line of Tim Long of Barclays. Your line is open.

Thank you. Just wanted to ask on the gross margin front. I think the comment was the sequential decline in Q4 should be similar to Q3. You could just clarify that. And then looking out on this line, it seems like the mix might steadily be shifting to E and flash ray C series. Is that something that we would expect on the product and hardware side to continue? And if you could make some comments on competition now that more of the competitive set has QLC-based products in their portfolio? Is that piece of the market getting more competitive? Thank you.

Tim, out of respect for some who have gotten back in line with their second question, we're going to maybe try to take one or two of your questions, not all three.

Yeah, Tim, I'll hit the product gross margin and the sequential decline similar to what we saw in Q2. to Q3 and what we're expecting now to Q4. And that really is driven through our strategy of enabling our customers to transition their cost-sensitive workloads to our e-family and Flasher AC solutions. And it's really all about the strong growth we're seeing across these solutions. Now, there is less price elasticity for these solutions, given the price sensitivity of the workloads. So the combination of the increased growth of these solutions and the reduced price elasticity is putting pressure on the product gross margins that you're seeing.

Thank you, Tim. Next question, please.

Your next question comes from the line of David Vogt of UBS. Your line is open.

Great. Thanks, guys, for squeezing me in. So maybe a question, Kevin, for you on margins next year. You talked about investing in the businesses to support the rollout in calendar year 26. And you also mentioned gross margins would be relatively comparable in your fiscal 26 versus fiscal 25. Can you kind of help us understand sort of where the investment dollars are going? Because you've been aggressively investing for the last couple of years. Should we expect the same level of growth in OPEX? Is that kind of the framework? If I think about 24 into 25, should it look similarly in 26? Thank you.

Yeah, great question. And I'll spend some more time next quarter going into more details of our expectations. But what I did communicate is the fact that we believe our operating margin of 17%, and that's consistent with what we communicated for this year, will apply for next year as well. And when we think about the main drivers of these investments, I mean, it includes focusing acceleration of our density roadmap with our flat direct flash technology and expanding our supply chain capabilities. qualifying additional NAND suppliers and manufacturing sites, and really integration of our technology with the hyperscaler hardware specifications. And that's where we think the significant incremental investments will come from. And then when we think about it for this year, obviously we're investing heavily as well from a CapEx perspective. And that's why, you know, for the full year of FY25, we're thinking our free cash flow margin will be slightly below, one to two points below our operating margin.

Thank you, David. We're going to take our last question from Mehdi, who got back in line for his second question. Thank you very much, Mehdi, for getting back into the queue. So this will be our last question.

Your last question comes from Mehdi Hosseini of Susquehanna. Your line is open.

Yes. Charlie, what is the estimated exit by shibboleth in FY25?

It's a little bit hard to predict. It's going to be very low. It's a little bit hard to say because, as I said, it's mostly test environments that we're going into, pre-production environments. So maybe one, maybe a couple, something along those lines.

Thank you, Matty. Before we conclude, Charlie, I think you had some Final comments.

Yeah, I want to thank you all for joining us on today's earnings call. The design win underscores, I think, the critical role that Pure is going to be playing in addressing high data growth and energy demands of hyperscalers. They're facing very fierce competition for power and even turning to very unique new power sources. But these power sources are going to take a long time to come online. With power constraints continuing to be a huge issue for them, this is one of the best ways for them to free up dramatic amounts of power on the order of 20% of all the power that they use today and make it available for all of the growth that they have in front of them while improving the overall performance and capabilities of their existing storage. I want to thank once again our customers, our employees, our partners, our investors, and our suppliers. We deeply appreciate all of their continued support and commitment. We look forward to speaking to you again next year. Happy holidays, everyone.

That concludes the Pure Storage third quarter fiscal 2025 financial results conference call. Thank you for your participation. You may now disconnect your line.