Pure Storage, Inc.

of strength that we've seen throughout the year. If you recall, we similarly outperformed in Q2 and raised the outlook and guidance for the full year. Underlying that really, I would say, is broad-based strength that we're seeing across the enterprise business, across some of the newer product areas, such as Portworx, we talked a bit about on the call. And then certainly we had a discussion about starting to or really surpassing our previously anticipated full year shipments to the hyperscalers. So a really strong quarter and really from what we see and flowing through to the outlook for the rest of the year, I continue to see that momentum building. I'd say that in the quarter and really the discussion that we had in the earnings, Really two elements, I would say that, well, maybe three elements that pervaded those discussions. One is commentary that we put out in terms of, hey, how to think about the incremental financial benefits accruing to us in terms of the hyperscaler business. Second was, hey, as we expand our discussions with our existing hyperscaler customer, other potential hyperscaler environments, really looking at, hey, what's the range and optionality in terms of additional business models that we can introduce? And then third, as you'd imagine, I'm sure you have questions on, a lot of discussion about commodities and kind of the supply chain tightness. And what I'd say is, and maybe what a lot of the discussions we've had kind of post the call, what I'd say is on the incremental kind of spending commentary, You know, really what we're trying to say is, look, as the hyperscaler revenues come through, we see a ton of opportunity across the business, whether it's in the enterprise, whether it's, you know, going after newer markets, really, you know, going after the neoclouds, the AI market with FlashBlade EXA, with Vigor, certainly the hyperscalers. We see opportunities across the board to continue to invest for growth, and we intend to do that to a degree. Um, but you know, we also are laser focused on continuing to grow operating profit, uh, as well as, uh, to a degree our operating margin expansion. And I think that that, you know, that that's been a piece of the discussion, uh, that we've had post, uh, the earnings. Um, you know, and the, I would say the other thing that, uh, you know, would seek to clarify on, uh, the additional business models, right. Is, um, as you recall, our existing, uh, you know, the existing business model with, uh, our, our first customer, really has been framed around primarily a software license or royalty revenue associated with the shipments and deployment of the technology. We're not providing the customer any of the hardware components. Really, it's just a software royalty. As we discuss other environments of different price performance tiers with a customer, as we discuss engagements with other potential hyperscalers that we're in discussions with, what's become clear is, hey, there's a range of options. Just like we tailor our technology solution to fit into their technology environment, we have the optionality to tailor the business model and the mechanism for procurement into however it fits the hyperscaler best. But to be clear, we don't want to be in a position, it's not our intention to be in a position to be sourcing the full, all the NAND for the hyperscalers, but we do see a range of options premature to get into specifics. We see a range of options that really might over time take the gross margin profile associated with a hyperscaler revenue stream a bit closer to blended company averages, but we're not going to take the whole kind of NAND on the bomb.

Got it. Now, that's a great overview and a lot to unpack there. So as you can imagine, in the last day and a half or so, we've been getting a lot of questions on that relationship that you just mentioned. So maybe we could start about what happened, obviously you outperformed on Exabyte deployments. Can you help us understand how the customer in this case is thinking about that roadmap with you? I would imagine that deal that you currently announced previously is unchanged from a royalty perspective and a roadmap from an Exabyte perspective. Is that a fair characterization of that current relationship or is there an opportunity to expand it to different models or different tiers of storage or use cases as you just described? Or is that more targeted towards other potential relationships with other hyperscaler environments?

Yeah, so really two pieces in there, right? Hey, how's the relationship going? What is the current environment that we're serving? How does that grow? And then second, how does the new business model commentary layer into that? So let me hit those in two parts. So the relationship is going great. As we previously discussed, we're going to be a bit more circumspect about quantitative disclosure about shipments because of the wishes of the customer. But we had previously indicated coming into the year that we had expected and really contemplated in our guidance one to two exabytes of shipment for the year. We've surpassed that within Q3. And so we felt it important to update our financial community on that milestone check. We've also said, hey, shipments continue. And our expectations that we've previously put out, we're not updating those. We're not changing those one way or the other. But the relationship goes great and look, as we have discussed before, the way that hyperscalers in general design and deploy and ramp these types of environments, they go through a long design process to inclusive of storage, compute, networking, HVAC systems, the whole nine yards. They build a template and once that template is defined for some period of time for a generation, if you will, as they have additional data center needs, as they have needs to decommission old data centers and refresh them, they'll go and deploy that template. And so that's going well, and that's really the driver for scale. Now, on the second part of the question, business models, as we are discussing, as that first deployment is ramping well, and we've given the update on that, We are working with them to look at qualifying the technology into other price performance tiers. And as part of those discussions in the different environments, which, as you might imagine, involve different economics, and discussions with other hyperscalers, that's really the catalyst for saying, hey, maybe there are other business models that might be more appropriate in those environments.

And was that a direct... comment towards the existing customer that you have or was that relationship or that changing business model or the devolving business model originated from potentially a second or third for both for multiple customers got it okay and then when you think about the price performance dynamic that you just referenced like what specifically i know you're not going to get into super nitty gritty details until there's a deal announced but when i look at the original deal with your first hyperscaler customer you know, it makes sense. You bring to bear, you know, pretty significant technological IP with DFM makes a ton of sense. Um, what are they looking at that you can bring to bear outside of that? I mean, going on buying run and like pretty, pretty basic skillset. So is it that the customer doesn't want to go in and actually manage those relationships with the memory providers? Like what, what was sort of the Genesis, if you could speak to that or the origination of why the model might change at different price performance tiers?

Um, well, I, I think, you know, it just starts with the overall, uh, economics of the solution, regardless of, you know, the piece parts, right? If you, you'd imagine at a higher performance tier, the, you know, um, the technical makeup, the solution is going to change. We're going to use smaller drives, for example, uh, configured for higher performance, they might fit into higher performance servers. So, you know, the economics of just the unit economics of that solution, um, that, that configuration are different. And when you look at the moving parts there, and there's a lot of moving pieces, not literally moving pieces, you understand what I'm saying? Figuratively. Figuratively. When you kind of net all that out, that kind of opened the door to saying, hey, maybe there's another way to kind of structure this that makes sense for us, makes sense for the counterparty.

Okay, at the risk of you shutting me down. So I think Tarek said on the call... and you just reiterated, so when you think about your product gross margins going forward, it's more in line with how the business has been operated historically from, you know, don't extrapolate a royalty rate from a product gross margin perspective. Does that mean that sort of these new structural relationships are contemplated in sort of the preliminary comments that you made regarding 27 at this point? And if that's the case, then does that suggest that there's incremental either revenue from the existing customer or a second customer that could be in fiscal 27 from these types of relationships?

Yeah, so look, we're premature to guide specific, you know, kind of puts and takes and incremental pieces to fiscal 27 revenue. But what I would say is, yeah, the reason we brought the additional business models into the dialogue now is, yeah, we are contemplating these different structures moving forward in a number of ways. We are contemplating potentially having different business models tailored to different hyperscalers and environments. But overall, as we deploy and introduce these new business models, we would expect the gross margin profile associated with the hyperscaler streams to approach a bit more closer to blended company averages from, right now they're very high, 90 plus percent. And that is kind of contemplated. And yes, I mean, if you just do the math, right, that would imply, you know, there's just naturally a tradeoff in there between gross margin and top line.

And so we got this question a lot yesterday in just random conversations. But when you think about the competitive advantage that Pure has brought to the table, what, in your view, from a technological perspective, outside of the DFM capability, kind of is extrapolated to future hyperscaler deals? What are they seeing that you can do that your competitors can't do beyond DFM at this point?

What I'd say is the major differentiator, the major pull is the direct flash technology. It does encompass the direct flash module, the physical module itself, but really the lion's share of that IP is in the direct flash software that makes the module work. and my hardware guys will give me a hard time for saying this, but our secret sauce in that technology is not some magic in how we solder the chips to the PCB. It's the fact that we have the software to then go make that module highly reliable, capable of delivering five, 10 times the densities of hard disk drives and SSDs, and performance at the same time. The challenge is, with SSDs, you can't have all three. You can build denser SSDs, but you trade off reliability and performance. So that really, at the end of the day, is the driver of interest because, well, what does that get the hyperscaler? Yeah, it's cool technology, but what it gets the hyperscaler is to say, hey, well, now I can serve the data needs that I foresee, with the performance levels that they require in a much smaller footprint, with much less surrounding equipment, which then consumes less space, less power, which is in short supply, and also has a greater increased reliability. If I can ship a five times denser solution, there's five times less surrounding equipment, that's five times fewer things that can fail. And so that really, at the end of the day, is what the hyperscalers are interested in. And then when they kind of tease it back and say, well, how do I get there? The direct flash technology is a critical enabler of that.

Got it. And maybe just one final question on this topic to start. When you think about the timeline from conversation, project design, customer testing, I think in the past you have said the original DFM win with the hyperscaler was measured in 12 to 18 months, correct me if I'm misremembering. Given the progress that you've made to date with this existing customer, does that allow you to compress the timeline with future relationships, potential relationships? And could there be an opportunity to kind of obviously accelerate top line growth from these potential relationships because of all the engineering work, the design work that has been done and tested previously?

Yes and no. So yes, I think there are definitely phases of the process between knocking on the front door for the first time and booking revenue. There are phases of those processes that absolutely will accelerate. But then there are also gates and phases of the process that we have very little control over. And let me unpack that a little bit. Um, a lot of the upfront work we did with the first customer was, uh, really convincing of the technology, uh, you know, in, um, you know, TCO analysis and really, you know, in, in spreadsheet and PowerPoint form, if you will. Um, then you kind of go to, okay, great. Uh, this is promising. Let me go kick the tires. Let me go do some light technology assessment. Okay. Yes, it behaves the way I think it does. Okay. Now let's go understand how would I actually integrate this series of discussions? iterative design to go do that. Oh, we think we have a way forward. Let me go proof of concept that. Let me go test that, et cetera, et cetera. And then that then joins into all of their other work streams to go figure out that design. Not just storage, but again, compute, networking, rack design, power, HVAC. And then that whole thing's gotta go then fit into their data center design cycle. And so to the degree that we've progressed with the first hyperscaler and at scale now, they've been public to a degree about the solution, this is a small community, everybody knows each other, that allows us to make progress very rapidly through some of those initial stages. And I think the integration work that we did with this first customer, what we have seen in subsequent conversations with other firms is hey, the nature of this integration and the problem, the way that the hyperscalers are solving the problems at the layer above us are substantially very similar. And so, you know, our belief is that, you know, 80, 90% of that core IP can be reusable and transportable into the other hyperscale environments. There's always going to be fit and finish things like, you know, one firm is going to want to monitor systems a slightly different way than another. And you know, the way that they install and manage this fit and finish work to be sure. But the core IP we think is very transformative.

Maybe just changing gears for a minute to the traditional core business. Obviously you've been doing relatively well over the last several quarters. It feels like the storage market and key verticals, particularly in markets that you serve, maybe less so in the government, coming back a little bit stronger than maybe people thought. Can you talk to what you're seeing in that market ahead of, we'll talk about commodity prices in a second, But what you're seeing in that market today from a demand perspective, I know we talked about it briefly the other day, but anything to call out from a vertical perspective, what customers are looking for solutions, what's driving sort of the traditional storage market, you know, demand strength that you're seeing today?

Yeah, so I'm not sure I can call it specific verticals. We are seeing pretty broad-based strength as we look back over the last couple of quarters. I would say in terms of customer segments, specifically in enterprise and kind of our most strategic pursuits, and part of that may be market and kind of nature and shape of demand. I think a large part of that is also our own focus. We've been very steadfastly focused on both technology, portfolio, enterprise data cloud, the targeting of our sales force. A whole number of things have really been focused on, hey, how do we go drive greater wallet penetration, wallet share penetration in large enterprise? And we're really starting to see those wheels turn. I think you also do have some market forces that are driving specific demand in workload areas. We call that one on the call, which is modern virtualization. There's been some acquisition activity in the industry that have caused a lot of customers to want to look for virtualization options. And what we are seeing is the largest customers, big banks, Fortune 50 type customers, are using this as an opportunity to say, as I look for virtualization alternatives, instead of going to an alternate virtualization provider, maybe this is the time to go to open source, go to Kubernetes, use that to go manage my virtualization. And when they go down that road, they pretty quickly discover that Kubernetes plus virtualization pretty much equals Portworx. And so we are seeing that, and that's one area where I think the shape and nature of demand has shifted a little bit. I think it's maybe early to call a trend, but I personally have been involved in more conversations this year than in previous years with the enterprise around selective repatriation. Okay, interesting. Not broad-based, right? But some signs. But some signs, right? Selective meaning... Hey, there's this workload. We had put it in the cloud, but we, for a variety of reasons, now believe we want to bring that back for on-prem. But other than that, I wouldn't call out specific verticals. It is broad-based strength. And our focus has been, and what we're seeing come through the business, is, I would say, biased towards the enterprise.

And since you mentioned it, for maybe those less familiar, what are you seeing... from a customer perspective with regards to Enterprise Data Cloud, right? Obviously, that's a differentiator for you. And that's been, you know, a relatively recent, you know, several quarters kind of dynamic. But what are you seeing from customers that is allowing you to win with that particular offering versus what the competitors are doing in the marketplace?

Well, so... Yeah, let me touch a little bit on why we have gone down this road and why we see this as such a strong strategic pillar and then what we're seeing from customers. We've been for many years saying, hey, we provide tremendous advantages with our consolidated technology, one software approach, one hardware approach. That sameness right across the portfolio is one way to help customers break down silos. Historically, customers have a sprawling data footprint, they have point solutions for every need, and historically, each point solution may be from a different vendor, it's a different product, each thing has to be managed separately, it's a lot of operational work. We've had a tremendous advantage by having a sameness of our one software base, one hardware technology, So a customer, as they buy more Pure, has one thing to go and learn and manage. They don't have incremental work to go do. That's a critical driver of our as-a-service offerings. Well, if we take that one step further and we say, all right, how do we then extend that operational simplicity to customers? That's what takes us down the Pure Fusion and Enterprise Data Cloud route. And customer feedback has been very, very strong. Customers want very performant, capable, reliable data storage. They don't want to spend a ton of time managing it. And that's what really Pure Fusion and Enterprise Data Cloud allows. Where we're headed with that is to not just automate data storage, but also the data management associated with that. The other thing, and I touched on this a little bit on the conference call, the other thing we are seeing is it's allowing us now to have very meaningful conversations with different personas within The customer base. Historically, storage has been bought and sold by subject matter experts, a storage administrator, maybe a director, senior director, VP of IT. But it hasn't typically been a C-suite conversation. It's kind of the plumbing, so to speak. Well, now with Enterprise Data Cloud, what we can offer in terms of data set management, governance, security, and really just all in view of where your data assets sit, it's actually driving us into much more meaningful and strategic conversations with the CIOs, the CTOs, the CISOs. And again, taking us back to our focus on penetrating with greater wallet share the largest enterprises, That really just helps us have a much more strategic approach as opposed to, oh, you know, you've got this workload in the corner.

Let's go refresh that. Got it. That's helpful. Obviously, top of mind, everyone here, you mentioned earlier, commodity supply chain. Obviously, the company's been through cycles. The company has, you know, extensive supply chain reach and expertise. And I think Charlie on the call touched on it or maybe Tarek touched on it. You know how to price. But maybe just as a refresher, you know, in these types of cycles, this one may be a little bit different. you know, how do you think about your price-value relationship for customers? What do customers expect? Kind of what is your initial sort of reaction to the higher DRAM, NAM prices? And ultimately, how do you think about the economic impact on, let's say, not just Pure, but ultimately, how do you think this plays out from an industry perspective, if you have a perspective?

Yeah, no, absolutely. I mean, I would say in some ways the cycle, you know, Maybe different, but it's like every time we think it's different. There are a lot of similarities. Let me start by saying I've been with the firm over 12 years. I talk to a lot of customers. I have never once been in a customer conversation where a customer says, oh, commodity prices are doing this. I'm not buying. I want this on my system price. That connection just really isn't there. What we do see in terms of pricing dynamics is, look, we price in a competitive market. We price at a premium to our competition. that premium reflects what we and really the market values are additional capabilities driven by software. And we typically price it, call it 15 point premium to the market. A lot of our competition are cost plus players. And what we typically see is when we're competing head to head on our flash solutions and their SSD based flash solutions, a rising commodity tide in terms of prices affects everybody. And what we typically see is that reduces my competitor's ability to aggressively price the solution, which then allows me to be more circumspect and disciplined on my discounting. And so really what we typically see is if commodity prices, non-commodity prices rise, the competitive prices will kind of, street prices will rise to pass that through. And we can be more disciplined in our discounting and a little bit more strategic in where we want to go win deals. The backdrop of that is because of our technology, because of our supply chain team, because of a number of things, we have structural and sustained advantages in all commodity markets. Because we use direct flash, because we don't source the same commodities they do. They're slightly different. We source NAND chips. They source transformed SSDs. They're slightly different. different ends of the same pool, so to speak. Those convey significant advantages. I mean, as an example, you take one of our smaller drives we ship, 37 and 1 half terabytes. If you take that drive apart, you take the chips, and you take a commercially available 30 terabyte SSD, take that apart, you'll see the same number of chips, the same chips potentially. so why is it we can deliver 22, 23% more, um, you know, usable storage out of that it's because of the direct flash software. And so then when you take that into the commodity, you know, when you think about the cost of bomb, right, um, that's one example of how, no matter what the commodity prices and markets are doing, we have structural advantages built in. Um, and yeah, so connecting this back to the commentary and the call, what we typically see is when we're competing flash to flash, we typically see the market prices adjust to meet those commodity prices. And therefore, we typically don't see a material impact on the product gross margins.

Great. And I think what we've thought in the past, and correct me if this is going to be different this cycle, customers allocate their storage budget to reflect the price. What I mean by that is they have a dollar amount or a fixed amount of storage that they're looking to buy for a particular workload or use case. Is that how you think this plays out, where you're not going to see people spending, to your point, less dollars on storage? It may just look differently, maybe smaller capacity, a slightly different storage configuration, if you will. Is that fair?

Yeah. I mean, I think in the, you know, you can take things to the extremes, right? But I think in the short to medium term and within a reasonable regime, I think that is fair. I think they buy to their needs. It's relatively inelastic. Again, you take it to extremes and things break down.

And then just maybe from a timing perspective, obviously you're not a huge inventory build company. I know inventory was up a little bit, but not material. How should investors think about your ability to manage the supply chain from a duration perspective, given where NAND prices are and DRAM? So if we look out, let's say, I know you're not giving a guide for fiscal 27, but given sort of your purchase commitment, dynamics, inventory, your relationship strategically, given where we are, let's say, from a spot price perspective, how do you feel about the duration of your quote-unquote protection going into next year?

So... What I'd say is we feel really good about where we sit. And I'll go back to what gives us confidence is a number of things, you outlined them, but also a very significant track record of being able to navigate tricky supply chain situations and markets. I think, again, I'll go back to structural advantages we have. One of the other advantages we have, and this came out in the post-COVID tightness, is because we share our technology across the entire portfolio, we have ability to steer demand. And we have higher performance price value offerings. We have lower ones. So we have a lot of flexibility in terms of how we manage our inventory and our BOM. And we have a crack team kind of at the helm. We typically don't get on earnings calls and talk about strategic buys because we buy all the time and every buy we do is strategic.

Just in the final minute or so that we have left, Maybe I want to give the mic to you. What do you focus on? What are you strategically interested in? What do you think the right takeaways are going into next year? I know there's a degree of maybe some confusion on what the market's going to look like, which we touched on from a commodity perspective, but what are the kind of takeaways that you think may be misunderstood about the pure story going forward into next year?

Thank you for that. I think the I think the thing that's probably least understood is how many facets of growth and opportunities we have in front of us. A lot of the dialogue from quarter to quarter is focused on hyperscalers or focused on one area or another. And what's really not understood is, hey, we've got multiple areas of growth and we're driving each of those in unison. When we look at the enterprise, we're something like a 13-ish percent market share holder. We've got a long way to go there. Enterprise data cloud is a huge strategic thrust. Our focus on the enterprise is going to increase our penetration there. When we look at hyperscalers, clearly we've had a little dialogue there. We see that as an area of growth both within this customer, additional customers, We've talked about the neo-clouds and our new product announcements and development to go penetrate that space deeper. We have industry trends that are driving growth, such as modern virtualization. And I think what's not really appreciated is, well, how many vectors we're pursuing and really the opportunity set that sits behind it. At the same time, and I'll point the investors back to a discussion we had at our New York financial analyst meeting, At the same time, our ability to go pursue that is driven by significant IP leverage, which is to say we've assembled a very rich stack of intellectual property over the years in our enterprise offer that we're now able to go tease apart and repackage to meet the needs of multiple new market sets, whether it's the hyperscalers, whether it's the cloud native, or whether it's AI. I had a deeper discussion of that, and really the whole management team did in our New York materials, which are also online. Great. Well, Rob, thank you very much for your time. You've been very generous.

Thank you, everyone. And Sandra's in the back if you want to hit her up for more questions. Thanks.