Q1 2022 Pure Storage Inc Earnings Call
We're standing by and welcome to the pure storage first quarter of fiscal year 'twenty 'twenty 2 earnings release conference call on.
At this time all participants are in a listen only mode at the conclusion of our prepared remarks, there will be a question and answer session.
If anyone should require assistance during the conference. Please press the star zero on your Touchtone pad at any time.
As a reminder, this call is being recorded I would now like to introduce your host for today's conference call. Mr. Sen, Joe Corona. Please go ahead.
Thank you and good afternoon welcome to the pure storage first quarter fiscal 2022 earnings conference call.
My name is on Joel Corrado, Vice President of Investor Relations of pure storage.
Joining me today on our CEO, Charlie Giancarlo, our CFO, Kevin Chrysler.
The vice President and Chief architect Robley.
The 4 we begin I would like to remind you all of that during the skull.
Management will make some forward looking statements, which are subject to various risks and uncertainties.
These include statements regarding the COVID-19 pandemic.
And related disruptions.
The growth in sales prospects.
Competitive industry and technology trends.
Our strategy of its advantages.
Our current and future product offerings and our business on operations.
Any forward looking statements that we make are based on facts and assumptions.
As of today, and we undertake no obligation to update them.
Our actual results may differ materially from the results forecasted and reported results should not be considered as an indication of future performance of.
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 the public filings.
During this call we will discuss non-GAAP measures in talking about the company's performance and reconciliations to the most directly comparable GAAP measures are provided in the 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 web site and is the property of pure storage.
With that I'll turn the call over to our CEO Charlie Giancarlo.
Hello, everyone and thank you for joining us today I hope you and your loved ones are healthy and looking forward to better days ahead as summer begins vaccination rates increase at the beginning of the end of Covid restrictions in many parts of the world comes into view.
Our Hearts go out to our friends in India and other countries still suffering from the scourge and we pray that they will soon recover.
Pure delivered very strong results in Q1, we drove double digit growth against the strong comparison with Q1 of last year.
I'm also happy to report that our strong quarter was broad based with balanced contributions across every aspect of our business we.
We continue to see enterprise expansion validating our investment in World Class Enterprise products services and our go to market teams over the past 2 years.
In this quarter. We also saw our commercial segment strength in its contribution, particularly in customer acquisitions, where we increased net new customers year over year.
Our U S and our international teams, both achieved double digit year over year of growth this quarter and our new products again saw significant annual growth.
Our industry, leading subscription business saw fantastic growth up 35% over the same quarter last year.
Pure is unique evergreen and as a service models continue to resonate strongly with customers and differentiate us from the rest of the industry <unk>.
Competitors are attempting to recreate our capabilities through financing marketing and professional services, but cannot change their legacy systems to match, our non disruptive upgrades API management or remote operations and support.
<unk> has doubled the number of partners selling pure as a service year over year and our channel partner bookings are growing nicely.
And we recently announced new incentives and offerings to them.
To enhance the subscription sales through our channel partners to build on this momentum.
Our operating profit exceeded expectations this quarter, reflecting our revenue over performance paired with prudent expense management.
The strong growth. This quarter was achieved during continued COVID-19 restrictions and is based mostly on improvements in our operations and our customers increasing confidence in our brand.
We've been reasonably accurate in our predictions of our business environment since the pandemic started.
I feel confident that as vaccination rates increase globally and our markets return to some semblance of normal office culture that our business momentum will increase even further.
This month, we kicked off our annual accelerate digital events and so far we have connected with more than 17000 attendees, a new record for attendance, 60% higher than last year.
The significant annual increase in customer prospect and partner participation at our accelerate conference is an indicator of how strongly our modern data experience strategy is resonating in the market.
We reiterated our vision of pure <unk> modern data experience and showed how leading organizations like AG Sciences.
<unk> and roadblocks are using pure data platform to modernize their infrastructure.
<unk> of their operations and modernize their business applications.
We announced updates to the pure 1 digital experience our cloud based management platform for all of the purest products and services and we released the latest version of Port works Enterprise.
We also provided greater details on our bare metal as a service solution with Equinix and our newest purity software enhancements.
All of these new capabilities and more will continue to be featured in workshops throughout the entire month long accelerate event cut.
Customers have shown excitement for our promise of leading edge automated infrastructure that is continually improving without disruption.
Pure <unk> modern data experience delivers modern infrastructure that enables modern operations supporting the needs of modern business applications.
We believe that these 3 steps are fundamental in every company's digital transformation journey and are made possible by pure as modern data experience.
The first component of our modern data experience is enabling our customers to modernize their infrastructure.
Modern data infrastructure provides easy to deploy reliable services manageable by I T and developers of like through Apis and code.
We provide common services interfaces and management across on Prem and cloud.
And with pure as a service we provide customers a single unified contract across clouds.
Customers can operate both existing business critical applications and next generation cloud native applications in a hybrid cloud environment.
Our founding vision of the all Flash data center is being further realized with tours flash array C. The first all key will see flash array that pushes flash 2 of new tier of workloads, where our competitors are stuck competing with desk.
Flash array see saw a double digit growth this quarter and continues to be our fastest growing new product ever.
Just last week pure flash array family was recognized as of Gartner peer insights customer choice.
You don't need to be in technology to know that data in security is not only of nuisance, but a matter of national security.
In the last few years, we brought industry, leading data protection to our entire portfolio, allowing enterprises to protect their data from ransomware with the ability to restore from protected copies within hours of the breach.
Customers like B the match, which is operated by the National bone marrow donor program have chosen pure flash array ex and flash blade platforms with safe mode data protection and rapid restore capabilities to protect their mission critical data in the event of the breach.
Meadville Medical center in Pennsylvania is another customer who subscribes to pure as the service with safe mode.
So that if they ever need of safe mode snapshot to recover their data they know that they can be back online within hours.
We launched a new safe mode dashboard in pure 1 this quarter, which provides a consolidated view of the ransomware protection of all pure arrays and of customers' fleet.
Delivering peace of mind that the organization's data franchise is protected by this extra layer of ransomware protection.
Pure is unique evergreen capability is the cornerstone of of modern infrastructure with the ability to continually update technology and services without disruption to our customers environment in.
In fact.
98% of our arrays that were deployed over 5 years ago are not only still in use but have been modernized in many cases to our most recent models on.
Our systems like most cloud services are upgraded to the most modern technology.
Distantly non disruptive Lee and transparently to the application.
Our purity software evergreen model and pure 1 management system uniquely positioned pure to deliver of true as a service modern infrastructure experience to our customers.
The second component of our modern data experience is modernizing operations. After all the value of modern infrastructure is deeply diminished if you operate it with yesterdays manual processes.
Modern ops means standardizing service offerings, and making them available to the organization via our service catalog and Apis.
Doing that delivers Dev ops data science teams and application developers the storage as code experience they have come to expect.
Pure as a service is a key element of our strategy for modern offs.
Pure as a service continues to be the industry's storage as a service benchmark and we're very pleased with its growth this quarter.
Launched in 2018, it unifies block file and object storage across all tiers of the performance and private and public clouds into a unified data storage subscription and is the foundation of of true hybrid cloud experience.
Customers such as the city of Denver use pure as a service to automate data management.
They use pure to monitor and deliver performance upgrades and even variable capacity for seasonal events like elections.
With the flexibility of pure as cloud block store for both AWS and Azure as an option in their pure as the service subscription we are seeing strong interest from companies, who want to simplify their data architecture with a proven solution, while reaping the benefits of both private and hyper scaler clouds.
Pure is the service is differentiated not only by the inherent agility of the evergreen architecture, but also by the as a service user experience we deliver via pure 1 are met of AI engine and our proactive support experience.
Pure 1 has now broadened its predictive fault of analysis and resolution using telemetry gathered from across pure ecosystem, including bare metal Vms and containers.
Our expanded AI driven workload planner can now suggest the right service tier for pure as a service subscriptions or infrastructure purchases.
The pure 1 service catalog was expanded this quarter so customers can easily add upgrade suspend resume limit and redo pure as the service capabilities as needed.
These SaaS tools work together to give customers the insight and intelligence they need to confidently make storage subscription decisions.
The investments we've made to modernize infrastructure and operations supports our customers' desire to develop truly modern applications, which is the third pillar of the modern data experience.
Modernizing applications Leverages cloud native architectures, specifically containers and kubernetes to take advantage of more efficient computing, new programming models hybrid cloud architectures, and new capabilities like real time analytics and data streaming.
The latest version of the Port works Enterprise and now instead accelerate gives customers an automated kubernetes native storage experience for container based applications wherever they live.
Port works enterprise now delivers deeper integration across the pure family fully enabling both flash array and flash blade for enterprise scale and resiliency in production environments.
It utilizes pure 1 for enhanced observe ability and proactive support and complete provisioning automation on all pure systems.
Customers are using port works to enable containerized workloads to run seamlessly across the cloud, including pure storage arrays bare metal infrastructure and even third party storage solutions.
Just 3 quarters since acquisition, we have fully combined port works on pure products into the integrated simple and evergreen platform that pure is known for.
As the number and range of modern applications increases and the volume of unstructured data increases organizations are reducing the complexity of their data architecture with fast object storage, where pure as flash blade remains of the market leader at.
At nearly $1 billion in cumulative sales. It is the preferred choice for customers needing a unified fast file and object platform for their modern business applications. In fact flash plate as the leader in Giga homes, New radar for high performance object storage.
Validating pure as the pioneer in the fast object space.
Overall, our product and market leadership is expanding.
We continued to deliver the industry's most advanced platforms greatest reliability and total cost of ownership with the most innovative service models.
Altogether, we are well on our way to delivering a complete modern data experience the customers worldwide.
I'll now turn the call over to our CFO, Kevin Chrysler for a deeper look at the numbers Kevin.
Thank you Charlie and good afternoon, we are very pleased with the broad based strength of our Q1 results and continued momentum.
We delivered double digit revenue growth despite both a tough compare as well as continued uncertainty of COVID-19, and its influence on markets across the globe.
Our sales growth excluding cancel the orders also reflected strength growing 13% compared to last year our.
The remaining performance obligations or our Po, which includes our committed and noncancelable future revenue is slightly over $1.1 billion.
Growing sequentially, 24% year over year.
In particular, what was most impressive about our performance this quarter was the strength across our entire business double digit sales growth from our key geos.
Strong contribution from our channel partners performance across our entire product and solution portfolio, including flash array of C.
And growth from both our existing and new customers, including our commercial business.
We were very pleased with the strength, we saw on new customer acquisition, which grew 15% year over year also driven in part by our commercial business.
Now turning to specific financial results for the quarter.
Total revenue grew 12% to approximately $413 million.
Of our National revenue grew 14% while revenue in the United States grew 12% compared to last year.
Again, consistent with what we saw throughout last year sales of our subscription services continue to reflect momentum.
Subscription services revenue grew approximately 35% year over year and represents approximately 39% of total revenue.
Non-GAAP total gross margins continue to reflect the differentiated value of our software and solutions improving sequentially to 75% in the quarter and continues to be on the high end of our long term expectations.
Non-GAAP product gross margins were 72% and non-GAAP subscription services margins were 71, 1%.
Subscription services margins improved both sequentially and year over year.
Product gross margins improved slightly sequentially and were 73, 3% in Q1 of last year.
Product gross margins this quarter reflect both the accelerated growth of our flash array C.
And increasing supply chain costs required to secure product for our customers. We achieved slightly positive non-GAAP operating profit during the quarter, which outperformed our expectation.
<unk> factors include revenue outperformance.
Lower expenses due to the COVID-19 environment, including less travel and physical marketing events as well as slower than planned hiring we ended the quarter with over 123 billion in cash and approximately 3800 employees.
Cash flow from operations was 21 million and capital expenditures were $28 million during the quarter cash.
Capital expenditures during the quarter included a higher mix invested in our peer as a service infrastructure.
We returned approximately $30 million of capital to repurchase slightly over 1.38 million shares as part of our $200 million share repurchase program.
Now turning to guidance as previously.
The mentioned, we are very pleased with our steadily increasing momentum over the last 2 quarters, while continuing to navigate the various challenges created by COVID-19, we.
We expect the challenges created by COVID-19 will continue to recede as we progress throughout the year and that our momentum will continue.
Q2 revenue is expected to be approximately $470 million.
Representing double digit growth of 16%. We also expect non-GAAP operating profit will be approximately $15 million.
As I mentioned last quarter, we will be guiding 1 quarter at a time and will not be updating our annual view.
But we will provide some additional color on how we are thinking about the impact of our Q1 over achievement for both revenue and operating income.
We expect that revenue over achievement will be accretive to our annual view.
Primarily due to increasing supply chain related costs that we anticipate we expect that approximately half of our operating income over achievement during the quarter will be accretive to our annual view.
We are excited to build upon our broad based momentum in Q1 by continuing to create best in class outcomes services and experiences for our partners and customers.
With that I will turn it over the operator, so we can get to your questions.
Thank you ladies and gentlemen, if you have of questions. Please press star 1 on your Touchtone telephone in the.
The interest of time, we ask that you. Please limit yourself to 1 question and 1 follow up question.
1 of your questions have been answered please jump back into the Q&A question in that scheme.
We'll pause for just the moment to compile the Q&A roster.
Your first question comes from the line of Carl Anchorman with Cowen.
Yes. Thank you good afternoon.
2 questions if I may.
With regard to your current outlook.
Kevin I was hoping maybe you can tell us.
Regarding ex by growth I guess, what could you tell us regarding extra by growth per box from your hardware business I asked because in the context of the NAND market.
That is seeing big growth increase on a roughly 30% clip. The all flash array revenue is flattish on a year over year basis.
But component pricing seems to have bottomed and I'm wondering whether maybe some of the deflationary pressures.
From on Prem Enterprise spend is still recovering.
<unk> going into the second half of the year.
And then if you could speak to.
Anything regarding the capacity points.
Per array as we think about that growth of Nash nights on the second half of the year as well.
Yeah. Carl This is Charlie let me, let me start on that 1 Kevin I think pulls together some of the stats on on that.
Overall, I would say debt our overall theres been overall growth in our flash array product line counting both flash array ex in Flasher AC.
And we were really pleased to see.
That that growth for that product line continue and I have to say that that I remain very bullish that we'll continue to see growth in that product line. In addition of course to.
Flash blade and in Port works, all of which are seeing you know.
Strong growth overall, so the and then if you count in along with that the growth that we're seeing in subscriptions and pass in particular, which does not show up immediately on the top line because of of the.
The accounting for subscription basis, Yeah, we are seeing good growth overall.
The overall and I'll just comment for a moment on on the supply chain side on on the NAND.
The first is you're correct, where we probably will not see although we entered the year that is the calendar year with some deflationary pressure initially.
Through the remainder of the year, you're exactly correct, it's unlikely to see any downward pricing in NAND and actually likely to see some upward pricing on the raw NAND as we go forward and that'll be our overall industry.
Affecting and of course, because most of our our sales are very competitive in nature. We also saw a slight increase in asps and I would expect asps, the hold reasonably steady plus or minus.
Through the year overall, so I think youre correct were not going to see a lot of deflationary pressure. This year, yeah, and I agree Charlie and I think 1 of the thing I would add is the inflationary pressure is just broader than NAND as well. So we're seeing it across the supply chain, but again that's been.
Considered in terms of how we're thinking about our Q2 guide and that's why in the prepared remarks, I commented that about half of our over achievement.
For operating profit would be incremental viewed as incremental to our annual guidance.
And then and then finally on the exabyte.
You know, we will definitely ship more ex bites of this year than we did last year for sure.
In terms of of average.
I think we're cautiously optimistic that the average will go up but spending tends to.
I'm expecting that overall spending for data storage. This year will also increase for the market as a whole lot. So I hope that provides you some indication.
That that does I appreciate that gentlemen.
For my follow up on your prepared remarks, you spoke about how pure cloud block store is now GAA at AWS and Azure and.
And so I'm curious, whether you'll be breaking out this business like your 1 of your primary peers and.
Maybe jumping the gun of little bit, but any thoughts on when this may reach of $100 million annual run rate. Thank you.
Yeah, Carl let me just to hit the the first point on on cloud block store and how that combines really nicely with our unified subscription of appears of service and that's really why I think we're seeing a lot of the continued demand and momentum with the peers of service and we're quite excited about our cloud block store on Azure and Rob do you.
Of some some comments on that it'd be great to share some thoughts on on cloud block store with as you were yeah, absolutely. We're super excited just to see the continued growth in the overall cloud portfolio of cloud block store key component for the monitoring so the.
The traditional applications.
Now expanding from interest of Azure, we see that is adding of just a ton of value to the unified subscription as an example of the large episodic customer this quarter.
You know who it was undergoing a tremendous growth in their business struggling to keep up on their legacy gear.
<unk> pure in under the unified subscription and was able to get.
Media performance capacity and elasticity of benefits on Prem as well as utilize cloud block store on Azure to move the disaster recovery environment over to the cloud on.
So I think the flexibility in and.
On the elasticity, we are able to deliver it just goes to speak to the benefits of the software subscription.
The software approach and just the overall unified subscription through which we deliver the cloud products.
Thank you.
Your next question comes from Sidney Ho of Deutsche Bank.
Thanks for taking my questions. My first question is on the gross margin clearly you guys are doing very well they are over 70%.
We continue to be higher than the the.
High end of the Targa.
Target range should we expect gross margin to stay at these higher levels, considering subscription services revenue will likely grow faster than the product revenue I think you guys talk about some deeply some the inflationary.
Chris you there.
It really does it depends on what type of surface is driving the growth or are there other.
The consideration to think about.
No I think that's of Great question, and I think the the pressure on the inflationary pressure. We're seeing are really more lends itself to our product gross margins.
But again, we're we're very pleased with what we saw coming out of the quarter are really with strong gross margins throughout both on the product and subscription side and to your point above kind of of high end of our expectations now as we progress through the year on the product gross margin side, we would expect to see some.
Some pressure on product gross margins due to what we're seeing on the supply chain, but again, we've accounted for that in terms of our Q2 guide and in my prepared remarks around the annual view.
Got it.
A follow up question is on the enterprise side of things you guys have been highlighting the strength of the enterprise business last quarter this quarter.
But the data points in general in the market Hasnt been it's I wouldn't say, it's kind of mixed some semiconductor companies will say, it's still kind of weak maybe just starting to get better can you talk about why you are seeing things differently and if the overall market does start to improve in the second half do you think Youll enterprise business will.
Also accelerate along with the market just off a higher starting point.
The answer to both is yes, we.
The reason why we're seeing such good overall expansion of our enterprise business is because of the investments we've made as the company remember just 2 or 3 years ago, we were largely a commercial company with some some deployments in the enterprise we made major investments both in products as well as our go to market team.
To really become.
The brand that would be respected by a broader set of it really by the enterprise customer environment at large and I think we've achieved that from a brand perspective, but we're still early in many ways in on.
Our expansion into the enterprise. So I expect that expansion, which is not you know of secular specific to the investments that we made to continue so really for us it's about penetration into what was for us of new market and I think you're comparing us perhaps the companies that had a mature market in the enterprise and therefore are not.
We are still waiting to see the secular growth in the enterprise segment secular growth in the enterprise can only help us as we continue to expand on that space.
Okay, great. Thank you.
<unk>.
Your next question comes from Jason Ader of William Blair.
Okay. Thank you.
Hey, Charlie.
We've definitely heard in the last let's say 12 to 18 months, there's been an inflection point in demand for micro services kubernetes.
The technology and I was just wondering.
Obviously, you guys saw that and that's why you bought port works, but how.
How is this manifesting I guess in terms of activity pipeline demand for Port works and then maybe can you give us a sense of when do you think it's going to start to be more material for your business, yeah, well as you know it is a subscription based business and therefore, it's of ratable it takes a while for ratable.
The products to make a big difference to the 2 of the top line, but I have to say that you know both revenue growth is.
You know were talking you know in and around doubling of revenue growth.
We've seen of much even larger expansion of of pipeline.
So I'm going out of a little bit on the limb here, but it's it's going it's going very well and the strategy of aligning and having you know single management and single.
Layer.
That is the Cooper of eddies layer for our customers to be able to manage both their traditional applications as well as their modern.
Applications, so called cloud native applications Youre under 1 umbrella supported by everything from the startup environment for or you know of new.
The development environment, you know with the with a small number.
With a small amount of storage under the original Port works.
Sds layer and then expanding into a full multi petabyte production environment, you know using a highly reliable arrays. The other flash array of flash blade and to have that all done non disruptive Lee it's the very powerful promise that we're able to deliver to our customers. So yeah. So far so good.
We're seeing a lot of interest we're seeing as I say, you know very fast expanding demand, but as we've mentioned.
In our last call or 2 you know.
It's probably going to be a year or 2 before it really becomes a truly noticeable on the topline that's growing even outside of Portland, Yeah, and Charlie maybe just to add onto that you know we're quite pleased with the integration that's going on there right. We've got a new version of Port works Enterprise They were quite excited about.
The synergy that we're now seeing with our existing pure customers is pretty strong as well and I don't know if you of Rob wanted to give a little color on the I'll talk a little bit about it you know just 8 months roughly after the close of the of the transaction. We've integrated all of our of our products now with the with more to come.
The customers are what we've seen in customers and we've indicated this but it bears repeating you know about half the customers are pure customers about half of that is the buyers are people that we've been talking to for years and the other half of the buyers are new.
New buyers for us sometimes in the same account, sometimes new accounts, but on the development side.
And it's a 1.2 punch of us being able to leverage what we already do and learn about a new area.
That makes it makes the acquisition of a really compelling 1 I think on part of the stumping. The part of what makes that 1.2 punch, particularly powerful as you know this is a fast growing space. This is a significant and secular transition in how applications are built on frankly. This is how are the most modern applications are being built today and so we've really take.
The strategy of investing in the full suite of data management capabilities to be able to help the customer deploy.
Deploy build of deployed and get the production in multiple environments, whether that's on Prem in the cloud hybrid cloud or multi cloud and across the whole of spectrum of of element of lifecycle, whether they're just getting started.
Getting the student or growing the global production scale on so early days, but the re.
Really exciting.
Thank you.
Your next question comes from the line of Rod Hall of Goldman Sachs.
Thanks for the question guys I guess I wanted to come back to the.
The question of cost not so much NAND, because I think thats fairly it seems like it's relatively predictable, but I'm wondering Charlie what are you guys seeing in other cost lines like free and things like that we hear a lot of people talking about various different upward pressure on cash.
Cost inputs of their businesses and then.
The kind of add on to that what do you think your pricing power is if you were to continue the upward pressure on.
On costs across the board.
Yeah.
Great question look we're seeing you know there is pricing pressure on the supply side across the board of I'd say, it's more acute on some of the component area.
NAND is seeing some but it's true on all of the different components of freight you know a bit I can't say that that's been a tremendous the driver for us, but oh I'm going to take your guidance.
And I'll look at it but it's you know the costs are going up at the same time as you probably know rod a lot of our most of our.
Sales are competitive in nature, and so our pricing is the determined much more by the the competitive environment in a particular deal.
Then it is by by our costs.
And so you know there will be some balancing with the Asps I'm sure exactly how much of that is we can't be on 100% confident but as Kevin mentioned, we've incorporated our best guests into the guide so we feel fairly good about it.
It may of the.
May be some effect on our margins I don't expect it to be severe.
Because again, we operate on a 100 per cent of the timing of generally of competitive environment.
And then Rod maybe I'll just add on a little bit more of that so specific to what we saw in Q1 on the ASP front, we actually did see some improvement on Asps.
And I attribute that relate to 2 factors.
I think we're doing a really nice job continuing to sell the value of our solutions, but I also think.
The the general inflationary issues, we're seeing around the supply chain is playing into that and so we'll just have to see how that plays out for.
For the remainder of the year, but I think broader as well when we get back to the supply chain issues. Luckily you know, where we've got very strong relationships with our suppliers and so we're very confident in terms of working with our suppliers in terms of making sure. We can meet our customers' needs and we're just being very.
Cautious and monitoring very actively I think our supply chain team is doing a tremendous job.
Navigating us through this no different than what they did in the Covid environment. So we're quite pleased with with how things are progressing but.
The the themes are yet general inflationary concerns across the board, especially with some of the the smaller component tree.
And then we did see some improvement in Asps, Yeah, I do want to just.
Underlying that really of our suppliers have been wonderful to work with the.
It's a tough environment out there, they're under a lot of pressure but.
We have good relationships with them, but the would be they've been they've been they've worked with us really well on.
Couldn't be more pleased with the supplier of the suppliers that are that we work with.
Okay.
Mark on sneak another 1 on none of the long answer but.
Not at all please.
The other 1 is just on it.
Your new product revenue was.
Clearly negatively impacted through Covid I'm, assuming because you've got exposure to some of these industries that were affected that day.
Remember exactly what you said about that I'm just curious what you think your exposure to the reopening.
<unk> industries, our travel leisure all of that kind of stuff.
What sort of industrial exposure or do you think you have the reopening.
Yeah. Thanks, Rod you know in the past when we talked about.
The COVID-19 exposure it had more to do with the fact that as of new relatively new vendor and 1 that was focused on growth at <unk>.
Customers are concerned not being able to be in the office and they're lesser willingness to try new things, whether that's the new products new vendors are new use cases.
For existing products and so the way we look at this is that as as we've returned to you know them.
In an environment, where customers are more willing to try new things.
<unk>, you know maybe of new vendor, but it may just be 1 of our new products or maybe 1 of our existing products and the use case that where they currently use a competitor's products, where it is the new use case entirely theyre going to be much more willing to do something new and different.
And so that's what we're looking forward to it it was less about us being exposed to.
Highly exposed segments and much more about <unk>.
Our reluctance to engage in.
In the new into activities by our customers.
Great Alright, thanks, a lot of all of it I appreciate it.
Yeah.
Your next call comes from the line of <unk> Mohan of Bank of America.
Yes. Thank you.
Sorry to get back on this inflationary topic, but can you be more specific on whether how much of that potentially is logistics versus procurement versus increased pricing from your suppliers and do you do you see that impacting revenue at all it sounded like you guys alluded to sort of the cost.
The impact of not all of the upside flowing through in the back half but.
What about what about revenue and of a follow up.
Yeah. Thank you wont see well once the look in.
In the context of it being a you know the.
They are being a lot of uncertainty in the supply chain that being said, we feel reasonably confident about about Q2 are we feel reasonably good about Q2, it's very difficult to talk about Q3, and Q4 with high levels of confidence, but we have a high degree of confidence in both our own operations team that have really prefer.
Formed from a you know from.
From a customer standpoint, flawlessly throughout COVID-19 and up and up until this day and with our suppliers, who we work with very closely we think it's been you know there are situations where.
Every day, we're components that 1 thought.
We're available suddenly become unavailable.
Are you also component availability no changes.
Every week.
And then 1 is looking for those components elsewhere. So it's both the supply issue as well as the cost issue.
We identified cost of growing up largely on the supply side I think less so on the logistics side at least for us.
Yeah.
And as I said, it's a bit of an uncertain world, but that being said, we feel reasonably confident on Q2 that it won't affect revenue.
On Q2.
And I was just 1 of them.
I'll put that caveat the reasonably confident and Q3 and Q4 will just going to keep we'll update you every quarter as to how we feel about this and maybe I can go into a little bit more detail on the what in terms of what we saw specifically in Q1. So so we actually did see improvement in Asps as I've mentioned previously.
That was more favorable in terms of what we're doing on on the discounting and again I think that's both.
The what we saw with the supply chain balance I think the the our field is doing a really nice job in selling the value of our products and frankly, what we saw with product gross margin this quarter I viewed as very favorable again on the high end of our expectations.
Despite kind of navigating through what we're seeing on the supply chain side and then obviously, we had some really great traction as we mentioned with flash array of C and given that that's a newer product for US we had some gross margin pressure with flash racy as well, which when you then look at the total gross margin.
While it is very positive for us so hopefully that is helpful for you.
Yeah no no other thank.
Thank you for that and the fact that follow up.
We're seeing an increased proliferation and competitive offerings of out of service on prime out of the service.
The download apex, now and really it's been around with the H b.
Charlie in your opening comments you referred to some some competitive offerings that are largely financings necessarily technology enhancements I was wondering how you would characterize the.
The competitive landscape to 2 of the lens of these these offerings. Thank you.
Thanks, Monte So largely is as you describe it I'll put some additional detail behind that.
As you could tell from both of the prepared remarks on I know that some of you perhaps had been attending our accelerate conference as well what you see us.
Delivering is a true as the service experience from a technology perspective, the way the customers interact with it the way that theyre able to manipulate it you know through through Covid and ATI. The fact that it is.
The constant continually improving the improving without disruption of very similar to any type of SaaS offering.
Offering you know these are all service qualities, whereas most of our competitors are very much blocked on the.
Focused on.
On a financial construct to make it look like of service and a big tell tale in my point of view from my point of view is that when we provide of yours. The service. We sign we were actually selling to our customer and S. L. A it's not an array.
It doesn't have a product name.
We are providing them and as a service level agreement that actually has teeth are 2.
2 of the agreement we have to we have to deliver the the service level that we are otherwise.
Otherwise the financial penalties to us.
Our competitors are.
Tend to provide an objective with no teeth.
In it whatsoever and there are named products in it. So it really is of finance financing a construct that they put together for us the the the fact that its subscription.
Basically is a is the fact that we're offering is of service and so naturally it becomes a.
Naturally it becomes a subscription the last thing I'll mention is that it exist both on prem and across the cloud with CBS the subscription it doesn't matter where the customer puts their data.
And they manage it all through the same management system, so really of a pan cloud.
The true technical service and.
And therefore of course of unified subscription very different than just the financial construct.
Thanks Holly.
Your next question comes from Amit <unk> with Evercore.
Yep.
Good afternoon, Thanks for taking my questions I have.
2 as well.
Most of if I take your July 1 of the guide, but the euro is going to do.
The <unk>, 5% growth give or take and your competitors actually get fairly easy in the back half and very Simplistically my tendency would be to say simpler easier compares would suggest growth accelerates in the back half was of the full of path.
I would love to understand of the 1 other factors we should consider as you go into the back half of the competitor would suggest we should see on exploration.
What factors should we think about on the back half would be helpful.
Yeah, I'll start on more tactically on and Charlie feel free to jump on and obviously, we are expecting some acceleration in second half with our where we landed for Q1 and our guide for Q2.
And then looking at what that plays out too for second half, we'd get some ramp on that and obviously it just to highlight as well. The Q4 is generally our seasonally highest quarter in terms of sales, which is the beneficial but early signs of a flash array see you know I think that's kind of parlay itself throughout the year.
Year.
And I think in particular, what what was exciting across the board for US is what we saw from a broad based perspective I mean, we we saw it really kind of everything driving with strength, whether that's the enterprise commercial Oh. This is the first time, we were really seeing some strength on commercial and I think it's important to highly.
That we were very pleased to see that strength coming through this quarter, despite still being in the COVID-19 environment. So that was great to see obviously pure as a service and what we're seeing across the board with poor works. So it's really this balanced the strength that we've seen in Q1 that we really do think that momentum.
Which really started in Q4 will continue throughout the year, but Charlie anything else you'd want to add to that yeah.
I would say that.
As we look at the year.
1 was still the.
Quarter, we've just had a 100% under Covid rules, we're still you know while we might be.
End of seeing maybe some green shoots come up mostly around the promise of people getting back to the office, we've yet to see any real pickup.
Pick up due to that.
Where.
We believe we may see that in Q2, and then we'll be in a better position. Once we once we have our next quarters earnings of being able to say what the rest of the year.
You know of might look like but given the.
Not all of the experience we've had to date. This year have been 100 per cent of speculate as to the second half of the year.
Fair enough.
Hopefully we don't have the code wave in the exploration sustained for you folks.
Well there can you just touch on what is driving the momentum of is it true.
Better engagement of the channel of the.
Sales force is doing something different and then on the commercial customers net product set with pure of worsening.
I'd say there.
Number of phenomenon.
That we're seeing it at work there is no question I think we might have mentioned this in the prepared remarks.
Debt, we're seeing increased what we call partner sourced deals and a large part of that is is commercial so.
We will we believe that that is the only continue we're really seeing a good pick up by the book.
Their feet underneath them, if you will on the scope.
With the environment and our.
Back back in the market. We think that's just beginning by the way I don't think that's a large part of it and I do think that you know of flash array see you know is in fact.
So the commercial market as well.
And so I think that also opens up a bit of of that so I think it's a little bit of the 3 of those things, but I think a lot more to come.
That's right.
Right.
Think the thought.
You may think that.
Appeals to large.
The enterprise customers, but we have a.
On a set of of programs for <unk>.
Actual market and it's doing very well there.
Perfect. Thank you very much.
Thank you.
Your next question comes from.
Simon Leopold of from Raymond James.
Thanks for taking the question.
I'm going to.
Asked maybe a little bit of an odd 1 but my my perception on this call was that Charlie.
You sounded more upbeat on the on the Flash Ray C and my recollection is that on the prior call you sounded more upbeat on flash blade.
I could be reading too much into it but.
I guess I wanted to get a sense of whether that was intentional and maybe how you think about.
Sort of the new product cycles here.
On things shifted in your thinking or how do we kind of separate these 2 trends. Thank you yeah. Yeah, no. We just like the share of the wealth and sometimes we'll spend a little bit more time on 1 than the other so you shouldn't take any and I started to get the.
I was I was getting tired of of both fill of different niches. The the flash blade product you know of very highly scare of scalable product.
Product of scale out product capable of supporting multiple simultaneous workloads at unbelievable speed.
Really good for scale out of environments, where AI machine learning analytics.
And rapid recovery all on 1 platform all of the same time, our platform now competitive with.
From a pricing level.
With with hybrid disk for that secondary.
3 tier.
Oh, no. We're very proud of both platforms from from quarter to quarter. He may of here of spend a little bit more time.
With different products, including block works on Port works rather.
And and flash array ex so you may hear us to spend the different amounts of time each quarter for color on each product and Simon I'll just add that the this was a quarter, where we had strength across our business and we had a plethora of of options to choose from in terms of what we wanted to emphasize and so the first thing is as we just had strength.
Across the board.
And then you know obviously see we're very impressed with what's going on with C. And I also say that you know flash played acquired.
New unstructured data scale out of customers at a much faster rate this quarter than what we saw in the previous year over year quarter. So so good stuff happening on all the way around and not meaning to ignore.
And then follow ups hopefully pretty easy.
Thinking on your own or.
The sort of pre COVID-19.
Expense levels in the study.
And the reintroducing travel and items like that how should we think about your own internal planning for those kinds of activity. Thanks.
You can imagine that.
That we are.
You're putting a lot of work and focus on that.
As we've discussed last quarter, we plan on average.
As we start to reintroduce.
Obviously, we'll slow down other expenses, we do expect to grow into this.
But I think the annual guide we provided last quarter.
Oh for modest.
Bottom line growth in the <unk>.
Heavens addition, too.
To that commentary.
On this call you should expect us to continue down that path.
We expect overall debt the percentage.
Of our expenses to total will come down so that we add more to the bottom line.
Thanks for taking the questions.
Thanks Simon.
Okay.
Your next question comes from Tim long of Barclays.
Thank you kind of deal sizes and win rates in cash.
Some of those metrics.
Thanks, and if theres anything.
That's kind of different when we're looking at the commercial side in the larger enterprise.
And those metrics here.
More of it sounded pretty good in the quarter.
Double digit, but overall was double digit so.
Given it's such a huge Tam when we're thinking about this.
What what's kind of accelerate the growth rate there or is it new use cases or pieces of them.
Your customer base that you've got to penetrate further.
So what is it that kind of.
It allows that product to really take on the much larger Tam. Thank you.
Sure. Thanks.
The win rates have stayed you know this is something we analyze all the time when rates have stayed rough.
Please stay steady.
It is very much in line whenever we did expand the number of sites that were in.
This quarter and win rates have held pretty steady and no big change vis vis vis any.
Any 1 of our competitors. So so the win rate 1 remains pretty much at historical rates.
Kevin you of any comment on on deal size I don't have that off hand, I think it's roughly the same but I don't have any of your overall deal size, where we were very pleased with what we saw on deal size. Now obviously Q1 of last year, we were fortunate to get some really large deals in part due to our folks working on mission critical in the in addressing their needs on that front in terms of work.
For homes, so I would say that the the significant larger deals were a little bit less this quarter, but I was really pleased with the balance we saw the multitude of of deals over $1 million. So on so nothing to highlight.
In terms of significance other than it was broad based occur.
Across the board in terms of what we saw in the lessor of larger deals that we saw see growth was.
Youre right double digits is a very wide wide range.
But the <unk> growth.
He also gave you commentary that that she has been and continues to be our fastest new product from a growth perspective. So you can assume that it's it's a higher number of the significantly higher number than our average then our growth overall as a company.
Does open up that second tier.
Sorry, but also somewhat on the file side and as we add more and more features.
We think it's going to add even more.
The market opportunity for us on the file side. So it's still a wallet on the block side, it's mature product on the file side. It is still early days and so we're going to see I think we're going to see continued expansion of our opportunity there.
Thank you.
Your next question comes from Matt Sheerin of Stifel.
Yes. Thank you I just wanted to ask regarding your cash.
The channel partners and the <unk>.
Contribution to.
The new customers as well as that of the commercial market.
What's behind that I know, you've put some new kind of programs in place in the last couple of years.
What accounts for that traction and do you see that that roster of expanding further on particularly given the rolling loud.
The value or where the very strong support based on the channel.
Yep.
We do I think there are several reasons for it 1 is where all of 100%.
Our partner.
Model, meaning that we don't go direct so.
1 of the things.
So that were fair and that will work with them and that when the going gets tough.
In a competitive environment, we're not going to just take it take it away from them. So that that loyalty is reciprocated by the partners themselves I think we've continued to make it easier and easier for the partners to sell our product first of all of the product itself is very straightforward very simple requires relatively.
A little bit.
Busy work by the partners to set up and to be able to operate and to be able to service and of course, it's highly highly reliable.
And that also makes for a better customer experience, which partners care.
About the about the customer experience because that's what gets the the.
Partner more business from that same customer so I think the values of the company itself that we represent high NPS hi.
Liability. The fact that we we don't stray to a direct model when the when the going gets tough and you're right. We've worked a lot on will continue to work on our partnered programs, especially aggressive growth programs.
And specialized.
The expertise programs with our partners to <unk>.
Table them to evolve as companies and enable them to provide a better experience overall for our customers.
Okay. Thanks very much.
The next question comes from the line of Shannon Cross of Cross research.
Thank you very much just 1 for me actually and it's a little bit day picture I'm curious when you think about recurring revenue, which I believe is now at about 39%.
Just kind of revenue.
And obviously growing given the next shift that's going on.
Where do you see that topping out or how do you see the the migration continuing I'm just curious if we get to a certain point where customers would rather.
And do you think this is something where eventually the.
Thank you that's it's a great question, Shannon and I will I'll start off look our first big milestone that we're looking at is 50% of our revenue and it would be the the big next milestone for us and.
Look at the end of the day, though it's still customer first in terms of what they prefer with flexibility. So we won't force of particular model on them in terms of how they want to consume it.
It comes but I do think of.
50% is a good target for us to have longer term in terms of recurring revenue, especially with what we're seeing with the margin.
Momentum around evergreen and peer of the service with a unified subscription.
Coming on board as we've talked about with cloud block store, both AWS and Azure I really will complement that and then following that and we've talked about that as well, which is the port works and our solutions around modern apps anything else you'd want to add Charlie.
No I think that.
That covers it okay.
Curious what what long term sort of refers to I mean are you talking a couple of years out or or further.
Definitely on that that'd be a couple of years out on how we're looking at that and then we'll give some more details on that in our analyst day, which we're contemplating in the month of September.
Great. Thank you. Thank you Shannon.
Your next question comes from the line of Kathryn Huberty with Morgan Stanley.
Thank you Charlie can you talk about some of the mismatch exited underscore your confidence in the second quarter.
For instance, what the pipeline growth look like.
Whereas backlog versus normal.
That drive the confidence.
And then my follow up sure. Thanks, Thank you Katy great to speak to.
To you. So we saw a number of things 1 is you know good linearity, but it but frankly.
The improved thing through the quarter so definitely.
Signs as I said green shoots.
For the quarter.
You know, we don't give specific.
Details on on pipeline by the pipeline that supports the Q2 guide that we have.
That we've provided based on.
Of the kind of of of.
The metrics and analysis that we've done in the past and of hard look at that.
We're not we're not basing it tremendously on any kind of hope for a dramatic improvement in.
In the whole Covid situation in Q2, we think it's fairly balanced from the standpoint of.
Not a bit of a lot of wishes you know our hopes.
The change to the positive. So we think it's the you know sort.
Sort of a prudent.
And balanced the guide.
Good.
The good support from <unk>.
The things that are you know near term near term deals near term pipeline. So nothing magic I would say in in the guide.
We believe we can get there with businesses as what we've seen over the last the couple of quarters.
Great. That's helpful. And then just a follow up Kevin as I think about.
The NAND price inflation in the past the industry in pure in particular has been able to per.
Pass through the higher costs.
That it is somewhat neutral to the profit dollars, maybe some pressure on gross margin percentage of it but it is typically fairly neutral is there a reason that.
You would expect it to play out differently. This time or is it just a function that this is just getting started and there's a lot of moving pieces within within the different cost buckets, and so you want to be conservative and assume that.
Some of the upside you saw in the first quarter gets offset by by the dynamic as you move through the year.
Our Katy it's really much more of the ladder debt you articulated and really if this was just a NAND than we were looking at the I think we would follow that thesis perfectly in terms of of how we think about NAND pricing and be able to pass that off but I think the issues. We're seeing around the supply chain of are much broader and theres really.
Uh huh.
Water general inflationary concerns that we've talked about.
The component level I mean, the smallest components are driving our supply chain team are with us with a lot of work and we do have inflation. There now that the interesting thing in Q1 as we were successful generally around increasing our asp's and I do think in part that's due to the inflation.
We were saying the question is is can we maintain net with the broader of supply chain constraints that we're seeing and that remains to be seen obviously, where we're confident in terms of our Q2 outlook.
But that is the reason why we were only.
Talking about taking half of our over achievement for for operating profit for the annual view and if I might just the insert because I don't want them to be.
Confusion, Katy and I know you're aware of this but it's not as if we pass higher costs, along we've never raised prices, but what does happen is.
Cause of our deals are competitive you know, we're competing every day against competition.
And when there when their costs are higher like ours.
All the vendors become more cautious in terms of their discounting and that's why the asps tend to float a little bit with with costs, but it's never quite 1 for 1 and timing this quarter versus next quarter, you know how long of peoples.
Supply contracts are in place for and so forth plays a role so there's always a little bit of movement because of.
On timing.
That makes perfect sense. Thank you.
Thank you Katie.
Yeah.
This concludes the question and answer session. At this time I will turn the call back over to Charlie John Carlo for closing remarks.
Thank you operator, I want to thank everyone on the call again I want to thank all I want to put out thanks to all of our customers and our prospects for the trust that they've put in the company and to our partners and suppliers for their really strong collaboration and their support and also to all of our employees for the innovation of the hard work over the past many men.
Any quarters and throughout the Covid period.
We're excited to ourselves to be getting back to work later this summer.
And we wish all of you on the call a very happy summer.
Take care.
This concludes today's conference call you may now disconnect.
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