Q2 2022 Pure Storage Inc Earnings Call
In our filings with the SEC and we refer you to these 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 our earnings press release and slides.
Additionally, when we refer to sales in our prepared remarks.
Marks we mean total <unk>.
Bookings excluding canceled orders.
This call is being webcast live on the pure storage Investor Relations website and is being recorded for playback purposes.
An archive of the webcast will be available on the IR website and is the property of pure storage.
With that I'll turn the call over to our CEO.
Charlie Giancarlo Hello, everyone and thank you for joining us today.
<unk> had an outstanding Q2, as a growing share taking company, we expect every quarter to be record breaking but this.
<unk> was extraordinary sales revenue and profitability were well above expectations revenue growth this quarter.
<unk> exceeded 23% and we had the highest Q2 operating profit in our history.
Especially pleased with the growth of both our new and existing products.
The balance of performance geographically.
And our continuing penetration of cloud and large enterprise.
These are all key parts of our long term strategy.
<unk> that we've shared over the past several years.
Results also show that our strategy of investing into the pandemic and specifically investing in our enterprise sales capability and expanding our product line was the right one.
As we discussed in past calls, we predicted that pure growth.
Accelerate as business has adjusted to the Covid environment.
We believe that our growth will be even stronger as businesses return to an in office environment.
We estimated that this would start this past Q2, and we are obviously very pleased with the results.
Looking ahead, we expect that business will continue.
<unk> would have to adjust to the effects of the pandemic, while driving digital transformation.
We believe that the Delta variant is slow to return to the office environment only temporarily and that large scale global vaccinations will do much to enable a full return to normal by spring of next year.
As we indicated last quarter, we believe that the current environment enables us to return to our historical double digit growth rates with increasing profitability.
Our leadership and innovation of the data storage and management market continues to grow.
Our strategy is focused on delivering a unified.
Our operating and procurement model across all data storage use cases and environments.
Enabling modern cloud native applications built on containers.
And driving the modernization of today's infrastructure with a focus on the all flash future that modern applications will demand.
What.
<unk> clock quick look at the results.
This past quarter provided many areas of outstanding performance highlighted by the highest total sales for any second quarter in the history of the company growing more than 30% year over year.
Continued strength and momentum in subscription services revenue up.
Let's take 1% year over year with strong growth in pure as a service, which almost doubled revenues compared to the prior year.
And our success in large enterprise continues to grow comprising over 50% of our sales with our top 10 customers spending more than $100 million in.
31.
As I mentioned, both our new and existing products achieved new sales milestones frankly, the superlatives from this quarter are too numerous to fully enumerate, but here are a few highlights.
Growth of our subscription businesses were very strong this past quarter with.
Totals of both pure as a service and Port works approximately tripling year over year.
All subscription sales taken together.
<unk> Port works pure as a service and evergreen increased almost 50% year over year in Q2 and is approaching one half of purest total sales.
These results show both the continued attractiveness of our evergreen model and the market's excitement for our new subscription offerings.
It has been nearly a year since we announced the acquisition of Port works every quarter as part of pure Port works has beaten their targets this past quarter port work sales tripled.
Sale every year and continued to gain many new customers, both large and small.
Financial services and service providers are particularly interested in the ability to easily scale container based workflows with port works.
Flash array C continues to deliver tremendous growth with sales tripling over.
Last year ever.
It remains the fastest growing new product in <unk> history, and is enabling customers to transition to an all flash data center cloud.
Cloud customers in particular are making use of flash array seat to improve their reliability to reduce their environmental footprint and to lower their operational costs.
Rippled your incidence.
A recent eight figure win with a top 10, hyperscale or which will begin to ship. This Q3 was one against traditional magnetic disk based on our high performance small space and power footprint and superior total cost of ownership.
Safe mode.
Is another compelling reason why ever more customers are turning to pure.
This high performance Ransomware protection solution for both flash array and flash blade takes less than a millisecond to create an immutable copy of data for fast recovery.
And customers can send these snap.
Good to a variety of destinations such as flash or AC flash blade or AWS, Microsoft Azure and NFS shares.
Only six months after introduction over 500 customers have enabled safe mode.
These examples demonstrate the success.
Shot strategy to provide organizations with the modern data services, they need to modernize their data infrastructure.
To take advantage of modern applications and to manage their data and infrastructure through code in a multi cloud environment.
Our focus on these goals has been rewarded with new and <unk>.
Of ours and customer relationships.
For example, one of our enterprise customers a global Fortune 500 financial services firm recently chose a pure as a service subscription to fuel the expansion of their core operating applications in a virtual hub.
While increasing the performance.
[noise] spanned the ability and scale of this global platform, they were able to reduce their physical footprint by nearly 80% contributing significantly to their environmental.
Sustainability goals.
They estimate that this will reduce their total cost of ownership by nearly 70%, while providing significant performance.
Flex and with growing global concerns about ransomware attacks.
U K based securities firm with sub millisecond performance requirements.
Performance simplicity, and safety and pure recovery capabilities.
Using flash arrays safe mode, with our flash blade flashed recover solution on.
Inquiry for Green gold subscription they now have the data protection and unified fast file and object platform they need to scale safely.
Our strategy since our founding is to focus on doing the right things for our customers and on doing things right.
Our environmental goals dovetail with our customer.
On an F values.
Part of ensuring that our products and services have the lowest total cost of ownership means designing products that use less energy require less cooling need less maintenance take up less space and produce less waste.
With our customers increasing focus on their own environmental footprint we.
<unk> for providing more quantitative measures and sustainability programs going forward.
Pure storage is advantaged by the major trends in our industry, we enable companies around the world to shift to a cloud operating model for their private and hybrid cloud infrastructure, we lead in driving the all flash.
We'll do better and we have the most advanced services and tools to automate data management for a modern cloud native applications.
As we entered the year, we stated that our customers would accelerate their investment in digital transformation with renewed confidence in economic recovery this year.
This was clearly evident.
Data is in our performance in the first half and especially this past Q2.
In the current environment, we are confident that the momentum of our first half will continue into Q3.
Evidenced by our Q3 guide and raised annual outlook.
I want to thank our employees and our partners who have worked tirelessly.
Tirelessly to support our customers with great products and great service throughout the uncertainty of COVID-19, and who have created our sustainable momentum.
Everyone at pure deserves to feel proud of the advancements we've made through this difficult period.
One last note that I would like to add before.
Before I turn the call over to our CFO Kevan Chrysler.
I am very pleased to announce that Rob Lee who many of you know has just been promoted and will serve as pure as Chief Technology Officer, Congratulations Rob.
John call growth 8-K caused who in addition to his title.
As founder also served as CTO will now take the title of Chief Visionary Officer.
Rob will continue to report to him and cars will continue to serve pure full time <unk>.
Gratulation, Rob and costs.
Kevin over to you.
Thank you Charlie and good afternoon.
We cannot be more pleased with the strength of our business our execution in Q2 financial results.
We saw strong sales execution across the globe, which is reflected in our sales growth of 32% excluding countable orders.
Similar to what we saw last quarter are into.
Our portfolio, including our subscription services contributed to our performance.
Our core business of flash array ex gained significant strength across our enterprise commercial and public sector customers flush or AC sales more than tripled year over year and flash blade sales established.
Tyre new record high for Q2.
Our revenue growth was 23% this quarter and product revenue had its highest year over year growth rate compared to the previous seven quarters.
Remaining performance obligations or our P O, which includes our committed and noncancelable future revenue.
At 1.2 billion growing 25% <unk> growth reflects the continued strength of our subscription services.
Including record sales this quarter of our unified subscription tiers of service.
We acquired 380, new customers representing 10%.
With year over year growth and we saw particular strength with new enterprise customers this quarter.
Now turning to specific financial results for the quarter.
Total revenue grew 23% to approximately $497 million.
Revenue in the United States grew 25% and.
National revenue grew 18% compared to last year.
Subscription services revenue grew approximately 31% year over year and represents approximately 35% of total revenue.
Product revenue was very strong during the quarter growing 19%.
The differentiated value.
<unk> Internet software and solutions continue to be reflected in our non-GAAP total gross margins of 75% this quarter.
Non-GAAP product gross margins continue to be on the high end of our long term expectations at 73%.
We expect that product margins will fluctuate depending on product.
You have a mixed as our newer offerings continued to scale.
Non-GAAP subscription services margins were 77%.
Revenue and gross margin outperformance and improving sales efficiency contributed to delivering strong non-GAAP operating profits of 40.
Product, one 6 million.
<unk> reduced travel due to the ongoing COVID-19 environment and slower than planned hiring also contributed to lower operating expenses during the quarter.
We ended the quarter with over 1.29 billion in cash and approximately 3900 employees.
Cash.
Six both from operations achieved a record high this quarter of $123 million, resulting from improved linearity and strong collections as well as increasing operating leverage and capital expenditures were $28 million during the quarter.
We returned approximately.
Cash flow of $4 million of capital to repurchased slightly over $2.3 million shares as part of our 200 million share repurchase program.
Now turning to guidance.
We are very pleased with our sustained momentum and improving operational efficiencies.
We expect.
43 revenue to be approximately $530 million growing almost 30%.
Our revenue guide for Q3 includes revenue, we expect to recognize in connection with the sale of flash array see to one of the top 10 hyperscale.
We also expect non-GAAP operating profit will be approx.
Qs My 40 million.
I have mentioned in previous quarters that we would not be updating our annual view.
However, given the strong performance of our business over the last several quarters, including our strong financial outlook for Q3, we have also updated our annual view.
We now expect.
Products revenue for the year will surpass 2 billion growing approximately 21% to 2.04 billion.
We also expect that operating income will be approximately $150 million.
This is an exciting time up here, our strategy innovation and service.
Check that repelling for our customers and we are executing with a focus on accelerating revenue growth and increasing profitability.
Q2, all of our employees and partners.
I'm also really looking forward to having you join us at our virtual analyst day on September 28.
With.
I will turn it over to the operator, so we can get to your questions.
Thank you ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone and the interest of time, we ask that you. Please limit yourself to one question and one follow up question. Once your questions have been answered please jump back in.
That in and answer Q, well pause for just a moment to compile the Q&A roster.
And your first question comes from the line of pendulum in.
With J P. Morgan.
Oh.
Great.
Thank you guys and good afternoon congrats.
Question on it seems like a super solid.
Quarter here.
Probably one of the highest beats I think if I was just looking at it going backward.
Charlie maybe at a high level did anything surprise you in the quarter. When we were doing checks a lot of partners kind of highlighted that pure continues to be.
On the club continues to see relatively short lead times, while competitors kind of struggled with elongated lead times do you think that is helping you to gain share anything that surprised you in the quarter and up to now.
Thanks Pendulum I think the reason why were we continue to gain share and why the quarter was so good is that you know we've been preparing a.
Our portfolio of products that are really second to none.
And while you know that was being done during the beginning of the Covid crisis of course, Theres a lot of disruption.
In our customer base, but as the customers have become accustomed to operating within the Covid environment.
That portfolio and our.
Our focus on developing.
Set of enterprise capabilities, both in sales support as well as with our products you know, it's finally, all coming together and hitting stride and.
So do we expect this to be at the beginning if you will of of very evident growth for.
As we go forward.
Oh.
Strong comments, thank you for that one follow up.
For Kevin It seems like you were able to maintain the gross margin sequentially. If I if I did my math correctly quickly.
Despite the inflationary pressures that have been creeping up.
The company is it fair to say that you saw kind of a better pricing environment. Maybe is the component price inflation, presumably made the competitors do less discounting in the field.
Well, Hey, pendulum I you know one is as I think your math is right. So yeah, absolutely we held on gross margins and I really think that's a <unk>.
Estimates.
A couple of things I think the our operations team continues to do an outstanding job. Our suppliers are continuing to work very closely with us and yeah to hold you know to answer your question, specifically discounting did hold and I really attribute a lot of that to our sales team.
And the discipline and execution in terms.
It took how we saw the gross margin.
No.
Okay.
Your next question comes from the line of Aaron Rakers of Wells Fargo.
Yeah. Thanks, Thanks for taking my question also.
Congrats on the solid results and guide.
Hum.
Throughout.
Today's call you you referenced the fact that you've now got a hyperscale top 10, hyperscale customer it sounds like for the flash array C product I guess the question on that is that is that is that tied to their cloud offerings or is that for internal usage in and do you expect this to kind of be the beginning of more.
Throughout potential hyperscale customer traction for the company going forward and I have a follow up yes.
It's a part of their of their overall operations. So I think the answer's affirmative from from.
The question that you asked.
And you know we do feel that this is sustainable both in a sense of.
Continuing.
This customer as well as we think it's the beginning of of seeing other similarly situated hyperscale.
Customers starting to look at at Flash as well as a real alternative it as you may know most of the Hyperscale or is the vast majority of what they store the store on disk. They may have a little bit of flashing.
Going with this but for the most part all storage is on desk and we think we think this is the beginning of breaking that breaking that structure. We finally have the kind of price performance that can really compete with in the disc market.
Yeah, no very helpful.
I wanted to follow up questions on actually the subscriber.
They're served in revenue you you referenced the subscription revenue up 31% and then I think you mentioned that on a combined basis pure as a service works and I believe evergreen was up close to 50% year over year, if I, if I correctly got that so I guess I'm curious of what is other.
In that other.
Subscription with subscription services line that maybe wasn't wasn't growing as fast as the three combined that you've mentioned.
Aaron This is Kevin and this is just a clarification I think the 50% reference is really towards sales bookings and bookings are okay. So and then obviously the revenue and Theres a lag with the revenue so two different metrics here.
Okay. So just to be clear evergreen port works and pure as a service basically or are the majority if not all of the services line in the P&L. That's correct that's correct okay.
Thank you very much.
Your next question comes from the line of Sidney Ho with Deutsche Bank.
This is Jeff Rand on for Sidney just wanted to kind of follow up on the flash array see into the hyperscale or.
Can you give us an idea of how close the pricing has gone and then compared to <unk> or is this more about the need for better performance by the cloud providers.
Rob I'll jump in.
Yeah. So you know when we look at it fluctuate.
Hi, you relative to the hybrid disk systems, it's competing with.
Generally speaking, we're seeing a flush of receiving very price competitive and actually price advantageous to you know.
30% price advantage in some cases.
But I think what we're seeing especially with this large hyperscale or deal is.
Luxuries of prices one element of the equation.
But all of the other attributes and benefits were able to bring from flash.
Such as the.
Performance, such as power cooling savings footprint savings those are all very meaningful across the board, but at the Hyperscale.
They become super.
Is that right and so.
As we look at for example, this customer flush.
<unk> was the only product that can meet their needs.
Without them, having to go build new data centers.
Great. Thank you and then just as my follow up you Didnt mentioned anything on supply chain in your prepared remarks can you give us an update on that.
And you add on any revenue due to supply chain constraints.
Yeah, No again, I think we're doing a great job with our operations team in partnership with our suppliers, obviously, the environment and from our perspective hasn't changed much from what we saw last quarter.
You know, we just continue to be focused on it.
And obviously you see the results are in our print and so this will be an area that we'll continue to focus on through second half.
We will manage that but again, a testament to our sales team to continue selling the value.
Especially the software value associated with our solutions.
Your next.
Comes from the line of <unk> Mohan of Bank of America.
Yes. Thank you.
Your guidance for next quarter calls for close to 30% growth, but all of that can be explained from sort of that acceleration from 23 to 30 can be explained.
Really to easier compares.
Ours are.
On the one hand, you're seeing very good traction Charlie you spoke about share gains.
You you essentially are reiterating sort of this.
Better outlook for the full year as well.
Just trying to reconcile what why wouldn't you see a further organic acceleration on top I'm not saying.
30% 30 vessels really got but why aren't we seeing a further acceleration, especially when you think about the comments around the backdrop of delta being maybe somewhat transitory.
The one thing I'm not sure I would follow your math in terms of a 30% being entirely explained by.
The easier compare.
Last year. It does represent a significant growth rate not just over the last year, but frankly over the if we take and as a company. We are looking at not just at year over year growth rates, but year over two year growth rates because of obviously the anomalous compares with last year and it's a substantial gain even.
Our two year compare right. So you know we think it's a a suitably appropriate guide for this coming quarter given given the entire given the entire environment and it is of course, a raise you know both from our our annual look.
Even look forward as well as to what was consensus. So we do feel that that is inappropriate.
Right. Yeah. We're we're very pleased with what we're seeing in terms of the Q3 outlook and the idea that we're driving almost 30% growth next year.
With the opportunity we highly.
Look on flash array sea. So you know I I think the guide that we've come out with what Q3 is actually quite strong. So we're very pleased with that.
Okay, great and if I could I think I heard you, Kevin maybe say that.
Some of the operating margin improvement the operating profit dollar improvement was.
It's a function of.
Got it bill able to hire as fast as maybe you would have liked to can you just elaborate a little bit on that.
How much behind our U verse as target in terms of hiring how should we think about the trajectory of that over the next few quarters. Thank you yeah, absolutely and again, you know what I really.
I was pleased with the quarter was not only the <unk>.
Topline growth that we're driving but the operating leverage that's coming with it and really that's come in you know really from the sales organization.
We're seeing really strong productivity and sales efficiency and discipline and then we're seeing that come through primarily.
Merrily on the operating leverage that we saw for Q2 and frankly, the increased outlook for the remainder of the year and so when I think about the increasing operating leverage I would look at first what we're doing in terms of outperforming on sales as well as the gross margin performance execution of the sales.
<unk> team and then you know yeah, Yeah, we've got a little bit of tailwind from the Covid environment, you know as I look at Q2, I would kind of view that between one to two points.
The ninth point said that we saw this quarter, so not a not a significant tailwind, but there is a bit of a tailwind that we saw for Q2.
And yeah, we're managing that quite well, obviously with on the sales side, even though we're we're oh I've got some more hiring to do on the sales side. They are just doing such a great job in terms of productivity participation rates are tremendous we're seeing a great growth in participation rates both on individual contributors as well.
First line managers, so I like what we see there.
Your next question comes from the line of Steve Enders of Keybanc.
Hi, This is George on for Steve. Thanks for taking the question and reiterate my congrats on the quarter.
I just wanted to ask if you could give us an update on <unk>.
Your ability to close new logos.
And then in the past you've mentioned out Covid is a bit of a constraint from that but then we've seen things sort of open up and then the delta very experienced coming back. So just an update on where you stand from that perspective. Thank you.
We do feel that you know.
People working at home offices are not really being open is a bit of a constraint on.
On a new net new logo growth.
Despite that of course, we were pleased with the 10% growth we saw year over year put in past years of course, we saw more so as we.
We believe that as things open up more obviously, that's been delayed a bit because of the delta variant, but as things open up more.
Late this year early next we expect that to actually just improve our our net new logo gains.
But in the meantime, our continuation to penetrate deeper and deeper into existing accounts.
To penetrate deeper and deeper into the enterprise.
And I might point out as well that are.
<unk> net new logo gains in enterprise was actually quite a bit quite a strong so.
As you might imagine the commercial logo games swamp it.
Because there are so many more commercial accounts in terms of net new logos are net new logos tend to be dominated by commercial but actually our gain of enterprise net new logos. This past quarter was.
Actually quite healthy.
Great. Thank you that's very helpful. A quick follow up obviously you had some nice bottom line outperformance. This quarter can you give us an update on how you're thinking about driving growth versus operating leverage over the long term. Thank you.
Yeah, we we feel like at this point in time, given our product portfolio and given the.
Or are the productivity that we're seeing from the sales force, we're gonna be able to deliver both we're gonna be able to deliver both the continued double digit growth.
As well as continued improvement quarter by quarter.
In our operating profit our profit margin so.
Yeah, no we're quite confident in that.
Okay.
Your next question comes from the line of Simon Leopold of Raymond James.
Thank you for taking the question.
I first wanted to just sort of check on how you're thinking about the longer term growth trajectory because in the past Chuck Charlie you've mentioned growth exceeding 20%.
And now you put up 23, and you're guiding for 29.
Which maybe theres some easy comp to it but if you could just sort of update us on how you feel about the overall trajectory relative to your prior comment about exceeding 20%.
Yeah no.
We've.
Doing with hybrid cloud and things like the cloud block storage, but what is your what youre doing with AWS could you help us get a better assessment of how that fits into the model.
Has been about a 30% plus Oh no we.
Cloud is an area that we're very focused on and it's an area that that we that we hope can actually continue to increase for us, especially as especially.
Especially as more.
More and more customers and workloads go to either SaaS environments cloud environments and has the consumer cloud continues to scale and we feel you know as you're seeing with the flash array see that overtime, we because of our belief in the all flash data center.
Your next question comes from the line of Shannon Cross of Cross research.
Thank you very much just a couple of questions. The first strengthened cash flow our free cash flow obviously.
You're buying back stock Im curious, how youre thinking about acquisitions and other uses you hear about it you're awesome. When you announced it works and then I have a follow up. Thanks, yes. Thank you Shannon, we we continue to be investigating opportunities for for M&A.
We believe that our M&A that really.
It enhances our ability to provide.
A cloud operating model for our customers is the right way for us to be to be focused.
And you know there isn't a day a quarter or even a week that goes by where we're not investigating potential.
Potential combination for the company so Emma.
M&A continues to be an active area of investigation for us.
Let me just say I do want to comment on the the strong operating cash flows, which I think were tremendous for the company and again I think they were kind of three areas that I would attribute that to this quarter. One that was really the great linearity that the sales team drove this.
Quarter.
Which really improved our collection efforts and we saw that come through with the record operating cash flows that we saw this quarter and the other thing. Obviously is the continued focus of the company we have on operating leverage and we're seeing some good benefits from that as well.
Okay. Thanks, and then I'm just curious.
Stationary environment are.
Are you how are you thinking about component costs longer term end and also just you know some of the increased head count et cetera costs that youre seeing.
You know I know, you're managing things well and the pricing environment remains fairly positive.
Positive but.
And you know how are you thinking about this given what we're at least seeing coming from from an inflationary perspective. Thank you yeah. It's a great question. Let me start Kevin you might have a more I would really separate it into the two items that you mentioned one is component costs, which we have seen an increase on average about probably about 10%. This.
Ah in increased component costs, but of course, we live in a.
On a longer term deflationary environment on component cost. So we really view that as a temporary phenomenon and having to do with.
With supply chain shortages.
And that should come back in the next year or so to where to the standard long term.
Price reduction curve that exists in that environment on the flipside are absolutely where there's going to be in there we're already starting to see the signs of an inflationary environment around wages.
You know, our our forecast and guide to take that into account, but certainly it certainly.
You speak of is becoming.
Evidence and well one other thing I would just make sure to highlight two back to the component costs. As you know look at our approach to sourcing raw NAND really continues to be an advantage for us are really when we look at some of our other folks who are leveraging sourced ssds and leveraging our software capabilities.
To enable man management is really beneficial for us at this time as well.
All right.
Your next question comes from the line of Karl Ackerman with Cowen <unk> Company.
Yes, good afternoon gentlemen.
With Port works tripling revenue.
<unk> year over year is it now accretive to operating income.
And then second you are exiting the fiscal year and a low double digit EBIT range.
That's in line with record quarterly results exiting 2019, that's certainly really good.
The question is you know while some skeptics may suggest that's the.
Maybe the best you could do could you discuss the operational improvement since the beginning of 2020.
That would argue operating profit improvement is sustainable and enable to grow. Thank you yep.
Thanks for the question Karl that's been on People's minds.
Focusing on operational improvement productivity.
<unk> enhancement across the board of the company has been something we've been very focused on over the last several years.
Covid, obviously set us back a bit because obviously, we plan to grow into productivity.
And with Covid, we decided to continue to invest.
In areas, where we felt very important to our long term.
<unk> growth in particular.
Investing in our ability to penetrate a large enterprise, which by the way as part of productivity improvement.
And two was to invest in.
Our broad scaled portfolio of products again to help us to be able to penetrate and achieve much greater wallet.
Sure.
In in our customer base.
It was only a few years ago, where where we could only address maybe 10% of their storage needs and today, it's much wider than that so you know as we look forward over the next several quarters.
With the anticipation for the.
Topline change that we've already discussed.
We know quite strongly what our productivity gains are going to be in the different parts of our organization.
And these are productivity gains that we're gonna be able to continue.
Continued to maintain inside the company again last year was the anomaly.
For many companies but in different.
Ways, you know for us it meant that our continued investment.
We wouldn't see the productivity or the sales return on that until the economy started to improve and now we're starting to see that.
Yeah, Let me, let me just add on to that a little bit. If you don't mind, you know look I think we've made a surprise.
Prize for us in terms of the increasing operating leverage we're driving for the all due to the point that Charlie is making and you actually see the great strides our go to market, making in terms of their costs and expenses as a percentage of revenue I think that's going to continue I think we'll see over time, we will get some benefit.
Fits on R&D as well and obviously on our gross margins continue.
To should be strong we've seen that on the product gross margin side and also believe we can get more scale and improvement on the subscription gross margins overtime as a unified subscription and pure as a service scales.
So I absolutely believe.
Believe there's upward trajectory to our operating.
Thank you.
Your next question comes from the line of Rod Hall of Goldman Sachs.
Yes. Thanks for the question I guess I wanted to start Charlie with this philosophy.
Tracy sale to the Hyperscale or I'm really intrigued by that as an opportunity and I wonder if.
Maybe you could give us any more color on what that use case looks like and are there other hyperscale or in your pipeline with very similar use cases, just how big is that opportunity for you and what does that pipeline look like with those types of.
Customers and then I've got a follow up.
So first of all.
The individual opportunity itself is a very large opportunity it's not a one off.
That will continue as we go forward as we understand it.
It is a you can think of it as a general purpose.
<unk>.
Slash implementation for one of their key application environments.
The organization, but I really can't go much much further than that but it's not something that is too is unusual or extraordinary in our hyperscale environment. So it is something that is easily transferable to other hyperscale is just not.
By the way, it's not the first of the top 10, Hyperscale or is that we've sold Oh. This flash array C into it's just it's just one that is significant.
Significant for a single quarter.
And we do believe that this is something that we can continue to expand to other hyperscale orders as well and just to be clear too.
Two you know in terms of the strength, we're seeing in our Q3 guide you know look when we exclude this great opportunity that we're seeing with flash array C and a top 10, hyperscale or we're still in a comfortable 20% plus 20% year over year growth rate, excluding that opportunity. So I think that's important to note as well.
In terms of the strength is across the business and it is across the portfolio.
We're really excited about the flash array see opportunity, but its really incremental to the strength we're seeing.
Okay, Great. That's helpful. Thanks for that and then I was also interested in this comment you made on wage inflation.
I guess, it's tough to know.
And how that might play out over the next 18 to 24 months. So just curious if you guys have any thoughts on what sort of inflation, we'd be talking about we're talking about a few percentage points do you think you might incur.
Any kind of thoughts on the quantification I don't want to go I don't want to go over I don't want to overestimate.
It might be but our thinking is its going to be a few percentage points yes.
Okay, great. Thanks, a lot I appreciate it.
Yeah.
Your next question comes from the line of Amit <unk> with Evercore.
[laughter] things and thanks, taking my question I guess I have two.
What it is.
Looking at our subscription growth metrics of 31% which is.
Obviously fairly impressive and I think investors have struggled with that number a bit.
Is there a way to think about how much of this growth is coming from existing customers versus new customers and then could you also quantify the size of some of the components that are within the subscription line.
Yeah, we're not going to get into a whole lot of detail on that now obviously on virtual a financial.
Financial Analyst day, well will provide some color.
That's hopefully you'll find helpful. In terms of our subscription momentum, but look nothing's changed significantly we've got great momentum on a unified subscription with tiers of service that we've highlighted.
What works.
Still very important from us from a strategic perspective, but the performance excellence and obviously, our evergreen is our bread and butter, that's our baseline.
<unk> continues to be so for.
For the.
And what we're looking at for this year. So we'll get some more details on that as we are.
Oh look out at the analyst day, but that would be all for now.
Fair enough.
If I could just follow up if I look at the growth guide that you're providing for October quarter, and the full year. The implication obviously October will be up 29, 3% year over year, you touched on that a bit but then I think the implication for John quarter, that's going to decelerate.
To like 19, 20% I mean, that's a really good number but I'd love to understand why the deceleration that you've seen a bit of a pull in or are you just being conservative with the implied non quota numbers that'd be helpful. But I think it's important that the you know we've been talking about the a large hyper scaler, a with a top 10 hyperscale or on the flash array C that are.
Putting some more.
On our Q3 guide it looks sequentially. It's a you know even sequentially Q3 to Q4 I am pleased with what we're seeing year over year at close to 20% for the the annual outlook.
Ceding, 20% overall.
I'm pleased with it you don't really view it as a decile, especially when I think about.
String of larger opportunity that where we're digesting it.
Spec to digest in Q3 with the classroom, we see opportunity.
And your next question comes from the line of Kathy Huberty with Morgan Stanley.
Yeah. Thank you, Kevin just to come back to the third quarter contribution from the hybrid.
Hyper scaler, a count was that was the revenue contribution from that customer are baked into the rich now until your revenue outlook and are you expecting any contribution from that customer that would be material in the fourth quarter.
That's a great question you know looking at you know when we've.
Are you looking at the annual guide at the beginning now it's fair to say that we wouldn't have contemplated so it's part of our beat both from an annual perspective, and how we're looking at it for Q3.
And we're not expecting a significant amount that that come through in Q4, we would expect a larger piece in Q3.
Thank you and then just a follow up maybe for Charlie if we step away from the slower hiring in into Q, which I assume is more a function of the tight labor market. How are you thinking about hiring in the coming quarters to support the stronger demand you're seeing and the intention.
The sustained growth rates north of 20% for the foreseeable future.
Great question, Katy, obviously, we want to sustain that.
Strength Oh.
And momentum of our sales capability so.
A high degree of focus on sales teams are both U S and internationally.
And then continuing.
Okay develop further develop our infrastructure to be able to support sales. So I would say largely.
The areas of of I T.
Other areas to support our sales growth, but the large.
Our largest focus is going to be on sustaining sales momentum.
Okay.
Great. Thank you congrats on the quarter. Thank you.
Your next question comes from the line of Uh Huh <unk> with Northland capital.
Thank you and.
Congrats on the really strong breeden's, so deep in the 7% above consensus guide for.
Q3, and the implied guide for Q4, that's awesome Congratulations I appreciate it.
Yeah.
So just to be cleared as top 10% of revenue contribution for Q3 very clear now what it's going to how much does it contribute though during Q2, though.
We didn't have an impact for.
No impact for Q2, okay great.
And then you said the paas doubled in revenue year over year, but what about Paas bookings.
Oh, so paas bookings almost tripled.
Most tripled year over year.
Wow, Okay. That's.
It's very impressive then.
And then finally.
Yeah absolutely.
And then finally.
And you haven't had your long term models listed in your presentation for a couple of quarters now, presumably that's because your book to update at the upcoming Investor Day is that correct. That's correct.
Okay.
Okay, great. Thank you very much appreciate it.
Your next question comes from the line of Matt Cabral with credit Suisse.
Yes, thank you very much.
I wanted to dig a little bit more into cloud block store I think it's.
<unk> coming up on six months since you guys went GAA on Azure.
Just curious what the ramp has been there so far and if theres any way to compare and contrast, what the ramp on Azure is look like compared to what you saw in AWS. The first time around.
Yeah, absolutely well.
As we've said in the Paas cloud block store, a fundamental part of our overall pure as a service subscription and no doubt it.
Was very critical in driving part of that growth of the pure as a service.
As you know many customers.
<unk> already determined.
Which of the Hyperscale or if they want to use and it's been instrumental in several of our pure as a service deals.
Some with some very large you know certainly fortune 50.
Companies that had set their sights on on Azure.
From that standpoint are very strong and then with respect to actual deployment on cloud block store actually I'm going to let Rob take that because he's the one that's been most are tied into it.
Yeah. So you know on the deployments you know others come on.
Really strong right. So we've seen we see customers now deploying across AWS and Azure I would say demand for Azure.
It tends to be a little bit stronger.
But if we step back from it.
We look at cloud block store and that's a combination.
It really is as forming the backbone of our R. R.
Our cloud portfolio, and we're seeing strength across the board there.
Really both from customers that are deploying in cloud day one.
With both Port works and put blocks are now available on multiple cloud providers, but as well the customers that are starting out with tiers of service through the unified subscription on premise and then later on growing.
And transitioning into azure or AWS and.
And so we see both of those motions and I think that just validates.
Our strategy as well as you know our thesis that customers continue to value the flexibility and uniformity that we're able to deliver across the prem hybrid cloud and multi cloud.
I will say just to finalize our thoughts on on cloud block store.
That it is a fundamental part of the unified subscription we rarely see although we do see some customers that will just go to cloud block store without having a raise on prem, but far more customers are using it as a way for them.
To be able to transition from on Prem into the cloud.
And therefore, the it starts off as a unified subscription and then they start to migrate whether it's for disaster recovery or other capabilities Dev test into the.
The cloud environment using cloud block store, so it tends to be a personal.
First of all an attractive element to the enterprise subscription, but secondly taken advantage of subsequent to.
Two the engagement on the on a pure as a service.
Got it all all of that is really helpful. And then just.
My follow up you called out enterprise momentum several times in the prepared remarks.
Couple of times in the Q&A, but I was wondering if you can spend a little bit more on the biggest contributors or drivers to that strength.
I'm curious if there's any way to think about how much of that momentum is just bigger footprint within existing customers versus getting into some net new wins versus the competitive landscape and maybe there's been a little bit bigger than they were in the past.
Yeah, it's actually all of the above first of all having a broader portfolio gets you more respect within within an enterprise customer, whether that's a new customer or an existing customer.
We had a we had the enterprise customers of four years ago, when I first joined and there first.
Our response to me is.
Pure your grades, but we can only use you for this for this specialized environment why can't you build products to cover the rest of our.
Reservoir storage footprint, and so having a broad portfolio is necessary to be a good partner to an enterprise customer. It also allows you to compete for larger.
Deals inside those customers and then for a number of customers and this was certainly true with a lot of banking customers until we could reach a certain scale and address a certain percentage of their footprint. They actually didn't even want to talk to us because.
Because they want to have.
Very significant relationships so it really.
So then going back to the beginning of your question, it's been because of the investments that we've made into enterprise capabilities, both sales as well as support it's been investment in the breath.
<unk> of the product line.
And it's been about a maturing our own organization in terms of how to work with enterprise.
Enterprise customers. So all of those have contributed to our ability to and our success that we've seen in expanding our enterprise business.
Just to add onto that you know I think one of the areas, we haven't talked too much about today.
Portfolio is flushed played and I think that's a great example of where we've invested in broadening the portfolio broadening our enterprise capabilities.
Abilities and feature sets.
It's reflective in the strength, we saw flush played out did extremely well in terms of large deals and and just getting back to Charlie's point, having the breadth of enterprise capabilities in the portfolio, whether it's a pleasure to see which we've talked quite a bit about a flush reacts are flushed blade.
Having all of that together really just helps us go and prosecute these opportunities.
And your last question comes from the line of Matt Sheerin with Stifel.
Yes, hi, Thanks for squeezing me in Charlie in your opening remarks, you talked about seeing somewhat of a slowdown in.
Return to office on Prem.
And certainly we've heard that from other companies as well your guidance for the quarter as strong even without that hyperscale.
Deal. So could you give us more color on what you're hearing from customers and partners about timing of projects and in your visibility is it better or.
Or perhaps weaker because of that.
I think our visibility into their build outs has been excellent. It really has so that they share a very they share openly with us obviously, you're planning a build out it takes some time. So they do want to share openly I would say that the returns we've been remember theres.
There's only about a couple of months when there was people returning to the office and then it got slowed down right away. So most of most of the improvement. We're seeing is from the improvement of working in a COVID-19 environment, not because things freed up tremendously Oh.
Over the summer. So you know our guy just as I'd mentioned before just reflects the way the world is.
As we see it today not based on any further opening up.
We do think that when when the World does open up we'll see even better.
Even better performance to be clear.
I would say that if anything on a very small basis. What we did see was some projects move out but not because of COVID-19. It was all.
Because of our customers the ability to get other products for their build out.
Yeah with servers networking sheet metal is power supplies whatever it might be.
We definitely we definitely saw it.
Expected timelines push out a bit on in some customer invite.
Environment.
But all of that I think bodes well for us in the future as things improve.
Okay. Thank you and you talked a lot about the strength you're seeing from the enterprise customer.
Customer base again last quarter, you called out commercial is finally picking up is that continuing to hold up are you seeing any other.
Signs there.
It did it did hold up but it didn't improve any more than it did last time. So that's what we're waiting for you know what.
As Covid improves we think commercial will pick up even more but it did hold up certainly through this last quarter and we expect it to hold up through this quarter, Yeah, I think the commercial business. It did really well I mean, obviously coming off.
Fantastic quarter last quarter, and then had been holding onto that strength I think it's pretty impressive. So we were impressed with both enterprise and commercial.
And this concludes the question and answer session at this time I'll turn the call.
Call back over to Charlie Giancarlo for closing remarks.
Such operator, well Q2 has really been a fantastic quarter for pure as our strategy and our execution have become evident this quarter.
Yours being chosen because we deliver a leading and highly differentiated technology with also best in class customer experience. It's.
It's a very exciting time at pure and we're in a great innovation.
Thank you all our portfolio and our sales.
Momentum and our execution has never been stronger I do want to recognize again the hard work of all of our employees at pure and the strong collaboration that we've had from our business partners everyone's singularly focused on delivering strong results for our customers. Thank you all and have a good evening.
Michael with this concludes today's conference call you may now disconnect.
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