Q3 2022 Pure Storage Inc Earnings Call
President of Investor relations of pure storage.
Joining me today at our CEO.
Gian Carlo.
Our CFO, Kevin Chrysler and our CTO raw bleed.
Before we begin I would like to remind you that during the call.
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.
Our growth in sales prospects.
Competitive industry and technology trends.
Our strategy has its advantages.
Our current and future product offerings.
And our business and operations.
Any forward looking statements have been bank are based on facts and assumptions as of today and.
And we undertake no obligation to update them.
Our actual results may differ materially.
From the results forecasted and reported results should not be considered as an indication of future performance.
A discussion of some of the risks and uncertainties relating to our business is contained in our filings with the SEC and we refer you to these public filings.
During this call we will discuss non-GAAP measures in talking about the company's performance.
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, we mean total bookings excluding constable orders.
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.
Welcome everyone.
As American families and many of you get ready for Thanksgiving all of us at pure extend to U R. Thanks for joining us today to discuss another terrific quarter.
We are very pleased with our Q3 results, which demonstrate what can be achieved when great innovation and enthusiastic customer focus worked together.
Our Q3 revenue was up 37% year over year with.
With double digit quarter over quarter growth across all product lines and across both U S and international markets.
We were also pleased with our strong profitability trend continuing through this fiscal year.
With a sustained and steady growth across all key regions products and customer segments pure continues to take share in this large and growing market.
Our strategy to deliver a modern data experience to our customers and partners continues to lead the industry with new first almost every quarter as we deliver on all aspects of the modern data experience.
Modernizing data infrastructure operations and applications.
This quarter, we announced the latest additions to our product portfolio that brings storage and applications even closer together.
Pure fusion, our new software defined multi cloud self service storage environment is a major advance that will allow customers to better manage their data in a multi cloud environment, while enabling developers to deploy sophisticated data storage services on demand.
We also announced Port works data services, which will further allow those self same developers to quickly deploy production grade data services on kubernetes.
Together with advances in our pure one digital experience pure is enabling a cloud operating model for enterprises everywhere and engagement has been strong.
Our next announcement on December 8th will push infrastructure modernization modernization, even further and extend the breadth of our flash array platform.
Today.
All of <unk> capabilities are available as a service we continue to see strong growth across evergreen pure as a service and port works, which together represent a third of our revenues.
Gartner has once again validated tours leadership in both of their storage magic quadrants, recognizing our execution envisioned in primary storage and in the rapidly growing file and object market for unstructured data.
Given our speed and breadth of innovation it should not be a surprise that more and more customers are purchasing the full pure portfolio.
This quarter the Commonwealth of Massachusetts chose a full pure as a service solution with flash array and flash stacked for block performance and capacity.
Flash blade for unified fast file and object.
And our port work suite to Containerize and modernize applications.
The Commonwealth of Massachusetts said that what put pure ahead of the competition was our ability to provide them with what they described as a data plane as a service offering that can work with any data type.
Provide ransomware protection and rapid recovery and skill seamlessly all delivered through an SLA for transparency reliability and cost effectiveness.
One of their first use cases will be to modernize and application for Massachusetts law enforcement.
Using tour and Port works, they will provide fast distributed access to criminal record information with no degradation, even under heavy load increasing the safety of their law enforcement personnel and the public.
Pure continues to see strong adoption in the public sector state.
State and local governments and agencies have long been a strong segment for pure.
I am pleased that we are seeing steady progress and traction with U S federal and international governmental agencies.
For instance, we now have deployments in all three branches of the U S. Federal government and three branches of the U S Department of defense.
Enterprise and commercial markets continue to experience strong growth.
Pure is proud to deliver our modern data experience to now more than 50% of fortune 500 companies and almost 50% of Fortune Global 500 list companies, which speaks to the universal appeal of our portfolio.
I will now turn briefly to two topics very much in the news and on investors' minds.
Our global customers and prospects are beginning to appreciate the power <unk>.
And green advantage of pure and buy power I am not referring to I offshore throughput and by Green I am not referring to our evergreen subscriptions.
Simply speaking tours products use dramatically less energy and create far less waste than competitive offerings.
We take this expanded scope and responsibility very seriously and look forward to publishing our first environmental social and governance report early next calendar year.
When customers learn how much our solutions reduce energy space and waste in their environmental footprint pure becomes a true partner in helping them achieve their ESG objectives.
Supply chains on everyone's mind and no company is immune to this disruption as.
As we have reported in the past pure has built a very robust supply chain based on strong open and trusted relationships with our partners.
Our strategy incorporates manufacturing and operations in multiple sites and on multiple continents.
To enable flexibility resilience and global responsiveness.
This past quarter.
Global semiconductor availability was more challenging than last quarter and we expect this environment to continue into next year.
However, our operations team and the strong partnerships, we've built with our suppliers have continued to work well minimizing impacts to our customers and our business.
Knowing that our products are helping people all over the world is incredibly motivating to our team.
I am proud of how well pure employees have innovated executed and delivered our modern data experience to customers. Despite the continuing COVID-19 environment and the many other challenges they may individually face.
I'd like to give a special shout out and congratulations to our new Chief revenue Officer, Dan Fitzsimmons, who is six years at pure has risen to every challenge we've thrown at them most.
Most recently, leading our Americas business to increasing excellence.
Dan It's elevation is indicative of the deep leadership and bench strength, we have across the company.
Given the effectiveness of our team the quality of our products and the strength of our customer and partner relationships the future remains bright for pure.
Kevin over to you. Thank you Charlie and good afternoon. We are very pleased with the continued robust demand across our entire portfolio.
As well as our execution there.
<unk>, both strong revenue growth and operating profit during the quarter.
The high demand we saw this quarter was balanced and was evidenced by ourselves.
41% excluding.
We didn't cancel borders.
Also include sales of flash array see to one of the top 10 Hyperscale.
Okay.
Many.
<unk> disruptions.
For our customers despite.
And environment that is dynamic.
We are also pleased with the continued progress of our subscription business.
Subscription services revenue grew approximately 38% year over year.
Subscription E R R or annual recurring revenue was $788 million.
Growing at 30%.
I think compared to last year subscription <unk> includes the annualized value of all active subscription contracts as of the last day of the quarter.
<unk> annualized on demand revenue.
Remaining performance obligations or our P O, which includes our committed and noncancelable future revenue was over $1 2 billion growing at 27%.
We saw an improvement in new customer acquisition with 345, new customers, representing 12% year over year growth.
New customer acquisitions were balanced across geography market segment, and our solutions portfolio.
Our total customer count has exceeded 9500 customers, which includes over 50% of fortune 500 companies.
Now turning to additional specific financial results for the quarter.
<unk> revenue grew 37% to approximately $563 million.
Revenue in the United States grew 35% and international revenue grew 42% compared to last year.
With the strong demand this quarter, including the sale of flash array see to one of the top 10 hyperscale.
Product revenue was very strong growing approximately 37%.
Non-GAAP total gross margins were 68, 5% this quarter.
The decline in non-GAAP total gross margins, both sequentially and compared to the last year is driven by non-GAAP product gross margins, which were 66, 7% in Q3.
Our sale of flash array see to one of the top 10, hyper scaler this quarter and to a lesser extent increasing supply chain costs were the primary drivers we saw impacting product gross margins this quarter.
Non-GAAP subscription services margins continue to trend favorably at 72, 1% this quarter.
We achieved nearly 70 million of non-GAAP operating profit and 12, 3% of non-GAAP operating margin this quarter.
Increasing revenue growth sales efficiency and the effects of the Covid environment contributed to our increasing profitability.
We estimate that the effects of the Covid environment are approximately two points of benefit to our operating margin this quarter. These.
These reduced expenses generally relate to significantly reduce travel physical marketing events and slower than planned hiring.
We ended the quarter with over 1.36 billion in cash and approximately 4000 employees.
Cash flow from operations of $127 million were again very strong this quarter.
And capital expenditures were $25 7 million during the quarter.
We returned approximately $56 million of capital to repurchased slightly over $2 3 million shares.
At the end of the quarter, we have approximately $70 million remaining from our 200 million share repurchase program.
Now turning to Q4 guidance.
We expect strong demand in Q4 with estimated revenue to be approximately $630 million growing 25%.
We also expect continued healthy profitability.
With non-GAAP operating profit estimated to be approximately $90 million in Q4.
Representing approximately 14% non-GAAP operating margin.
For the full fiscal year, given the strong performance of our business in Q3 and outlook for Q4, we are also raising our annual guidance.
We now expect that revenue for FY 'twenty, two will be $2 1 billion growing approximately 25%.
Non-GAAP operating profit is estimated to be approximately $206 million rep.
Representing approximately 10% non-GAAP operating margin.
In closing.
Our highly differentiated and innovative portfolio and services is why our customers are choosing Pierre.
I want to thank our entire payer team and channel partners for continuing to deliver terrific results.
While navigating a dynamic environment.
With that 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.
Interest of time, we ask you please limit yourself to one question and one follow up question.
What's your questions have been answered please jump back into the well pause for just a moment to compile the Q&A roster.
Right.
Okay.
[music] jewelry.
Yes.
Right.
[laughter] angry.
I don't know if you wanted me to do a dance or something.
Okay. So I guess the E mail.
My main question.
Two is can you rank order the main factors through driving or obviously this is a bit of a weird year given that the comps are pretty easy.
But.
So maybe just macro execution, new products, and then maybe competitor weakness because we know.
Or that some of your competitors are struggling with supply and I don't know if that do you think that's factoring in as well to your performance yeah adjacent time, describing this quarter only in the central.
This past quarter so.
They seem to only diminish everything else that was going mentioned very balanced across new.
Products.
Laurie.
Having products like flash array also.
Did very well.
Balanced and strong growth across the world.
Great participation from our sales force so.
A very balanced among the sales force as well if I were to rank. It I would have to do so not so much on <unk>.
To do it I'm very general terms.
Obviously as you point out.
Comps are easier, but even if you were to compare us on two year comps you know the results are very good I really believe.
Of the investments that we've been making over over multiple years that are finally coming together the investments we've made.
In enterprise the investments we've made in broadening out our product line to be a much broader.
Supplier to major.
There's been a stronger market throughout.
The Covid environment all of these have really contributed to our strength and the fact that we've continued to advance the technology as we pointed out hyperscale pillars looking too.
Our infrastructure and of course.
This quarter.
Added to this quarter.
Again, it is very promising.
For us.
In terms of we think all of these investments will continue to pay dividends as we go forward. So does that does that and yeah. That's great and then that's perfect and then Kevin is there any early look at fiscal 'twenty, three and how we should be thinking about.
Both top line and then you know the operating margin obviously, you've got some serious outperformance this year.
You just mentioned two points benefits any kind of.
On fiscal 'twenty three for us.
When you think about it from a demand lands.
Continues to be robust.
As we think about Q4 I wouldn't see a significant change.
As you mentioned for next year.
Sure.
We'd like to see how the remainder of this year plays out with our guide that is reflecting continued strength.
In Q4, a couple of callouts when we do think about next year, let these terrific as well by the Covid environment. So we do need.
You take that into account and then obviously the hyperscale right.
Opportunity that's being reflected in.
But when we think about when we think about next year, but hopefully that's helpful. Jason.
Yes. Thank you.
Yeah.
Your next question comes from the line of Aaron Rakers with Wells Fargo.
Yes. Thanks.
Thanks for taking the question.
I guess I wanted to kind of build off that last point you know.
Can you help us appreciate how meaningful that cloud a bigger deal did that all impact. This last quarter is there any expectation of follow on for cloud opportunities and maybe in that same vein can you talk about I think recently you announced the relationship.
Eric So first of all no the E D a.
<unk> was was separate from the top 10, hyperscale or obviously if we.
Felt we could have announced it.
We certainly would've but the customer is a wants to keep this confidential. So we certainly respect that on the hyperscale or but the EBITDA. One is one yes, we work very closely with the with.
With Microsoft to develop it where customers wanted to have very high speed performance on EDA workloads. It is not necessarily restricted or we don't believe that the architecture is restricted to EDA workloads.
But.
We think that that's something that's going to scale well for us. So we're looking forward to that now, but the hyperscale or was different I'll, let Kevin.
Respond with how you know what we've given you some.
Insight into how the hyperscale affected the quarter, yeah, and it's not that different than how we were talking about it last quarter as part of our guide, but hey, if you think about.
With the quarter being complete and if we were to exclude the hyperscale or opportunity that came through this quarter or year over year growth would more likely be in the high 20, because it is a good way to be thinking about it.
Okay.
And that's helpful. And then just so I understand there is there's nothing embedded in this quarter.
From a hyperscale and pumpkin win.
We announced the win last quarter, but we booked it fulfilled this quarter. So that is in Q3.
Okay, and then yeah yeah.
And then as a quick follow up I'm just curious on gross margin I know you talked about the hyperscale deal impacting gross margin, but <unk>.
<unk> gross margin cost headwinds and stuff do do we think that those.
To abate do you feel comfortable still that you know that 70% plus gross margin that you outlined at the analyst day is achievable and how should we think about that next couple of quarters. Thank you, yes that sounds great and that gross margin I think on the 70% was more akin to the subscription our subscription business, but hey, when we think about it from a product gross margin.
Or a total perspective look the largest driver.
This quarter was the hyperscale or opportunity. It did have some headwinds increasing component costs that we saw in the quarter, but that would be.
Driver if you will in terms of what we saw.
In the sequential and year over year drop in product gross margins and hey, when I when I think about looking into Q4, I do expect our product gross margins when normalized.
It's a good way to think about it and that's even.
Cost increases that we're contemplating.
Thank you.
Your next question comes from the line of.
Thanks, Chris.
I wanted to maybe just get a better sense of where you are in terms of the pure software.
Our product revenue or contribution within the mix. So I know pure fusion is new but.
<unk> been around a bit.
Is this something you could you could break out for us.
Well you know.
Simon as you probably know, especially on new products.
As they grow not to not to break them out.
I find it.
And then you have too much focus on the new.
Products not enough on the total.
On the on the total revenue line, but what I would say.
As well as pure as a service they're growing.
Very well typically.
A range on it on a year over year.
Yeah, I would say in terms of a breakout.
We're unlikely to do that in the end.
In the future, yes, that's right.
Look at the integrated <unk>.
Market, obviously, there's tremendous value.
With our software that's part of that and Thats reflected in the gross margin as well as product.
We're seeing some nice traction as Charlie pointed out on subscription <unk> year.
Year over year, so pleased with.
With what we're seeing there and then obviously.
The large driver in the value and the economics, we're seeing.
Thanks, and just as a follow up.
Package.
The use case.
Okay.
Hyperscale or and what I'm really trying to get at this question with an understanding of.
As a repeatable opportunity either with this customer or other.
In the UK.
And whether we should think of this as a new leg of growth or more of a one off project. Thank you.
Thanks, Simon I think also Erin might have referred to this early on.
We didn't.
Specific.
Iphicles, so I just want to start off where with this particular hyperscale or we do believe it's repeatable no reason for us not to believe that it's repeatable and conversations continue.
But let me, let Rob weigh in on the general use case, yeah, so as far as the use case.
Who.
Analysis and.
And understanding of how to better deliver the Hyperscale service as part of their production environment. I think you know as far as repeat ability and understanding the use case I think what's notable.
Is the overall size and capacities that we're talking about here the performance requirement.
So it's dictated customer evaluated all the options available to them, obviously cost was a part of the equation and so obviously with the disc, but pretty quickly came to the conclusion that flush.
<unk> was really the only option that was going to solve the balance of their needs performance price footprints, so on and so forth.
And I think it's also worth noting that.
The overall footprint savings was a key part of winning the initial deal, but we are into this same customer too.
And benefits that we're delivering to them.
With a flash array solution as part of their ESG analysis and the nice thing is that these are all benefits that we're able to deliver to each and every one of our customers.
Thank you for that.
Your next question comes from the line of Rod Hall with Goldman Sachs.
Yeah.
Yes.
Okay.
On for Ryan.
Quick application.
As Ken came from early this year seems to indicate back.
Could be an extra week.
Okay.
Just wanted to double check.
Spot on yet for this for Q4 as we contemplate Q4, we do have it.
Fiscal year and that is.
Complaint it both from a revenue side and an opex side.
The revenue and Opex is about equal so I view it as a bit of a headwind for us in terms of profitability.
Probably around 14 $15 million, both on the revenue and the Opex side of the good way to be thinking about it in terms of the additional.
Gotcha.
Okay.
Yes.
Okay.
On this flash and as she hyper scale.
Wow.
No.
Basically hyperscale digital model.
Okay.
And one thing became more so hyperscale customer traction.
Going forward.
Having more conversations.
So.
Yes.
Actually I think.
Evaluating.
Any kind of under the roadmap there would be very helpful.
Yeah, well first of all we believe very strongly that as flash continues to decline.
Yes.
That there is.
So inevitably going to be a crossover point.
Wherever every every player everywhere, including the Hyperscale is where start switching from disk.
To to flash and it's just it's just a matter of time and there are particular use case or instance, before that happens we do have the best technology in the business. We are having multiple conversations with multiple parties I think it's too early.
They're big when they don't come your way.
Kidding.
I think it's a little bit too early for us to speculate on it but there are conversations and it isn't.
Before flashes used in a more substantial way alright lets say in a mainstream way.
In the Hyperscale.
Thank you Jeff.
Paula.
Audio and.
Do you mean.
Thank you Paul.
Yeah.
But we are not expecting revenue.
So from that particular Hyperscale in Q4, we shifted at all.
That point, well I'm sorry, okay. There.
Pardon.
Your next question comes from the line of Steve Enders with Keybanc.
Okay.
Okay, great. Thanks for thanks for taking the question.
Wanted to touch a little bit more on the on the <unk> guide pretty strong.
<unk> revenue that you're expecting to see there, but just kind of wondering kind of what's built into the assumptions within that guide and how should we be thinking about kind of how the macro environment is playing out over the past.
90 days escalate into.
To lead into the.
The raise guide here.
Well, let me start and then I'll, let Kevin go into it it's based on what we see in the market today and the performance.
It's one of the world economy.
So the expectation is generally more of the same.
In terms of macro.
And Covid to continue probably.
I've been watching the news.
News into watching the figures.
It is having its seasonal effects, so seasonally it'll get a bit worse.
But we're not expecting that to make a major change too.
Our expectations is what business.
<unk>.
How business will perform this coming quarter.
What we see is a strong demand.
And you.
We believe that that strong demand is based on fundamentals of fundamental demand. We don't think it's.
We don't think that at least for our market. There's a lot of Phantom demand out there.
And.
Our lead times have stayed relatively low our customers know that so there they can order when they need it not when not to game the system.
Yeah, and Steve I, probably wouldn't have much more to add on that I think we've got good visibility in terms of how we're looking at Q4 two.
To Charlie's point demand still is robust in terms of what we're looking at no no real change in that trajectory.
Understanding that there's a little bit.
Now to Q4.
Okay great.
That's helpful and then just.
Just on just on the hiring environment.
And it sounds like there might have been a little bit behind.
And plan in the quarter.
And kind of anything to call out there.
They are in terms of where the biggest challenges are and when you kind of see that.
Is that beginning to reverse.
Yeah.
I would say that you're.
Are you being a bit behind in hiring is across the board.
Theres no one, let's say function that stands out.
To put some context on it.
We're seeing somewhat slightly higher attrition than average years, certainly a lot more than last year last year was very low by comparison to an average year.
<unk> is a bit higher.
I would say that recruiting interestingly is the quality the quality of resumes that one Ken.
Bring on for interviews now is high.
So the good news is.
That there.
There are lots of good people available.
Good news is there are there are a lot of.
Lots of slots that we need to fill but you know we're confident we'll be able to catch up.
Yeah, and I would just add on to that that we are seeing a nice pickup in terms of our hiring cadence.
Through our talent acquisition team doing a nice job on that front and that's been contemplated obviously and in the Q4 guide is you'll see a pickup in opex sequentially and that's not only the additional week that also contemplates a pick up in pace that we're seeing in hiring talent as well.
Okay perfect. Thanks for thanks for taking the questions.
Your next question comes from the line of Onesie, <unk> Mellon with John on the <unk>.
My first question, so you've mentioned about the supply chain constraint.
One is the corner.
I was just wondering if you could maybe quantify the impact.
From a revenue standpoint.
I just want to confirm the guide reflects.
Supply chain uncertainty.
And maybe what I'll do is talk just more tactically in terms of the impact for the quarter.
Maybe have Charlie just talk about it more from a from a holistic standpoint, because I think the operations team and our engineering team as well as our suppliers continue to a terrific job and look when that when I look at it for the quarter. Obviously, you saw a drop in product gross margins, both sequentially and year over year.
As I mentioned to a smaller piece of that is really due to the component cost increases that we saw during.
During the quarter that was moderated slightly by the fact that our asps are still quite stable and we are quite competitive in the marketplace, but with that I'll turn it over to Charlie to give some more a holistic macro comments on.
On the macro side.
We see.
<unk>.
All costs associated with the supply chain, so component transformation and in logistics.
Logistics costs.
Have all increased on an annual basis, we think on the order.
Now of approximately 10%.
So you know.
That's a significant cost increase in what is traditionally a deflationary market for technology products.
So.
So quite significant our expectation at this point is.
Is that while supply chains will remain tight we're expecting to not see the same kind of increases in costs going into next year now. It is as Kevin said, a very dynamic market on a quarter by quarter basis things can change dramatically or a little bit difficult to predict.
And that clock.
And pricing.
So is it.
But as Kevin mentioned, it's a very dynamic market and it's hard to get them completed.
Oh.
I was just wondering.
Hearing how the broader IP spending.
In storage and.
Thank you.
Yeah.
On the enterprise side, it's been quite robust. So we think quite good a lot of demand a lot more.
Data processing, taking place and upgrading.
From where it might've been without without Covid.
And we're looking forward to continue.
Your recovery there.
But I would think overall the demand for it.
Enterprise storage actually has been quite good.
Got it thank you.
Your next question comes from the line of Tim long with Barclays.
Thank you.
Maybe Charlie if you can talk a little bit or Kevin if you want to chime in.
Just obviously a good margin performance so much of next year, but.
Going to be a lot of moving parts I guess with some of the benefits be coming off since with return to work in and things like that so.
Kind of how are we thinking about leverage over the next year or two.
And the model and then second I wanted to just go back to the to the Hyperscale and flash array see if I could.
It looks like the pricing.
Resulting in a much lower gross margin for that business. Just curious how is that pricing said is it somewhat that you have to get close to disk.
Is that kind of what the bogie is going to be for all hyperscale deals or will that be different in your or pretension on repeat business is a little bit better.
So if you could just talk about kind of the dynamics around pricing and potential movements. There. Thank you.
I don't want to get too far ahead of next year, and we will certainly have a better view of this.
As we when we get it.
Get into our Q4 earnings call and projection for for next year, what I would say is where we're planning that.
We will still be under Covid rules.
Through certainly Q1, and probably most of Q2 and then as we get into the summer.
When we think we will start seeing customers being open to visits and therefore open up.
More travel.
And normal expense type category in person meetings for some of the things we do as well. So that's we'll see about a half a year of a return to.
More investment in time, we expect there to be as you saw during this even though COVID-19 very our margins in terms of.
And our sales and marketing organization.
And our engineering organization.
Being to see more leverage.
Really on a continuum.
As we go forward.
Based on based on greater productivity in the organization and that's largely based on scale.
Yeah, and I'll, just chime in a little bit more on that and then we can we can move to the hyper scaler topic, but the you know when we think about the full fiscal year with with our guide for Q4, which puts us around you know, 10% non-GAAP operating margin.
Thinking about two to three points of that is tailwind from from Covid related aspects, whether that's less travel whether that's less physical events for them from a marketing standpoint or from from a hiring standpoint, and then obviously, we're seeing a nice pace and uptick on hiring we expect that to continue.
And so when I think about next year and it's still too early to get too specific but I would expect us to continue to gain more leverage when you kind of exclude the tailwind we're seeing from Covid. So hopefully, we're giving you a sense some nice roadmap in terms of how we're thinking about that.
Okay.
On C.
I'll go back to that on C. We expect that a large portion of <unk> sales to this hyperscale, but also potentially others will be replacing if not replacing usually it goes into new builds but the new builds would be for them to look at flash rather than disk and so there'll be comparing the price to their <unk>.
<unk> disc design and as such the early wins will probably would be lower margin, but will.
To improve over time, both as flash cost improve but frankly as they gain more experience with with pure as a provider.
Okay. Thank you.
Your last question comes from the line of Karl Ackerman with Cowen.
Yes. Thank you good afternoon gentlemen.
Kevin two questions. Please from product revenue.
That's quite impressive given the ongoing supply chain constraints.
You mentioned.
I'm curious whether the upwardly revised outlook for January is also driven primarily by product revenue.
Particularly given you.
And your planned expansion of your flash array platform that you highlighted in your prepared remarks, if you could comment on that.
Oh.
Yeah, and I guess my my view on this and I'll, let Charlie and Rob add some some comment on fueled by by high demand across our portfolio, which is the you.
That translates to the growth rates, you're seeing in product revenue, but obviously, where we're also seeing good traction with our subscription business 30%.
Growth in our subscription <unk>.
And obviously, that's going to have a lag before that works its way to the P&L, but this comes back to how balanced the description business or.
Whether that's specific to say.
That's really the story.
Line here is the balanced strength that we're seeing across the board, but charlier, Rob any other points you would add on that front I think that answers that Kevin I think what youre seeing is strong demand for our.
You know subscription base.
Of course, we always want to allow the customer to buy.
I in the way in which they want to provide I want to buy right, we're expecting I would say.
We're expecting this quarter this Q4 to be balanced as well.
So.
We are seeing just to be clear, we're seeing good growth in pure as a service and obviously.
Especially the way that works from a you know given that it's ratable.
That does that starts off slow so you don't see it quite as readily.
But you know again I expect it to be balanced going into this quarter.
That's helpful. Thank you I guess as my follow up I did want to touch on margins a little bit now it seems that the entire upside in your revenue outlook for January is falling directly to operating income which is.
Quite impressive now that.
It's quite impressive and now operating margins are in line with your long term outlook.
On one hand, it seems youre benefiting from volume leverage on the other you are at least offsetting the rising input costs through pricing actions.
So in that vein could you discuss the.
<unk>.
Our ability to.
Perhaps further pass on rising input cost as they happen and secondarily, how you see revenue next year. Thank you yeah, well as we've said in the past we don't specific we don't price on a cost plus basis, we we price based on competition in the market.
Summer is newly negotiated with others.
And as such we're response.
The pricing of our competitors, rather than let's say a standardized discount.
For that customer.
Who operate on a cost plus basis.
Okay.
And so with the rising costs that exist in the market.
That finds its way into the price negotiation.
So because of that we do expect that for the most part.
Asps and cost we expect relatively stable margins it'll vary based on mix.
Obviously, you've got.
For the most part we think it'll stay relatively stable, regardless, regardless of costs now part of the mix as well is in fact as you point out the subscription offerings are.
We expect long term that those subscription offerings, because they will have higher value will be providing more services in the subscription offerings than we do in the straightforward.
Capital sale.
And as such we expect those margins to be significantly over time.
The above ours are reported standard reported margin, yeah, and just to be clear Karl the our view on on subscription margins really hasnt changed since since our analyst day and in our communication and expectations on that but to Charlie's point.
With the growth of Port works and as we scale, our pure as a service offering.
With cloud block store, but that clearly is going to give us some tailwind as we think about it longer term for our subscription gross margins are shorter term to your point, yeah, where we are.
Very much pleased with with what we're seeing.
In terms of increased profitability, even considering the tailwind from from Covid. So we like what we're seeing you know well will definitely still trade and prioritize growth, but we very much of the belief that we can drive growth and increased operating leverage as well.
Thank you.
This concludes the question and answer session. At this time I will turn the call back over to Charlie Giancarlo for closing remarks.
Thank you operator.
He has been preparing for this next phase of our growth for several years building breadth in our product line developing operational excellence center functions industry partnerships and vendor relationships and most of them.
Yes.
Want to thank our investors and our employees for their trust.
Okay. Thanks, Kevin.
This concludes today's conference call you may now disconnect.