Q1 2023 Pure Storage Inc Earnings Call
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As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference call. Mr. Feng Zhang pour money Connie. Please go ahead.
Thank you and good afternoon welcome to the pure storage first quarter fiscal 2023 earnings conference call.
My name is Sanjay Corona, Vice President of Investor Relations and treasurer at pure storage.
Joining me today are our CEO .
Charlie Giancarlo, our CFO , Kevin Kreiser, and our CTO Rob leaf.
Before we begin I would like to remind you that during this call management will make forward looking statements, which are subject to various risks and uncertainties.
These include statements regarding the COVID-19 pandemic and related disruptions.
Inflation and macro environment.
Our growth in sales prospects.
Competitive industry and technology trends our.
Our strategy and its advantages.
Our current and future product offerings, our sustainability goals and benefits and our business and 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.
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 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, we mean total bookings excluding cancel 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.
Hello, everyone and thank you for joining us today.
Once again delivered very strong results this quarter in the midst of a highly dynamic environment, we drove 50% year over year revenue growth with exceptional performance in both U S and international markets.
Enterprise expansion continues experiencing strong growth year over year.
<unk> brand is now both highly recognized and highly respected in enterprise customers worldwide and is considered a must have and any storage consideration.
We were especially delighted this quarter that a large telecom customer expanded their relationship with pure selecting our flash array product line for their <unk> deployments.
Our industry, leading subscription services business grew 35% over the same quarter last year.
<unk> unique evergreen and pure as a service models continue to resonate strongly with customers and differentiate us from the rest of the industry.
Next week at our annual accelerate conference in Los Angeles, We will announce further expansions of our evergreen portfolio.
Customers, such as Knight systems, which provides predictive behavioral analytics will share stories of how multi generational evergreen upgrades have provided huge benefits, including lowered operational cost and complexity increased uptime and lower energy consumption, yielding greater environmental.
<unk> sustainability.
On this very topic, we released our first ever environmental social and governance or ESG report this past quarter.
Particular note we were proud to show that our products make a significant and immediate reduction of data center energy usage.
Pure positively improved our customers' environmental footprint by requiring substantially less power space in cooling and by producing less waste than both legacy solutions and current competitive systems.
Customers that deploy pure are able to reduce direct energy usage in their data storage systems by up to 80%.
They are also able to reduce their data centers contribution to E waste.
More than 97% of pure arrays purchased six years ago are still in service benefiting from our industry, leading evergreen program, which actively reduces E waste while also saving.
Saving customers time money and effort.
In our ESG report, we commit to extend our leadership by further reducing our scope three emissions by 66% per petabyte by 2030.
Operating profit was very strong this quarter, continuing the trend of past quarters and benefiting benefiting from the combination of increased scale and prudent expense management.
Our investment in research and development remains strong demonstrating our commitment to innovation and belief that data storage and management is high technology and requires the same level of investment as other critical technologies too many competitors in our industry actively promote and invest in storage as a commodity.
For both enterprise customers developing modern private and hybrid cloud solutions as well as cloud service providers pure delivers the flexibility simplicity and agility required by today's operations and applications environments.
A key milestone we achieved last month was the releasing both pure fusion and Port works data services for general availability.
Sure Fusion provides an end to end storage is code platform for organizations that want to create a cloud operating model to automate and deliver data services to their organizations.
<unk> data services deliver single click deployment of multiple data services for search event streaming no sequel databases and more.
Together these two products allow customers to create a cloud operating model automating data management tasks and delivering customized data services to developers and applications through a simple unified control plane.
With these products customers will be able to modernize their data center operations, avoiding existing highly manual and costly operations for both traditional and cloud native workloads.
Flash array flash array C and flash blade all saw strong growth during the quarter setting multiple individual records.
Unstructured file and object data makes up the majority of data worldwide and flash blade has taken the lead in penetrating the file and object workloads that require high performance, such as EBITDA advanced analytics, and AI and rapid recovery.
However, the vast majority of unstructured data continues to exist primarily on lower cost disk based storage systems. Please.
Please join US next week at our accelerate conference for a game changing announcement on flash blade.
We continue our progress towards creating the all flash data center expanding into higher performance tier zero workloads with flash array XL, while also expanding our leadership in <unk>.
With our unique direct flash technology, we are using <unk> to close the price gap with magnetic storage using the latest developments in solid state storage to overtake the lower cost magnetic market requires sophisticated software and years of experience. We believe we have a multiyear advantage in delivering this price.
Performance <unk> technology, and we will showcase this next week.
This past quarter I had the opportunity to meet with many of our customers partners and team members in Europe , and the Middle East for the first time in over two years.
It was wonderful to strengthen existing relationships and build new ones and it's impossible to overstate the pleasure and the effectiveness of resuming face to face meetings.
These meetings made clear that our customers confidence in pure is high that our brand is strong and getting stronger and that we are clearly differentiating ourselves in the market simply put.
Our messages are being embraced that data storage as high technology, not a commodity as our competitors promote that.
That customers can build the cloud operating model for themselves and that evergreen is a better way to buy and operate their infrastructure.
We are also aware of current industry and customer concerns of course, one of these concerns of supply chain.
This remains a challenge across industries and around the world.
Pure focus on a simplified consistent and efficient architecture across our product line has served us and our customers well.
As fewer components means lower cost lower waste and less supplier risk.
Our architecture and World class hardware design team means that we can quickly address component supply disruptions with design modifications.
As we've stated before we have invested for years and strong relationships with our supply partners and flexible multi sourced global operations.
I'm very proud of the way our extended team have worked together to continue meeting customer.
<unk> demand with minimal disruption.
Another area of concern is inflation and its effect on the economy and on demand.
We believe inflation will be present for some time.
And we will also cause both stock market rebalancing as well as monetary and fiscal responses and this will certainly have economic effects in our market. However, we believe its influence on customer behavior will be muted in aggregate and even less for pure first.
Enterprises have now made digital transformation top on their list for this for the success of their organizations.
Next we believe pure has entered a second phase of growth enabled by an expanding portfolio of highly differentiated and leading products as well as sales and business models spanning commercial enterprise and cloud customers.
Another area of concern is cost inflation, coupled with the so called great resignation.
We have seen higher than average levels of attrition over the last year, but lower than what has been reported for the industry as a whole.
While we do expect somewhat higher labor costs this year.
We expect labor cost increases to moderate going forward.
Recently reported slowdowns of hiring in the tech space will soften the demand for technology professionals, which will in turn reduce attrition and wage inflation.
We believe that this marks the beginning of a return to the old normal.
Pure is a great place to work as validated by both external recognition and our own internal surveys, which has enabled us to recruit and retain top talent.
Our brand and our strong talent acquisition team are attracting top performance across industries, and we are hiring to our planned targets.
The final item I'd like to touch upon is the European economy, given the effects of general inflation and Russia's invasion of Ukraine.
Inflation, especially in energy is projected to dampen European economies in the near term.
While this may somewhat reduced overall investment capacity of European based businesses European customers have indicated that investment and it is required to make up for the loss of other business modalities as noted earlier.
Furthermore, higher energy costs are already increasing demand for equipment that is energy efficient something that pure excels at.
We believe that this represents another opportunity for pure to pick up more market share.
The bottom line is that technology is now the number one driving force of enterprise strategy and business transformation and pure is the innovation and customer experience leader and one of the largest segments of technology investment.
We believe that we are now positioned to see secular growth less affected by this economic cycle than our competitors.
Our full views of the impact of all of these events are taken into consideration in our guidance.
Overall, we have never been more optimistic about <unk> opportunity and growth prospects. Despite pandemic war and market turmoil pure has thrived and grown we have only gotten stronger over these last several years and we expect to delight ever more customers in the years ahead.
I'll now turn the call over to our CFO , Kevin Chrysler for a deeper look at the numbers.
Thank you Charlie and good afternoon robust demand across our portfolio outstanding execution and high resilience continued to be the constant contributing to our sustaining momentum in our very strong performance this quarter we.
We again saw solid demand across our portfolio of solutions services and geographies, we saw impressive growth in our key international geographies as well as the U S.
We continue to minimize delays and deliver for our customers as the backdrop of a challenging supply chain environment has not improved.
We also achieved increased profitability and cash flows during the quarter, resulting from our revenue growth and continued operational discipline. Despite broad based inflationary pressures.
The strength of our subscription business continues as subscription annual recurring revenue or <unk> grew 29% to 900 million remaining performance obligations or <unk>.
Grew to 143 billion.
Our RPM balanced when compared to Q1 of last year reflects a reduction of approximately 32 million relating to product shipments for an outstanding commitment with one of our global system integrators. Excluding these product shipments are also grew 29% year over year.
We continue to be very focused on growth of our new customer business, which has improved as we increase our travel.
Our total customer count reflects the acquisition of approximately 360, new customers. This quarter and includes approximately 54% of the U S Fortune 500 customers.
Total revenue for the quarter was exceptional growing over 50% to over $620 million approximately 16 million of our product revenue upside. This quarter was with several of our larger enterprise customers in the U S that we had originally forecasted to close in the second half of our fiscal year.
Our customers were pleased we were able to deliver our solutions against the earlier schedule, which is a testament to the agility and resilience of our technology and supply chain.
Growth when excluding these transactions was still a very strong 36%.
Revenue in the U S grew 57% and international revenue grew 33% year over year subscription services revenue grew approximately 35% year over year and represented approximately 35% of total revenue.
non-GAAP total gross margins were solid at 76% this quarter.
As we have continued to highlight we believe our integrated software and hardware designs continue to be a key differentiator that our customers appreciate and value high performance simplicity sustainability and resilience of our solutions are key factors contributing to our.
Gross margins of 70% this quarter.
non-GAAP subscription services gross margins also continued to be strong at 71, 5% this quarter.
We were very pleased with achieving non-GAAP operating profit of over $85 million and non-GAAP operating margins of 13, 8% this quarter.
The strength of our operating profit and margin during the quarter was further improved by transactions that occurred during the quarter, but were forecasted to close later in the year that I mentioned earlier.
Now, let's turn to the balance sheet and cash flows we ended the quarter with over 129 billion in cash and approximately 4400 employees.
Cash flow from operations was over $220 million this quarter high collections benefited both from a robust sales in both Q4 and Q1 higher profitability was also a contributing factor capital expenditures were approximately $33 million during the quarter.
As mentioned last quarter, our outstanding credit revolver balance of $250 million was paid at the beginning of this fiscal quarter.
We returned approximately $66 million of capital to repurchased slightly over $2 1 million shares during the quarter, we have approximately $184 million remaining from our $250 million share repurchase program now.
Now turning to guidance.
Clearly, we are executing well against our strategy of driving strong revenue growth and continued improvement in profitability.
We expect continued demand strength in Q2 with estimated revenue to be approximately $635 million growing approximately 28%.
We expect non-GAAP operating profit to be approximately $75 million in Q2, representing approximately 11, 8% non-GAAP operating margin.
Given our Q1 performance and outlook for Q2 as well as consideration of the current macro environment, we are raising our annual guidance for the full fiscal year.
We now expect that revenue for FY 'twenty, three will be 266 billion growing approximately 22%.
non-GAAP operating profit is estimated to be approximately $320 million, representing approximately 12% non-GAAP operating margin.
Revenue and estimated profits from transactions that were projected to close later in the year, but closed during Q1 were included in our original annual guidance.
In closing.
Our team and partners continue to deliver as a results this quarter were exceptional.
Our sustained commitment to innovation provides our customers with solutions that are highly performance and reliable.
An integrated software and hardware that require fewer components consume substantially less energy in space and produce less waste than other flash storage alternatives in the market.
Strong demand for our market, leading solutions and excellent execution in.
In particular to our supply chain provide.
Providing our leading storage and data management solutions to our customers when and where they need it will help us deliver 22% annual revenue growth along with 12% non-GAAP operating margins.
With that I will turn it over the operator, so we can get to your questions operator.
Thank you Les.
Ladies and gentlemen.
Have a question. Please press star one on your touch tone keypad.
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 the question in the queue. We will pause for just a moment to compile the Q&A roster.
The first question is from the lineup.
Raymond James You May proceed.
Thanks for taking the question I wanted to help us get a little help on Charlie.
Charlie your comments around the macro it sounds like you're acknowledging the environment is more difficult yet you sound quite upbeat.
The better understanding of what's really informing your view of how pure should be more resilient than its peers and essentially.
Are your customers, telling you that gives you the kind of confidence that.
You're essentially giving us.
Yet acknowledgment that the macro is more challenging what how do we put these things together and just as a very quick follow up if you guys could give us a little bit of insight regarding the recent announcement you made with the partnership with Snowflake I'd like to hear about that as well. Thank you.
Very good thank you Simon and hope you're well so Simon.
What we're seeing is strong momentum in the market overall all of our products customers buying more the fact that we have a stronger and broader portfolio now being being brought into a much greater set of opportunities in large existing customers and a stronger brand thats, allowing us to.
Right.
Net new logos and to penetrate with larger opportunities and larger companies is a net new logo. So we're actually seeing strength just to address your question.
I would say that our the way we're looking at the macro is a little bit different I would say we have not yet seen.
Effects.
The macro affecting us or the customers that we speak to.
But we are not blind to the fact that the macro.
The possibility of economic slowdown can affect us going forward. So I would say what we're currently seeing what I'm currently seeing in the market through through last quarter continues to be strong demand by customers and then a greater acceptance for our pure overall, just a strengthening if you will of our brand and our value proposition.
And the breadth of our value proposition to our customers.
And I'm going to let Rob answer the question on Snowflake, Yes. Simon This is Rob so to answer your question on Snowflake look we're a super excited about the hybrid cloud.
Analytics solution that we announced earlier this month.
This is the first step in a strategic partnership that we're forging with Snowflake and we think that this joint solution is going to be a great fit really for customers, who would benefit from the power of cloud based data warehousing, but would also benefit from holding either tighter control over their data or.
Our.
Want to manage and operate that data in their on premise environment. We see early customer demand for these types of solutions.
For security reasons customers the need to hold.
And manage the data in more tightly for security compliance as well as customers who are generating a lot of data on premise environment that may want to share that data across multiple tool sets and so like I said early days, but we're seeing good signs of early interest and we think this is just a great joint solution to bring the two technologies together for customers.
Great. Thank you very much.
Thank you.
The next question is from the line.
<unk> with Jpmorgan you May proceed.
Oh, great. Thank you very much for taking the questions.
Charlie Kevin and everyone else seems like a really solid quarter I had looked at the number of place.
Again, I guess for the second quarter in a row, but.
Charlie I wanted to ask you on supply chain pure obviously has done an incredible job in managing the supply chain.
Till now and it seems like Youre not getting affected at all.
However, we do see casualties all over.
Field so.
Our U S.
Is this kind of elongate so prolongs I should say for longer time or are you seeing any streams developing.
Which investors should be aware of.
That might impact your over the six to 12 months, if this kind of environment for loans in the supply chain side.
Thank you pendulum, it's it's a great question, let me characterize the supply chain environment now.
We generally and if you were to ask our supply chain.
Our operations team our engineering they would tell you that the situation has not gotten better it's changed in character, perhaps a bit.
But we still see.
Surprises on on Decommit, obviously.
Things like Shanghai, shutting down means a lot of background work to rebalance.
And to find new sources of supply for various.
Sub assemblies and so forth. So it's a constant stream of challenges that are being thrown at us from a supply chain perspective, I would say that we have.
Minimized to the point of almost nonexistent the effect on our customers, but it certainly affecting us a lot of our teams are.
No.
Very very busy and I want to take my hat off to them because there's a lot of work that goes into this but as Kevin mentioned.
As did I in our prepared remarks.
We we have fewer parts that we need to worry about that gives us more optionality.
We have.
We design our own hardware rather than most of our competitors are.
Using commodity parts, they have less choice less flexibility.
So it gives us greater flexibility.
And our goal is to make sure we have a minimum effect on our on our customers and we were fortunate to actually be able to accelerate some of the shipments this quarter as Kevin noted.
But I knock on wood as I talked about these things because the supply chain remains challenging.
The things I would add to that.
Is high confidence with the risks that Charlie alluded to I'd say, the other thing I would add to it as our supply partners are doing a terrific job as well.
In the three factors combined I think really drives the sustainability confidence that we have around the supply chain, even acknowledging the risks that we've alluded to the other thing I'd point out is.
Demand is not subject to the same types of <unk>.
Challenges and constraints that we see across really around the IC side in semiconductor side and so obviously, that's the biggest part of our Bom and materials and that's an important call out as well.
Understood. Thank you and quick follow up for Kevin.
I have two really squint to find or will close in the press release, but.
I wanted to ask you on the subscription revenue side. It seems it was in line to consensus when I look at the sequential growth seems like it's it's not that much and then when I look at subscription.
Net new growth seems like it's decelerated a bit was this mainly kind of a capex net quarter versus.
Unified subscription that.
I think that's right and that's a good way to be thinking about it I mean, we had a lot of volume coming through on the capex side, but but look the subscription business continues to be strong.
Our growing 29%.
I would be expecting variability quarter to quarter.
We're very focused on accelerating growth with our partner ecosystem, a lot of great energy out there and looking forward to accelerate and talking to our partners around up here as a service.
Got some key milestones that we've identified around general availability for pure fusion and quarter to date data services and really this takes us.
On a roadmap that we've talked about the Charlie's laid out around really establishing a cloud operating model for every customer no matter, where their workloads are being run.
I'd say stay tuned to we're very excited with some new announcements of evergreen and accelerated as well.
Got it congrats again and thank you for taking the questions.
Thank you.
Thank you.
The next question is from the line of Aaron Rakers with Wells Fargo. You May proceed.
Yes, thanks for taking the questions and congrats on the great results I guess the first question I wanted to ask is that when I look at your gross margin at 70% on the product line. It would really imply that you've not seen any incremental deployments with one of your large hyperscale cloud customers. So I guess, yes.
First question is that a fair assessment and I guess on the heels of that how are you. How are you thinking about that hyperscale customer meta.
Fully deploying their AI project is of course this year, how is that factored into the expectation.
Yes. Thanks.
So youre correct, we have not seen.
This quarter substantial.
Revenues from the nature of the hyper scalar that you spoke about before.
We do but we've also been making good good progress on both the discounting front as our.
As the market has stabilized if you will from a pricing standpoint.
As well as.
The ability to extract more value from our from our products overall, so I would say that.
We've been able to manage the gross margin I think very well and I'll, let Kevin answer the question well actually I'll take care of this I'll take this one.
As we discussed when we first.
Started speaking about the metal win and that was before they.
They permitted the use of their name.
We indicated that that these types of sales tend to be somewhat episodic as they build out their data centers on specific quarters.
And this is one of the light quarters, but we continue working with them. We're certainly optimistic on on future orders, but it will be on their timeframe and I think to be clear that was expected right very much perspective, we're not expecting there standpoint sales this quarter Thats correct right.
Yes, yes.
That's very helpful and I guess I'm, just curious given the momentum that you've not only saw this last quarter, but you've seen the last couple of quarters.
How has the competitive landscape reacted.
Have you seen I know that Dell EMC saw a little bit of growth, 9% growth. This last quarter their storage business I'm. Just curious have you seen any changes on the competitive landscape at all.
Yes, it's relatively minor to be to be honest with you.
We tend to be competing against the same set of products and the same.
Type of environments with the same set of customers.
Obviously as we expand our sales force, we're competing across a greater set of customers a larger set of customers, which is a good thing we get into more fights.
And more at bats.
And our win rates are very good so I.
I would say in our brands is certainly helping the fact that we're in.
Now.
I think customers believe that we have to be in any competitive bake off that they may be performing but so I would say that and I'll, let rob contribute here, but I haven't seen anything terribly substantial from the competitors in this space, Yes erinn.
That I think the.
Yes, I think the biggest takeaway is that from my view, we really remain standouts as we look at the competitive set in terms of having really differentiated technology as well as Charlie talked about in his prepared remarks.
Our thesis and investing in innovation to further expand.
Those.
Yes.
That differentiated technology, if you look at what we're doing with <unk> to go after disk and hybrid if you look at what we're doing with flash array and extending that family into XL to go after higher performance.
With pure fusion now GAA in port with data services.
And not to mentioned significantly more to come next week I think this is just an area, where we see a great opportunity set out there for US a lot of runway ahead of us to go grab more market share and I think the biggest stand out is that we don't see any of the competitive announcements materially change in that landscape.
Let me let me also answer it with one additional.
Comment, which is we're just playing a different game than our competitors.
Our competitors play a commodity game they've been marketing their products that they've been marketing storage as a commodity the customers should only care about.
Price and nothing else and we're playing a high technology game, we invest in it like it's high technology.
Entirely different business strategy, and it's going to be very difficult I think for them to respond.
Thank you.
Yeah.
Thank you.
The next question is from the lineup.
Again.
Evercore you May proceed.
Thanks for taking my question and congrats on a great quarter.
But first one is really Charlie you talked in your prepared comments about pure has entered a second phase of growth and a journey.
Hoping you could talk a little bit about what does that mean for PR because when I look at your new customer addition, for example that definitely inflected higher pretty materially, but what is the second piece of growth for the company are you seeing engagements with bigger enterprises are are you seeing.
Quaker land and expand just maybe help frame what does this mean and does.
That potentially in like absolute higher as you go forward.
Yes, what we mean by second if we look back our first phase of growth was building on our award winning product in a unique environment, where really for many years. It was the only product of its type and therefore allowed us.
Three very rapid early early growth.
And as.
As our competitors started to respond.
They were able to use their larger sales forces and their greater portfolio.
To compete with us more effectively and so our growth slowed a bit.
Responded over the last several years.
Our longtime investors know with continued investment in R&D and in particular in investment in broadening out our sales focus and capabilities sales and support such that we could support enterprise customers with a larger portfolio and now we're seeing the fruits of.
That bear out and so the second phase of growth is the fact that we can.
Penetrate.
More and larger customers with a expanded and superior portfolio and thats going to give us a runway of pretty long runway to continue what I believe is going to be a second phase of growth and.
We're now we now have the scale if you will to compete with any of our competitors.
And deploy our unfair advantage of leadership products.
That's how I phrase the second phase of growth.
Got it and then if I just follow up really quick the upside and growth in revenues I'm, sorry that we saw in the quarter right.
Kevin the way you laid it sounded like $60 million I would call. It was from pull in from the back half and 40 million was more organic.
I'm curious if it is is the outgrowth that pure seeing more of a reflection of the fact that.
You are resonating better with customers and the engagement even know Charlie's thought on what you talked about or is it very simply the fact that you probably have better supply ability as youre getting incremental market share with you are the one with better supply versus your peers. I am curious do you think better supply is playing a part in this outgrowth or is it more fundamentally driven.
Well look I mean, this is Kevin I'll start with that and I'll, let Charlie add to it I am not sure. It makes sense to decouple supply versus the power of our portfolio and our technology I mean, when you look at the architecture of our technology and how we're leveraging our software and how we from an architecture standpoint require.
Less components.
Simpler in terms of architecture, that's obviously, helping us a lot on the supply side, but then thats also what really resonates for customers right. Its performance its resilient, it's simple to use.
Our ESG report, we've got some just kind of stunning stats in terms of what we're doing in terms of sustainability and energy reduction with the architecture that we're leveraging with our with our portfolio. So I would actually say that the two go together from my perspective are there any other signs that says it all Kevin really do.
Mike drop.
Mike.
Perfect. Thank you guys.
Yes, thanks, Nick.
Thank you.
The next question is from the line of Rod Hall with Goldman Sachs.
<unk>.
Yeah, Hey, guys. Thanks for the question I wanted to I wanted to go back to the $60 million and just try to understand how we should be thinking about that in other words are we.
Should we be thinking about it as backlog that you had good execution against supply. So you were able to kind of go ahead and deliberate we're more a customer coming back to you on going Hey, we we were thinking about doing this in HDD, we really wanted to accelerate that I'm, just kind of trying to figure out how we should comment synthetically think about that $60 million then I have a quick follow up.
Ron It's a great question it was very much the latter.
Obviously, we have visibility with these large enterprise customers in terms of our plan in terms of our discussions.
Came back to us requesting earlier delivery.
I could appreciate those requests given the environment, but it's really the latter to your point Rod.
Okay, Great Charlie Thank you and then on Port works I noticed all the port where FDA announcements mid month.
I feel like that's a pretty exciting part of the services portfolio I'm just curious what you think that the.
The funnel looks like there what kind of interest have you had expressed.
How does that affect <unk> as we move through the next few quarters.
Well I just spoke about in the past Port works is still a relatively new product and because it is as you point out it's ratable on it and.
Goes into <unk>, we are seeing very good growth in that product line overall as I mentioned in my opening remarks, I've spent a lot of time, this past quarter or actually over the over the last quarter and this quarter.
In Europe , and the Middle East a lot of excitement by customers and our and our sales teams and partners in the product.
So I think it has.
We believe it has a really strong future as we go forward.
Obviously, it will take a little bit of time before it really starts making a tangible difference in reportable difference if you will.
In our in our IRR.
Great. Okay. Thanks, a lot Charlie I appreciate it.
Okay.
Okay.
Thank you.
The next question comes from the line of Jason Ader with William Blair You May proceed.
Yes.
Yes. Thank you.
I guess I just want to understand Kevin.
On the comment on macro and how you when you thought about the guidance for the year you've baked in macro does that mean that you changed any of your assumptions on close rates or deal sizes or geographies or customer behavior.
Yes, it's a great question, Jason and I think the simple answer is no there were no significant changes to our assumptions.
The first the first thing, we evaluated pretty carefully with demand signals and as Charlie mentioned demand continues to be quite strong obviously, a lot of noise out there from a macro perspective that.
We're digesting and understanding what if any impact that will have for us in second half.
But when I, when I really break it down and look and compare against our.
Our initial guide for the year.
We're outperforming we saw that from a demand.
Standpoint in Q1, we see that in terms of our guide for Q2, and then obviously, increasing our annual guide for the year. So.
I think it's business as usual with the outperformance that we're seeing in Q1 and Q2.
Okay, Great and then Charlie for you just.
Sure.
The last couple of quarters have been.
Off the charts.
And I understand that there's been some kind of let's call it.
Near term.
Spiking as to the business.
Youre going to have some deceleration as you move through the year here, but.
As the storage market just that much better right now than it's been in a while or is it just that you guys are are taking just gobs of share.
Right.
It's an interesting question, Jason obviously, the numbers speak for themselves, we're clearly taking share.
The market is very benign at the moment.
So it's a strong market despite everything thats going on.
Prices.
Asps have stayed strong that that's always helpful.
So I think it's been a benign market and we're taking share is probably the best way to best way to put it.
And is there a lot of pent up demand still from the pandemic that's helping in other words should we be.
Moderating our expectations for 2020 for fiscal 2024 because of.
Pent up demand that will be that that tailwind will be gone in 2024.
Honestly, we've not really been seeing even over the last year pent up demand playing a role here, it's usually new new developments.
New infrastructure.
Spansion.
Youll fundamental expansions not not pent up demand. So I would say pent up demand at least for US has not been playing a big role remember we don't get refreshes of equipment are evergreen means that the equipment is always upgraded.
On a regular on a regular basis and when customers need additional capacity they pay for that but they don't pay for any replacement of existing capacity. So we don't get the same benefit that maybe some of our competitors get by.
By pent up demand because.
We don't have replacements, we have evergreen.
And so I would say.
But.
Pent up demand has not really been a factor for us. This is all basically new demand or expansion of existing environments. Yes. It is.
Interesting TJ said when you look at seasonality.
Pre COVID-19 for us in growth rates.
And you normalize for the 60 million that we alluded to I'll tell you that the seasonality is matching kind of the pre COVID-19 days.
In terms of first half second half growth rates. So that's another data point.
For thoughts as well.
Thank you guys. Good luck.
Thank you.
Question is from the line of meta Marshall with Morgan Stanley You May proceed.
Great. Thanks.
Maybe taking that away from macro, but a little bit more micro and TR.
About 30% exposure to cloud customers.
Want to get a sense just as we're seeing some kind of.
Changes in technology hiring environment, whether thats trickled down to anything youre seeing from that customer for that and then just maybe diving into the $40 million kind of additional kind of upside that you guys saw in the quarter, just any indications that some more like of your commercial or enter.
<unk> customers. Thanks.
B.
So overall I would say, we've seen just strong demand and growth across the entire set of customer segments that commercial enterprise.
What we characterized as cloud.
In the past.
These were all strong segments for us I don't think other than the continuing exceptional growth of enterprise I Wouldnt say theres been a dramatic change in the overall character of the of the revenues coming in.
And I'll, let Kevin answer the question on the on the.
The accelerated shipments.
Yes.
I would call out actually that international had a fantastic quarter, along with U S and so to Charlie's point on broad based performance.
We saw that from a geography standpoint, I was really pleased with what we saw on the international side, which really when you when you normalize for the $60 million in the U S is really tracking with the U S growth rates and as Charlie talked about commercial we saw some good strength there public sector was a highlight for us as well in terms of how we look at it so.
So again, when we look at the $40 million of outperformance I would again talk about the power of the portfolio. We have enterprise is absolutely a workhorse for us, but we're seeing it across the board.
Great. Thanks.
Thank you.
The next question is from the line of Sidney Ho.
Okay.
Thanks for taking my questions and congrats on the quarter.
Wanted to go back to the the full year guidance, obviously, you raised it by a little bit but that would imply second half will be up about 10% year.
Year over year, but maybe maybe 15% of the account for the revenue pulling you talked about can you walk us through your thought process. There are you just being prudent in your guidance or are there more revenue being pulled in from second half into the second quarter and a follow up to that is if I look at the operating profit you also raised it but youll see high revenue.
Second half, but the operating profit dollars roughly flat in the first half of the year just can you walk us through maybe that dynamics as well.
Yes that sounds great.
Sidney let me start with the revenue growth and look.
We're very pleased with the raise of our annual guidance to 22% I think that's a very strong obviously, an outlier in terms of what we're seeing especially in this environment.
So not backing away from from that that annual growth rate, which I think is very strong.
You are seeing strong growth in the first half and Youre seeing some moderation in the second half some of that is seasonality the $60 million that we alluded to that that really was contemplated and forecasted for second half.
But when normalizing for this seasonality.
Do you expect the growth rate in the back half is still in the high teens.
Which is quite strong and then again as I talked with Jason about when you look at our growth rates first half second half from a seasonality standpoint, we're kind of getting back to what we saw in the pre Covid days, which is which is great.
Couple of other thoughts as we've progressed a year. We're also working with strong comps I mean, we had a fantastic year last year and that is only growing.
So had an extra week in the fourth quarter. So that's a consideration as well and we are being thoughtful about the macro environment as well, but without a doubt we're pleased with our revenue growth outlook for the year now if I move to operating profit, which was really the second piece of your question I feel really good about the current view.
<unk> and increasing profitability. This is our execution against our strategy that Charlie laid out which is absolutely prioritizing innovation and growth while at the same time, improving profitability and Thats, what youre seeing here.
So we're quite pleased with the operating operating profits in the quarter.
I expect 12% operating margin for the year.
And obviously our profit over achievement.
This quarter was helped by the transactions that were moved into Q1.
What we're also doing very well on hiring in Q1, we made great progress in hiring talent and we continue to invest thoughtfully and.
And we will continue to be focused on operating discipline and operating leverage as we monitor the effects of inflation goes on so hopefully that answers your question.
That's helpful. Maybe one quick follow up if I look at the product gross margin for Q1, it definitely improved more than we expected, but with NAND pricing a headwind in the quarter. As you expect it may be able to raise prices to offset that but the real question is how are you thinking about gross margin from both product and subscription services.
For Q2, and the rest of the year.
Yeah.
Yes, we might be a broken record on on the product gross margins look I still think longer term I'm very happy with the product gross margins being in the high <unk>.
I think once again, we have over achieved.
And I'm very pleased I think the sales team is doing a tremendous job selling the value of our solution and we're seeing that in the average selling prices as we navigate.
Navigated Q1, so I think that's a large driver on it in terms of subscription gross margins, what we've been tracking is pretty consistent in the low seventies and thats a good catch.
Have a corridor that I like in terms of subscription gross margins.
Okay, great. Thank you.
Yes.
Yeah.
Thank you.
The next question is from the line of Bihar Gucci.
The planned capital markets you May proceed.
Yes. Thank you.
Fantastic quarter.
Hey, just back on this but subscription growth did decelerate at 35% year over year growth, 42% of the prior quarter.
Why did that happen and then also why subscriptions are growing slower than the revenue line. I think you did mentioned that theres, some lumpiness and so to go into why there's that lumpiness that would be helpful as well.
Yes, I mean look I think when you look at the subscription revenue growth.
Really a late indicator I mean, that's revenue coming off the balance sheet over time.
I think when I really look at the health of our subscription business I'm looking at our subscription IRR balance as well as how we're doing from an <unk> standpoint, which grew 29% and look I'm very pleased with that very strong growth. We're setup well, we've got a lot of good things happening in terms of our accelerated.
Announcements on evergreen.
And so obviously youre going to get a little bit of variability on subscription IRR as well as <unk> growth.
But again, if I'm looking at the revenue and rolling off the bat.
Balance sheet to the top line I think that's really not a strong indicator in terms of the health of.
Of the subscription business now the other thing that I would highlight to you is when youre comparing quarter to quarter and you've got a you've got to build in the extra week in Q4, which would have a bearing on that as well.
Okay.
Yes, Okay alright.
That's a good point.
And then Charlie.
Earlier question, you had made a point of saying first George is doing a technology sell versus competitors and with commodity. So can you expand on what do you actually really mean by that.
You bet.
I'll take it back to R&D, we invest heavily in R&D, which means that we consistently build a product that leads the market. Our competitors generally are that our largest competitor who spend less than 5% on R&D.
I used to run a very large R&D shop, you can barely keep the lights on at 5% R&D They can't keep up with us.
A technology development perspective, and if we're correct that that data storage and management is high technology and requires.
Continuing development of <unk>.
Advanced capability, it's going to be very difficult for them to change their business models too.
Accommodate that higher R&D, not just from a financial standpoint, but from the standpoint of managing a top tier top class R&D staff.
You get a reputation and so.
As I said, we play a very different game and.
Customers had been used to buying storage as a commodity used to substandard.
<unk> capability and assuming that all of them were like Theyre learning very quickly that pure is very different.
And then the other vendors that we require far less labor.
That we're highly automated.
We require less space power and cooling.
And that they have a superior experience overall with our product and that's being now increasingly appreciate it and I think the results of that are pretty apparent if you look across the portfolio, but if you look at flush racy, we've been shipping that product for two and a half years now going after hybrid and just completely unmatched out in the market you look at flash blade.
What we're doing for some of the high value use cases out there, whether it's analytics and AI, whether it's technical computing chip design simulation.
Modernizing data protection rapid recovery and if you look at core works.
Suite of products that we have there.
So that just gives you some small hence of really the results of this focus on R&D and innovation is driving much less what we have to discuss next week at accelerate.
Yeah.
Great. Thank you both very helpful.
Yeah.
Thank you.
The next question is from the line.
Along with Bank of America. Please go ahead.
Hi, yes. Thank you.
Wondering.
Apologize if this has already been answered jumping across calls here, but can you talk about the second half guide I mean, youre attributing about $60 million of pull forward, but also effectively lowering the second half implied guide by the same amount. So are you actually saying that the demand environment has not changed because I mean, there is all the <unk>.
<unk> are saying that the demand remains robust there are supply chain issues, but demand remains robust. So just wanted to clarify if you are saying that the macro environment is not actually impacting demand, thus far and what's the methodology where you are.
Effectively calculating the $60 million pull forward I know you have obviously visibility into the deals in your pipeline can you talk about how broad based that was in terms of was it just an isolated like in a few customers where you saw this pull forward was it much more broader.
And if you could address profit seasonality as well in the second half.
Relative to the first half thank you so much.
Yeah, you bet. So we can only report on what we're actually seeing and what we're actually seeing as demand remains robust at the same time, we're certainly taking note of the increase in inflation.
The public.
Debate around a slowdown in the economy.
Possible, even some discussion about possible reception recession, and so we our.
Our outlook has to be a bit more.
It has to keep that in mind and not get ahead of ourselves.
And so I think that our forecast.
It reflects exactly that thinking but for four through the last quarter.
Demand remains strong.
Without.
And even at the end of.
At the end of April even though at that time, there were warning clouds on the horizon with respect to economies.
Certainly energy in the.
Prices in Europe et cetera at the same time, we were hearing from our customers that their budgets and their focus on.
On investment and it was remaining strong.
Yes, and then just to answer your question in terms of the $60 million.
That would've been a couple of large customers.
So it was limited obviously for these large enterprise customers, we're working with them very closely with their demand planning.
I would put it in more of the isolated bucket very easy.
For us to quantify.
Very binary in terms of understanding and our demand planning with the customer that the second half. So that's a shift in seasonality and that's how I view it as simply a shift in seasonality has nothing to do in my mind.
With demand drop off.
As one might have alluded to in the second half demand looks strong revenue as I mentioned I went through a fair amount of detail on <unk> in terms of revenue first half second half as well as operating profit first half and second half when we can take you through that in more detail as well.
Okay. Thank you so much.
Thank you.
The next question is from the line of Tim.
Barclays You May proceed.
Thank you two if I could as well.
First Charlie you mentioned something about it.
Win with a large telco for flash array for <unk> can you.
Talk a little bit about kind of.
Application, there and just give us a little color on this as a potential new vertical how how important.
Let's see.
On the wireless worlds moves to more of a data center data Center architecture.
And secondly, just one more on that on the op margin.
22% revenue growth, but only moving overall.
Little over 100 basis points for the year. So can you talk about what's limiting that return to office in T&D or is there any other reason, we're not seeing as much leverage on on a really strong revenue growth here.
Thanks, Tim I'll, let Kevin handle the second part as far as the <unk>.
The exciting opportunity and an exciting.
Yes.
And call out we were able to make up for this quarter.
One of the top telcos in the world, they're not the only ones, who we're talking to you about <unk>, but it was great to get one of the first large.
Orders associated with with five G deployments.
That.
Were smaller.
Denser.
More power efficient and and generally more performance.
Then other products in the market has certainly helped.
In this environment, we think it is.
As I mentioned, we are talking to quite a few other telcos about fiber deployments I'm optimistic about this space and I'm going to invite Rob to do who worked on this.
Opportunity to tell us a little bit more about this specific deployment yes.
So I think this is a testament really to the quality of our products and the reliability and performance all the attributes of Charlie just mentioned and really the suitability of those attributes to <unk> deployments in many ways. It is a great validation that just like the hyperscale environments, which we have spoken to you previously about and these large telecom environments really share a lot of the same.
Or requirements that are highly available.
Highway performance demanding very mission critical environmentally automated highly automated as well and I think those are all attributes where <unk> products and services are uniquely well positioned to grow and serve and so I think we're super pleased with the win I think I'd also mentioned that in this particular environment. We were chosen to replace what was.
Italy, a custom design built around open source software customer had really tried to build out part of the environments themselves and then turn it back to us too.
When they couldnt achieve the reliability performance and really the ease of management and automation required of these are very demanding environments.
And I'll just hit the operating profit question again and really this just comes back down to our strategy really around prioritizing innovation and growth.
Is paying off and we're seeing it and we've been seeing it for several quarters.
And at the same time.
We're increasing our profitability now.
We're balancing that we had some great hiring as I mentioned I think quarter over quarter hired over 170 folks in new talent worldwide, which we're really pleased with we are navigating some higher wage costs as can be expected and all of that is being balanced and incorporated while we're increasing profitability for the.
Year, so hopefully that helps.
Helpful context.
Alright, thank you.
Thank you.
The next question is from the line of Nathan.
You May proceed.
Yes, I was just curious I wanted to go a layer deeper on the.
Product gross margin curious to see if there is any letup.
Obviously, putting up good gross margins in a tough supply chain environment, but expedited shipping fees anything there or youre seeing relief for forecasting relief.
I would say not at the moment.
We had hoped backing.
Back in Q3 and Q4, that's the supply chain.
Constraints would start to ease by by Q1 or Q2. Unfortunately, we've not seen that one one situation. After another just continues to extend change.
Changes the nature of the supply chain problems, but it extends extensive supply chain problems to be clear, we've not seen it get worse, but we've not seen it get better either and it's across the board as you as you are.
Pointing out everything from logistics shipping but.
The ones that.
We can absorb all of that the ones that always concern us is.
Is components and availability of components, because that can get you to shut or or border closures right. Those are the ones. We're most concerned about but it's still across the board.
And it's across the board I'd and where the advantage again comes.
To us is really around the fact that we have less parts that we have to navigate in terms of exposure and that's really paying off for us both on the inflationary side as well as supply.
Constraints and how we've been able to navigate against that headwind.
Got it thanks for taking my question.
Thank you.
This concludes the question and answers.
At this time I will turn the call back over to Charlie Giancarlo for closing remarks.
Thank you operator.
Our strategy to deliver a simple and evergreen data platform, enabling our customers and companies around the world to turn their data and innovation continues to deliver exceptional results across our business.
We're growing share in our market segments as customers turn to our leadership in digital transformation.
And that's critical to their future and this promises to sustain us for quite a few quarter.
Quarters, and hopefully years ahead I want to thank once again, our customers our partners for their trust our suppliers for their collaboration and to all of our employees for their innovation and their hard work and I think I'd like to thank all of our listeners today and look forward to seeing you next week at accelerate thank you.
This concludes today's conference call you may now disconnect.