Q2 2023 Pure Storage Inc Earnings Call

I.

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Pure Storage Second Quarter Fiscal Year 2023 Earnings Release Conference Call. At this time, all participants are in listen-only mode. At the conclusion of our prepared remarks, there will be a question and answer session. If anyone should require assistance during the conference, please press the star zero on your touchtone pad at any time.

As a reminder, this call is being recorded.

I would now like to introduce our host for today's conference call, Mrs. Sanjot Khurana. Mr. Sanjot Khurana, please go ahead.

Thank you and good afternoon.

My name is Sanjod Khurana, Vice President of Investor Relations and Treasurer at BL Storage.

Joining me today are our CEO , Charlie Giancarlo, our CFO Kevin Chrysler, and our CTO Rob Lee.

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, our growth and sales prospects. Americans are experiencing a rational Lis girlfriend, Chris impro, we celebrate

competitive industry and technology trends.

Our strategy and its advantages.

our current and future product offerings, and our business end.

offerings 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 the risks and uncertainties relating to our business is contained in our filings with the FCC and we refer you to these public filings.

During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenues, remaining performance obligations or RPO, and cash and investments.

Reconciliations to the most directly compatible 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 cancelable 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 website and is a 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, we are very pleased with Pure's continued success as demonstrated by this quarter's strong results.

Pure's Q2 revenue grew by 30% year over year, with our subscription ARR up 31%.

Our growth was balanced between the US and our international markets, highlighting the broad and durable appeal of our portfolio and Pure's continuing ability to deliver simple, sustainable data storage and management solutions that every organization needs.

Data is the modern linchpin of business transformation, and Pure is the innovation and customer experience leader in one of the largest segments of technology investment.

Building on our momentum, we introduced a number of major advancements in our portfolio during our annual Accelerate conference in Q2, generating strong excitement from current and potential customers.

We unveiled FlashBlade S, our next generation FlashBlade.

A significant step forward in performance, density, and capacity, providing a modular architecture for increased efficiency and flexibility.

FlashBlade S significantly expands the use cases for this product line, including a wide price performance range of file and object workloads such as computational analytics and AI.

image search and recognition, electronic design automation, media special effects, high performance computing and data protection.

FlashBlade S was designed with full evergreen capabilities, enabling the system to be continuously upgraded without disruption.

With its launch in mid Q2, FlashBlade S comprised 20% of all Q2 FlashBlade orders, and customer feedback on the first installed units is excellent.

In Q2, our Evergreen subscription portfolio was extended with the addition of Evergreen Flex, a new fleet-level Evergreen offering.

Evergreen Flex provides customers additional flexibility as they optimize their data infrastructure.

It provides utilization pricing across a customer's entire storage environment.

with the ability for customers to purchase inexpensive storage hardware and consume capacity on a pay-as-you-go model.

Evergreen Flex joins Evergreen Forever and Evergreen One, formerly known as Pure as a Service, and is available across our Pure portfolio.

We also released our Pure Fusion service for general availability this past quarter.

Pure Fusion enables customers, managed service providers, and cloud service providers to implement a cloud operating model for data storage management and offerings.

The industry sometimes refers to this as infrastructure as code.

Customers can use Pure Fusion to orchestrate and manage their entire fleet of Pure storage, reducing costs and complexity, and also offer storage services to their customers or developers through APIs, dramatically increasing developer productivity and corporate agility.

While Pure Fusion is still in its early days, it has generated great interest from our largest enterprise and MSP customers. Pure Fusion is yet another example of how Pure continues to drive the data storage and management industry forward.

Pure's Portworx software was chosen by Giga Ohm Radar Reports for the third consecutive year as the leader for enterprise Kubernetes storage and cloud native Kubernetes data storage.

Their in-depth analysis awarded us the highest scores among all market segments, deployment models, and evaluation metrics.

Portworx's ability to empower developers to deliver superior outcomes on every cloud, both public and private, is the reason that a large global credit card company dramatically expanded their use of Portworx this quarter to support their hybrid cloud data strategy.

Portworx Data Services, released just three months ago, has likewise generated great interest, including many POCs and its first sales in Q2.

Customers valued its simple one-stop shop for modern database operations.

It's rapid time to deploy and scale database as a service for developers.

and ability to avoid cloud lock-in due to its multi-cloud compatibility.

As I have said before, Pure believes data storage and management is high-tech, a fundamental component of critical infrastructure, and we invest in it accordingly.

We are reaping the rewards of delivering leading products and services in a massive market that was written off as a commodity by legacy competitors.

In this uncertain macro environment, customers are especially looking for solutions that speed their digital transformation roadmaps while reducing their overhead and total cost of ownership.

I've just returned from two weeks of customer and partner visits in Australia and Japan, including hosting a very successful Tokyo Accelerate event.

In our Asia Pacific theater as elsewhere, customers are simply blown away by the superior performance, reliability, and simplicity of our products. And they rave about their entire experience with Pure. One customer who installed Pure to replace a competitor's All-Flash product reported a ten-fold improvement in performance while also significantly reducing their labor and energy expenses.

And now, for the first time, I increasingly hear from international customers that they actively consider Pure specifically for our ability to drive down energy usage and e-waste.

The demand for solutions that reduce customers' environmental footprint is now top of mind in a majority of international enterprises that we speak to.

We added more than 350 new customers this past quarter.

In addition to sustained growth of new customers in enterprise and commercial segments, we also saw very strong interest from public sector customers this quarter.

Many of them cited sustainability and energy reduction goals as equal to their performance, price, and reliability targets.

One example is San Luis Obispo County's IT department, which reduced their data center storage footprint by 75% and power consumption by 59% while substantially increasing their storage capacity.

By replacing a competitor's all-flash systems with Pure, they also reduced their time dedicated to storage administration with Pure1 and enabled Safe Mode to protect their data infrastructure against cyber threats.

Now, I will discuss the business environment as we see it today.

I'm pleased with our ability to deliver on our strategy of strong growth while increasing operating profit, all while navigating the external inflationary and supply chain environments without raising list prices.

Our customers are continuing to expand their data storage with Pure, and we continue to expand our customer base.

We do however see signs of increased diligence of purchases by enterprise customers resulting in some lengthening of sales cycle.

Overall, I remain confident in our ability to take market share and to grow faster than the market.

As reported last quarter, our hiring remained strong. Our attrition rates are below the rest of our industry tiers and are reduced from the highs experienced this past spring.

As companies around the world adjust to a post-COVID normal, we believe that investment in critical data infrastructure will remain central to their growth plans, and that the dedication of our talented technology, sales, customer success, and other core teams will enable Pure to outperform the market.

Next week, we are officially kicking off our new hybrid work policy, which will have full teams come together in the office on specified days to collaborate, enhance creativity, and increase employee engagement.

Many of our development teams are already at over 50% in-office occupancy. Like everyone else at Pure, I'm excited about our new Silicon Valley campus that we will be moving into this coming spring.

I'd now like to hand the mic over to our CFO , Kevin Chrysler, for a detailed review of our numbers.

Thank you, Charlie, and good afternoon. We delivered strong financial results once again this quarter. Our ongoing commitment to innovation, including our recent introduction of FlashBlade S and our expanded Evergreen subscription business models, have enabled us to deliver highly differentiated solutions that our customers are leveraging to accelerate their strategic objectives.

The power of our technology and software enables our customers to grow and increase productivity. Our customers also deeply appreciate our ability and commitment to deliver our products with short lead times, not increase prices, and substantially lower their energy requirements.

These factors, among others, are why we believe demand for our solution portfolio continues to be strong despite a turbulent macro environment. Our U.S. business continues to deliver strong revenue growth, growing 31 percent, with particular strength this quarter in both commercial and public sector.

Revenue growth of 29% from our international business was also strong, even with FX headwinds due to the strengthening of the US dollar.

We continue to be pleased with meaningful contributions from new business. Our total customer count reflects the acquisition of more than 350 new customers this quarter and 56% of the US Fortune 500 customers.

Performance of our Evergreen subscription businesses and Portworx were solid as Subscription Annual Recurring Revenue, or ARR, grew 31% to $955 million. Remaining performance obligations, or RPO, grew 25% to $1.5 billion. Similar to the remarks we made last quarter, our RPO growth compared to Q2 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, RPO grew 28% year over year.

Our headcount has increased to 4,600 employees as our investments in talent continue to be disciplined and focused around our key business objectives.

Now, turning to specific financial results and discussion.

Total revenue for the quarter grew 30% to approximately $647 million.

Product revenue grew 28% and subscription services revenue grew approximately 35%.

Subscription Services revenue represented approximately 36% of total revenue.

We continue to drive solid gross margin at 70.4% this quarter.

High performance, reliability, simplicity, and sustainability of our solutions are factors contributing to both our strong product gross margins of 69% this quarter and subscription services gross margins of nearly 73% this quarter.

Importantly, we were also able to deliver these gross margins without passing price increases onto our customers.

We achieved favorable operating profits of $106 million and operating margins of 16.4% this quarter.

Now let's turn to the balance sheet and cash flows.

We ended the quarter with over 1.36 billion in cash. Cash flow from operations was over 159 million, resulting from the combination of strong sales, collections, and increasing profitability. Capital expenditures were approximately 25 million during the quarter.

We returned over $60 million of capital to repurchase approximately 2.4 million shares during the quarter. We have approximately 123 million remaining from our 250 million share repurchase program.

Now turning to guidance.

We are pleased to have established a track record of strong performance in dynamic and challenging environments.

Demand signals for our solutions are solid, and our visibility of opportunities is healthy.

We estimate revenue in Q3 to be approximately 670 million, growing approximately 19% year-over-year, and we expect operating profit to be approximately 85 million in Q3, representing approximately 12.7% operating margin.

We are also raising our annual guidance for the full fiscal year.

We now expect that revenue for FY23 will be $2.75 billion.

growing approximately 26% year over year.

Operating profit is estimated to be approximately $390 million, representing approximately 14% operating margin.

Also, as a reminder from our remarks last quarter, approximately $60 million of product revenue in the first quarter of this year was forecasted to close in the second half of our fiscal year. This impacts seasonality when comparing growth rates in our first half compared to our back half of this year.

Our Q3 and updated annual guidance contemplates, based on our visibility, macro environment conditions including factors such as demand signals, foreign currency and inflation.

With time being such a critical asset for our customers, we continue to expect to deliver our solutions with short lead times.

despite supply chain challenges that have reduced slightly but still exist.

In closing, our data storage and management technologies and software are critical to accelerating our customers' digital transformation objectives.

Customers continue to depend on us to innovate, to be flexible, to meet their needs quickly.

to not raise prices and to reduce their energy consumption and waste.

With that, I will turn it over to the operator so we can get to your questions. Operator.

Thank you. Ladies and gentlemen, if you have a question, please press star 1 on your touch tone telephone.

In 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 and answer queue.

We'll pause for just a moment to compile the Q&A roster, and I'll turn it over to Sanjot for Q&A.

Our first question is from Aaron Reakers with Wells Fargo.

with Wells Fargo. Your line is now open.

Yeah, thank you very much and congratulations on the solid result. You guys raised the guidance for the full year, strong guidance in the fiscal third quarter, but clearly there's a little bit of commentary around the macro. I think, Charlie, you mentioned that you did see some signs of lengthening maybe sales cycles, etc. So I'm curious if you could expand a little bit upon what you're exactly seeing from a demand profile in your pipeline.

All right.

Can you guys hear me?

No.

Let me know.

I could hear you there, Charlie.

You could. Okay, sorry. I guess we were having technical trouble. So let me start over again. I was talking to myself apparently for a while.

We're very pleased obviously with the financial results we had this quarter and frankly demand signals continue to be quite healthy. So we wanted to make sure we were very measured in the way that we were reflecting what we are seeing. While we are seeing a little bit of let's say second looks by companies, finance perhaps stepping in for a second look at a deal and that is lengthening some of the enterprise sales cycles.

But it's not changed, the closing of the deals later in the process. And as I said, demand and pipeline looks very healthy. You know, the way we look at this is we are market share takers in what is a very large market. You know, slight perturbations in the growth of this market shouldn't affect dramatically, you know, our ability to transform, you know, pipeline into sales and continue to grow our pipeline. So we feel like we're very well positioned. We have a

of economic uncertainty.

Very good. And as a quick follow-up, I wanted to touch maybe on some of the points you brought up there, portfolio differentiation and just portfolio expansion. The FlashBlade S product, you started off your prepared remarks just highlighting, it sounds like out of the gate very strong traction, 20% of your FlashBlade volume. Where are you seeing exactly the most momentum from that product? And have you seen any cannibalistic effects of your existing product portfolio?

Now what I'm trying to get at is how much expansion of your existing TAM does that bring to the table for PURE.

It is the next generation product. I don't know that catalyzation is the right word. It is our next generation product. In several quarters it should be full replacement for the existing generation one flash blade product. It is a very significant expansion of the price performance range that the Gen 1 product provided. It scales both up and down better in both capacity as well as in performance.

I'm Raymond James.

I wanted to see if maybe you could help us characterize how your customer base might be evolving. And what I'm getting at here is you've talked in the past about moving up markets and doing more business with larger enterprises and larger deals that I imagine could offset some weakening from smaller businesses. Is there some metrics you could share with us to help us understand the change in the profile of your customers?

Well, I think we continue to expand on all fronts. This quarter, commercial, what we call commercial and public sector were the stars of the quarter. But we continue to expand into enterprise and large enterprise, which was a process that we started a little over three years ago. My expectations is that we'll continue to optimize each of those market segments and our business model to support each of those markets.

of our sales in enterprise and frankly cloud to continue to increase, not because of any lack of success in commercial and public sector, just because of the size of those markets in general. Yeah, and Simon, I think this is Kevin. I'd add on just a little bit more in terms of the traction we're getting with new business and new customers. And we saw some meaningful contribution to revenue from new customers across all customer segments this quarter.

sort of shifting of production capacity and trends are you seeing, even though there may be different products, is there any flexibility or fungibility of the manufacturing that is benefiting you?

Well, Simon, this is something that's been a hallmark for Pure since almost the very beginning, ever since we started building our own digital flash modules, which is that we have a wide variety of suppliers for the raw NAND. We're able to leverage different levels of quality of that raw NAND without affecting the quality that we deliver to our customers. That gives us a large degree of freedom in terms of the cost that we pay.

for the NAND as well as choice of supply. And it also tends to allow us to be able to take advantage of price declines on the NAND market faster than the rest of the competition. And lastly what I will mention is that it's also given us a tremendous energy advantage because we make better use of the flash which allows us to produce products that require far less power than the competition. But I'm going to invite our CTO Rob to chime in.

over the years and standardized our technology on the same DirectFlash modules across the entire platform, we're going to realize some pretty significant benefits from this. One is certainly the kind of scale and leverage that we have in terms of the development of the technology. But number two, this is also going to allow us to move a bit more nimbly and intentionally, even more so than we do today, as we navigate future NAND parts and generation. So net-net is a significant advantage for us all around. Thank you.

Thank you very much.

Thanks Simon.

Our next question comes from Shannon Cross from Credit Suisse. Shannon, please go ahead.

Thank you very much. Charlie, can you take a step back and talk about your thoughts regarding margin? You obviously have a very leverageable model where revenue growth sort of flows through very quickly and drives a higher operating margin. But I'm wondering how you think about investments in the business to continue to drive the strong revenue growth versus trying to increase your cash flow or, you know,

over time see the operating margin go up as it is because you know clearly you have a good product that's well received that you know, I don't know if you could invest even more maybe you could you know either accelerate or at least continue the rapid revenue growth.

Yeah, thank you Sharon. We're actually always looking at this in terms of pricing and growth. Frankly, we believe we provide a very high value product, and we do get a return. We think we get a premium of 10% or more in general in the market for the product and the value that we deliver in our product. I would say that we're generally fairly happy with the margins in the range, the product margin in the range.

where we've been over the last multiple quarters. We think it gives us a lot of flexibility to be able to win deals, especially new customers. We do invest in winning new customers without a doubt. Existing customers over time really understand the total cost of ownership that we deliver, and I think we receive the value accordingly. So I think we have the right balance of investment versus margin at this point.

in hiring talent. We're not where we'd like to be, frankly, with our quota sellers, our quota carrying sellers, and so that will be an area of focus for us in terms of hiring for the remainder of the year in investment. So we are expecting to see some higher investment levels really within our sales organization in the second half. And there's always some seasonality with our OpEx, especially in the fourth quarter, as a result of our sales reps starting to earn their accelerators. So hopefully that's helpful context for you.

Okay, yes, thank you. And I'm sorry if I missed it. I don't think I did. Can you give us an update on the meta-relationship and opportunities with other hyperscalers? Thanks.

Sure, you know, meta relationship continues. We, you know, did it wasn't terribly significant this quarter, although there were some shipments. And we continue to make progress, you know, slow and steady with other with other hyperscalers, you know, obviously you'll be the first to hear, you know, when, when, you know, assuming that that we actually are able to solidify something solid. solid.

Thank you.

Thank you, Shannon. Our next question comes from Tim Long from Barclays. Tim, please go ahead.

Thank you. Yeah, two questions if I could. First, on the subscription services side, another strong quarter, it sounds like some of the new platforms are really working. Maybe just give us a sense as you kind of transition some of the solutions towards more subscription, what are the push backs, and what do the customers like about that? And secondly, I did want to follow up.

I think that's sort of a pretty nice win with a large telco customer, I think for 5G. So just update us on that larger deal. And also similar to the last question, are there any other large opportunities? That seems like it could be a nice large new TAM for you guys to go after. Thank you.

David Biesecker absolutely. The numbers I think on the subscription side pretty much speak for themselves. I'd say the largest hurdle that we have with customers is just that it is a very new way to buy. And it may very well be that other parts of their data center build, they build with CapEx, so it is a bit different from that standpoint. So I would say it is largely the fact that it is new and different is the largest hurdle. In terms of the terms of the service capability...

We are seeing steady, as you can see, steady growth and steady interest. Two additional things I'd add to that, Tim, and maybe Charlie or Rob, you can jump in. The expansion of Evergreen with Flex, I think that's going to be a big opportunity for us, early days at this point. But then even more so with FlashBlade S and the additional features now with Evergreen that we've enabled, I think it's going to be pretty powerful as well. I don't know if you want to add some commentary on that. Yeah, no, absolutely. This is Rob. Let me add to that. I think one of the biggest impacts that we have with S is the growth of the

but we've also now opened up the path for that customer as they evolve to grow independently performance or capacity as they need. That flexibility now allows us to introduce the full benefits of Evergreen Forever to FlashBlade. We look at that as definitely going to be a tailwind as we look forward. On the 5G question, as you may know, we've already made shipments against the account they're being deployed. The commentary that we're receiving back from the customer is

on executing really well in a very tough environment. So kudos to you and your team.

My book thanks, Krish.

Thanks for that. Charlie, my first question is to the extent you can talk about it. How should we think about enterprise demand beyond the January quarter? I know it's still early but the main concern within Nesco seems to be that.

Storage could be the next shoe to drop. I'm kind of wondering what you're hearing from your customer base about their IT spend budget for next year and then I'll follow up with Kevin on operating margins.

Well, that's a tough question. I'll pull out my crystal ball. What we're generally hearing from the enterprise customers is general optimism around the IT budget, meaning that they also see the questions around the economy, questions around recession. And I don't think we can answer this question uniformly around the world. I think Europe , and in particular the UK, is different from Asia PAC and different from the US.

But in the U.S., I think general optimism that with digital transformation and the need for companies to really be able to compete in the new world, that they have to continue investing in their IT environment, data is the core of that being able to leverage their data. And so data infrastructure is important. So we're seeing general optimism there. I think Europe is going through some of different challenges with energy, pricing and inflation.

And that could be affected a bit more. And then your Asia PAC is a tale of many of many different countries, but, you know I'm expecting Asia PAC absent some kind of geopolitical issue to continue to be a strong growth engine for us.

Got it, very helpful.

Congrats on raising the off margin from 12 to 14%. I'm just kind of curious to figure out what are the key drivers for it. I'm just trying to understand the sustainability of an operating margin. And Kevin, if I can extend this question a little further, if hypothetically speaking, revenues are up 10% next year, how will off margins look? And conversely, if revenues were down 10% next year, how will off margins look?

Yeah, thanks, Krish. I mean, you know, let's first talk about the performance around op margins, which, yeah, we're very pleased with. And again, when we think about our strategy and business objectives, it's really about growing our top line and balancing that with increasing profitability in a sustainable way. And we're doing that and we feel very comfortable with that. This year is a fine example of being able to grow both our top line and our top line

I've talked a little bit about our sellers. We've got more work to do to invest in our selling organization, and we'll look forward to doing that in the second half. And then, you know, on scale and infrastructure, we're doing a nice job continuing to invest in that area. And so without getting into details beyond this year, I would just say that I have a lot of confidence that it's sustainable.

about our sellers. We've got more work to do to invest in our selling organization and we'll look forward to doing that in the second half. And then you know on scale and infrastructure we're doing a nice job continuing to invest in that area. And so without getting into details beyond this year, I would just say that I have a lot of confidence that it's sustainable. Thanks a lot Kevin.

Thanks, Krish. Thank you, Krish. Our next question comes from Nihal Chokshi from Northwind Capital Markets. Nihal, please go ahead. Hi, I'm Nihal Chokshi from Northwind Capital Markets.

Thank you. Great quarter and really very impressive guidance given the trends that everybody is citing. I'm not going to beat that data. It's clearly a very strong pipeline that you have. Couple quick things though. The dollar based net revenue retention rate on your ARR, you did give some color a couple quarters ago. That was 120 plus percent. Has there been any material change on that?

You know, high level, and no material change, and we update that May hall once a year. And we update that May hall once a year.

Okay, great. And then, I do want to double click on the sales hiring environment. It does seem like things are improving, but your sales hiring has not improved in a material way yet. Why is that, and why do you expect that to be able to improve going forward? Well, I think our sales hiring has improved, but we're continuing to scale. We are a bit behind, no doubt, we're a bit behind where we'd like to be.

that your sales productivity has been improving massively. Is there room for further sales productivity improvement here?

Short answer is absolutely. I think we still have a ways to go to become best in class there and we have plans in place to that we think are the elements that will allow us to continue to improve sales activity. We are going to continue to improve sales activity.

Great. Thank you. Congratulations.

Thanks. Thanks, Nihal.

Our next question comes from David Vogue from UBS. David, please go ahead.

Great, thanks guys for taking my question. If we just go back to the map, go.

Can you guys hear me?

Yes, yes, yes, yes, yes, you can hear you, go ahead, David.

He can't hear us though.

Exactly.

Hello?

What.

While we move on to the next question, and if he comes back on, we'll...

Wait, hey guys, I'm here. I just got a static in your area. Okay, good.

So just want to go back to the macro and the conversation around elongated tail cycles. When you talk to customers, are you seeing any again? It just cut out.

Please go ahead David.

Yeah, let's move on and let's move on to a matter if we can.

Next question would come.

At.

Our next question comes from Amit Daryanani.

from Evercore. Amit, please go ahead.

If thanks for thinking about my question. Yeah, I guess the first question I have is, you beat July quarter of about 12 million versus what you folks initially said. But you're raising the full year by like 90 million or so. So you can really think of the back half expectations of a fair bit beyond just the beat. And despite all the macro commentary you had, I love to start to understand, what are the levels of the upside you think? Is it better share games? Yeah, yeah.

more of the hyper-steel, a metaramp, that are happening, or something else. I'm not saying that, what's the label you do with the numbers is well about and beyond what you'd be present.

I will start and I will invite Kevin to join in. We do a very bottoms up fundamental analysis of everything from pipeline to the field forecast and so forth. It is really based on that. If I were to uplevel it towards more of the macro, I would say yes, it is continued share gains and as I said before I'm going to get into future

I might have mentioned earlier in this call, we are still roughly a $2.5 billion, $2.75 knock on wood, vendor in a $50 billion market. Our opportunity is based on gaining share and less on the overall size of the market at any particular time. So Kevin, do you want to? Yeah, Amit, I think I would add a little bit here. We continue to have relatively good visibility.

beyond just one quarter out. I think our sales leadership team has done a really nice job focusing on demand gen and pipeline beyond one quarter. The sales team's really got a good pulse on the business right now around our pipeline, our opportunities, ability to convert, what that looks like. That in combination with our track record, both with our existing customers and be able to expand.

within our existing customers as well as the continued traction we're seeing with the new business. This is just really how the second half shapes out based on what we saw exiting Q2 and looking out to Q3 in the last year. So hopefully that's helpful for you.

That is super helpful. And I know there's a bunch of moving parts over here. Kevin, I guess from your perspective, I think the question that folks will probably have is, in the back half of the year, you're sort of implying low double-digit kind of offline growth versus the 40% on the first half. I know there are a few moving parts to compare to that, but maybe just help contextualize what's driving the deceleration in the back half versus the first half.

Yeah, it's a great question and obviously we've had a fantastic first half and you know leading to raising our annual guidance to 26% year over year. But you're right, as we think about growth in the second half, there's a few things to be thinking about and a few factors to keep in mind here. One is that the second half is impacted by seasonality of that deal we mentioned previously around 60 million. There's actually a couple deals.

that we delivered in Q1 really contemplated for second half. And so that's going to impact second half growth by approximately six points, so that's important to consider. I think the next factor to consider is our comps are getting much tougher in the second half due to the substantial growth and the additional week we had last year. Just a reminder in terms of our growth last year in Q3 and Q4, we're 37% and 41% respectively.

which was just outstanding. And then lastly, as we mentioned, we're navigating some incremental headwinds as we think about the elongation of the sales cycle, but we've contemplated that in our guide. So that with FX, I feel pretty good in terms of how we're looking in terms of second half growth.

Thank you and congrats on a great quarter.

Appreciate it.

Thank you Amit.

Our next question comes from Meeta Marshall from Morgan Stanley . Meeta, please go ahead.

Great, thanks. Charlie, you mentioned it again on the call, but I just wanted to get a sense of on the power consumption advantages that you guys have are just the kind of green energy angle. So where or what type of customer type is that having the most success with, you know, you mentioned your up last quarter, is it having any increase?

prevalence or acceptance with cloud customers. And then maybe second.

You guys have clearly talked about a little bit of elongation of deal cycles. Just wondering if there is any difference in deal types, whether you're seeing customers want to move more towards Evergreen or Pay As You Go versus whatever purchasing model they were looking at before. Have we seen any changes in what type of purchasing they were looking to make? Thanks.

On the energy side, there are several different customer types that are focused on energy. One I would say are large reporting companies that are now needing to report on their own ESG environment and that's been pushed down into their data center operations, which tends to be a very large part of their energy utilization. The second I would say is countries now with energy insecurity.

So that covers a lot of Europe right now. It's not just the price of energy that's causing them to take a look at their energy bills and so forth. It's now also the availability of energy making them quite nervous about how much energy their entire environment takes up. But certainly a big part of that again is in their data center. And then third I'd say is it's government. Government worldwide, governments worldwide now are very focused on...

say the energy sensitivity is large and growing probably not surprising to this audience larger internationally currently than it is in the US but growing in the US as well.

On the deal cycle,

standpoint, we started to see it earlier. I would say starting around mid-quarter we started to see it and then it increased through the quarter. The deal cycles were just taking another week or two. Generally all of those deals closed. So it wasn't a demand issue and so far the approvals are still going through. There definitely was on average a lengthening of

their deals and I would say absolutely and I think our timing of Evergreen Flex bringing another option for customers and how they might want to consume our technology and solutions is really resonating but we are having a fair amount of conversations with our customers around flexibility.

Great, thanks.

Thanks, Peter.

Our next question comes from Wamsi Mohan from Bank of America. Wamsi, please go ahead.

Yes, thank you and congrats on the solid results.

If we look at your guidance here, it sort of implies product revenue will grow about 20 or a little bit higher. When we look at your long-term model, that really implies software or subscription growing at 30% plus and becoming more than 50% of revenues. As we look into next year and further out, should we be thinking that product meaningfully decelerates, is a 20% product revenue growth sustainable from share gains? I will follow up.

And if each one of those that gets cracked really would be a meaningful revenue accelerant on the product side. So no, we're looking at both as meaningful growth factors for us.

Okay, thanks, Charlie. And then if we think about your operating margin performance as a quarter, relative to your expectation, you had a $12 million top line beat, but you had multiple of that on your operating income dollar delta on your beat. I'm just wondering if there was anything that you would call out specifically around the operating margin performance and...

As we look at the back half of the year, I know the revenue growth is decelerating, but generally speaking, when you think about the margin profile there, anything that can help us to bridge the sequential margins, that would be helpful. Thank you.

Thanks, Swamasi. I think the primary factor I probably want to highlight around our investments for the second half, and then overall when we think about our operating expenses for the year and the growth, is really around continuing to invest in our sellers. We've mentioned that before, but that is an area where for Q2, arguably, I would have liked to have been further along in terms of where we are with our investment profile on the sales side with our sellers.

But we'll make that up. I feel confident on that and we'll see that through our investments as you look at the second half.

Okay, thank you so much.

Thank you, Bhamzi. Our next question comes from Matt Shereed from Stifel. So, Matt, please go ahead.

Yes, thank you. I have a follow-up, Charlie, on your comments regarding customer expansion. In addition to the new logo ads, can you comment on the progress you're seeing in increasing spend within existing customers, particularly large enterprises, due to the expanding products and services within your portfolio and the opportunity for that going forward?

Absolutely. That is another major growth vector for us is simply the number of large enterprise logos that we have, I think it kind of hides a big opportunity for us in that our wallet share, on average, in those large enterprises is still relatively small. Obviously, there are a handful of them where we are the majority of their spend in the storage area, but for the vast majority...

quite some time.

Okay, thank you. And just for my follow up, could you just comment on the supply environment? You really haven't called that out as an issue relative to your competitors. I know you've got a smaller footprint in terms of components, and you've managed that very well. But any sort of hiccups or incremental pluses or minuses or negatives there?

I would say that in general and on average the situation has ameliorated somewhat. That is, it's not quite, it hasn't gotten worse. And in fact, if anything, it's gotten gotten a little better, but it's very uneven. In other words, there are some components that have become much more widely available shorter lead times, but you know many others that are still on allocation and we still get the commits every now and then.

commit the number of D commits are down things are a little bit easier but it's still I wouldn't say that we're out of the woods yet that being said you know we expected to continue to improve

Yeah, and I think it's all about our confidence and our track record of delivering timely to our customers, which is so critical for them as they're kind of working through, accelerating what they need to do from a digital transformation standpoint. And we don't see that changing. And again, the challenges we are having would be outside, obviously, of NAND and DRAM, to be clear as well. The Government of Canada F accounting and seat

it's all about our confidence and our track record of delivering timely to our customers, which is so critical for them as they're kind of working through accelerating what they need to do from a digital transformation standpoint. And we don't see that changing. And again, the challenges we are having would be outside, obviously, of NAND and DRAM, to be clear, as well. Got it. Okay. Thank you.

Thanks, Matt. Our next question comes from Jason Eder from William Blair. Jason, please go ahead.

Hey, good morning – or, good afternoon. This is Sebastian on for Jason. I just wanted to ask a little bit more about the Evergreen Flex offering. What is sort of the target customer for that offering and what has been the initial reaction from the channel or from customers that are looking to adopt it?

Yeah, thanks. Evergreen Flex is really targeted at those customers that were open and interested in a subscription model that is a pay-as-you-go model, but whose internal financial philosophy was really based on CapEx. You can think of, in some cases, managed service providers. You can think of a large enterprise where I had mentioned on an earlier question that the model for the rest of their data center is CapEx.

and they just couldn't make the full jump over to an OpEx model, or at least not yet. And this gives them the ability – it gives them several things. One is it gives them the ability to buy on CapEx, but to really reserve a lot of their spending for when they actually start using the product. The second, and this one is more subtle and more important to many customers, Flex is really calculated on a full fleet environment.

across their entire environment rather than on an array by an array in capability. And what that means is it gives them greater economics, more efficiency, and it gives them much greater flexibility – ergo the name Flex – as they build out their data infrastructure. Rob, do you want to add? Yeah, I just wanted to jump in and add here for a second. We introduced Flex at the same time that we rebranded and renamed some of our other subscription offerings to bring them all under the Evergreen umbrella, and that would be Evergreen forever.

Flex, and then Evergreen One, formerly known as Pure as a Service. And one of the reasons that we did this is it really is a spectrum of ways that customers can get the benefits of the Evergreen architecture and the services we're able to deliver there. And just to put this in perspective, we look at this as a spectrum all the way from one end where you've got, as Charlie mentioned, a more CapEx-oriented customer, a more traditional hardware sale that's seeing the benefits of Evergreen through the Forever program where those assets are being constantly modernized, hardware and software, non-disruptively, they get access to future evolution and...

They see the benefits of Flex owning title to the hardware upfront, but seeing the benefits that Flex can offer in terms of flexibility to grow, evolve, as well as redeploy assets across their fleet. So what we really see with this enhanced and more I would say consolidated Evergreen family is introducing a variety of ways for customers to realize the benefits of the core architecture wherever they are on that journey to the cloud operating model.

Got it. That's really helpful. Maybe just a quick follow-up on that point. I guess now that you have this sort of middle offering, is this going to be a big driver you think of new customer editions, or was this something that existing customers were asking for and it's going to be a big driver of expansions within those accounts? Can you help me think about how you're thinking about those aspects?

Yeah, I really think it's both. That certainly for existing customers that, and we've reported this in the past, that we're looking at Evergreen One, but at the end fell back to CapEx because of their unfamiliarity with that buying model. We think Evergreen Flex now gives them that opportunity to get into a capacity oriented subscription model. And secondly, no doubt for customers that, or for prospects that want to try Pure, but want to do so on an as you go basis, I think it can open up a new.

and obviously early in share gains, Charlie will be coming from more of a subscription based...

sale, you know, maybe, you know, this kind of software model ask questions here, just the precursor, right? You know, holding back product growth, you know, so strengthened long term deferred here in the quarter. So going forward, we can expect some mechanisms there, you know, just going out maybe to fiscal 24. Is that something we can expect in terms of the product revenue growth and have a follow-up on the service? All right.

Well, we definitely believe that subscription should outpace the old product growth. That's been our that's our long range plan and certainly what we believe, but I would also remind, you know, everybody on the call that in fact our evergreen subscription, the entire range of it. Even the evergreen forever, which is attached to a capex sale does in fact over time, you know, reduce, you know, the the capex sale and that's because we never have to replace.

in existing – the customer never has to replace an existing system. So many – the storage industry, a significant portion of their sales is just selling a new system to replace an old system. We always see that in our subscription line. We don't see that in a product sale line. You see that in growth and subscription. So it's a different way to sell a product. We only sell it once. The customer never has to buy it a second time.

The customer never has to replace an existing system. So the storage industry, a significant portion of their sales is just selling a new system to replace an old system. We always see that in our subscription line. We don't see that in a product sale line. You see that in growth and subscription. So it's a different way to sell product. We only sell it once. The customer never has to buy it a second time.

Okay, great. I thought the upfront portion of the subscription sales was recognized in product, not all in services. And then so… Not a big…

You're right. It's subscription. When we do an Evergreen 1 transaction, the entire value would be reflected as a subscription. Evergreen Flex, the hardware portion, obviously, would be in product, but the consumption piece would be in subscription. And then for Evergreen, Evergreen Forever, all of the Evergreen Forever attached for that subscription is reflected as subscription revenue. Hopefully, that's helpful for you.

Very clear Kevin, thank you. And then second question, I guess I'm really more on the services side. We know this is where the data services and Portworx and basically your overall software portfolio is there. Any

commentary you can give in terms of maybe getting a little bit more steep here. Any type of upsell call outs you can call, maybe an attach rate of software to new enterprise deals now, any type of help you can give that can give us comfort in terms of continued strong growth here on the services line as well as the software would be helpful. Thank you.

Absolutely. Well, we're seeing a large fraction, probably more than 50% of the software sales are going to existing customers, but a significant amount are going to new customers as well. And I would say that also even within existing customers, it may be a new buyer.

within that customer account. I would say that a large fraction are into enterprise customers, more so than on the commercial side, and a small but increasing amount coming from a channel source.

Thanks, Charlie. Thank you. Thank you. Thank you. Thank you.

Thanks, Tom.

Our last question comes from Rod Hall from Goldman Sachs. Rob, please go ahead. Hey guys, thanks for squeezing me in. This is Bala on for our Congrats on a good quarter. I want to double-click on the guidance, really strong guidance for the second half. Implied Q4 guidance, it looks like it's up meaningfully from what you were thinking before. I'm just wondering if there is any large deal. I know you mentioned the telco deal, cards back.

Meta ramp, and I said Meta could be lumpy and then it didn't do much business this quarter. So could one of those large deals be helping in queue for dust weatherizing guidance? I have a lot.

Yeah, thank you. A couple things. Metta hasn't changed in terms of our remarks earlier. I think when we were coming into the year and our view on meta so that that hasn't changed meaningfully. And then in terms of how we're thinking about the second half, you know, walk through that a fair amount in terms of how we're thinking about it. You know, our approach hasn't changed. We continue to evaluate and analyze our pipeline and opportunities. We're staying very close. We're staying very close.

with the sales leadership team who have a very good pulse on the business. I wouldn't call out anything specific as we think about implied Q4 on any particular deals. It's just where we're falling out based on the visibility we have over the next two quarters or the remainder of the year.

Okay, thanks, Kevin. Follow-up, product gross margin said 69%, still very strong, but down slightly, only slightly from last quarter. I understand flash paid new products, flash paid yes. That could carry lower margins, so maybe it's that. I'm just wondering, given your commentary about not planning to increase the list prices for your products, I guess I'm wondering what are you saying in terms of competition? Are you seeing any increase in intensity at all?

We're having some great success in terms of the opportunities we're in and winning those opportunities. I've said and been very consistent with my remarks on product gross margin that the high 60s is our sweet spot, and we continue to be in our sweet spot of product gross margins. Frankly, when I start getting into the 70s, it's a bit hot in terms of sustainability and what we can do with our customers. So I actually like where we are.

in terms of our product gross margin profile, if that's helpful.

gross margin profile, if that's helpful.

Okay, thank you.

All right, thank you, Bhadam. This concludes the question and answer session. At this time, I'll turn the call back over to Charlie for closing remarks.

Well, as I hope we've been able to convey, we believe Pure Storage is well positioned to grow both in the near and in the long term. We have this unique combination of product portfolio and operational rigor to continue to lead our industry. And we continue to improve our game every quarter. We enable organizations everywhere to build a cloud operating model for their private and hybrid cloud infrastructure. We lead in solutions for the All-Flash Data Center. We have the most advanced services and tools to automate data management for both traditional and modern cloud native applications.

And we're definitely the clear sustainability and energy reduction leader now. I'm deeply appreciative to all of our employees for their innovation and their diligence, to our partners and suppliers for their ongoing partnership, to our customers for entrusting pure storage with their mission-critical data storage and management needs, and to all of you that follow us so closely each and every quarter. Thank you all very much and have a wonderful rest of your day.

That concludes today's conference call. You may now disconnect.