Q2 2024 Pure Storage Inc Earnings Call
Please standby were about to begin.
Good day and welcome to the pure storage second quarter fiscal year 2024 earnings Conference call Today's conference is being recorded.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star one on your telephone keypad at this time I would like to turn the call over to Mr. Paul <unk>, Vice President Investor Relations. Please go ahead Sir.
Thank you good afternoon, everyone and welcome to pure <unk> second quarter fiscal 2024 earnings conference call on the call. We have Charlie Giancarlo Chief Executive Officer, Kevin Chrysler, Chief Financial Officer, and Rob Lee Chief Technology Officer, following Charlie's in Kevin's prepared remarks, we will take questions.
Our press release was issued after the close of market and is posted on our website, where this call is being simultaneously webcast slides that accompany this webcast can be downloaded at investor day pure storage dotcom.
On this call today, we will make forward looking statements, which are subject to various risks and uncertainties. These include statements regarding our financial outlook in operations, our strategy technology and its advantages are current and new product offerings and competitive industry and economic trends.
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 our reported results should not be considered as an indication of future performance.
<unk> of some of the risks and uncertainties related to our business is contained in our filings with the SEC and we refer you to those public filings. During this call all financial metrics and associated growth rates are non-GAAP measures other than revenue remaining performance obligations or RVO and cash and investments reconciliations to the most directly comparable GAAP measures are provided in.
Our earnings press release and slides this call is being broadcast live on the pure storage. The Bester 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, our third quarter fiscal 'twenty four quiet period begins at the close of business Friday October 20th.
'twenty three.
I'll turn it over to Charlie.
Good afternoon, everyone and welcome to pure storage is Q2 conference call.
We are pleased with our financial results this quarter.
While the macro environment continued to be challenging we outpaced our competitors and saw strong growth in our strategic investments, particularly in flash blade S flashed Lady and evergreen one.
Our results demonstrate that we continue to lead our market and then our strategy is working.
Pure is delivering extraordinary outcomes for our customers by transforming data storage from a highly fragmented solutions set to a single consistent platform.
Pure is today, the first and only data storage company that can deliver a single consistent non disruptive operating and management environment leveraging the most advanced flash technology across all data storage needs.
With the introduction of the <unk> family or all flash products now span from the highest performance systems to the most cost effective systems for bulk data.
Uniquely in our industry all of yours products are based on one operating system purity. The only storage software that operates natively director flash rather than using less efficient commodity ssds.
All of <unk> products are managed with our pure one management system and have consistent Apis.
All of our product support non disruptive upgrades forever.
Through our evergreen technology and subscription programs and are all available to consume as a service through evergreen won that.
The data storage industry has for decades been plagued with different tailored software and hardware solutions for the wide range of storage protocols formats performance levels and price points needed to cover the market.
The storage portfolio of legacy data storage providers was generally assembled by acquisition and our collections of disparate inconsistent environments.
That approach left customers with a complex infrastructure with multiple software operating environments with different management systems and multiple deferring operational processes.
As a result legacy storage environments are complex they vary for each use case, they required downtime for upgrades and require forklift replacements roughly every five years.
Pure is the only company that provides customers a single consolidated operating environment for all of their data storage needs, including block file and object.
Q2 was the first full quarter of shipments for flashed Lady.
Sales and pipeline have exceeded our expectations and it is experiencing.
Fastest growth of all prior new product releases.
At purchase Flash Blade E with three years of Evergreen subscription has an acquisition cost competitive with hard disk based systems and has substantially lower operating costs.
It enables our customers to move ever more of their cost sensitive workloads to all flash.
The E family of products allows pure to now cover the entire spectrum of data storage inclusive of low priced bulk storage, providing customers with a consistent modern and reliable product line for all of their storage needs.
Flash array E will become available later this year joining flash blade.
Flash array will enable cost effective storage for bulk data or capacities from one to four petabytes.
And as part of the family.
Can also reduce customers' total operational costs by up to 60% and produce 85% less E waste compared to hard disk based system.
We are seeing continued momentum and opening new opportunities with our cloud strategy.
Last week, we announced an expanded multi year partnership with Microsoft Azure services and its Azure Vmware solution known as ABS youth.
Using our pure cloud block store.
This offers a new age of cloud migration that can drive faster more cost effective adoption of cloud services.
Combining <unk> industry, leading data reduction with our ability to decouple storage needs from compute.
Customers can significantly reduce their total cloud costs, while increasing hybrid cloud capabilities.
In addition to operating in the cloud our cloud operating model allows our customers to operate their storage environment like the cloud.
The offer services like the cloud.
To better build for the cloud and also to consume storage like the cloud.
Pure fusion enables our customers to manage the pure portfolio as a fleet as an integrated pool of storage across data centers and across clouds.
Your fusion allows customers offered their developers access to bespoke data services through Apis.
Port works.
The most highly rated kubernetes data platform for deploying cloud native application.
Was chosen for the fourth consecutive year by analyst firm Giga AUM as the leader for enterprise Kubernetes data storage and cloud native kubernetes data storage.
Evergreen one allows our customers to also consume like the cloud based entirely on a service level agreement with pure to allow them to store their data whenever and wherever they want.
Evergreen one is available for all of your product offerings.
The growth of subscription services contributed significantly to our success in Q2.
Evergreen won the industry's leading storage as a service offering saw sales double again year over year.
Our evergreen technology and programs and revolutionize the industry and provide pure a sustainable competitive advantage ending traditional legacy hardware replacement practices for customers and turning every sale into a storage as a service relationship.
With our evergreen forever subscription companies upgrade both hardware and software of the latest technology without paying additional capital continually without downtime forever.
As we discussed last quarter.
Generative AI and chat GPT have brought artificial intelligence to the top of mind for all customers and AI creates two sets of opportunities for pure.
First we can supply products for AI training environments, such as the creation of large language models or <unk> for short.
And second we can support enterprises to prepare their data architecture for AI inference, meaning the use of <unk> on their own data.
Most customers will leverage third party <unk> as their base.
They will re tune and retrain these models on their proprietary data within their own organizational boundaries.
By adding guardrails, they will enable AI inference to achieve outcomes specific to their business.
The former requires very high performance, while the latter is enhanced with the replacement of low performance secondary hard disk systems with our <unk> family of cost effective flash storage.
During the quarter flashed Blaine asked one of generative AI footprint in a production environment in the low eight digits.
Port works also saw multiple wins in early AI development environments.
Customers purchase Port works to ensure reliable data management during the training and inference process.
Over the last five years, well over 100 customers have chosen flash blade to accelerate their AI and machine learning environments with.
With the introduction of Flash played E. AI customers are able to take advantage of a single operating and management environment for both their heart and their bulk data dramatically simplifying their data storage infrastructure and reducing its cost and environmental footprints.
For the last few months I have visited customers partners and retailers across the U S Asia Pacific and Europe highlight tours, new ever more powerful position.
Customers immediately grasp the benefits of and the need for a unified operating and management environment for all of their data storage needs.
Mark file and object from.
From the highest performance to the most cost effective.
They responded enthusiastically to the ability to operate their storage and data environment as consistent storage pools across data centers and clouds.
And they welcome the advantages of our evergreen technology and subscription available across our entire data storage platform.
Jurors products uniquely stand out in the industry due to our single operating environment and consistent Apis across our products.
This is powered by our consistent use of purity and our pure one management system across all our products.
Our new <unk> family of products leverage our latest direct to flash capabilities of purity software to unlock the most cost effective Q O see flash to penetrate the bulk data market for the first time with all flash technology.
Our high density direct flash modules or defense work with purity to powered this events.
This enables better performance better longevity, better reliability, and ultimately better price performance than both hard disks and even SSD based systems.
We have been shipping 48 terabyte defense for the last three years and we will introduce our 75 terabyte DFM later this year.
Today, George D. F N R. Two to four times denser than the largest hard disk and ssds and competitive use.
And our advantage and density is accelerating.
Our roadmap calls for a 150 terabyte DFM next year.
And a 300 terabyte DFM by 2026.
Our improvements in performance and density of direct flash versus commodity products will enable us to increase our competitiveness in the industry by a wide margin not only in performance and cost, but also in energy efficiency and E waste reduction.
Speaking of energy Anyways, we issued our second ESG report last week. It details the advancements we continue to make across our technology portfolio operations and people.
Our largest area of contribution continues to be the extraordinary energy E waste and space savings of our products, which enable our customers to achieve their environmental sustainability goals.
Fewer products can reduce the total energy and emissions from data centers globally by upwards of 20% as pure as flash optimized systems use up to five times less power than competitive SSD based systems to up to 10 times less power than the hard disk systems, we will replace.
In closing I have never been more confident in our long term growth strategy or in our opportunity to lead this market.
I'll now turn the call over to Kevin Chrysler.
Kevin.
Thank you Charlie revenue of $689 million in Q2 grew six 5% year over year and exceeded our revenue guidance. We achieved record sales of our entire flash play portfolio, including Flash played in and saw continued high demand for our evergreen one subscription service.
As sales more than doubled year over year.
While the spending environment remains relatively consistent to what we have seen out of it. The last couple of quarters. Our customers are choosing to invest in our high technology data storage solutions for their key strategic projects as we have seen with the sales performance at both our flash blade and evergreen one offerings this quarter.
<unk>.
Momentum we saw across our entire flash play portfolio included specific AI and ml use cases, including a significant generative AI win that Charlie highlighted.
We are excited with the historic ramp for both sales and pipeline of Flash play E throughout the quarter.
Customers no longer need to settle for hard disk systems and can now choose peer is higher performance flash solutions at competitive price points.
Q2, operating profit of nearly $112 million exceeded expectations due to the performance of our product and subscription gross margin.
Our unique purity software architecture, working directly with raw flash rather than less efficient and shorter lived ssds contributed to the strength in product gross margin.
Leveraging our purity software the majority of the capacity. We now ship is based on Q L. C Raw flash.
More aggressive discounting behavior from our competitors during the quarter slightly offset product gross margin expansion.
In Q2 subscription services annual recurring revenue grew 27% year over year to $1 $2 billion and included strong growth from our evergreen one storage as a service offering.
Closed evergreen won contracts, where the effective service date has not yet started are excluded from the subscription E RR calculation.
Subscription are a our growth would have been 28% when considering closed evergreen one contracts, where the service date has not yet started.
Remaining performance obligations or RP O grew 26% the $1.9 billion.
Similar to the remarks, we have made in previous quarters. Our R. P. O previously included and outstanding commitment with one of our global system integrators. During Q1. This remaining outstanding commitment was fully satisfied and when excluding the impact of the past outstanding commitment our P. O grew 30%.
Year over year.
Subscription services revenue of $289 million comprised 42% of total revenue, which is six points higher than Q2 last year.
U S revenue for Q2 was $495 million and international revenue was $194 million.
We acquired 325, new customers during the quarter and our total customer count now exceeds 12000.
As previously mentioned we were pleased with our continued strong gross margin performance at 72, 8% with product gross margin of 71, 5% and subscription services gross margin of 74, 5%.
Our head count increased slightly to approximately 5400 employees at the end of the quarter.
<unk> balance sheet and liquidity remains very strong, including $1 $2 billion in cash and investments at the end of Q2.
Cash flow from operations during the quarter was $102 million and capital expenditures totaled $55 million.
In Q2, we repurchased nearly 600000 shares of stock returning nearly $22 million to our shareholders.
This represents a lower level of repurchase activity than recent quarters as a result of the fixed trading parameters that were in place throughout the quarter.
We have approximately $190 million remaining on our existing $250 million repurchase authorization.
Now turning to guidance.
We expect Q3 revenue to be $760 million, representing double digit growth of over 12% year over year.
Our Q3 revenue guidance assumes continued strong subscription revenue growth fueled by our evergreen one subscription services.
We continue to execute on aligning our cost structure with expected demand.
The results of our continued operational discipline and the economic benefits, we are seeing with our unique architecture of purity software working directly with flash is reflected in our Q3 operating profit guide of $135 million or 17, 8% operating margin.
Our annual revenue guidance, we previously communicated remains unchanged and assumes revenue growth in the mid to high single digits as we expect significantly stronger year over year revenue growth for the second half of FY 'twenty four.
As a reminder, revenue for evergreen one subscription service offering is recurring and is recognized over time the sales strength of our evergreen one offering through the first half of the year has outperformed our expectation and this momentum is expected to continue throughout the remainder of the year.
Success of our sales of Evergreen one subscription services has been considered in our annual revenue guidance as the growth of this offering creates a near term headwind to the total revenue growth rate as revenue is recognized over time.
We also continue to assume no significant improvement or worsening of macro economic conditions from what we have seen over the last few quarters.
Finally, we are increasing our annual operating margin guidance from 15% to 15 and one 5%.
Driven by our continued operational discipline as well as the benefits. We are seeing as a result of our unmatched Flash management technology powered by purity software.
In closing <unk>.
Trading data storage and management as high technology as demonstrated through our continuous innovation across our portfolio and business models. We have established an extraordinary advantage in reducing power consumption.
State space Labor N E waste for our customers.
Our business value and total cost of ownership advantages are unmatched against our competitors.
With that I will turn it back to Paul for Q&A.
Thanks, Kevin before we begin the Q&A session I'll ask you to limit yourselves to one question consisting of one part so we can get to as many people as possible. If you have additional questions. We kindly ask that you. Please rejoin the queue and we will be happy to take those additional questions. If time allows operator, let's get started.
Thank you if you would like to ask a question. Please press star followed by the number one on your telephone keypad. If for any reason you would like to remove that question simply press star One again and again that is star one to ask a question and as a reminder, if you are using a speaker phone. Please remember to pick up your headset before asking your question.
And we will pause here briefly as questions are registered.
We'll go first this afternoon to Amit <unk> at Evercore.
Yeah. Good afternoon, Thanks for taking my question.
I was hoping you could talk a bit more about the flash blade portfolio I think in the press release, you talked about record sales over here, So love to understand where is the strength coming from what's driving the success you had given a challenged macro.
It was really related to that any sense in all flash blade <unk> adoption is looking and maybe some traction there I think net op recently talked about how they're equal and proud of at least is having a very strong launch. So I'd love to hear you know wears flash. They brought me resonating with customers and is there anyway to quantify what you're seeing there would be really helpful. Thank you.
Absolutely. Thanks, Samit, but just as a reminder to the audience.
We launched flash blade about five or six years ago now and then more recently are a little over a year ago updated it with what we call our flash played S.
Program, which shares.
Our direct flash modules with our flash array series as well as more recently just last Q1, our flash blade E product a flashlight S addresses the high performance into the market and flashed Lady as I've mentioned in my.
In my script.
Actually addresses the are they high.
High capacity, but a bulk data lower cost market overall.
To answer your question directly, but I believe the the greater focus around AI certainly helps.
In flash blade sales, but frankly, you know flash blade has continued to grow, especially since the introduction of flash blade S, which gave it even greater compatibility with our flash array series ever since we introduced that product and now that we've introduced the E. It really allows customers to look.
At the full range of price performance for their.
For their high capacity workloads with one consistent platform and I think <unk>.
Bleeding, if you will the family with he has really helped our flash blade sales overall.
Yeah, absolutely and Amit this is Rob just to jump into the second part of your question.
Look I think it's important to realize that he really has no equivalent on the market.
E. As Charlie mentioned is really enabled by our highly differentiated purity software direct flash technology, that's designed for that software.
Which really sets us far apart not only from disk, which is largely the displacement market. We're going after but also are any of the competitive set that might try to follow us with SSD based technology and as Charlie mentioned, we started.
Using this technology leveraging of bringing are using it to bring <unk>.
And to the enterprise over three years ago with flush received at the time to displace a hybrid.
Disk based systems, and then now with E. I would both flash Brady and flash array <unk> joining our later this year really see a complete portfolio to go after the entirety of our customers' data storage needs and again as Charlie said being able to do that and offer it with a very consistent hardware software and management approach.
Thank you Amit next question please.
We'll go next to Aaron Rakers at Wells Fargo.
Yes, thanks for taking the question I guess I wanted to ask about the AI opportunity.
If you can can you unpack a little bit about the eight figure deal that you won in.
In AI. This quarter have you revenue recognize that just kind of any context that and then also just to clarify.
The meta deal are you continuing to not assume any kind of a follow on.
From that footprint deployment next generation data center opportunity.
Your guidance for fiscal 2004, thank you.
You bet. So the eight figure deal with a nice as I said, a low eight figure deal, but in a production environment that has opportunity for expansion. So very excited and it was the.
The largest gen a ideal of its of its site, which is why we wanted to highlight it not be not be only AI deal that we did in the quarter, but just because of its scale something we wanted to highlight.
I would also say that.
You know, it's an area that where we are seeing additional interest overall in the market that being said as I said last quarter I'm just as excited by the opportunity to upgrade our customers existing data environments, they're lower performance environment because of the needs of our wanting to you.
Use that data for AI inference in the future so I'm seeing both of those opportunities.
In front of us.
Separately with respect to the meta RSC, which we've commented on the past because you know what.
When a new shipments happened into that tends to have an effect on our overall P&L.
P&L, Yeah, I, you know until as I've stated in the past.
We have there's really no change from prior quarters it continues to be.
In an environment that that meta is happy with our relationship with them is very good they're no change as far as we know of are.
Are there plans to expand it in the future in other words that still our expectation, but we don't know the exact timing.
Kevin did you want to make a comment about revenue recognition for that eight figure deal that was included in our revenue yes. Thank you Paul.
Thank you Aaron next question please.
Go next now to meta Marshall at Morgan Stanley .
Great. Thanks.
A couple of questions for me just coming out of accelerate you know you guys had made some very bold statements just about kind of customers not named us anymore and I just wanted to get a sense of how you found that message resonate with customers.
What pieces of the portfolio do you feel like or pieces of the roadmap that you need to demonstrate over the next kind of coming years, just demonstrate to customers that they can have more comfort in that transition.
And then just maybe a clarification on flashlight.
Kind of typical order to ship time thanks.
So.
I can answer the first part of that question you know in a number of different ways first of all I believe that customers have already experienced the disk to flash.
Benefits when they went with their primary storage from disk to flash and what they found was smaller footprints higher reliability less maintenance less effort overall, especially when they moved to pure flash.
Slash and so they they already recognized that as a positive effect and so when we can now go in at these lower price points lower price performance levels are they get very excited about it but as I had mentioned in my prepared remarks, what gets them even more excited is consolidating.
Their overall environment to a more consistent.
Hardware software environment, because it reduces the complexity in their overall I T datacenter reduces their complexity when they want to move to the cloud just reduces complexity generally so it's not he has interesting not just in the just the flash transition but in the.
Do you have customers to move to a more consistent portfolio overall.
Just to jump in here you know I think part of your question had to do with building comfort with customers around the transition look I think it's important to realize that the transition from hard disk to flash, we're offering with E is completely seamless alright to another way to look at it is there are basically no reasons that are.
Customer says Hey, you know I would like to get disc I would like to keep this there really no puts and takes.
The only reason that customers have held onto disk and a lot of these environments. Historically has been price and then now with our technology with what we've been able to do with E.
We have we have effectively neutralize that and so I think.
I think that's something that's.
<unk>.
Perhaps goes less appreciated in and I think we'll use that transition because it's not a re architecture, it's not a redesign it really is.
Just a seamless and really instantaneous improvement on all dimensions, and let me just touch on that last question on order to ship time for <unk> are consistent with what we see across our portfolio. So no significant difference there.
Thank you meta next question please.
Well go next now to pendulum Bora at Jpmorgan.
So can you tell you guys congrats on the quarter.
Staying on the AI team.
I want to ask you about pork, where it seems that was a little bit surprising I don't think people are thinking about the <unk> NDA together, maybe talk about that AI opportunity with respect to pork works. What are you seeing what kind of workloads are these are these on premise or cloud.
<unk>.
Are these more of a training or inference time Colby.
That would be helpful. Thank you.
Yeah. Thanks, a pendulum well first of all it's both inference and and training and as you might imagine you know a lot of these are new developments are being made in container based and kubernetes based environments and port works is without.
Out equal in terms of its ability to manage our storage of all types.
For kubernetes and containers and to do it both there can do it on bare metal can do it in the cloud can do it on top of our our infrastructure and so as these are very large environments Port works, how has always been a really superior when it gets to large scale production.
And so before going into a development, where the developers know it's going to go large scale when they when they are when they scale out they're starting off with with Port works for their.
State full data management and pencil and just to just to add onto that you know I look at the the port works and cloud native.
This puzzle is really a part of the overall set of environments that we see as being impacted by the uptake of AI technology and positively impacted and so certainly number one you know AI training infrastructure and environments. We've talked to you all a lot about that number two is really the demand to store.
More and more data in the enterprise remove the silos and really move more of that called it into the warm and then as Charlie says number three looking at the application environments that the trained AI models are connected to if you look at.
Where a lot of that data is coming into enterprises, it's coming from multiple sources is coming from business data databases Iot sensors machine data all over the place a lot of these application sets environments very highly dynamic.
Very Ah aligns to open source cloud native technologies.
It's also important to realize that.
Getting views are deployed training trained AI models are deployed and connected to real time systems.
Is ultimately the goal for a lot of these enterprises and so when you look at the application environments driving these real time systems that folks want to plug chat bots or what have you into.
Again, all very heavily based on and built on cloud native architectures open source software and they have the needs for our agility scalability elasticity.
That that that those architectures are afford while at the same time, having the enterprise capabilities that the technologies like Port works can offer and really that's what we're seeing out there today.
Pendulum next question please.
We'll go next now to <unk> Mohan at Bank of America.
Hi, yes. Thank you so much.
Charlie will not really seen a large uptake on on premise AI driven workload, but you mentioned sort of this large inference opportunity at enterprises any thoughts on when that can happen do you see that in calendar 'twenty four or <unk> 25 from a materiality perspective, and if I could like subscription IRR has been decelerating over the last four.
Orders, how should we think about the growth trajectory here. Thank you.
You know, it's it's an interesting question I would say that we do see opportunities on Prem for AI in you know I would say highly specialized environments.
And and so I think that is a real thing of course, many of them are waiting for delivery of GPU and AI based processing systems and environments and I would say that a lot of focus has been on the.
Currently on the on the compute side of it a little bit less focused by the customers because they've been so focused on the compute side a little less focus on the storage infrastructure I believe that's just starting to become a better known and understood.
Requirement for these AI systems, but I would say that Ah I, just I would disagree wamsley I'd say that our that we do we are starting to see interest.
If not yet deployments are on Prem.
And once he let me touch on the subscription <unk> growth definitely pleased with what we saw in terms of subscription growth, especially evergreen one which is that outperforming our already strong expectations that we had at the beginning of year and as a reminder, in my prepared remarks close to evergreen one car.
Contracts, where the effective service date has not yet started are excluded from the E. R. A calculation.
And our subscription <unk> growth would have been 28% had we included those contracts where the service date had not begun and look you know is it just as a result of our product revenue being low to lower for our Capex sales, we do have less attach of our evergreen subscription which is also reflect.
<unk> and our subscription growth rate.
Thank you <unk> and just a kind reminder to everyone to please ask one question consisting of one part and we'd be happy if you'd like to ask another question later on in the queue next question. Please.
The next now to Krish sanka at TD Cowen.
Yeah, Hi, Thanks for taking my question, Tony I had a question on AI too.
From a store standpoint, where do you think benefits the multiple AI workload.
In block storage and object, where do you think benefit most and also can you help us clarify.
What products in your portfolio today support Infiniband and how to think about it in the future.
Oh absolutely.
I would say that a.
A lot of the.
A lot of the AI environments use block because it's very straightforward.
Especially with programmers and block can be utilized for any structure that you want underneath but increasingly it's moving to an object based environments.
Because because.
Over over time block is easier it's more efficient.
And it is.
It's less requires less state than the than what is generally necessary in a block environment. So I think we're starting to see that shift, but it's been taking a lot of time to get to a very high performance object, Rob do you want to add yeah, no one's here I think.
Sorry, Chris a couple of things.
Look I think if we step back from.
<unk>.
Application sets, we're seeing AI technology being applied to today and we look at the long term drivers.
I think it's going to have a positive effect on all forms of storage and why and what makes me believe that is look the source data that enterprises are looking to feed into our AI technology and got benefits from are coming from all over the place they're coming from business systems are coming from traditional databases that are coming from.
More modern databases are coming from unstructured data log files images and that really spans the gamut of block file and objects I also think that the.
The enterprises.
Source data.
That they are collecting.
Through through those means today and is going to increase in the future I think that's the larger opportunity set.
It is a.
Clearly a fast moving technology space that every enterprise is looking to adopt and looking to take advantage of and.
And that's just going to drive a greater demands to collect and store.
Data across across the enterprise.
I think just to address the second part of your question on Infiniband.
We've really focused on addressing the AI space as one of several very important segments.
And the portfolio one of the things that really sets us apart in the market and really with our customers is are the benefits we can deliver by having a consistent hardware software and management experience across all of their workload sets in and this is where we see the benefits of Ethernet based technologies, we see the benefit.
<unk>.
More ubiquitous technologies that again as the.
Current application sets that you see perhaps an air training environments broaden and those environs needs to connect to other parts of a customer's data center spell.
Special purpose technologies, if you will such as Infiniband really hinder that really get in the way.
So you know and fundamentals nothing new we've been around for quite some time, but mostly found in more specialized environments, we see the bigger demand in and value to the enterprise and being able to give them a complete solution set not just for the AI training environments, but for all of the data environments that are going to be impacted by.
The uptake of AI technology. Thank.
Thank you Chris next question please.
The next night to Sidney Ho at Deutsche Bank.
Great. Thanks, Thanks for taking the question. My question is on the remaining purchase obligation.
That is still showing really good growth at 26% growth year over year, but D.
The Unbilled portion really accelerated in the past few quarters can you talk about what's driving that acceleration does that have anything to do with the new products or maybe evergreen just growing rapidly.
Yes.
I appreciate the question and it's a real simple answer you're exactly right. It's due to the evergreen one acceleration and just timing of billings is really what it comes down to.
Okay. Thank you Sidney.
Next question please.
We'll go next to Shannon Cross at Credit Suisse.
Thank you very much you mentioned that is exceeding your expectations.
If you can talk a bit more about how the customer conversations are going how much youre seeing being sold into existing customers versus some of the new customers is this opening up a new opportunity for us to bid on new Rfps just any more color you can give there. Thank you.
Yeah, Let me, let me start it.
Yeah first of all it is exceeding our expectations. Both in terms of the revenue that we saw in our first full quarter of shipments as well as in the pipeline growth, which continues at unprecedented rates are very very fast the conversations are.
First of all.
They are happening all around the world Theyre happening across a very broad set of use cases.
And you know in some cases.
At prices higher.
Then what the customer would be paying for new disk environments because of the lower total operating costs are that theyre able to get and the better performance that they're able to get out of the out of the all flash E environment, So and I would say that it's really I I have yet to hear.
Of a use case around for an existing disk based system that flash flash blade he was not able to address.
Great. Thank you Shannon next question please.
We'll go next to Jason Adder at William Blair.
Yeah. Thank you hey, guys.
Can you can you quantify the revs.
Revenue growth headwind over the last 12 months from evergreen one in and also just stuck.
Any color on materiality to the total services revenue I mean can you give us a ballpark of how big it is becoming.
Yeah, No. It's a great question and an evergreen one performance has simply been terrific in the first half and we're expecting that momentum to continue and you're right.
There is a short term headwind on revenue as a result of revenue being recognized over time and when we think about it from an annual lands, it's probably about one to two points is how we're thinking about it currently and then we don't we're not quantifying our evergreen one specifically at this point in time Jason.
Okay. Thanks, Thank you Jason.
Next question please.
Well go next now to Mehdi Hosseini Susquehanna.
Yes. Thanks for taking my question wanted to better understand the dynamics of the folks that you're talking to decision makers at the customer's site and how is that changing and I'm asking you because I'm looking at your Opex that is on track to grow.
The low teen versus revenue growth talk to them.
Mid to high <unk>.
Single digit.
Yeah regarding the the.
The type of customer environment.
The new positioning the new messaging, we're talking about is definitely getting us into the C suite increasingly and it's both that message is made up of several parts one is.
An extremely consistent environment that first of all can take care of all of their their storage needs and the same with the same environment. Therefore, lowering their total operating costs the dramatically lower power space in cooling that both lowers costs, but improves their ESG their own ESG ratings.
Which is extremely important.
And then also.
As I mentioned in my prepared remarks, the ability now to be able to rise above just individual arrays attached to individual use cases and enable customers to create an environment, where they could have consistent storage pools across their entire enterprise multiple datacenters multiple.
<unk> yeah.
This is really a new message. It's one that that addresses the concerns of C. I OS of C. T OS even though the business units and developers. So this is getting us certainly a higher level attention in major accounts.
Thank you Mehdi next question please.
The next not too David vote at UBS.
Great. Thanks, guys. So.
Kevin and John Carl I, just want to go back to the current demand environment and the macro.
You touched on the challenging macro backdrop and yes last Lady was a really strong launch during the quarter. Just curious about what did you see from customers was there any sort of potential spin down where it did make sense to maybe to use a more lower cost all flash solution in the quarter at the expense of maybe a little bit more performance solutia.
<unk>. In addition to maybe disc replacement and then how do you think about that sort of dynamic as we move through the balance of the year. It doesn't sound like the macro is getting dramatically better and so should we expect to see obviously on the blade side and then ultimately the rate side sort of.
Be a key growth driver in the second half of the year. Thanks.
Yeah, we haven't really seen that type of what do you call. It a spin down or cannibalization. We track. This very very closely as you might imagine when we bring in a lower price performance product to see if.
Customers are trading down.
We really don't see that it really did open up net new opportunity for us to go into go into new areas. I think if we were in a better economic environment. All of these numbers would be would be enhanced.
But no I think it's just a.
We'd all love to see even stronger growth than what we're seeing now and of course, we are where.
Pedaling vary.
Very hard to drive more performance out of the team overall, but yeah.
But the the economic effect has been broad based and I would say if anything.
When you have an economy that started off the year the way it did cut.
Customers reduce their intention to spend and they have their high priority projects and because we announced the disk to flash transition. After the beginning of the year I think if anything it's muted.
We'll be increase next year as customers start to plan for it.
In there are in their budgets. So no I think it's more of a economy than anything else.
Great. Thank you.
Next question please.
Well go next now to Thomas Blakey at Keybanc.
Hey, guys. Thank you for taking my question I, just wanted to circle back to the <unk>.
Personal service line and from a puts and takes perspective evergreen wondering great off to a great start just what maybe focus on the other areas that maybe are experiencing some pressure specifically wanted to know it looks like maybe there is just understanding how you're relatively you'll start smaller and grow with your customers. If there's any.
Pent up demand that you can see there heading into next year from that from any pressures in other areas of the evergreen products. Thank you.
Yeah I know this is Kevin and I'll start off and then have Charlie add on any more commentary, but it's a good question and again, we commented on the strength of our subscription <unk>, which really has been driven.
And fueled by our evergreen one subscription offering now obviously with with demand being a bit lower on the capex side, the attach of evergreen subscriptions, whether that's forever.
Or foundation is impacting somewhat our subscription are our growth rate, which I've talked about a little bit earlier now if we look at and really that's the only thing going on that I would highlight in particular.
If youre looking specifically at our subscription revenue growth rate.
Do you want to let you know we've got professional services in that line item as well and obviously that's not growing at the same pace as our subscription offerings and so that would be driving your difference that you might be noting.
Thank you Tom Thanks for question. Please.
Well go next to Simon Leopold Raymond James.
Great. Thanks for taking the question I wanted to see if we could maybe step back and help us size, the AI opportunity as to sort of where it is now and where it's going I think in the past you've talked about sort of where plas play. It is maybe AI use cases, not just generative we're probably more.
More than half of those use cases, you've given us some customer metrics wonder if we could get some revenue metrics as well even a ballpark. Thank you.
Yeah.
Yeah, we don't do it.
Simon we don't generally like to break break these things out I would say, though that.
The AI is a significant contributor to our revenue it's not a it's not a dominant one nor frankly do I expect it to be a you know it's a.
It's a very exciting new area without a doubt and we expect to see growth our growth in that but.
Plain old plain old data storage, both for high performance databases as well as for lower performance bulk data.
We will continue to dominate our markets what is exciting about the AI environments is a high performance systems.
Generally.
Our high profit our system environments, which is which is good and we do hopefully anticipate.
Like the meta R. S C that we might see environments, where the scale of it really starts to grow but I would say still you know and I think this is true for it for everyone except for the GPU builders you know while wallet is an exciting new area.
It's probably going to be you know what.
A small let's say.
Low double digit portion of their overall revenues in general.
Thank you Simon.
Next question please.
Well go next now to Nihon <unk> at Northland capital markets.
And Nicole your line is open if you do have a question.
Yes. Thank you.
Hey, Thank you for your question and I really like the new presentation content formats really great. Thank you for that.
So lastly.
Lastly, it sounds like you've had better expected revenue and pipeline with respect to pipeline are you, assuming a lower conversion rate of that pipeline.
For the remainder of this fiscal year, that's more or less driving the.
No change in our guidance here.
Yeah, No. That's a great question and the answer would be no or our conversion rate, especially for flash. The Lady is quite healthy and we've considered that in our overall annual revenue guide that we provided the other thing to highlight as well.
And we've highlighted that in my prepared remarks is the strength of evergreen one.
Which needs to be considered as well because obviously that takes more time to make its way to revenue and that's been considered as well as we've looked at our overall annual guide for this year. So hopefully that's helpful for you.
Thank you Neil.
Next question please.
We'll go next to Matt Sheerin Stifel.
Yes. Thanks. My question is on the recent Azure Vmware announcement could you help us understand the significance of that in terms of your position with Microsoft within that.
As your ecosystem, how that positions you versus competitors in the cloud and how we should think about the product roadmap going forward.
Yeah.
We consider it to be a very significant announcements. It is a combination of the Vmware and in the cloud Azure via services and.
Vmware services as well as our cloud block store, providing a simpler methodology for customers to move their existing workloads into the into the cloud and also dramatic the same time.
Dramatically, reducing their overall cloud costs. So it's really a one two punch that that's hard to beat we consider the relationship with Microsoft very strong and continuing we're looking forward to doing more things with them as we as we go forward and I think this is going to be a very competitive offering in the market.
Rob.
Yeah, No I mean, just to add onto that.
Charlie said I think one of the things that really makes US unique is the you know the.
The integration that we've undertaken with in partnership with Azure team really over the last year plus to bring the service to market.
We have had a number of cloud block store customers that have really been pushing.
Pushing both of US in this direction and have been part of our early previews in beta activities and Theyre very excited now to be able to move into production and look overall, we just see this as a continued validation of the benefit the customers are seeing from the cloud block store technology and reducing their cloud costs.
And really giving them a much better environment.
Cloud infrastructure to run their production workloads, you know as we mentioned last quarter, we had our largest individual sale in the quarter.
Quad blocks are to a large healthcare organization that organization is now moving into production and frankly, seeing even better than expected cost reductions and savings as a result of that and so overall, we see this as just continued validation of.
The great technology, the ability to go drive meaningful savings for customers and then now in partnership with Azure are tightly integrated to a very very important use case for our customers.
Thank you Matt It looks like we have time for one more question and I'm happy to say, we have a person who has rejoined the queue. So this will be a second at bat. So our last question.
We will take that now from Mehdi Hosseini.
Yes, thanks for opportunity I wanted to go back to my original question.
As your engagement with the C level executives.
Obviously, we shouldnt Ts are reflected in your subscription is there another metric that we could track and to better understand your longer term revenue growth because you're spending your opex growth is much higher than this year's fiscal year revenue growth, but obviously.
It helps your sustainability of revenue growth and I'm just wondering if there's any other metric that we could look at to better measure your longer term revenue growth.
No nothing specific many that I'd I'd point, you to that other than the rich amount of in our portfolio and the opportunity associated with that portfolio.
Across our entire data storage platform.
So obviously navigating through this year I provided a guide for this year and as we navigate through the second half we'll be looking at next year as well.
Thank you thank you Mehdi.
Before we conclude I think Charlie has some final comments.
Our customers appreciate our new capabilities in our positioning as a as I had mentioned the only consistent consolidated data storage and management platform for all of your data storage needs.
I want to thank our customers and partners suppliers employees and investors your collaboration and your innovation your hard work and your trust propel US forward. So we look forward to meeting you around the world we have a number of accelerate roadshows set up.
In various major cities around the world and we look forward to seeing you all there. Thank you.
That concludes the pure storage second quarter fiscal year 2024 earnings conference call. Thank you all for your participation you may now disconnect your lines.
Okay.
Hum.
Today's conference call. Thank you all for your participation you may now disconnect your line.