Q3 2025 Pure Storage Inc Earnings Call
Speaker Change: Good day, and welcome to Pure Storage 3rd Quarter Fiscal 2025 Financial Results Conference Call. Today's conference is being recorded.
Speaker Change: All lines have been 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 1 on your telephone keypad. At this time, I'd like to turn the call over to Paul Ziots, Vice President of Investment Relations. Please go ahead.
Paul Ziots: Thank you. Good afternoon everyone and welcome to PURE's third quarter fiscal year 2025 earnings conference call.
Paul Ziots: On the call we have Charlie Giancarlo, Chief Executive Officer, Kevin Krysler, Chief Financial Officer, and Rob Lee, Chief Technology Officer. Following Charlie's and Kevin's prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast.
Speaker Change: The slides that accompany this webcast can be downloaded at investor.peerstorage.com. On this call today, we will make forward-looking statements which are subject to various risks and uncertainties.
Speaker Change: These include statements regarding our financial outlook and operations, our strategy, technology, and its advantages, our current and new product offerings, and competitive industry and economic trends. Any forward-looking statements that we make today are based on facts and assumptions as of today, and we undertake no obligation to update them.
Speaker Change: Our actual results may differ materially from the results forecasted and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties relating to our business is contained in our filings with the SEC and we refer you to these public filings.
Speaker Change: During this call, all financial metrics and associated growth rates are non-GAAP measures other than Revenue, Remaining Performance Obligations, or RPO, and cash and investments.
Speaker Change: Reconciliations to the most directly comparable gap measures are provided in our earnings press release and slides.
Speaker Change: 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 the property of Pure Storage.
Speaker Change: Our fourth quarter fiscal 2025 quiet period begins at the close of business Friday, January 17, 2025. With that, I'll turn it over to Charlie.
Good afternoon and welcome to our Q3 FY25 earnings call.
Speaker Change: Pure Storage delivered solid third quarter results with both revenues and operating income exceeding our guidance.
Speaker Change: As I have discussed in previous calls, we have been engaged on achieving a significant hyperscaler design win by year-end, and I am pleased to announce that we signed a design win with a top four hyperscaler in the last few weeks.
Speaker Change: This is the first-ever design win to provide Flash for standard hyperscaler storage, and it is the vanguard for Flash storage providing all online storage in major hyperscale environments in the future.
Speaker Change: For reference, the hyperscale market is responsible today for 60-70% of all hard disk drives purchased globally.
Speaker Change: In addition to providing cost effective data storage, this top four hyperscalers use of pure technology is expected to free up significant amounts of power and space in their data centers.
Speaker Change: It is also expected to significantly reduce the failure rates and maintenance costs associated with legacy disk storage while doubling the expected lifetime of their storage infrastructure.
Speaker Change: Pure Storage, Purity Software, and Direct Flash Technology will provide this hyperscale customer the necessary price, performance, density, and power to deliver the cloud-based services with unparalleled performance and energy efficiency.
Speaker Change: The close engineering engagement between the companies and extended testing by this major hyperscaler has proven PURE's DirectFlash technology is now capable of providing cost-effective data storage at hyperscale capacity, even at low-cost bulk data price ranges.
Speaker Change: with a single consistent architecture for all of their online storage.
Speaker Change: inclusive of low-price bulk storage, near-line, higher-performance storage, as well as high-speed storage for their most demanding use cases, including AI.
Speaker Change: To support the expected increase in flash demand for the hyperscale industry, we also announced today a deepening collaboration with Keoxia, a global leader in NAND flash technology.
Speaker Change: Keoxia has been a steadfast partner in our engagement with the hyperscale community.
Speaker Change: Our design win signals that Cure's DirectFlash technology is now ready to replace hard disks everywhere, and NAND vendors are taking notice and planning their opportunity to address this 700 exabyte per year market.
Speaker Change: As data volumes continue to increase, our combined technologies enable hyperscalers to meet the challenge of increasing data volumes while reducing power consumption, labor, and the physical footprint of hyperscale data centers.
Speaker Change: While we have had sales of standard product into hyperscale customers...
Hyperscalers have developed their own software for their storage services.
which operates on commodity hard disk drives and SSDs.
Speaker Change: Our early outreach to hyperscalers was first met with skepticism that we could achieve the price and performance necessary to replace cheap hard drive storage.
Speaker Change: However, this hyperscaler was open to investigating us further, and working together, PURE optimized the design of Purity and our DirectFlash technology to fit smoothly into their compute and storage architectures.
and optimize the economics to fit their financial targets.
Speaker Change: With this win, Pure is entering an exciting new hyperscale market.
Speaker Change: The design win itself signals that this top four hyperscalers future data centers are approved to use Pure's technology as their data storage standard.
We expect early field trial buildups next year.
Speaker Change: with large full production deployments on the order of double digit exabytes.
Expected in calendar 2026.
which corresponds to our fiscal 27.
Speaker Change: We continue in our dialogues with other major hyperscalers as well. Given the significant opportunity that exists for this and other hyperscalers, we anticipate increased investment in our hyperscale line of business over the next year.
for which Kevin will provide additional details.
Speaker Change: I would like to turn now to another significant area of opportunity for PURE, namely artificial intelligence.
AI creates several key opportunities for PURE.
Speaker Change: First, we continue to provide leading-edge, high-performance storage for public and private GPU farms in machine learning and training environments.
Speaker Change: This past quarter, we were officially certified for the NVIDIA DGX SuperPOD architecture designed to provide turnkey infrastructure for the world's largest training environments.
Speaker Change: We recently announced a strategic investment with CoreWeave, a specialized GPU cloud provider to better serve our AI customers.
Speaker Change: Building on our successful existing supercomputing scale deployment, serving thousands of GPUs, we partnered with CoreWeave to make pure storage available as a standard option within the CoreWeave dedicated cloud environment.
Speaker Change: Second, many enterprises are considering inference engines and retrieval augmented generation or RAG environments as they look to apply commercial large language models to analyze their proprietary data.
Speaker Change: This quarter, we introduced the Pure Storage Gen-AI Pod, a set of full-stack solutions which reduce the time, cost, and expertise required to deploy generative AI projects.
Speaker Change: In the quarter, we signed a deal with a medical device manufacturer who faced multi-million dollar interruptions because their legacy storage technology couldn't support a real-time AI imaging system to catch defective products.
Speaker Change: With Pure, they can now run AI analytics, capture metadata, and train their machines to identify and prevent defects, significantly improving their operations and their quality assurance.
Speaker Change: Third, AI continues to drive customers to modernize and break down infrastructure and data silos to enable easier access to data.
Speaker Change: Unlike with other vendors, pure customers will not need to manage different storage operating environments to meet their varied AI needs.
Speaker Change: This quarter, one of the world's leading suppliers to the defense and aerospace industry chose Pure for their AI data storage infrastructure.
Speaker Change: This Fortune 200 customer chose Pure's platform to support a wide range of training, inference, and fine-tuning, sharing many datasets and storage environments seamlessly across multiple groups and AI activities.
Speaker Change: The Pure Storage Platform will be used to develop multiple AI technologies to enhance human capabilities, improve aviation safety, reduce pilot workload, and develop human-centric autonomous solutions.
Speaker Change: Expanding on the Pure platform and turning to the enterprise, Pure is driving the biggest shift in enterprise storage since Flash.
Speaker Change: With PureFusion, we are transforming enterprise data by virtualizing data management and storage and enabling enterprises to create their own data cloud environment across their global enterprise.
Speaker Change: Pure Fusion will be available this quarter as a non-disruptive, free upgrade to all existing Pure Block storage arrays and will be standard in all new Pure Block products and storage service offerings.
Speaker Change: Fusion will be extended to our file and object platforms early next year.
Speaker Change: Our advances in data storage innovation for enterprises and now hyperscalers are transforming the industry.
Speaker Change: Our experience and technology in optimizing flash storage for enterprises has now enabled us to begin to penetrate the largest hyperscalers with our purity-based direct flash technology at the largest scale.
Speaker Change: Because of their scale, hyperscalers manage their storage far differently than traditional enterprises.
Speaker Change: Traditional enterprises manage individual storage arrays which are dedicated to specific workloads.
Speaker Change: Storage dedicated to a specific workload cannot be shared with other workloads. Therefore, data stored for a particular workload is generally inaccessible for other workloads.
Traditional enterprise storage architectures and products create data silos.
Speaker Change: By contrast, hyperscalers only have a small handful of storage environments segmented only by price performance levels.
Low, medium, and high, for instance.
Speaker Change: All data from all workloads and customers utilize the same storage environments. This makes data access far easier.
Different storage capabilities are enabled by software, not dedicated hardware.
Speaker Change: Our experience in working with hyperscalers has allowed us to bring the best attributes of data cloud architectures to enterprise data centers with Pure Fusion version 2.0, which will be released this quarter.
Speaker Change: PureNow makes it possible for businesses to build their own enterprise data cloud, seamlessly combining on-prem and cloud environments to stay agile and competitive in the age of AI.
Speaker Change: Pure Fusion automates data management, simplifies operations, and enhances the DevOps developer experience.
Speaker Change: Fusion empowers enterprises to build their own enterprise data clouds that federate storage across both cloud and on-prem environments.
Speaker Change: enabling effortless scalability, global accessibility, automated job placement, load balancing, and importantly AI ready data access.
Speaker Change: Fusion allows organizations to define and standardize their own customized global data management classes inclusive of performance, cost, resiliency, recovery, and location.
Speaker Change: and to automate delivery of data services to users via API and according to enterprise policy.
Speaker Change: Fusion fully unifies, automates, and delivers the cloud operating model across the Pure platform, on-premise, and in the cloud.
Speaker Change: We have also deepened our partnership with major public cloud vendors for enterprise services.
Speaker Change: with the official preview of the Pure Fusion powered Pure Storage Cloud for Microsoft Azure VMware Service or AVS for short.
Speaker Change: We simplify enterprise migrations from on-premise VMware environments to AVS, enabling independent scaling of storage from Azure Compute Nodes.
Speaker Change: This first-of-its-kind solution ensures a smooth, efficient cloud transition with minimal IT disruption, boosting cost efficiency, data resilience, and storage simplicity.
Speaker Change: Turning now to the market and broader macro environment, we have not seen any meaningful change in the overall landscape, which remains relatively consistent with the muted IT spending and heightened competitive environments we have seen all year.
Speaker Change: Customers continue to contend with higher software SAS and cloud costs, as well as AI spending uncertainty.
placing unanticipated pressure on operating budgets.
Speaker Change: While I would have liked to have seen more strength from Evergreen One in the quarter, we are confident that we are strongly positioned across all of our segments.
Speaker Change: The cloud is not a location. It is an operating model enabling self-service, speed, consistent operations, and faster scaling with greater efficiency at lower costs.
Speaker Change: With Fusion and our data storage platform, we're turning the vision of an enterprise data cloud into a reality for enterprises.
Speaker Change: Our consistent innovation in our industry has been recognized annually by industry analysts such as our recent 11th time leader position in the 2024 Gartner Magic Quadrant for primary storage platforms.
Speaker Change: and our fourth-time leader position in the 2024 Magic Quadrant for file and object storage platforms.
Speaker Change: Energy availability is a global concern and has become a critical risk to hyperscalers operations.
Speaker Change: Some are even contracting with nuclear power plants to secure a reliable supply of electrical power.
Speaker Change: Hyperscalers no longer seek low-cost power. They're looking for power at any cost.
Expanding electricity production cannot add significant capacity for many years.
Speaker Change: Alternatively, replacing inefficient hard disk drive storage with pure direct flash technology represents one of the largest power sources presently available to hyperscalers.
As power limitations increasingly hinder data center growth.
Speaker Change: Pure Storage is the only company that can simultaneously enable hyperscalers to cost-effectively upgrade their data storage.
Speaker Change: while simultaneously freeing vast amounts of electrical power and data center space for other applications, such as AI.
Speaker Change: Overall, we are very pleased with our progress on our hyperscale opportunity and with the expansion of our enterprise capabilities. I am personally more excited than ever about Pure's opportunity ahead as we drive a new era in data storage management.
With that, I'll pass the mic to Kevin.
Kevin Krysler: Thank you Charlie. We are pleased with our Q3 financial results exceeding both our revenue and operating profit guidance.
Kevin Krysler: Revenue of $831 million grew 9% year-over-year, while also delivering strong operating profits of $167 million.
Kevin Krysler: Strong demand continues for our eFamily and FlashArrayC solutions, enabling customers to move their cost-sensitive workloads to all flash.
Kevin Krysler: Additionally, renewals of our Evergreen subscriptions across our install base remained robust, demonstrating strong year-over-year growth.
Kevin Krysler: Total contract value or TCV sales for our Storage-as-a-Service offerings during Q3 was $96 million, reaching $253 million for the nine months of FY25.
Kevin Krysler: Conversion of larger Evergreen One opportunities valued greater than $5 million is consistent based on our expectations that we reduced last quarter.
Kevin Krysler: Higher Velocity Evergreen One Pipeline that we define as less than five million is strong, though in Q3 we experienced a meaningful increase in these opportunities converting to a traditional sale.
Kevin Krysler: This contributed to higher-than-expected product revenues in Q3, while also resulting in lower-than-expected TCV sales of Evergreen I.
Kevin Krysler: Subscription Services Annual Recurring Revenue, or ARR, grew 22% to $1.57 billion.
Kevin Krysler: Total RPO exiting Q3, which includes both subscription services and product orders, grew 16% year-over-year to $2.4 billion.
Kevin Krysler: RPO excluding product orders and associated exclusively with our subscription service offerings grew by 17%. RPO growth is impacted by lower than expected TCV sales of our Evergreen One offering.
Kevin Krysler: U.S. revenue for Q3 was $562 million, and international revenue was $269 million.
Kevin Krysler: Our new customer acquisition grew by 340 customers during Q3, and we continue to serve 62% of the Fortune 500.
Kevin Krysler: In Q3, total gross margin remained strong at 71.9%, reflecting strong subscription services gross margin at 77.4%, and solid product gross margin at 67.4%.
Kevin Krysler: As anticipated, product gross margin was influenced by our strategic efforts to help customers transition cost-sensitive workloads to our eFamily and FlashArray-C solutions.
Kevin Krysler: This approach, while resulting in a modest decline in product gross margin, underscores our commitment to delivering cost-effective, high-value solutions for our customers across our data storage platform.
Kevin Krysler: Looking ahead to Q4, we expect continued strong growth of our eFamily and FlashArray-C solutions, resulting in a sequential, modest decline in product gross margin, similar to the trend observed from Q2 to Q3.
Kevin Krysler: Operating profit of $167 million and operating margin of 20.1% during Q3 were positively impacted by revenue overachievement.
Kevin Krysler: strong gross margin performance and continued operating expense discipline. Our headcount increased sequentially by nearly 140 to approximately 5,900 employees.
Kevin Krysler: Pure's balance sheet and liquidity is strong, including $1.6 billion in cash and investments at the end of Q3.
Kevin Krysler: Cash flow from operations during the quarter was 97 million dollars and reflects a large upfront payment for new software technology that we licensed.
Kevin Krysler: Capital expenditures were 62 million dollars and include significant investments to scale operations for our hyperscale opportunities.
Kevin Krysler: During Q3, we repurchased 3.6 million shares, returning approximately $182 million to our shareholders. We also paid $55 million of withholding taxes due on employee equity awards, which also offset dilution by approximately 1.1 million shares.
Kevin Krysler: We have approximately $213 million remaining on our existing repurchase authorizations.
Kevin Krysler: Turning to guidance. We are raising our FY 25 revenue expectations to $3.15 billion, representing approximately 11.5% year-over-year growth.
Kevin Krysler: The raise to our FY25 revenue expectation is the result of seeing an increase in Evergreen One opportunities under $5 million, converting to a traditional sale.
Kevin Krysler: While this dynamic increases product revenue expectations, it also reduces FY25 TCV sales growth expectations for our as-a-service offerings.
Kevin Krysler: With lower TCV sales growth for our as-a-service offerings, we do not expect the growth of our consumption and subscription offerings will have a significant impact on our FY25 revenue growth.
Kevin Krysler: As such, we are not updating our FY25 TCV sales guidance for our as-a-service offerings.
Kevin Krysler: For Q4, we anticipate revenue of $867 million, reflecting 9.7% year-over-year growth.
Now moving to Operating Profit Expectations.
Kevin Krysler: For Q4, we are guiding operating profit of $135 million and operating margin of 15.6%.
Kevin Krysler: Before closing, I'd like to share some preliminary thoughts on our first transformative design win with a top four hyperscaler to help inform your models.
Kevin Krysler: The commercial framework for this design win involves licensing our technology and delivering support services.
Kevin Krysler: Hardware will not be included as part of our sale to the hyperscaler.
Kevin Krysler: We anticipate meaningful revenue contribution and operating margin expansion from this wind beginning in FY27, which aligns with our expectations for full-scale production deployments reaching double-digit exabyte capacities by that time.
Kevin Krysler: To capitalize on this milestone, we will increase operating investments in FY26, aimed at scaling operations and accelerating our opportunity to deliver PURS differentiated technology for hyperscale storage.
Kevin Krysler: When considering these investments, we expect FY26 operating margin will be approximately 17%, consistent with our FY25 operating margin guidance.
Kevin Krysler: In closing, as we look ahead, our strategic investments and innovation position Pure as a leader in transforming the data storage landscape.
Kevin Krysler: The growth opportunities ahead are fueled by our advancements across our data storage platform, empowering organizations to unlock greater efficiency, scalability, and resilience in their operations.
Kevin Krysler: We are excited about what lies ahead and confident in our ability to drive sustained growth and innovation.
With that, I'll turn it back to Paul for Q&A.
Thanks, Kevin.
Paul Ziots: Before we begin the Q&A session, I'll ask you to please limit yourselves to one question consisting of one part.
Paul Ziots: 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'll be happy to take those additional questions as time allows. Operator, let's get started.
Thank you.
Speaker Change: If you would like to ask a question, please press star followed by the number 1 on your telephone keypad.
Speaker Change: If for any reason you would like to remove that question, please press star followed by one again
Again, to ask a question, it is star 1.
Speaker Change: As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question.
Speaker Change: Your first question comes from the line of Amit Daryanani of Evercore ISI. Your line is open.
Amit Daryanani: Thanks a lot, good afternoon everyone and congrats on the hyperscale win. I know you folks have been working on this for a while.
Amit Daryanani: Could you perhaps just touch on what drove the decision by this hyperscaler to choose pure storage?
Amit Daryanani: Versus building this on their own given most of these hyperscalers do have a fair amount of resources
Speaker Change: And then just in terms of the financial impact, I heard you folks talk about size it up a bit. But how big do you think at scale this revenue opportunity or time could be for PR? Thank you.
Thank you, Amit, and good to hear your voice.
Speaker Change: You know, as you know, we have been working on this a long time. So there are a number of different factors. At the end of the day, it was our ability to provide a number of different superlatives.
Speaker Change: that got this hyperscaler to believe that our technology was the best fit out of anything they could do. And frankly, given our experience in this area, the fact that we had it ready for them right away and that they wouldn't have to develop it themselves.
Speaker Change: First, and in no particular order, really unmatched reliability at scale. First of all, we can scale to these exabyte levels.
Speaker Change: percent failure rate per year. That's unbelievably low. That compares to failure rates five to ten times higher for SSDs and for hard disks. And that reduces overall labor costs and outage costs.
Speaker Change: We have between a 5 and 10 to 1 improvement, or that is less power, than hard disk environments.
Speaker Change: At that level, you see data centers saving perhaps 20% of their total power. That's a huge power source if you think about it. Think of it as a power source rather than power savings. It's power that's then available for them to scale out in other applications such as AI.
Speaker Change: for this to happen. It also fits their architectures very well. Our software, remember, is a processor-based architecture rather than a SSD-based architecture.
Speaker Change: which means it fits into their virtualized model of having all of their software operate on a processor.
Speaker Change: So really it's a much more software-defined model. And then finally, unparalleled price and performance.
Speaker Change: You know, getting to the same TCO capabilities as hard disks when everything is considered, and to do so with five or so times the performance of those hard disks. I mean, it's just an equation that's really tough to beat.
Kevin Krysler: You know, for the economic side of this, you know, let me pass it over to Kevin.
Kevin Krysler: Thanks, Charlie, and thanks, Amit, for your question. A couple of things I'd point to, just a high level for you on the financial front, including what this opportunity potentially could look like at scale.
Kevin Krysler: Charlie mentioned that about 60-70% of all discs sold today is really driven by the hyperscaler market, and so I think that gives you a good...
Kevin Krysler: data point in terms of what the opportunity looks like for us long term.
Kevin Krysler: Obviously, that will result for us in terms of significant revenue contributions over time as well as operating margin expansion over the long term as well. In the shorter term, I think there's a couple of considerations I would highlight that I also included in my prepared presentation.
Kevin Krysler: remarks. In terms of operating margin for FY26, we're expecting that to be flat with this year's guidance that we gave at the beginning of the year of 17%, and that's really to enable funding for scaling operations and accelerating the hyperscale opportunity that's in front of us.
Kevin Krysler: We don't expect meaningful revenue contribution from this opportunity until FY27, and that would also include operating margin expansion. It's also important to note that we are not going to include hardware in our sale to the hyperscaler, and that's an important consideration for us as well.
Kevin Krysler: And then lastly, when we're thinking about revenue contribution from this opportunity and we think about it in relation to data storage capacity purchase, it'd be significantly lower than when compared to, say, a sale of our FlashBlade eSolution. So I think those are some important points for us to be considering.
Thank you, Ahmet. Next question, please.
Speaker Change: Your next question comes from the line of Aaron Rakers of Wells Fargo. Your line is open.
Aaron, your line is perhaps on mute.
Aaron Rakers: Yeah, sorry about that guys. Hopefully you can hear me now. Thanks for taking the question and congrats on the announcement as well. I guess just unpacking a little bit of what was just said there.
Aaron Rakers: Are you licensing Purity on a capacity deployed basis and also licensing the DFM module and therefore you're not manufacturing those? Just maybe unpack those those mechanics of that. And then, you know, as we think about this,
Aaron Rakers: Do you think that this hyperscale customer, as they move into next-generational data center footprints, that they decide to go 100% flash, or is it a mix of hard drives and flashes? Any thoughts around that would be helpful. Thank you.
Speaker Change: Yeah, thank you. So let me let me start with that. So you're thinking about it the right way. We're effectively licensing both
Speaker Change: The two parts of the technology, that is the software as well as the hardware design.
Speaker Change: The customer will be buying directly from their integrator. They'll be buying the hardware, if you will, from their integrator. And so you have that correct. So for us, it comes in largely as licensing fees, software fees, and support fees.
In terms of the
Speaker Change: The way the revenue will roll out is, as we've indicated more in our FY27, next year is the ongoing development by this customer of their next generation data center design, which we're intimately involved in.
Speaker Change: Now, right now, what we had to prove ourselves in being able to do...
Speaker Change: The vast majority of their storage, including their higher performance storage, which is generally provided by SSDs today.
Thank you, Aaron. Next question, please.
Speaker Change: Your next question comes from the line of Howard Ma of Guggenheim Security.
The line is open.
Speaker Change: Great, thanks for taking the question and congratulations guys on the hyperscaler design win.
Speaker Change: I believe it's a game-changer for PURE and a potential fee change in the industry. So, Charlie and Kevin, I want to ask a little bit more about the size and structure of this deal. So, I guess first is, you know, could you share what the deal length is? And then, on the revenue opportunity,
If I just use the back of the offload mask...
Speaker Change: It's a double digit exabytes in calendar 2026, even if you just assume if you assume 10 cents per gigabyte and maybe half of that is recognized since it's software only, then you get to like $500 million in counter 26, which means that 2025 is something like
Speaker Change: It could either be zero or, you know, close to 500 billion. So, so any color you can share, you know, assuming those, uh, those ranges are right on, on, on 25, uh, would be helpful. And, and if I could sneak in a follow-up on, on margins too, could you just comment if, if the deal will be gross margin accretive and what exactly are the investments?
that you're making on the OPEX line. Thank you.
Speaker Change: Thanks, Howard. Lots of questions embedded in there. Let me first start with the gross margin impact.
Speaker Change: Look, I think the way we're, and again, we're still pretty high level in terms of what this looks like, and we'll provide more details as we go along. You're thinking about it right in terms of the fact that the majority of the value of the deal will still be hardware, and I think that's important to consider for your models.
It's a multi-year duration, although the volumes are TBD.
Great. Okay, thank you Howard. Next question please.
Speaker Change: Your next question comes from line of Pendulum Bora of JP Morgan. Your line is open.
Speaker Change: So great. Thanks for taking the question. Congrats on the quarter. Charlie, I wanted to ask you, how does this opportunity change or evolve as you kind of go through your motion of density expansion of the DSM modules?
Speaker Change: Is this currently based on the 75 terabytes or 150 as you move towards the 300 terabyte how do you expect the volumes kind of evolving in this particular case?
Speaker Change: Yeah, it doesn't specifically depend on any one of these things, although they do know our roadmap and that played a big role in their selection of us. They understand that we tend to lead in the density game. A lot of the, I would say the bulk of storage...
Speaker Change: You know, for most of the hyperscalers, and certainly this one tends to be on the low-cost side in terms of gigabytes, and therefore having a solution that stays at the forefront of cost is very important to them. At the same time, they are impressed that they can also utilize exactly the same technology.
Speaker Change: So the real magic here is that it's one technology at almost every level of price performance. And if you're a hyperscaler, having one technology that satisfies all the different levels of what you need to run the operation is a big positive.
Speaker Change: And I'll just add one thing, Pendulum, as Charlie mentioned earlier in the prepared remarks
Speaker Change: You know, we've been working with hyperscalers to drive this technology into disk replacement for some time. I would say that it was really the introduction of the 75 terabyte modules that really got, you know, this particular customer to really pay attention. And as we look forward, right, and as we look at the 150 terabyte generation we're shipping now, and our roadmap ahead, each step along that path just makes a solution that much more compelling from really on the basis of all the superlatives that Charlie outlined earlier, including cost.
Thank you, Pendulum. Next question, please.
Speaker Change: Your next question comes from the line of Mike Sikos of Needham & Company. Your line is open.
Speaker Change: Hey team, this is Matt Coletreon for Mike Sikos over at Needham. Thanks for taking our question. I wanted to clarify, is the commentary around Evergreen subscription, TCV, and revenue a reiteration of previous expectations? And is there any directional color you can provide on how you're expecting subscription revenue to trend as a percentage of the overall mix?
Speaker Change: Yeah, it's a great question Matt, and yeah that's correct. It's really a shift that we saw this quarter, in particular with our Evergreen One higher velocity opportunities, where we saw those opportunities converting to a traditional sale, meaning a CapEx sale. And so what that meant is obviously we saw a higher product revenue, and that's really what drove our guide increase for the year.
Yeah, Mac, let me expand on this a little bit.
Speaker Change: You know, the increase in software costs that unexpected increase that came in software and SAS costs this year, as well as AI uncertainty. And so we're seeing more customers than we had seen in the past.
who had been considering
Speaker Change: A storage as a service offering, which obviously comes out of an OPEX budget.
Speaker Change: economics and the superior capabilities that we bring in a storage as a service offering that we'll start to see growth again but I think this has been a temporary phenomenon due to unexpected high OPEX expenditures by organizations this past year.
Speaker Change: Yeah, and I think that's actually really important as well, right? That when we think about selling data storage technology as a service, it's still early in its maturity. And with it, there's a tendency to default to what's easier. And that's, frankly, purchasing technology through a TAPx sale or traditional sale.
Thank you, Matt. Next question, please.
Speaker Change: Your next question comes from the line of Simon Leopold of Raymond James. Your line is open.
Simon Leopold: Obviously, it sounds like that's not the big hyperscale opportunity. So maybe you could help us out in terms of describing the nature of that particular win and some of the color behind the use case and that opportunity. Thank you.
Simon Leopold: Yes, Simon, this is Rob, I'll take that. Absolutely, you know, we're very excited to expand our partnership with Corweave, both with the strategic investment we made as well as
Simon Leopold: The commercial partnership which will be announced which will bring and make available pure storage technology to all of their customers in the CoreWeave Dedicated Cloud.
Simon Leopold: As we mentioned in the release, we've been working with Corweave, who is the leading GPU cloud provider.
Simon Leopold: for over the last year in standing up one of the largest scale GPU storage deployments for a large joint customer. And building on the success of that environment, this latest partnership really expands that, takes those learnings, and makes that proven design more broadly available for our joint customers. So really excited to get that announced and already seeing early signs of interest and demand from the customer base. And Simon, just so there's no confusion, we had announced a double-digit GPU cloud win about two quarters ago, I believe.
Thank you.
Speaker Change: It was two, four, three quarters ago. That was Corweave. We were not at that point in time able to use their name, but that was the deal that that's the infrastructure that's in place there now.
Simon Leopold: And Simon, one last thing. Yes, Corweave is not the top four hyperscaler that we have been discussing today.
Thank you, Simon. Next question, please.
Speaker Change: Your next question comes from the line of Krish Sankar of TD Cowen. Your line is open.
Speaker Change: Hi, thanks for taking the question, and Charlie and Kevin, congrats on the results on this exciting hyperscale event. Charlie, you talked about double-digit exabytes in calendar 2026. Is this based on the agreement in place, or is that your estimate for how big this opportunity can scale? And also on the license, is it a one-time license, or is it annually recurring, and whether it's tied to exabytes or not? Thank you.
Speaker Change: So, that's our expectations for calendar 2026 based on coordination with the customer, but all sales, pretty much all sales are TBD. The design win is that we are the plan of record, however, just to be clear. They're designing around us, we're the plan of record.
Speaker Change: for the storage in their next generation design. The licensing for the DirectFlash technology and Purity software will really be tied to the capacity that we'll be shipping.
Thank you, Krish. Next question, please.
Speaker Change: Your next question comes from the line of Mehdi Hosseini of Susquehanna. Your line is open.
Yes, Charlie, in order to understand.
Speaker Change: Your reference to FY27 and the hyperscaler wind that will help you with double-digit extra-buy shipment. Can you help us understand what is the estimated extra-buy shipment in the current fiscal year, fiscal year 25?
No substantial shipments other than test systems this year.
Thank you, Maddie. Next question, please.
Speaker Change: Your next question comes from the line of Param Singh of Oppenheimer. Your line is open.
Param Singh: Yeah, thank you for taking my question. So, really want to dive into your Evergreen One opportunity. I know you mentioned the total, you know, more
Param Singh: Now that, you know, you have more hyperscaler opportunities coming in addition to the one we announced today. Do you think customers might be more likely to move directly to a hyperscaler with your purity platform and your DTF versus going for an evergreen one type of sale?
Speaker Change: Thank you. Yeah, I'll take that. It's an interesting question, but I think the answer is mostly no, and the reason is the following. Are the infrastructure that we'll be selling to this hyperscaler, and if we were able to win others, similar hyperscalers?
is the underlying storage technology, not the storage services.
that the customer offers to their customers.
Speaker Change: Those storage services are based on their own software and therefore are some of the same software services that they offer today. What does that mean?
Speaker Change: Largely, enterprises move to the cloud because of considerations around their application deployment, much less around decisions around storage.
Speaker Change: and so what we think those decisions are largely divorced from where they choose to put their data.
Speaker Change: So to the extent that they decide to keep their applications on-prem, that's where we generally sell our standard product today.
Speaker Change: And when they decide to keep it on-prem, we give them the alternative of using storage as a service.
Speaker Change: that operates both on-prem and in the cloud. So, I really see those as two very separate things, and I don't think that our offering...
Speaker Change: of storage for hyperscalers using our direct flash technology will dramatically affect enterprise decisions as to where to put their storage.
On the flip side-
I do think...
that
Speaker Change: We can bring some of the best attributes of cloud storage to the enterprise with the other announcement we made today, which is that we've released Pure Fusion for download this quarter.
Speaker Change: And what that allows companies to do is build their own enterprise data cloud.
Speaker Change: that consists both of their on-prem storage as well as storage that they put on our software in the cloud. And this allows them to operate very much in the same way that hyperscalers operate, which is storage as a service, storage as a cloud of data, rather than as individual arrays. So I see them as building upon one another, but I don't necessarily see our sales to hyperscaler for their foundational storage as making a big difference in enterprise decisions as to where they're placed their applications.
Thank you, Param. Next question, please.
Speaker Change: Your next question comes from the line of SCM Merchant of City. Your line is open.
SCM Merchant: Great, thank you for taking my question and congrats as well on the hyperscaler announcement.
SCM Merchant: The evergreen TCB, you know, it appears that most of the customers are transitioning more to a product sale. And you mentioned this was probably a temporary phenomena, given pressures and op-ex budgets. As you look at the pipeline of opportunity,
ahead of you, and as you look into calendar 25.
Speaker Change: You know, if you can help us understand what your expectations are for this evergreen offering and evergreen services.
Speaker Change: Yeah, I appreciate the the question and a couple thoughts here is look when we look at the dynamic of our evergreen one conversions
Speaker Change: Over 5 million. There's really no change to what we've talked about.
Speaker Change: from last quarter. That was actually quite consistent with our expectations, again, that we spent some time walking through with our investors last quarter.
Speaker Change: Where the dynamic has shifted a bit for us is on the higher velocity evergreen want opportunities and this would be five million dollars or less and that's where we saw meaningful
Speaker Change: kick up if you will on conversions to a traditional sale and again we've talked about that we that looks to be not sustaining especially giving our industry-leading evergreen one service offering but specific to thinking and guiding or talking about next year I want to wait to see how q4 plays out and then have an update for you all next quarter
Thank you, Asya. Next question, please.
James Fish of Piper Sandler, your line is open.
James Fish: Hey, guys. Just I'll echo my congrats on the on the crowd one as well. I did want to ask around pipeline first on the hyperscaler cloud opportunity. You guys keep alluding to potential to get other hyperscalers based on your comments. So, you know, what are you seeing with this similar licensing potential to other clouds in terms of conversations you have going on with, say, the top 10 cloud and AI providers? And second, maybe on the enterprise side, is the calendar 25 setting up to be a larger refresh year for startups? Storage or does that evergreen model kind of mute some of the impact? Thanks, guys.
as well as.
Speaker Change: Our strategic collaboration with Keoxia to go and enable broader penetration of our flash technology into the hyperscalers will serve to accelerate that. So we're very excited about the potential ahead of us. At the same time, as we mentioned, the design win is a very, very important milestone that puts us in the plan of record with this hyperscaler, but there's clearly more work to be done. And so we'll be working very, very closely with this hyperscaler over the next year as they continue to progress through typical move to production stages as they ramp into ultimately what we're expecting to be double-digit exabyte capacities in the fiscal 27.
Speaker Change: Thank you. As far as the expectations around enterprise, I believe your question really is, do we believe that there's demand being pent up?
Thank you, Fish. Next question, please.
Speaker Change: Your next question comes from the line of Wamsi Mohan of America. Your line is open.
Wamsi Mohan: Yes, thank you. Going back to the hyperscaler opportunity, Kevin, your comments around...
Wamsi Mohan: The revenue contribution in relation to data storage capacity purchases would be significantly lower.
Speaker Change: Is that just a lack of hardware as part of the mix or should we think that the pricing of the software itself is also somewhat lower on a per exabyte basis? And just to clarify, is the double-digit exabytes in Calendar 26, is that from this one hyperscaler or does that bake in additional wins in the future? Thank you.
Speaker Change: Yeah, thanks, Wamsi. The double-digit exabytes in FY27 relates to this hyperscalar design wind itself and our expectations.
Speaker Change: associated with that with that win and when what was your second your first part of that question?
Speaker Change: It's just that your comment on the relatively lower revenue contribution compared to a storage capacity sale, is that just because of the lack of hardware being sold in the solution, or is it that the pricing of the software itself?
Speaker Change: Yeah, thanks for the clarification, and it really is going to be that the primary driver of this will be the fact that hardware is excluded from our sale, and that would be really the primary driver. Now, when you also think about scale and order of magnitude, pricing will play into it, but it's secondary to the fact that hardware is excluded.
Thank you, Wamsi. Next question, please.
Speaker Change: Next question comes from the line of Mita Marshall of Morgan Stanley. Your line is open.
Mita Marshall: Great, thanks. I just wanted to, you know, on the volume being TBD, but kind of having a sense of what the architecture will look like, is the TBD in that
You don't know how...
Mita Marshall: Thanks. Thank you, Mita. It's largely, you know, the exact schedule of the data center buildouts. That's a little bit of an unknown. I would say exactly what percentage we have of the data center is also a little bit of an unknown. But I would say, you know, it's a little bit of an unknown. I would say exactly what percentage we have of the data center is also a little bit of an unknown. Although we know that we have qualified for a very, very large portion of it.
Mita Marshall: but we're shooting for even more. So I would say though that for the most part it's about schedule which we're not in control of more than anything else. They still have a lot of design, if you will, on their part for other components, including ours, but for many other components of their next generation design.
Thank you, Mita. Next question, please.
Speaker Change: Your next question comes from the line of Eric Marcannuzzi of Lake Street Capital. Your line is open.
Eric Marcannuzzi: I wanted to follow up on the change in the Keoxia relationship, given your comment about the hardware being excluded. I would think the hyperscaler would then be working directly with Keoxia, but what's changed about that relationship? Because you talk about, hey, more manufacturing capacity and more cutting-edge technology. It would seem like you guys are being disintermediated.
Speaker Change: Yeah, thanks for the question. No, we're not being just intermediated. It is still our relationship with all of the NAND vendors We're responsible for all the qualification. We're responsible for the design We will also be responsible for the design of the direct flash modules themselves
Speaker Change: So we're very much in control. The hyperscaler uses an integrator. It'll be the integrator that purchases the hardware modules and provides it to the hyperscaler.
Speaker Change: Think of it as a meat-in-the-channel model is probably the best way to think about it.
Speaker Change: You know, I would also say that this is, you know, it's an expansion of a long-standing relationship that goes well beyond, you know, just commercial and capacity. You know, we've had a great collaboration with Keoxia in terms of technology roadmaps and technology design, and that's a key part of this collaboration as well, which is to bring, you know, a co-designed, if you will, as Charlie mentioned, direct flash technology with their bleeding edge NAND parts to this hyperscaler customer together.
Thank you, Eric. Next question, please.
Speaker Change: Your next question comes from the line of Tim Long of Barclays. Your line is open.
Thank you. Thank you.
Speaker Change: Thank you. Just wanted to ask on the gross margin front. I think the comment was the sequential decline in Q4 should be similar to Q3. Just, if you could just clarify that. And then looking out on this line, it seems like the mix
Speaker Change: might steadily be shifting to E and flash array C series, is that?
Speaker Change: Something that we would expect on the on the product and hardware side
Speaker Change: to continue and if you can make some comments on you know competition now that more of the competitive set.
Speaker Change: has, you know, QLC-based products in their portfolio. Is that piece of the market getting more competitive? Thank you.
Speaker Change: Tim, out of respect for some who have gotten back in line with their second question, we're going to maybe try to take one or two of your questions, not all three.
Speaker Change: So, yeah, maybe I'll, Kim, I'll hit the product gross margin.
Speaker Change: and the sequential decline similar to what we saw in Q2.
Speaker Change: to Q3 and what we're expecting now to Q4 and that really is driven
Speaker Change: through our strategy of enabling our customers to transition their cost sensitive workloads.
Speaker Change: to our E-Family and FlashArray-C solutions. And it's really all about the strong growth we're seeing across these solutions. Now, there is less price elasticity for these solutions, given the price sensitivity of the workloads.
Speaker Change: So the combination of the increased growth of these solutions and the reduced price elasticity is putting pressure on the product gross margins that you're seeing.
Thank you, Tim. Next question, please.
Speaker Change: Your next question comes from the line of David Vogt of UBS. Your line is open.
Speaker Change: Great, thanks guys for squeezing me in. So maybe a question, Kevin, for you on margins next year. You talked about investing in the businesses to support the rollout in calendar year 26.
Speaker Change: and you also mentioned gross margins would be relatively comparable in your fiscal 26 versus fiscal 25. Can you kind of help us understand sort of where the investment dollars are going because you've been aggressively investing for the last couple of years. Should we expect the same level of growth in OPEX? Is that kind of the framework?
Speaker Change: So I think about 24 to 25. Should it look similarly in 26? Thank you.
Speaker Change: Yeah, great question, and I'll spend some more time next quarter going into more details of our expectations, but what I did communicate is the fact that we believe our operating margin of 17% and that's consistent with what we communicated for this year will apply for next year as well, and when we think about the main drivers of these investments, I mean it includes focusing acceleration of our density roadmap with our direct flash technology and expanding our supply chain capabilities.
qualifying additional NAN suppliers and manufacturing sites.
Speaker Change: and really integration of our technology with the hyperscaler hardware specifications. And that's where we think the significant incremental investments will come from. And then when we think about it for this year, obviously we're investing heavily as well from a CapEx perspective.
Speaker Change: And that's why, you know, for the full year of FY25, we're thinking our free cash flow margin will be slightly below, one to two points below our operating margin.
Speaker Change: Thank you, David. We're going to take our last question from Mehdi, who got back in line for his second question. Thank you very much, Mehdi, for getting back into the queue. So this will be our last question.
Speaker Change: Your last question comes from the line of Mehdi Hosseini of Susquehanna. Your line is open.
Speaker Change: Yes, Charlie, what is the estimated extra body shiver in FY25?
Speaker Change: It's a little hard to predict. It's going to be very low.
Speaker Change: It's a little bit hard to say because as I said it's mostly test environments that we're going into pre-production environments so you know maybe one maybe a couple something it's something along those lines.
Speaker Change: Thank you, Maddy. Before we conclude, Charlie, I think you had some final comments. Yeah, I want to thank you all for joining us on today's earnings call. The design win underscores, I think, the critical role that Pure is going to be playing in addressing the high data growth and energy demands of hyperscalers.
Speaker Change: They're facing, you know, very fierce competition for power and, you know, even turning to very unique new power sources. But these power sources are going to take a long time to come online.
Speaker Change: With powers constraints continuing to be a huge issue for them, this is one of the best ways for them to free up dramatic amounts of power on the order of 20% of all the power that they use today and make it available for all of the growth that they have in front of them.
Speaker Change: I want to thank once again our customers, our employees, our partners, our investors, and our suppliers. We deeply appreciate all of their continued support and commitment. We look forward to speaking to you again next year. Happy holidays, everyone.
Speaker Change: That concludes the Pure Storage 3rd Quarter Fiscal 2025 Financial Results Conference Call. Thank you for your participation. You may now disconnect your line.