Q2 2020 Earnings Call
Good afternoon. My name is Mike and I will be your conference operator today at this time I would like to welcome everyone to the pure storage second quarter fiscal 2020 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time press Star then the number one on your telephone keypad.
If you would like to withdraw your question press the pound key I will now turn the call over to Matthew Danziger, Vice President of Investor Relations you May begin your conference.
Thank you and good afternoon welcome to the pure storage second quarter fiscal 2020 earnings conference call.
Joining me today are our CEO , Charlie John Karla.
Our CFO , Jim writers are president, David Hatfield, and our VP of strategy that gets smaller.
Before we begin I would like to remind you that during this call management will make forward looking statements, which are subject to various risks and uncertainties.
These include statements regarding competitive industry and technology trends.
Our strategy positioning and opportunity.
Our current and future products.
Fitness and operations, including our operating model.
Growth prospects and revenue and margin guidance for future periods.
Any forward looking statements that we make are based on assumptions as of today and we undertake no obligation to update them.
Our actual results may differ materially from the results predicted.
And reported results should not be considered as an indication of future performance.
A discussion of various risks and uncertainties relating to our business is contained in our filings with the FCC and we refer you to these public filings.
During this call we will discuss non-GAAP measures in talking about the company's performance.
And reconciliation to the most directly comparable GAAP measures are provided in our earnings press release and slide.
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 for at least 45 days and is the property of pure storage with that I will turn the call over to our CEO Charlie jump Carla.
Thank you, Matt and good afternoon, everyone. Thank you for joining us on todays earnings call.
I will begin by sharing our high level results from the quarter Hal will provide a go to market update and Tim will offer detailed review of our financials.
We had a strong quarter and the fundamentals of our business remain solid for Q2 revenue was $396 million growing 28% year over year, which was above the midpoint of our guidance.
Our industry, leading gross margin grew to 69.4% and operating margin was a negative 0.8%, beating our guidance range.
In less than 10 years, we disrupted the storage industry by creating solutions that are intelligent automated and modern and delivered kinex improvements in the performance the cost of operations and usability.
We are now setting a bold new paths for pure for our second decade, which will deliver the next set of tenants breakthroughs. Our goal is to take the fragmented an antiquated data storage environment.
And recreated into a unified automated and multi cloud data experience.
Pure delivers a modern data experience to our customers. Unlike legacy infrastructure vendors pure enables customers to utilize more of their data, while reducing the complexity and expense of managing the infrastructure behind it.
We provide I didn't experience that creates a common operating environment across multiple data centers and cloud easing operations via eight <unk> and intelligent AI driven automation.
We now offer our customers integrated hybrid cloud and on Prem solutions consumable is a flexible subscription to deliver that modern data experience.
Looking at the market as a whole pure is clearly out executing our traditional competitors some of whom have expressed concerns around the macro economy.
We do not believe the macro environment has affected us this past quarter.
What we do see is a significant transitory NAND supply demand imbalance, which impacted component prices and the storage industry as a whole.
We expect the situation to continue to affect us for the balance of the year, given the natural lag between component costs, and such and storage market pricing.
However, we are already seeing NAND pricing wise in the spot market and suppliers are delaying additional fab capacity.
We believe these signals point to an improving market next year.
As compared to others Pures continued exceptional growth and margin leadership highlight our differentiation, which is consistently validated by our growing happy customer base.
Our results underscore that our strategy is working we also know that it is a challenging market environments. When our superior value proposition enables us to gain even more market share in today's world where data is at the core of digital transformation legacy vendors have inexplicably decrease their investment in innovation and instead are relying on commodity hardware and software.
They attempt to convince customers. They all systems are the same and that price is all that matters customers. However understand that an investment in innovation isn't investment in their future.
Our continued investment in successful innovation is one of several reasons, we are growing faster than public market competitors.
At our accelerate conference next month, we will announce groundbreaking portfolio additions and future innovations as part of our strategy for the next decade.
Sure its focus on priorities important to see iOS today.
Building, a hybrid cloud transitioning to fast consolidated data architectures driving business value for me on analytics and enabling customers to rapidly recover from my T. failures.
Mean that more customers than ever our choosing pure.
We are the central company driving change in the data industry, providing an unparalleled experience, which delivers business outcomes and ensures customer delight.
Now I would like to share some more personal news as you may have read in our press release, our CFO , Tim returns will be leaving pure for personal reasons and executive search is already underway for our next CFO , Tim will participate in that process and will help in the transition.
Well the first joint pure we were less than 200 million in revenue a private company, we had 600 employees and just one product.
Five years later, we disrupted an entire industry, we've grown almost 10 x. consistently delivering double digit annual revenue growth, we achieve profitability acquired two companies and dramatically expanded our portfolio.
He's been an invaluable asset and has had an incredible impact on our company.
I want to personally thank him for his years of excellent service is consistent energy and care and for his friendship and partnership over my tenure.
With that I'll turn it over to have.
Thanks, Charlie.
And let me add my thanks to Tim for all he has done over the past five years. We hope you can enjoy some much deserved time with family and friends.
[noise] pure is positioned to help enterprises tackle their most strategic IP initiatives is gaining market share and enabling our customers to achieve outcomes that were not previously possible.
Our industry, leading customer satisfaction or evergreen ownership model and our expanding suite of solutions position us not only as the most innovative but also the safest choice for our customers.
In contrast gear is growing approximately 10, x. faster than any competitor and their rate of spending on innovation is on average two x. less than peers R&D investment.
Customers are challenged with navigating competitor product line consolidation and disruptive upgrades, while peers customers reap the benefit of our evergreen experience with its continuous expansion of new capabilities and services.
We believe that data is strategic to our customers digital transformation journey.
Data requires innovation and investment.
Especially as new application architectures are driving unprecedented levels of performance parallelism and multi cloud data workflows.
Customers are selecting pure because we enable them to simultaneously modernize their existing applications and accelerate their adoption of hybrid cloud containers Dev ops, AI and real time analytics at scale.
Unlike our competitors, who are simply shipping commodity storage arrays peers modern data experience. This cloud managed.
Hi, driven.
Constantly improving.
And consumable via a flexible subscription model that can be deployed in a hybrid environment.
This is not your grandparents data storage environment.
Our focus on the largest consumers of storage cross cloud enterprise commercial and public sector markets is working.
Customers are realizing peers differentiation and our win rates continue to hold nicely.
We finished the quarter with more than 6600 total customers, adding approximately seven net new each business day.
Equated to more than 450, new customers in Q2, the highest number in Q2 of our history.
During last earnings we discussed the increase in new sellers and the transition we encountered in Q1.
In Q2, we are pleased with the level of sales execution, and the quality and ramp of new sellers.
This quarter, we closed a number of large transactions, including a 50% increase in million dollar deals from Q1.
We were particularly pleased with the progress in our enterprise and public sector segments as both outpaced the growth of our overall business.
Turning to our technology and strategic partnerships.
We saw continued progress across our ecosystem in the fastest growing segments of the market.
Alliances includes Splunk inelastic and next generation analytics and videos for AI and machine learning.
Cisco for mission critical converged infrastructure.
In a broad range of data protection partners to deliver the next generation of rapid re store and data protection.
We were thrilled with the continued flashblade momentum specifically in the rapid re store and data analytics use cases.
As well as the excitement for our cloud data services, including cloud block store on Cws.
We will share more on this with them at accelerate next month.
To highlight some of this momentum in Q2, a large U.S. government agency chose Flashblade and Splunk Smart store to meet policy objectives for regulatory compliance and to manage a large scale implementation.
As a result, the agency eliminated multiple copies of data reduce their physical footprint by eight to one and avoided thousands of dollars and potential penalties for power and space consumption, achieving a highly compelling Tito.
Another notable customer success in the quarter, a large global asset management firm chose pure for ease of management cloud native automation and orchestration and their hybrid cloud environment.
By freeing up time resources and money. This burn can now focus on their own innovation instead of day to day operations.
And finally, the interest in our unique unified subscription model across hybrid IP with our cloud data services Evergreen storage service is growing.
This quarter, a mid sized hospital in Illinois invested more than $2 million in our yet to offering.
This customer move their existing infrastructure to 100% subscription model with pure which enables easy capacity and performance planning.
And will allow them to shift to cloud block store on either U.S. under their yes to contract.
Customers like this it realize that yes, two empowers them to utilize our technology on premise is today.
While also preserving future flexibility for where and how they will architect their data strategy going forward.
We are as excited as ever to execute on our long term vision and provide freedom for organizations to build for today and tomorrow.
Peers, Q2 performance and rapid market share gains against the competition demonstrate our differentiation from our traditional peers.
We truly are just getting started.
So you would accelerate next month and with that I will now turn it over to Jim Jim.
Thanks, Pat Q2 was a strong quarter for peer as we continue to demonstrate industry leading growth.
Gross margins and continued innovation across our product portfolio in an evolving environment.
Before I dive into the specifics I'll make my usual note that the gross margin operating margin Opex net income and free cash flow numbers I will use our non-GAAP unless otherwise noted.
Reconciliations of these non-GAAP metrics to their GAAP comparable as well as our full Q2 results and presentation are available on our website at investors dot pure storage dotcom.
For the quarter total revenue grew 28% year on year to $396.3 million product revenue grew 24% year on year to $300.1 million and support and subscription revenue grew 42% year on year to $96.2 million.
Geographically, 74% of our sales came from the United States and 26 came from our international markets for the quarter.
Our gross margins continue to be industry, leading with product margins well above our competitors and aggregate gross margins, reaching an all time high in the quarter of 69.4% up 1.3 points sequentially.
Total gross margins reflect the significant differentiation and innovation, we deliver to our customers.
Product gross margins in the quarter were 70% up 1.3 points due largely to benefits, we are seeing and component cost declines.
Support gross margins were 67.4% up 1.1 point sequentially.
The sequential increase in margins were due both to operating ongoing efficiency improvements along with an approximately one half point impact from onetime benefits in this line of business.
Moving to operating margin in Q2 operating profit was negative $3.2 million or negative 0.8% of revenue and compares to an operating profit of point 9 million, 4.3% in the year ago quarter.
Operating profit was better than expected due primarily to overperformance on gross margins for the quarter.
Q2, net income for the quarter was positive $2.5 million or positive one cents per share.
This compares to the year ago period of positive $2.4 million or positive one cents per share.
The weighted average shares used for the per share calculations, our 271 million shares in Q2, and 263 million shares in the year ago period.
Moving to the balance sheet and cash flow, we finished the quarter with cash and investments of $1.18 billion, an increase of $16 million from the previous quarter.
Our quarter on quarter increase in cash was driven primarily by strong free cash flow in Q2, which is a typically low quarter for us.
Free cash flow in Q2 was positive $19.9 million.
Which includes $5.7 million of impact related to our employee stock purchase plan.
Adjusting for the normal impact of our employee stock purchase plan free cash flow was positive $14.2 million in the quarter.
We delivered strong deferred revenue growth in the quarter.
Deferred revenue at the end of the quarter was $607.3 million, an increase of 47% over the same period a year ago.
The strong deferred revenue performance was driven by three ongoing key trends.
Meaningful year on year renewals growth longer initial subscription agreement purchases and the early traction of our ears to product.
In addition, you will note from today's press release peers Board of directors has authorized an up to $150 million stock repurchase program.
This program demonstrates the confidence in our company strategy at our long term growth potential.
Our top priority continues to be investing in our business for growth.
At the same time this program gives us one more capital allocation tool to return value to shareholders in periods, where we can repurchase shares at reasonable levels and will help reduce the net amount of employee stock awards dilution going forward.
Now I will turn to our guidance.
As it relates to revenue first and most importantly, as Charlie mentioned, we are in an inflection phase with respect to the NAND pricing environment.
With price declines falling faster in Q2 than we had originally anticipated.
While we were able to show strong topline growth in Q2 in spite of these circumstances, we want to be mindful of this dynamic as we think about the rest of the year in developing our guidance.
We believe a more balanced revenue and NAND market environment will emerge as the quarters progress and returned to the consistent long term NAND market trend line.
Second.
While we did not see any specific indications that macro impacted our business in the quarter. We nevertheless wants to be mindful of the environment given the recent headlines and cautionary tone of other infrastructure vendors.
We remain confident in our ability to drive growth in the quarters ahead.
With this as context for the third quarter of fiscal 2020, we expect revenues in the range of between 434 and $446 million or $440 million at the midpoint.
non-GAAP gross margins in the range of between 66 and 69%.
And non-GAAP operating margins in the range of between three and 7% or 5% at the midpoint.
For the full year of fiscal 2020, we now expect revenues in the range of between 1.645 billion and 1.715 billion or $1.68 billion at the midpoint.
non-GAAP gross margins in the range of between 67 and 69%.
And non-GAAP operating margins in the range of between 2.25% and 4.7, 0.5% or 3.5% at the midpoint.
You will notice that our operating profit guidance remained unchanged.
This speaks to our focus on thoughtfully and carefully investing given the current environment and engine in adjusting our spend plans to maintain our profit goals. Despite the reduction in our top line expectations.
As I wrap up I'd like to offer some final thoughts on why we continue to be excited about the road ahead here appear.
Number one our Q2 results highlight peers momentum with us growing roughly 10 times faster than any of our public competitors number two the fundamentals in our business remains strong.
Number three we are on the cost of a significant and exciting product cycle and finally, we remain focused on driving a smart and profitable business.
In closing as Charlie mentioned I have made the personal decision to leave pure.
My last day will be later in the year and in the interim I will participate with the flexion of and transition to our new CFO and I will be at accelerate next month and look forward to meeting many of you at our Investor day. It has really been an honor to serve as pure CFO . The company is positioned well for the future and I'm excited to see what pure does in its next decade.
With that I'll turn it back to the operator for questions.
At this time I'd like to remind everyone in order to ask a question press star one on your telephone keypad.
We will pause for a moment to compile the acuity roster.
Your first question comes from Alex Kurtz from Keybanc.
Thanks, guys can you hear me, Okay, you bet Hi, Alex.
Hey, before getting to questions I, just want to say, Tim it's been a real pleasure working with you and maybe we'll see you on the mound one day.
Appreciate it thank you.
Yes.
Best of luck and what's next.
So as I understand as they try to understand your pricing dynamic.
Point, you made in the prepared remarks.
Can you just give a quick example, and you can tell me how far Mafia. So at the beginning of the year customers are expecting maybe two to $3 per effective gig when they came into a deal now with this.
Oversupply in an end market, maybe theyre looking for one to three.
And so your reps are hitting their numbers, but now they have to ship extra beds to get to the original guidance is that the right framework.
We're just shipping more more terabits terabyte.
Per per sale right and.
When prices drop more rapidly than you expected takes a while for customers to adjust to the idea of.
Two things one is buying more terabyte for.
Workloads that they've already planned, but now looking at new workloads.
New tiers and that takes a little more time and planning on the customer side. So.
I've said many times in the past Alex that you know in a steady decrease we live in an environment with steadily decreasing.
A component in commodity prices right, that's the entire tech market and as long as it's a slow and steady the market.
The equivalent rates on that but you do have quarters, where it's faster than you expect and it takes a while for the customers to catch up with that so thats, what we saw and just to be clear cohorts as far as their yield rates have been trending.
Correctly any context there Tim.
You mean sales cohorts or customer, yes, no sales cohorts dose cohorts performing nicely, we had a big class come in this year and that's in early signs are positive.
Thank you.
Your next question comes from Matt Cabral from Credit Suisse.
Yes. Thank you also wanted to ask about the lower guidance just wondering if you parse a little bit between just the push you're making into larger enterprise deals versus the more run rate commercial business and just help us understand the incremental caution that you're putting into the guidance and just how that compares to where you were looking about at 90 days ago.
Yeah, I'll, let Pat answer that first piece, but really those two things are quite separate for us we're not.
The balance lets say between enterprise and and commercial is not a it did not affect or calculate into our guide it all but I'll, let Pat answer, though the complexion between those two really good progress in energy enterprise in my prepared remarks, we talked about enterprise and the public sector, both outpacing the growth of the company.
That's a highlight a quarter on quarter more million dollar deals closed including.
A couple of the larger ones, we talked about in Q1 for seven and eight figure. So we feel great about the momentum in the business overall.
And then on gross margins, obviously came in meaningfully above your range for the quarter.
Just wonder if you could talk a little bit about how you're balancing growth versus profitability and just if you think there's an opportunity to get a little bit more aggressive against what seems to be a little bit more of a difficult environment out. There you know I've said this before you know we don't know when our price, we don't lose on price and and.
Generally generally we're not losing on price so.
I think the the upward margin reflects the fact that we do get to take advantage of composite lower component pricing before the rest of the.
Rest of the competition, so that adds a little bit to it.
I think if we thought that we could win a deal, especially with a new customer by discounting we do it. So that's not holding us back. So generally those are not the things that pricing is not the thing that's holding us back.
Your next question comes from team gallon Bohra from JP Morgan.
Hey, guys. Thanks for taking my question and congrats on the strong Q2, I will also want to do that deep on the on the revenue guidance is there any way to just kind of parse.
The the 300 points or so.
Of course, I mean, how much is macro concerns how much is the pricing environment and then.
I know the narrative in the market as across your peers is pretty bleak, but are you seeing any signs of macro softness in the pipeline or maybe more scrutiny on may be Brexit related weakness or any kind of signal, which is causing you to be more prudent with the guidance.
Yes, Tim on the first part of your question, we're not sure.
Big number but the majority of it is really the pricing environment that Charlie talked about.
As it relates to macro certainly we want to put some sort of prudence in there as well and that the second quarter reason for for the guidance, but to your question about the signals. We're seeing one of the big measures I look at is pushed deals in our pushed deal number was down quarter on quarter, Rich, which you know if you're into a macro situation that you'd expect that number to go up. So we're just really not seeing those signals when we're driving the leadership of differentiation. We are into its obviously a good thing, but we just didn't see the signals.
Let me just add to that when you're an innovator and a share taker I think the macro tends to affect to us because youre.
So we may may be out there and we may just be a little less sensitive to it.
But where share taker right now and so thats not what as Tim said, it's mostly the pricing environment that is the.
That has.
Created the caution.
Understood.
I just wanted to ask a follow up on the strength.
Obviously, it kind of jumps out of the page.
And I think part of the reason you said is longer initial subscription agreements. However, no meaningful change in the duration for these agreements and then is that the main driver for the group cure because I think he has to its probably pretty small.
Yes, so on deferred revenue a couple of things number one the main reason for deferred revenue.
Growing the way it is renewal is our renewals business, our subscription business subscription renewals.
Evergreen model is indeed, working and we're starting to see big Traunches renew are very nice renewal rates. So that's really what's happening in the main reason on elongation of the overall initial rates that's happening, but it's more of a second order effects in the primary reason which is renewal.
Got it thank you so much.
Your next question comes from Katy Huberty from Morgan Stanley .
Yes. Thank you just looking at your guidance versus consensus coming into today, you lowered October , but but not so much. The January quarter is there something you see in terms of large deal pipeline or product cycles that give you more confidence around the January versus the October quarter.
Our kids it Tim really it's a question of more sort of challenging and easier comps last year. So if you look at last year given some of the things we had in Q4, it's a relatively easier comp and so by definition I as you know it's less of the adjustment that we made versus the harder comp is in Q3.
Okay that makes sense and Tim Dsos have run higher the last three quarters is there is there a changing dynamic in terms of timing of deals or collections as you move towards subscription or something else going on that's that's impacting dsos, yes, something slightly different Katy you know we've talked a lot about our up market focus and getting into larger and larger enterprise customers. Those enterprise customers tend to be more forceful in wanting longer extended terms and it's a great use of our balance sheet will do that any day, if we can get into big accounts. So they typically take a little bit longer term and that's what you're seeing more than anything else and they are.
Okay, and then just lastly sales and marketing as a percentage of revenue continues to grow despite pretty significant scale and marking market leading growth rate. What do you have a view as to when we can start seeing sustainable leverage on the sales resources. They are putting place I'll take that Katie you know as we said at the beginning of this year. This was going to be a major investment year for us as we expanded into enterprise and really believe that with the addition of new products that are coming out. This year and are an early next that we were really going to be able to.
Youre take just merger larger share in the enterprise, but of course, it's the at bat set that matter. So I would expect that this this will be the year. When you start to this will be the last year, where you see that and you'll start to see it come down in future years.
Okay. Thank you congrats on the quarter best of luck, Tim Thank you.
Your next question comes from Simon Leopold from Raymond James.
Hi, guys. This is Victor Chiu in for Simon Leopold can you provide some color around the linearity in the July quarter specifically.
Whether you sell business slowed during the month of July and yeah.
Reduced pipeline as you go into the October quarter.
Yeah. This is what I would say that we actually saw really strong July we had solid linearity throughout the quarter, but different what some of our peers were saying.
We actually see things really had great momentum towards the end and continued momentum in the beginning of Q3.
Okay, and I guess.
Let me said do you have any metrics I guess to give us an update on progress of the new sales hires in ramping up the speed and how that's impacting that progress towards pivoting towards larger deals yeah. We're super diligent on looking at all the cohort classes. We have 27 core classes that we've had since I've been here and we look at it.
And what we measure is the ramp to productivity relative to their peer group and so we've seen the largest classes. We've had over the last couple of quarters come in and deliver.
In line with expectations and in line with our previous cohorts. So it's early days, you know and we're spending a lot of time and energy driving enablement et cetera.
But really nice early signs.
Okay, great. Thank you.
Your next question comes from Steven Fox from Cross research.
Thanks. Good afternoon first I was wondering if you can give a little more color on the public sector. You mentioned one large win.
How how broad was the growth that exceeded overall growth beyond that one wind and then I had a follow up.
Yeah, a public sector has been an area that we've been investing in for the last couple of years, we wanted to get into a more meaningful run rate and I think the last two quarters that we've seen three quarters that we've seen real consistent growth quarter on quarter, it's across the large central agencies in the in the federal government in the us.
As well as state and local governments coming in and contributing so its nice breadth, we feel positive that will continue especially into the September quarter for the end of the fiscal year and so we feel like we've kind of starting to hit our stride in public sector business in the U.S in particular, but also globally.
Thanks, and then just as a follow up when we think about the transition to Nbn me what you guys have.
Well move forward pretty rapidly I mean, what does that that much the impact been on financials.
From just that technology transition.
Yes. Thanks for that question. So as you may recall, we were the well we innovated in both cases, both at the back end in the front end we were the first to incorporate envy me on the back end and of course that helped both margin and pricing and made us competitive in the market helped overall performance of the systems versus the competitors and then just a couple of quarters ago. We introduced it on the front end with the envy of me over fabric. We are seeing a very nice interest level by the most advanced customers as you may recall, our nvme over fabric requires a change in overall RAC architecture, we're seeing a nice pickup there, but its early days.
Kicks on that.
No I think those grades I mean, the only thing I would add is as we talked with industry analysts I think in the last quarter. We mentioned that we're at this point kind of a majority of our businesses shift within via me.
On the comments from analysts lead us to believe that were far far ahead of any competitor in that regard.
Great. That's helpful. Thank you.
Your next question comes from Aaron Rakers from Wells Fargo.
Yes, thanks for taking the question and also Tim it's been great working with you and wish you. The best of luck I want to go back to kind of the sales leverage question can you first of all talk about maybe any updated metrics around the success that youve seen as far as bundling across the product portfolio given kind of the expansion.
You've seen and then also in this last quarter I know a couple of quarters ago, you had a large GSI.
Systems integrator alignment have you started to recognize revenue from that relationship or is that still that 100 million plus opportunities still in front of US Hey, Aaron. This is that yes. So first of all the portfolio motion is really working well you know it's a key contributor to why we're thrilled with the Flashblade performance, but we also saw a really nice uptick in our flashstack business and as we introduce new products the ability to have our core reps or attach that to their deals or find other opportunities through the port. So fully motion is super encouraging. So we haven't provided any specific metrics on that but we're seeing a nice uptick on the percentage of our core sellers selling multiple products, which is really the key pull through metric that we look at.
And on the GE site GSI win that we mentioned a couple of quarters go Yeah. We did see some incremental contribution from that in the quarter.
And and seeing great pipeline build in a number of product announcements with their organization, specifically and then broadly across the rest of the GRC I sector, we're seeing nice momentum so that route to market.
As we talked about was going to be critical for us and it's nice to see it starting to contribute net revenue in the quarter.
Okay, Perfect and then a real quick follow up is there as as flash pricing kind of normalized here as we look forward.
Can you help us just understand why we should expect gross margin to fall you know, possibly below 68% again in product in the product gross margin line or do you think that we've hit kind of a new level of sustainability on product gross margin.
Yes.
Aaron This is Tim what I would point to is the guide that we offered for the year I mean again, we raised it for the full year, which speaks to the environment. We're in as it relates to a longer term gross margin number that you know this we don't typically talk about a longer term number in a in a in an earnings calls, we'll probably leave it at that.
Fair enough. Thank you.
Your next question comes from Tim long from Barclays.
Thank you.
Just two quick ones if I could.
Just back to the large enterprise and Opex can you just talk a little bit about where we are with the investment.
Needed to better penetrate that it sounds like you're seeing good traction with the large deals. If you can just talk about the the investment and where we are and then secondly, you mentioned he is to traction and maybe if you could talk about cloud data services as well how how does the trajectory look there over the next few quarters for those those businesses. Thank you.
Tim This is how I think maybe the first part of that the investments really are across a number of areas. One is sales capacity.
And so we've obviously made a significant investment in Q4 and Q1 of that.
Two is routes to market and so one of the reasons why we've been highlighting the Gs I wins and the managed service provider wins with Rackspace and others. Those are critical routes to market to be able to go get access to the enterprise customers. It takes some time to build.
What we saw a really nice trajectory on that as well as continued growth of the mix of the pipeline of larger deals and I think as we look at those metrics are all very encouraging signs as Charlie mentioned, we do expect to get some leverage as that capacity comes online or through next year and the year beyond that and those are opportunities where the Tam is higher so we do get and we'll expect to get more revenue per quota bearing head.
Better catering to those enterprise customers.
I'll answer the question about cloud data services. So I'd say overall, we're still in the beta phase with our block store, but it's already turning into be a success for our product line as a whole if you're talking if you talk about the platform motion that had mentioned earlier, having a cloud dimension to our platform has materially changed the kinds of conversations we're in and how people look at not only the platform today, but where it can take them in the future and the flexibility we provide erroneous to to be able to deploy on prem and extend that to the cloud and the future again is really materially change the discussion.
In terms of the beta going really well you know.
Great results from that so far and come to accelerate next month, you'll hear more from both us and Amazon to accelerate and customers that are using it on Amazon.
Okay. Thank you very much.
Your next question comes from and prevent him from Wolfe Research.
Yes, I had a follow up on the DSL question. So if we move to the other side of the balance sheet. You saw days payable go down meaningfully as compared to the prior year. So it seems like it's taking longer collect but also it seems like customers are allowing you as long and pain and together those kind of seemed like tepid indicators. So is there anything else to read macro wise from this.
No not at all on the balance sheet on the on the asset side, we talked about the reason they are does have sort of rise a little bit on the APC side. It's just timing there is not really anything we're seeing in any of our vendors, which which are changing terms or whatnot, so that I would read into them.
Okay, and then maybe just a follow up on the public sector commentary, so strength in the quarter, but any indication there might be pull forward that occurred and you might potentially dilute what we'll see in October quarter.
No I don't think so it's still reasonable.
Smaller contributor to our overall top line and the deals that we are getting our new wins that.
They build on so there's not a lot of pull forward.
In this quarter or the quarter before and we're optimistic about what we'll see in the fiscal year end.
Thank you.
Your next question comes from Jason Ader from William Blair.
Thank you.
First question just for Charlie can you give us update on object engine and then also I am just.
On cloud block store can you talk about some use cases, where the customers that youve seen traction with our.
Applying the technology sure well, you're the rapid restore has proven to be a really strong.
A product introduction for us.
This is based on Flashblade object engine helps in that depending on the on the circumstances, but the rapid restore a lot of customers never realized that they could get back up and running in less than an hour and it's proven to be a major mover of that overall of Flashblade product line as kicks mentioned on on cloud block store.
Because it's in beta of course, there is no revenue to speak of yet.
We do have customers that are looked at.
I feel fairly confident we'll see the first revenue in Q3, but as you know its a.
It's a subscription revenue so it's.
It will be.
Right.
Recognized ratably over the life over the life of the contract.
We but we have many dozens of beta customers.
And some of whom are talking about.
Standardizing their application development as they go into the cloud on on cloud block storage, so very promising, but but very early days and I'll. Just add you asked about used cases I think one of the things. We have been pleased about is really the diversity of use cases, where we see people wanting to do application migration.
But actually in both directions. So people interested in doing say Dev test on Prem deployed in the cloud or the other way around people are interested in DRC use case between on Prem and cloud and then of course just application mobility. So still early days, but we're encouraged by what we're seeing.
Okay, then and then second question for Tim.
Tim.
If you've made any different assumptions on conversion rates in your guide relative to how you've your normal guidance methodology.
Well I think Jason is a function of acknowledging pricing as well as sort of ensuring that should we think about macro as well I mean implicit in that is to think about different sort of ways of measuring conversions I think the short answer is yes.
Okay, Great and good luck to you Tim Thank you.
Your next question comes from Karl Ackerman from Cowen and company.
Hi, two questions. Please.
The first question I was hoping you could address how you think philosophically about utilizing more of the channel as well as changing your pricing structure with the channel.
I ask that because of the cynic would say.
You don't have an innovation or technology challenge you have a variable cost challenge so perhaps that changes with the new CFO , but any color on the company's plans to rein in discretionary and semi variable spending.
Amidst this soft and demand backdrop would there would be very helpful. Adam and I have a follow up please.
Carl that's up then it interesting question do we changed our pricing structure about a year ago in order to accommodate the channel.
Where we went to set standard discount across all of the product lines and made the pricing more transparent more easily.
And gave them much much clearer.
Discretionary pads, if you will in terms of how to price the product without pure being involved I think we were it took us a little time to get all the tools out.
That is all the electronic tools and so forth, but that's been largely largely done now so I'm not quite sure where the where the question is ending up that we have provided now very standard pricing into the channel of course, when when prices drop more rapidly we follow up.
With long list price changes so that they can follow the same swim lanes, if you will which we've done and do continuously so.
You want to handle or so the general question, yes. So philosophically the channel has been incredibly productive asset for us from the very beginning and we anticipate continuing to do so on the majority of our of our net new customer as our identified by our channel partners.
Getting the right routes to market to map to the customers that we're segmenting in our guys are getting us access to large scale enterprises that was very difficult for us to get access to on our own and we're driving toward independence. So we can actually lower our costs by leveraging the channel over time to be able to quote and configure and sale independent of pure and so as I look at the the channel of the partner ecosystem. Those are all accelerators and routes to market, but to the extent they don't deliver that value to us we'll look at a very practically making sure we're getting the right ROI for every dollar we put into it.
That's that's helpful.
If I may move back to the outlook.
Question, one of the Investor questions I perceive is how much visibility do you have at attaining your new revenue outlook for 2019.
Which has been curtailed again, yet core fundamentals from several peers would suggest the overall IP spending environment, perhaps might get worse before it gets better and midrange competition, maybe accelerating.
You mentioned earlier on this call how.
NAND pricing and not the macro is the larger factor, but I guess are there any steps that.
You may provide or they have taken that would enable you to have perhaps better visibility over a multi quarter, Tom price and how we should think about that as investors. Thank you <unk>. We continue to you know every time, we have a learning process as we had over the last couple of quarters with respect to in particular this pricing challenge we incurred.
Bring that into our planning model going forward, but I will tell you that in a certain it's certainly the case that when you have a commodity market that is less.
Let let steady less linear it does get it does make it a little more challenging to predict going forward with that we've tried to incorporate everything that we are aware of this time, including the signals that we're seeing from the commodity market, which as I said that overall the commodity prices are firming up now we also believe that our strategy. Overall is working I mean, we are growing I mean, despite let's say a modification of our forecast I mean, we are growing in some cases, 40% or more faster than our competition. We are getting that means we're actually gaining more share and I do believe that in tough times leaders that is the time when leaders take more share we are putting out a boatload of new products. This year and early next and I think thats going to allow us to continue to win in the future, but you know short term swings are are more difficult to predict.
Your next question comes from Rod Hall from Goldman Sachs.
Yes, hi, guys. Thanks for the question I guess I wanted to go back to these dynamics around NAND and just ask.
Kind of a question about what you're assuming in terms of contract pricing lead time or lag time, I should say to the spot market. So we know that it lags, but are you then assuming because the spot markets been recovering are you assuming that then positively impacts your revenues in that fiscal Q4 implied guidance and then can you also talk us through sort of the margin puts and takes around this.
Because we understand that lower NAND pricing is leading to lower revenues and that's partially offset by higher gross margins, but then we expect the impact on gross profit there to be neutral unless you pass through 100% of the component cost reductions, but then gross profit guidance is coming down. So I know that's kind of a long winded one but just the dynamics of those margins relative to what Youve commented on the component pricing changes in the revenues would be helpful. Thanks.
Well Rod you've I think perfectly identified the fact that it creates a complex environment because the one thing I think that you alluded to but didn't explicitly mentioned is also the elasticity of the market that as pricing goes down you can now compete for more workloads workloads that would go to hybrid or to disk because the pricing of semiconductor flash now is more competitive so when you roll that all together what really what occurs is that in day. One your pricing is lower you got to sell more terabyte. So do it customers may not yet be ready for those more terabyte, but as they do as they understand the lower pricing start looking at other workloads. They can bulk up on it it's the ability of our sales force to convince the customer that they should while prices are low that they should buy more terabyte. It's all those things that that go into making the quarter at the end of the day with respect to margins.
Because we do believe that we are able to take advantage of the costs before our competitors.
It generally is a good good news for margins for for pure so it's we think of it that we think of it affecting our margins less than it does the most immediate.
Quarter and as to timing, yes, we see it as we see the spot market as well as indications that new fab capacity is being is being delayed by.
By NAND suppliers as as positive for the pricing environment, but whether that hits our market in Q3 Q4 Q1.
Thats always.
That's more difficult to predict.
Okay. Thank you.
Your next question comes from now Chuck She from Maxim Group.
Yes.
So that was a really strong deferred revenue add especially relative to our model you did give the three reasons of strong renewals longer initial subscriptions and use to traction.
I guess first of all the longer initial subs is that on his two or is that.
The other cloud based products.
Traditional treated our traditional mainline business now.
Okay got you.
So could you parse.
Those three drivers in terms of what were the biggest drivers or percentage of the.
Strong deferred revenue at.
In terms of order of order of operations is the is the biggest the smallest so again renewals first elongating of contracts second and then yes, two and we're not talking about what they are on a percentage basis, but it gives you at least a sense of magnitude how they stack up.
Okay.
But so does this is your second reduction in full year guidance.
Have you guys actually reduced the sales quarter.
Along with us.
Reduction in your guidance or are the sales people so much in the same.
The objectives that was initially laid out for their own plans. Yeah. We don't comment nail. This has had this has had on that on the quota piece, but their marching toward.
The productive.
Goals that we put out for them and those are all data driven an opportunity basis out of their territories and so thats where were focused and we're driving toward participation of those folks hitting their goals.
Okay, and then finally.
Definitely appreciate the million dollar deals increased 50%, Cuba, Cuba do you have can you give color on how that did on a year over year basis, Yes, nice progress up year on year as well so.
Continued momentum there.
Thank you.
Your next question comes from Mehdi Hosseini from Susquehanna financial.
Hi, Thanks, so much for taking my question. This is David Ryzhik for Mehdi.
Charlie you talked about.
Some meaningful additions to the portfolio to be announced that accelerate.
Would those be commercialized by Q4 and does your implied Q4 guide includes some impact from those new products and add a follow up.
Yes, hi.
Yes, we've got some very exciting new products, some of which will be GA and some of it which we will announce beta but there will be new G eight products in.
Accelerate.
Got it thanks.
And.
Can you maybe provide an update on your international strategy, maybe give us what percentage of business is international and <unk>.
Maybe what steps you're taking to to diversify the revenue base.
Yes, we continue to see great progress internationally at 24% of our revenue I believe on the quarter had a particularly strong quarter in a P.J., which was great and the nice to have that business come online and obviously you want to be looking at the biggest business, which is the Americas business in the context of that international growth and we've had three consecutive quarters of improved performance in our Americas business and so.
That's that's that's a great indicator of the health, we think thats driven by the enterprise and public sector that we talked about the portfolio motion, that's there and the routes to market really kicking in so of course that leaves EMEA EMEA was a little softer than what we would expected but in any given quarter you are going to have some.
Some segments perform hired some perform lower but we feel great about the pipeline in the second half for me as well so really nice contribution in line with expectations.
Great. Thanks, and Tim Best of luck to you, who really was a pleasure.
Thank you. Thank you David appreciate it.
Thanks.
Your next question comes from George O'leary from Oppenheimer.
Thank you for taking my question with the strong new customer adds can you maybe give us a little bit more color is there anything changing with the size of the lands or that the makeup of the customers you are adding.
Well no we have been very clear on saying volume is isn't the focus the quality is and so we saw a really nice mix across our focus segments of cloud enterprise public sector and commercial on a global basis. So continuing to focus on that GE to K native cloud, one k. and non public you know kind of central government organizations. So we saw progress across all of those.
Those theaters, we'd like the 450 number in our situation we have to go take share from somebody.
So 450 or seven net new customers per day business day.
Everybody else is trying to protect their base.
And we're having to go out and win net new so we keep a real focus on the quality and the execution. There. We think it's a really nice indicator relative to size. We don't talk about ASP, specifically, what we're seeing nice lands in each of those segments. They vary by segment as you <expletive> as you'd appreciate but we're saying nice lands and we're also seeing a continued.
Progress on our repeat purchases. So when you look at the fundamentals we got to go in and take share from somebody we are doing that better than anybody else. We are doing so at a nice ASP and our repeat purchase rate. So its important nature of this this pricing dynamic I think is what it is that will drive through it and gain or share in Q3 and Q4, we feel great about next year.
Alright, and expanding on that from a competitive standpoint, so our win rates ticking up a little bit.
In the current environment and is that helping drive those lands.
Or are they primarily just a larger channel presence, that's giving you a chance to land across more customers at the same time.
Yes, we saw a nice quarter on quarter uptick on win rates.
Year on year, they're stable and kind of across the board so you're going to see a little nuances on a quarter by quarter basis by a competitor, but broadly speaking we saw nice pick up quarter on quarter. So I think thats. The majority of the contribution our biggest competition remains not being in the fight in the first place which are at Bath and so as we continue to invest in our channel and continue to make them more independent.
It's getting more and more fights.
On the front end, we've always said, we take a lower win rates.
In exchange for more at bats, and I maintain that so, but we feel great and we're clearly differentiating ourselves, especially in a market like this with the competition and we feel like at the time for us to really dig in and grind.
And pop out the other side of this with a lot more market share.
Thank you and Tim Best of luck.
Thank you.
Your next question comes from Eric Martinuzzi from Lake Street.
Yes. My question has to do with the use of cash you've got a tremendous amount of cash on the balance sheet typically people put that to work either.
M&A or investing in the business you guys are obviously pulling the lever with the repurchase program, but.
But I guess are we inferring from the other the actions that you're taking that there is not really a front burner M&A opportunity and that you're not interested in kind of taking a deeper dive into maybe a mid year course correction on sales hiring to to continue to press and take share versus competitors.
No. Our M&A strategy remains the same which is build build partner by and we have the assets to be able to do that with cash or or what the if appropriate stock as well, we do see a very.
You know very well priced asset right now it's called pure storage and so are our board has enabled us to take advantage of that.
There are no further questions at this time I will turn the call back over to Charlie John Carlo for closing remarks.
Thank you as you can see pure is clearly outpacing and out innovating the legacy vendors you by creating a modern data experience, we're offering a dynamic solution that solves our customer.
Our customers' problems today and in the future I want to thank Tim for his partnership over the last two years, Tim He's had an impressive impact on pure and he will be missed we wish him. The very best on his new adventure and then all of US here look forward to seeing many of you would accelerate next month and I want to thank you for your time today.
This concludes today's conference call you may now disconnect.