Good day, ladies and gentlemen. Thank you for standing by and welcome to the Pure Storage third quarter fiscal year 2022 earnings release conference call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, there will be a question and answer session. If anyone should require assistance during the conference, please press star zero on your touch tone pad at any time. As a reminder, this call is being recorded. I'd now like to introduce your host for today's conference call, Mr. Sanjot Khurana. Mr. Khurana, please go ahead.
Thank you and good afternoon. Welcome to the Pure Storage third quarter fiscal 2022 earnings conference call. My name is Sanjot Khurana, Vice President of Investor Relations at Pure Storage. Joining me today are our CEO, Charlie Giancarlo, our CFO, Kevan Krysler, and our CTO, Rob Lee. Before we begin, I would like to remind you that during the call, management will make some forward-looking statements which are subject to various risks and uncertainties. These include statements regarding the COVID-19 pandemic and related disruptions, our growth in sales prospects, competitive industry and technology trends, our strategy and its advantages, our current and future product offerings, and our business and operations. Any forward-looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them.
Our actual results may differ materially from the results forecasted, and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties relating to our business is contained in our filings with the SEC, and we refer you to these public filings. During this call, we will discuss non-GAAP measures in talking about the company's performance and reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. Additionally, when we refer to sales in our prepared remarks, we mean total bookings excluding cancelable orders. This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Pure Storage.
With that, I'll turn the call over to our CEO, Charlie Giancarlo.
Welcome, everyone. As American families and many of you get ready for Thanksgiving, all of us at Pure extend to you our thanks for joining us today to discuss another terrific quarter. We are very pleased with our Q3 results, which demonstrate what can be achieved when great innovation and enthusiastic customer focus work together. Our Q3 revenue was up 37% year-over-year, with double-digit quarter-over-quarter growth across all product lines and across both U.S. and international markets. We are also pleased with our strong profitability trend continuing through this fiscal year. With a sustained and steady growth across all key regions, products, and customer segments, Pure continues to take share in this large and growing market.
Our strategy to deliver a modern data experience to our customers and partners continues to lead the industry with new firsts almost every quarter as we deliver on all aspects of the modern data experience, modernizing data infrastructure, operations, and applications. This quarter, we announced the latest additions to our product portfolio that brings storage and applications even closer together. Pure Fusion, our new software-defined, multi-cloud, self-service storage environment, is a major advance that will allow customers to better manage their data in a multi-cloud environment while enabling developers to deploy sophisticated data storage services on demand. We also announced Portworx Data Services, which will further allow those self-same developers to quickly deploy production-grade data services on Kubernetes. Together with advances in our Pure1 digital experience, Pure is enabling a cloud operating model for enterprises everywhere, and engagement has been strong.
Our next announcement on December eighth will push infrastructure modernization even further and extend the breadth of our FlashArray platform. Today, all of Pure's capabilities are available as a service. We continue to see strong growth across Evergreen, Pure as-a-Service, and Portworx, which together represent a third of our revenues. Gartner has once again validated Pure's leadership in both of their storage Magic Quadrants, recognizing our execution and vision in primary storage and in the rapidly growing file and object market for unstructured data. Given our speed and breadth of innovation, it should not be a surprise that more and more customers are purchasing the full Pure portfolio.
This quarter, the Commonwealth of Massachusetts chose a full Pure as-a-Service solution with FlashArray and FlashStack for block performance and capacity, FlashBlade for unified fast file and object, and our Portworx suite to containerize and modernize applications. The Commonwealth of Massachusetts said that what put Pure ahead of the competition was our ability to provide them with what they describe as a data plane as a service offering that can work with any data type, provide ransomware protection and rapid recovery, and scale seamlessly, all delivered through an SLA for transparency, reliability, and cost effectiveness. One of their first use cases will be to modernize an application for Massachusetts law enforcement. Using Pure and Portworx, they will provide fast distributed access to criminal record information with no degradation, even under heavy load, increasing the safety of their law enforcement personnel and the public.
Pure continues to see strong adoption in the public sector. State and local governments and agencies have long been a strong segment for Pure. I am pleased that we are seeing steady progress and traction with U.S. federal and international governmental agencies. For instance, we now have deployments in all three branches of the U.S. federal government and three branches of the U.S. Department of Defense. Enterprise and commercial markets continue to experience strong growth. Pure is proud to deliver our modern data experience to now more than 50% of Fortune 500 companies and almost 50% of Fortune Global 500 companies, which speaks to the universal appeal of our portfolio. I will now turn briefly to two topics very much in the news and on investors' minds. Our global customers and prospects are beginning to appreciate the power and green advantage of Pure.
By power, I am not referring to IOPS or throughput. By green, I am not referring to our Evergreen subscriptions. Simply speaking, Pure's products use dramatically less energy and create far less waste than competitive offerings. We take this expanded scope and responsibility very seriously and look forward to publishing our first environmental, social, and governance report early next calendar year. When customers learn how much our solutions reduce energy, space, and waste in their environmental footprint, Pure becomes a true partner in helping them achieve their ESG objectives. Supply chain is on everyone's mind, and no company is immune to this disruption. As we have reported in the past, Pure has built a very robust supply chain based on strong, open, and trusted relationships with our partners. Our strategy incorporates manufacturing and operations in multiple sites and on multiple continents to enable flexibility, resilience, and global responsiveness.
This past quarter, global semiconductor availability was more challenging than last quarter, and we expect this environment to continue into next year. However, our operations team and the strong partnerships we've built with our suppliers have continued to work well, minimizing impacts to our customers and our business. Knowing that our products are helping people all over the world is incredibly motivating to our team. I am proud of how well Pure employees have innovated, executed, and delivered our modern data experience to customers despite the continuing COVID environment and the many other challenges they may individually face. I'd like to give a special shout-out and congratulations to our new Chief Revenue Officer, Dan FitzSimons, who, in his six years at Pure, has risen to every challenge we've thrown at him, most recently leading our America's business to increasing excellence.
Dan's elevation is indicative of the deep leadership and bench strength we have across the company. Given the effectiveness of our team, the quality of our products, and the strength of our customer and partner relationships, the future remains bright for Pure. Kevan, over to you.
Thank you, Charlie, and good afternoon. We are very pleased with the continued robust demand across our entire portfolio, as well as our execution, delivering both strong revenue growth and operating profit during the quarter. The high demand we saw this quarter was balanced across our portfolio, key geographies, and market segments, and was evidenced by our sales growth of an incredibly strong 41%, excluding cancelable orders. Our sales growth this quarter also includes sales of FlashArray//C to one of the top ten hyperscalers. Our supply chain team and suppliers continue to execute, minimizing disruptions for our customers despite an increasingly supply-constrained environment that is dynamic. We are also pleased with the continued progress of our subscription business as subscription services revenue grew approximately 38% year-over-year.
Subscription ARR, or annual recurring revenue, was $788 million at the end of Q3, growing 30% compared to last year. Subscription ARR includes the annualized value of all active subscription contracts as of the last day of the quarter, plus annualized on-demand revenue. Remaining performance obligations, or RPO, which includes our committed and non-cancelable future revenue, was over $1.2 billion, growing 27%. We saw an improvement in new customer acquisition with 345 new customers, representing 12% year-over-year growth. New customer acquisitions were balanced across geography, market segment, and our solutions portfolio. Our total customer count has exceeded 9,500 customers, which includes over 50% of Fortune 500 companies. Now turning to additional specific financial results for the quarter. Total revenue grew 37% to approximately $563 million.
Revenue in the United States grew 35%, and international revenue grew 42% compared to last year. With the strong demand this quarter, including the sale of FlashArray//C to one of the top ten hyperscalers, product revenue was very strong, growing approximately 37%. non-GAAP total gross margins were 68.5% this quarter. The decline in non-GAAP total gross margins, both sequentially and compared to the last year, is driven by non-GAAP product gross margins, which were 66.7% in Q3. Our sale of FlashArray//C to one of the top ten hyperscalers this quarter, and to a lesser extent, increasing supply chain costs, were the primary drivers we saw impacting product gross margins this quarter. non-GAAP subscription services margins continued to trend favorably at 72.1% this quarter.
We achieved nearly $70 million of non-GAAP operating profit and 12.3% of non-GAAP operating margin this quarter. Increasing revenue growth, sales efficiency, and the effects of the COVID environment contributed to our increasing profitability. We estimate that the effects of the COVID environment are approximately two points of benefit to our operating margin this quarter. These reduced expenses generally relate to significantly reduced travel, physical marketing events, and slower than planned hiring. We ended the quarter with over $1.36 billion in cash and approximately 4,000 employees. Cash flow from operations of $127 million were again very strong this quarter, and capital expenditures were $25.7 million during the quarter. We returned approximately $56 million of capital to repurchase slightly over 2.3 million shares.
At the end of the quarter, we have approximately $70 million remaining from our $200 million share repurchase program. Now turning to Q4 guidance. We expect strong demand in Q4, with estimated revenue to be approximately $630 million, growing 25%. We also expect continued healthy profitability, with non-GAAP operating profit estimated to be approximately $90 million in Q4, representing approximately 14% non-GAAP operating margin. For the full fiscal year, given the strong performance of our business in Q3 and outlook for Q4, we are also raising our annual guidance. We now expect that revenue for FY 2022 will be $2.1 billion, growing approximately 25%. Non-GAAP operating profit is estimated to be approximately $206 million, representing approximately 10% non-GAAP operating margin. In closing, our highly differentiated and innovative portfolio and services is why our customers are choosing Pure.
I want to thank our entire Pure team and channel partners for continuing to deliver terrific results while navigating a dynamic environment. With that, I will turn it over to the operator so we can get to your questions.
Thank you. Ladies and gentlemen, if you have a question, please press star one on your touchtone telephone. In the interest of time, we ask that you please limit yourself to one question and one follow-up question. Once your questions have been answered, please jump back into the question and answer queue. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Jason Ader with William Blair.
Hello? Do you guys hear music?
Yes.
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Where's it coming from? Okay, good. Thank you.
There you go.
I didn't know if you wanted me to do a dance or something. Okay. I guess, you know, my main question is, can you rank order the main factors that are driving your outperformance? I mean, obviously this is a bit of a weird year given that the comps are pretty easy, but yet you guys seem to be executing really well. Maybe just macro execution, new products, and then maybe competitor weakness, because we know that some of your competitors are struggling with supply, and I don't know if that, you think that's factoring in as well to your performance.
Yeah, Jason, thank you for the question. First of all, I'd say that we had a hard time describing this quarter only in the sense that everything went very, very well this past quarter.
Calling any one thing out really seemed to only diminish everything else that was going very well. As I mentioned, very balanced across new products. You know, the longer standing products like FlashArray also did very well. You know, balanced and strong growth across the world. Great participation from our sales force. You know, very balanced among the sales force as well. If I were to rank it, I'd have to do it on very general terms. Obviously, as you point out, the comps are easier, but even if you were to compare us on two-year comps, you know, the results are very good.
I really believe that it is the coming together of the investments that we've been making over multiple years that are finally coming together. The investments we've made in enterprise, the investments we've made in broadening out our product line to be a much broader supplier to major enterprises. The fact that we did invest in enterprise, which has been a stronger market throughout the COVID environment. All of these have really contributed to our strength. The fact that we've continued to advance the technology to the extent that, you know, even as we pointed out, you know, hyperscalers looking to utilize us in their infrastructure. Of course, that'll be lumpy business, which we saw this quarter that added to this quarter.
You know, again, it's very promising for us, in terms of we think all these investments will continue to pay dividends as we go forward. Does that answer your question?
Yeah, that's great. That's perfect. Kevan, is there any early look at fiscal 2023 and how we should be thinking about both top line and then, you know, the operating margin? Obviously, you've got some serious outperformance this year, but, you know, you just mentioned two points coming from kind of COVID-related benefits. Any kind of just broad strokes on fiscal 2023 for us?
Yeah, Jason. Again, you know, when we think about it from a demand lens, continues to be robust as we think about Q4. I wouldn't see a significant change in demand as we look beyond Q4. Now with that being said, it's probably a bit early to get specific views, as you mentioned for next year. I would like to see how the remainder of this year plays out, with our guide that is reflecting continued strength in Q4. A couple call-outs when we do think about next year. Look, these terrific growth rates that Charlie mentioned for all the great reasons, but are also aided as well by the COVID environment. We do need to take that into account.
Obviously the hyperscaler opportunity that's being reflected in this quarter is a consideration as well when we think about next year. Hopefully that's helpful, Jason.
Yes, thank you.
Your next question comes from the line of Aaron Rakers with Wells Fargo.
Yeah, thanks for taking the question. I guess I wanna kind of build off that last point. You know, can you help us appreciate how meaningful that cloud opportunity was this last quarter? I think last quarter you talked about an eight-figure deal. Did that all impact this last quarter? Is there any expectation of follow-on for cloud opportunities? And maybe in that same vein, you know, can you talk about, you know, I think recently you announced a relationship or a deal with Microsoft Azure for EDA. Was that the cloud relationship or is that something separate from your opportunities? I have a follow-up.
Right. Okay, Aaron. First of all, no, the EDA announcement was separate from the top 10 hyperscaler. Obviously, if we felt we could have announced it, you know, we certainly would have, but the customer wants to keep this confidential, so we certainly respect that on the hyperscaler. The EDA one is, yes, we work very closely with Microsoft to develop it, where customers wanted to have very high-speed performance on EDA workloads. That it's not necessarily restricted, or we don't believe that the architecture is restricted to EDA workloads, but we think that it's something that's going to scale well for us. We're looking forward to that. No, the hyperscaler was different.
I'll let Kevan respond with how, you know, we've given you some insight into how the hyperscale affected the quarter.
Yeah. It’s not that different than how we were talking about it last quarter as part of our guide. Hey, if you think about, you know, with the quarter being completed, and if we were to exclude the hyperscaler opportunity that came through this quarter, you know, our year-over-year growth would more likely be in the high 20s%. That is a good way to be thinking about it.
Okay. That's helpful. Just so I understand, there's nothing embedded in this quarter from a hyperscale top ten win.
We announced the win last quarter, but we booked it and fulfilled it this quarter. That is in Q3.
Okay.
Yeah.
Yeah. As the quick follow-up, I'm just curious on gross margin. I know you talked about the hyperscale deal impacting gross margin, but you know, product gross margin, you know, cost headwinds and stuff, do we think that those, you know, start to abate? Do you feel comfortable still that, you know, that 70%+ gross margin that you outlined at the Analyst Day is achievable, and how should we think about that next couple quarters? Thank you.
Yeah, that sounds great. That gross margin, I think on the 70% was more akin to the subscription, our subscription business. Hey, when we think about it from a product gross margin or a total perspective, look, the largest driver really this quarter was the hyperscaler opportunity. It did have some headwind, obviously with the increasing component
Costs that we saw in the quarter, but that would be a much lower driver, if you will, in terms of what we saw in the sequential and year-over-year drop in product gross margins. Hey, when I think about looking into Q4, I do expect our product gross margins will normalize back to what we typically see in the high 60s%, is a good way to think about it. That's even obviously considering the cost increases that we're contemplating.
Thank you.
Yeah.
Your next question comes from the line of Simon Leopold with Raymond James.
Thanks. I appreciate you guys taking the question. I wanted to maybe just get a better sense of where you are in terms of the Pure Software product revenue or contribution within the mix. I know Pure Fusion is new, but Portworx has been around a bit. Is this something you could break out for us?
Well, you know, Simon, as you probably know, my bias is to not give details on, especially on new products, as they grow, not to break them out. I find that new products go through their own cycles. They tend to be lumpy, and then you have too much focus on the new products, not enough on the total revenue line. What I would say is that, you know, we gave color last quarter on Portworx as well as Pure as-a-Service. They're growing, you know, very well, typically, you know, in the three-digit percentage range on a year-over-year basis.
You know, we're seeing more of the same. I would say, you know, in terms of a breakout, we're unlikely to do that in the future.
Yeah, that's right, Simon. I mean, you know, look at the integrated solutions that we're delivering to the market. Obviously, there's tremendous value with our software that's part of that, and that's, you know, reflected in the gross margins that we're seeing both on subscription as well as product. We're seeing some nice traction, as Charlie pointed out, on subscription ARR, again, growing 30% year-over-year. Pleased with what we're seeing there. Obviously software is a large driver in the value and the economics we're seeing as we look at our growth numbers.
Thanks. Just as a follow-up, I wanted to see if maybe you could unpack a bit about the use case for this hyperscaler. What I'm really trying to get at in this question is an understanding of if this is a repeatable opportunity either with this customer or other customers. I'm looking for an understanding of the use case and whether we should think of this as a new leg of growth or more of a one-off project. Thank you.
Right. You know, thanks, Simon. I think also Aaron might have referred to this early on, and we didn't respond to it specifically. I did want to start off with this particular hyperscaler, we do believe it's repeatable. No reason for us not to believe that it's repeatable and conversations continue. But let me Rob weigh in on the general use case.
Yeah. As far as the use case, you know, this is part of their production environment. It's an environment that has a very large amount of data, and they're using this environment, you know, to essentially do, you know, analysis and understanding of how to better deliver the hyperscale service. It is part of their production environment. I think, you know, as far as repeatability and understanding, you know, just the broad applicability of the use case, I think what's notable is the overall size and capacities that we're talking about here, the performance requirement, and the fact that this, you know, is a very sophisticated customer evaluated all the options available to them.
Obviously, cost was a part of the equation, and so obviously looked at disk, but pretty quickly came to the conclusion that FlashArray//C was really the only option that was gonna solve the balance of their needs, performance, price, footprint, so on and so forth. You know, I think it's also worth noting that the overall footprint savings was a key part of winning the initial deal, but we're now also undergoing, you know, work with this same customer to quantify the environmental savings and benefits that we're delivering to them with a FlashArray//C solution as part of their ESG analysis. The nice thing is that these are all benefits that we're able to deliver to each and every one of our customers.
Thank you for that.
Your next question comes from the line of Rod Hall with Goldman Sachs.
Hey, guys. Thanks for taking my question. This is Bala on for Rod. I just have a quick clarification on the 10-K from earlier this year, which seems to indicate that there could be an extra week in fiscal Q4. I might be wrong, but I just wanted to double-check.
Spot on. Yeah. For Q4, as we contemplate Q4, we do have an additional week with our fiscal year, and that is contemplated both from a revenue side and an OpEx side. You know, the revenue and OpEx is about equal, so I view it as a bit of a headwind for us in terms of profitability. You know, probably around $14 million-$15 million, both on the revenue and the OpEx side is a good way to be thinking about it in terms of the additional week.
Gotcha. Very helpful. Then follow-up. I just want to double-click on this FlashArray//C hyperscale roadmap. Now, typically hyperscalers, they store more on disk, obviously. I guess I'm wondering, do you see more potential hyperscale customers traction going forward? Are you having more conversations with more cloud players? Has anyone who actually might be evaluating-
Actually, any color on the roadmap there would be very helpful.
Yeah. Well, first of all, we believe very strongly that as flash continues to decline relative to the declines in magnetic disk, that there's inevitably gonna be a crossover point where every player everywhere, including the hyperscalers, will start switching from disk to flash. It's just a matter of time in their particular use case or instance before that happens. We do have the best technology in the business. We are having multiple conversations with multiple parties. I think it's too early. The issue with these large environments is that they're lumpy, uncertain. When they do come, they're big. When they don't come, you're waiting. I think it's a little bit too early for us to speculate on it.
There are conversations, and it is a given, we believe that it's just a matter of time before flash is used in a more substantial way, or let's say in a mainstream way, in the hyperscale environment.
Thank you, Charlie. I think to follow up there, FlashArray//C revenues, are you assuming any revenue from fiscal Q4 from that hyperscale win?
We are not expecting revenue from that particular hyperscale in Q4. We shipped it all at that point. Well, I'm sorry. Okay. There, there's some residual revenue for it in Q4, but for the most part, no.
Your next question comes from the line of Steve Enders with KeyBanc.
Okay, great. Thanks for taking the question. I just wanted to touch a little bit more on the 4Q guide. You know, pretty strong revenue that you're expecting to see there. Just kinda wondering what's built into the assumptions within that guide, and you know, how should we be thinking about kind of how the macro environment has played out over the past 90 days that's leading to the raised guide here?
Well, yeah, let me start, and then I'll let Kevan go into it. It you know it's based on you know what we see in the market today and the performance that we had in Q3. We're certainly not you know we're not contemplating any major changes to the current direction of the world economy. You know the expectation is generally more of the same in terms of macro economic forces. We're expecting COVID to continue you know probably you know if you've been watching the news and watching the figures it's having its seasonal effects.
Seasonally it'll get a bit worse, but we're not expecting that to make a major change to you know in our expectations as to how business will perform this coming quarter. You know, what we see is a strong demand. And you know we believe that that strong demand is based on fundamental demand. We don't think that at least for our market, there's a lot of phantom demand out there. And you know, our lead times have stayed relatively low. Our customers know that, so they can order when they need it, not to game the system.
Yeah. Steve, I probably wouldn't have much more to add on that. I think this, you know, we've got good visibility in terms of how we're looking at Q4. To Charlie's point, demand still is robust in terms of what we're looking at. No real change in the trajectory. Understanding, you know, that there's little bit more in terms of what we're seeing on a wave of COVID on the European front. Again, I don't think those will be meaningful drivers as we think about Q4.
Okay, great. That's helpful. Just on the hiring environment, it seems like might have been a little bit behind plan in the quarter. I guess is there kind of anything to call out there in terms of where the biggest challenges are and when you kind of see that beginning to reverse?
Yeah. You know, I would say that being a bit behind in hiring is across the board. You know, there's no one, let's say, function that stands out. To put some context on it, you know, we're seeing somewhat slightly higher attrition than average years, certainly a lot more than last year. Last year was very low by comparison to an average year. This year is a bit higher. I would say that recruiting interestingly is the quality of resumes that one can bring on for interviews now is high. The good news is that there are lots of good people available.
The bad news is there are a lot of, you know, lots of spots that we need to fill. You know, we're confident we'll be able to catch up.
Yeah. I would just add on to that we are seeing a nice pickup in terms of our hiring cadence, thanks to our talent acquisition team doing a nice job on that front. That's been contemplated obviously in the Q4 guide, as you'll see a pickup in OpEx sequentially. That's not only the additional week, but also contemplates the pickup in pace that we're seeing in hiring talent as well.
Okay, perfect. Thanks for taking the questions.
Your next question comes from the line of Wamsi Mohan with Bank of America.
Hi. Thank you for taking my question. This is John on behalf of Wamsi. My first question, you've mentioned about the supply chain constraint headwinds faced this quarter. I was just wondering if you could maybe quantify the impact from cost of revenue standpoint, and I just want to confirm the guide reflects the supply chain uncertainties. Thanks.
Yeah. Maybe what I'll do is talk just more tactically in terms of the impact for the quarter, and then maybe have Charlie just talk about it more from a holistic standpoint. 'Cause I think the operations team and our engineering team, as well as our suppliers, continue to do a terrific job. Look, when I look at it for the quarter, obviously you saw a drop in product gross margins, both sequentially and year-over-year. As I mentioned, a smaller piece of that is really due to the component cost increases that we saw during the quarter. That was moderated slightly by the fact that our ASPs are still quite stable, and we're quite competitive in the marketplace.
With that, I'll turn it over to Charlie to give us some more holistic macro comments.
Yeah. You know, on the macro side, you know, we see all costs associated with the supply chain, so component transformation and logistics costs have all in all increased, you know, on an annual basis. We think on the order, you know, of approximately 10%. That's a significant cost increase in what is traditionally a deflationary market, you know, for technology products. It's quite significant. Our expectation at this point is that while supply chains will remain tight, we're expecting to not see the same kind of increases in costs going into next year. Now it is, as Kevan said, a very dynamic market.
On a quarter-by-quarter basis, things can change dramatically, because both supply and demand are a little bit difficult to predict, and that causes, you know, swings in pricing. It's as Kevan mentioned, it's a very dynamic market, and it's hard to have complete confidence in exactly where it'll go.
Great. Got it. Thank you. As a quick follow-up, I was just wondering how the broader IT spending environment is tracking, particularly in storage, and, you know, if you have any trends that you would call out. Thank you.
You know, on the enterprise side, it's been quite robust. We think quite good. A lot of demand, a lot more data processing taking place and upgrading. We've seen it quite strong. Commercial, while it's recovering, is recovering slowly. I would say that in general, that's probably still down from where it might have been without COVID. We're looking forward to continual recovery there. I would think overall, the demand for enterprise storage actually has been quite good.
Got it. Thank you.
Your next question comes from the line of Tim Long with Barclays.
Thank you. Maybe Charlie, if you can talk a little bit, or Kevan, if you want to chime in, just, you know, obviously a good margin performance in the quarter. Just curious how, I know you don't want to get into too much of next year, but going to be a lot of moving parts, I guess, with some of the benefits becoming offsets with return to work and things like that. So kind of how are we thinking about leverage over the next year or two in the model? And then second, I wanted to just go back to the hyperscale and FlashArray, see if I could. You know, it looks like the pricing resulted in a much lower gross margin for that business. Just curious, how is that pricing set?
Is it, you know, somewhat that you had to get close to disk? Is that kind of what the bogey is going to be for all hyperscale deals, or will that be different, or potentially is it, you know, maybe a tougher margin up front and then on repeat business it's a little bit better? If you could just talk about kind of the dynamics around pricing and potential movements there. Thank you.
Yeah. I don't want to get too far ahead of next year, and we'll certainly have a better view of this, as we, you know, when we get into our Q4 earnings call and projection for next year. What I would say is we're planning that, you know, we'll still be under COVID rules through certainly Q1 and probably most of Q2. As we get into the summer, you know, that's when we think we will start seeing customers being open to visits and therefore open up more travel and normal expense type you know in-person meetings for some of the things we do as well. That's. We'll see about a half a year of a return to more investment.
You know, I think what you're going to see is a gradual, you know, gradual easing into those additional expenses. At the same time, we expect there to be, as you saw during this, even the COVID period, our margins didn't really change all that much. We have been improving our execution in terms of, productivity, certainly, you know, in our sales and marketing organization, and we think increasingly over time in our engineering organization. We are expecting to see more leverage really on a, continuous basis, as we go forward, you know, based on greater productivity in the organization, and that's largely based on scale.
Yeah. I'll just chime in a little bit more on that, and then we can move to the hyperscaler topic. You know, when we think about the full fiscal year, with our guide for Q4, which puts us around, you know, 10% non-GAAP operating margin, you know, we're thinking about 2-3 points of that is tailwind from COVID-19-related aspects, whether that's less travel, whether that's less physical events from a marketing standpoint, or from a hiring standpoint. Obviously we're seeing a nice pace and uptick on hiring. We expect that to continue.
When I think about next year, and it's still too early to get too specific, but I would expect us to continue to gain more leverage when you kind of exclude the tailwinds we're seeing from COVID. Hopefully we're giving you some nice roadmap in terms of how we're thinking about that.
Right. Good. Thanks.
On C, you know, I'll go back to that. On C, yeah, we expect that a large portion of C sales to this hyperscaler, but also potentially others, will be replacing if not replacing. Usually it goes into new builds, but the new builds would be for them to look at flash rather than disk, and so they'll be comparing the price to their existing disk design. As such, the early wins will probably be, you know, lower margin, but will improve over time, both as flash costs improve, but frankly, as they gain more experience with Pure as a provider.
Okay, thank you.
Your last question comes from the line of Karl Ackerman with Cowen.
Yes. Thank you. Good afternoon, gentlemen. Kevan, I have two questions, please. First one for Kevan. Most of the upside this quarter came from product revenue. That's quite impressive given the ongoing supply chain constraints you mentioned. I'm curious whether the up-revised outlook for January is also driven primarily by product revenue, particularly given your planned expansion of your FlashArray platform, that you highlighted in your prepared remarks. If you could comment on that would be helpful.
Yeah. I guess my view on this, and I'll let Charlie and Rob add some commentary as well, is yeah, absolutely. We've gotten great momentum fueled by high demand across our portfolio, which is, you know, that translates to the growth rates you're seeing in product revenue. But obviously, we're also seeing good traction with our subscription business, 30% growth in our subscription ARR. And obviously, that's going to have a lag before that works its way to the P&L. But this comes back to how balanced the demand and strength is that we're seeing across the board, whether that's specific to our subscription business or whether that's specific to sales of our solution. So that's really the storyline here is the balanced strength that we're seeing across the board.
Charlie or Rob, any other points you'd add on that front?
I think that answers it, Kevan. I think what you're seeing is strong demand for our products, regardless of capital and/or, you know, subscription base. Of course, we always want to allow the customer to buy in the way in which they want to buy rather. You know, I would say we're expecting this quarter, Q4 to be balanced as well. So we are seeing, you know, just to be clear, we're seeing good growth in Pure as-a-Service, and obviously the way that works, you know, given that it's ratable, that starts off slow, so you don't see it quite as readily. You know, again, I expect it to be balanced going into this quarter.
That's helpful. Thank you. I guess as my follow-up, you know, I did want to touch on margins a little bit. You know, it seems that the entire upside in your revenue outlook for January is falling directly to operating income, which is quite impressive, and now operating margins are in line with your long-term outlook. On one hand, it seems you're benefiting from volume leverage. On the other, you're at least offsetting the rising input costs through pricing actions. In that vein, could you discuss the ability to perhaps further pass on rising input costs as they happen? And secondarily, how you see margins improving or may improve as subscription revenue becomes a larger piece of your revenue next year. Thank you.
Yeah. Well, you know, as we've said in the past, you know, we don't price on a cost plus basis. We price based on competition in the market. One of the unique things about this market is that nearly every new opportunity, even in an existing customer, is newly negotiated with other competitors. As such, we're responding primarily to the pricing of our competitors rather than to, let's say, a standardized discount for that customer. Many of our competitors do operate on a cost plus basis, and so with the rising costs that exist in the market, that finds its way into the price negotiation. Because of that, we do expect that for the most part, you know, ASPs and costs, you know, we expect relatively stable margins.
It'll vary based on mix, obviously the hyperscaler deal, but for the most part, we think it'll stay relatively stable regardless of costs. Now, part of the mix as well is, in fact, as you point out, the subscription offerings. We expect long term that those subscription offerings, because they will have higher value, we'll be providing more services in the subscription offerings than we do in the straightforward capital sale. As such, we expect those margins to be significantly over time to be above ours, our reported, you know, standard reported margins.
Yeah. Just to be clear, Karl, you know, our view on subscription margins really hasn't changed since our Analyst Day and our communication and expectations on that. To Charlie's point, you know, with the growth of Portworx and as we scale our Pure as-a-Service offering with Cloud Block Store, that clearly is going to give us some tailwinds as we think about it longer term for subscription gross margins. Shorter term, to your point, yeah, we are very much pleased with what we're seeing in terms of increased profitability, even considering the tailwind from COVID. We like what we're seeing.
You know, we'll definitely still trade and prioritize growth, but we very much have the belief that we can drive growth and increase operating leverage as well.
Thank you.