Ladies and gentlemen, thank you for standing by, and welcome to the Pure Storage Q2 Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now hand the conference over to your speaker today, Nicole Noutsios, Investor Relations. Thank you. Please go ahead.
Thank you. Good afternoon. Welcome to Pure second quarter fiscal 2021 earnings call. My name's Nicole Noutsios , Investor Relations at Pure. Joining me today are our CEO, Charlie Giancarlo, and our CFO, Kevan Krysler , and our VP of Strategy, Matt Kixmoeller. Before we begin, I'd like to remind you that during this call, management will make forward-looking statements which are subject to various risks and uncertainties. These include statements regarding the COVID-19 pandemic and related disruptions, our growth and sales prospects, competitive industry and technology trends, our strategy and its advantages, our current and future product offerings, and 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 these risks and uncertainties related to our business is contained in our filings with the SEC and 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, which are provided in our earnings press release and slides. 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 property of Pure Storage. With that, I'll turn the call over to our CEO, Charlie.
Good afternoon, everyone. Thank you for joining us on today's earnings call. Let me start by extending my sincere wishes that you, your family, friends, and colleagues are all healthy and staying well. The current environment continues to challenge us all, but I am proud of how Pure has risen to the occasion. We are helping our customers navigate the crisis and accelerate their digital transformation during this difficult time. The ease, flexibility, and economic security of our Evergreen model has never been more necessary or appreciated by our customers. Pure's core differentiators of unmatched technology leadership, simplicity of operation, high performance, and ultimate reliability make Pure the right decision, especially at this time. These core tenets are also the foundation of our vision of the modern data experience.
Data storage that is entirely automated, fully dynamic, and provides a cloud-like experience in an as-a-service model with flexible on-demand consumption responsive to the needs of the application. This modern vision is taking hold in the market. The most important characteristic of any cloud infrastructure is reliability, and customers become even more acutely aware of this in times of crisis. I am pleased to announce that in Q2, Pure's FlashArray product surpassed a full seven nines of total availability across our installed base of tens of thousands of arrays, including during all upgrade cycles, which is unprecedented in our industry. To put this in perspective, seven nines is the equivalent of only three seconds of downtime per year.
Across our product portfolio, we are delivering savings in power, cooling, and floor space, driving ecological advantages and contributing to the lowest total cost of ownership at a time when economic and environmental efficiency are on the minds of our customers. With our renowned simplicity and cloud-based Pure1 management and support, we dramatically reduce employee time managing storage, freeing them to innovate in a landscape with new demands. I am pleased with our execution during this crisis, and I continue to be very confident that we will exit this downturn in a position of strength, supported by our innovative technology, subscription services, and a long-term vision that is aligned with customer needs.
In Q1, we saw a wave of customers, many of them critical and essential businesses, coming to us to expand their applications and replace their legacy infrastructure that just couldn't keep up with the new demands brought on by the pandemic. It was a quarter that was dominated by urgent and immediate needs, and our customers' previously important plans were put on hold. In contrast, Q2 was a quarter of replanning for many organizations. Companies paused to consider the future and reassess their technology direction, aligning it to the new reality that their organizations face. Although the situation remains fluid, we believe the second half of the year will see businesses return to and even accelerate digital transformation.
The growth and strength we saw from our international business in the quarter provides an early but positive indication of increased demands for our solutions when crisis levels created by COVID-19 decline. We continue to dramatically outpace our industry in innovation, I am excited to share several technology announcements, expanded partnerships, and portfolio and subscription services momentum with you. Today, we announced the second generation of FlashArray//C, the industry's first and still only all-QLC storage solution. This offering effectively renders hybrid storage obsolete by providing flash density, performance, and reliability at lower costs than legacy hybrid disk arrays. With FlashArray//C for capacity-oriented workloads, FlashArray//X for performance-centric workloads, and Cloud Block Store in the cloud, all available under our unified subscription, customers are able to consolidate a broad set of workloads onto a single platform.
Late last quarter, we expanded our file portfolio with the introduction of file services on FlashArray//C, which allows customers to further simplify and consolidate their general purpose file needs on the same platform. The combination of file support and FlashArray//C enables customers to cost-effectively consolidate and run their block-based applications like VMs, databases, and VDI alongside their general purpose file systems and user shares on a unified FlashArray platform. We continue to see strength in our FlashBlade product for addressing high-performance file and object needs with a single platform. FlashBlade continues to redefine what is possible for cutting-edge analytics, real-time data, AI, and scientific workloads. The wide array of software features we delivered earlier this year, and in particular, file and object replication, are rapidly expanding FlashBlade into additional mainstream enterprise use cases.
FlashBlade is helping customers drive unparalleled consolidation across multiple workloads so that they can both modernize file and introduce high-performance object in a single platform. For example, this quarter, a large media and entertainment customer selected FlashBlade to consolidate their Splunk, Elasticsearch, and Rapid Restore environments onto a single unified fast file and object platform. This quarter, the National Center for Missing & Exploited Children selected FlashBlade for its high-performance replicated file storage to expand and enhance their analysis and machine learning applications used in the fight against online child exploitation. In these very trying times, it is gratifying to see the ways in which our technology is being used to help those most in need. FlashBlade's adoption to power rapid recovery and protect against ransomware continues to grow. Two weeks ago, we announced a partnership with Cohesity to introduce Pure FlashRecover.
This is the first fully integrated all-flash rapid recovery solution on the market. We are excited to deliver it in Q3 with streamlined support delivered through Pure. Customer demand has been strong for an integrated solution that not only restores data rapidly in the event of an attack, but also reduces complexity while scaling both performance and capacity to meet even petabyte-level recovery requirements. Pure's subscription services continue to yield great results. These services include our Evergreen program and our unified subscription, which delivers our on-prem solutions and Pure's Cloud Block Store under a single consumption experience. Our unified subscription saw continued strong growth from both existing and new customers in both cloud and enterprise segments, including Telstra, Dizzion Managed Desktop as a Service, BidFX, and Arrow Energy. These customers are choosing our unified subscription because it is a true enterprise-class utility that delivers ultimate flexibility for storage consumption.
It provides a cloud-like experience on-premise with the ability to move data to the cloud at any time and align spend with actual consumption. Cloud Block Store, which is part of our unified subscription, solves one of the biggest challenges for enterprises today: how to cost effectively bridge private and public clouds for Tier 1 applications. The unified software and unified subscription of Pure as-a-Service offers both compelling cost efficiencies and high performance, both on-prem and in the cloud. We've also seen strong customer adoption of our Pure Service Orchestrator software, which enables automated, stateful container storage, creating a modern container environment for developers to build cloud-native apps on-prem. Pure Service Orchestrator, combined with Cloud Block Store, create a hybrid container strategy that truly unlocks the potential of Kubernetes.
We believe our modern data experience vision, unique unified subscription services, and hybrid cloud and container strategy, all driven by our FlashArray and FlashBlade platforms, will enable us to continue to grow and take even more market share in the coming quarters and years. Looking forward, I am confident in our opportunity, our long-term strategy, and our ability to re-accelerate growth upon exiting the global crisis, all while continuing to focus on operating discipline. We are the one company driving change in this $50 billion industry, providing an unrivaled experience that customers simply love. In closing, I am truly thankful to our employees, customers, partners, and the entire Pure community for their tenacity, their diligence, and flexibility to adapt to and overcome the challenges of the current environment. With that, I'll turn it over to you, Kevan.
Thank you, Charlie. Good afternoon, everyone. Our Q2 financial results reflect solid execution during the headwinds of the macro environment caused by COVID-19. We are also pleased with the continued strength of our subscription services and the growth of our international business following a challenging Q1. Total revenue during Q2 grew 2% year-over-year to $403.7 million. Product revenue declined 9% year-over-year, while subscription services momentum continues as revenue grew 37% year-over-year and represented approximately 33% of total revenue, up from 24% of total revenue year-over-year. Subscription services revenue includes revenues from our Evergreen subscriptions and our unified subscription, which includes Pure as-a-Service and Cloud Block Store. We saw significant growth in our international business during Q2 while facing headwinds in the U.S. created by COVID-19.
Total revenue in the U.S. during Q2 was $282 million, declining 4% year-over-year. Total international revenue grew 20% year-over-year to $122 million during Q2. Given the ongoing macroeconomic uncertainty that persists, I will continue to provide additional color around our sales performance. Total bookings or sales during the first six months of the year grew 8.3% year-over-year. During Q2, declined 3.3% year-over-year due to the headwinds we faced in the U.S. Global channel source sales continue to represent a growing and meaningful percentage of our total sales. We are very pleased with the close partnership of our global channel. New customers are continuing to choose Pure. Both average deal size for new customers and FlashBlade new customers grew year-over-year. Sales to new customers choosing Pure during Q2 represent over 20% of our total sales.
Across our full solution portfolio, we acquired over 350 new customers, compared to over 450 customers during Q2 of the prior year. Non-GAAP gross margins for product and subscription services during Q2 was 69.8%, representing a slight year-over-year increase of 0.4 points. Non-GAAP product gross margin in Q2 was 70.1%, generally consistent year-over-year, and non-GAAP subscription services margin increased 1.8 points year-over-year to 69.2%. Total non-GAAP operating profit during Q2 was approximately $11 million, compared to a non-GAAP operating loss of approximately $3 million during Q2 of the prior year. We continue to focus on strong operating discipline while investing thoughtfully. Non-GAAP net income during Q2 was $18 million, and non-GAAP net income per share was $0.06. Non-GAAP net income in Q2 of the prior year was $3 million, and non-GAAP net income per share was $0.01.
Weighted average shares used for the non-GAAP net earnings per share calculation was 283 million shares in Q2 and 271 million shares in the prior year. We generated positive operating cash flows of $51 million for Q2 compared to $49 million in the prior year, and free cash flows of $26 million compared to $20 million in the prior year. Total cash and investments at the end of Q2 remain very healthy at $1.29 billion. Total deferred revenue for Q2 was $725 million, compared to $706 million at the end of Q1 and $607 million at the end of Q2 of the prior year. Our remaining performance obligations or RPO, which includes our committed and non-cancelable future revenue for Q2, is nearing $1 billion at $956 million. This compares to $912 million at the end of Q1 and $770 million at the end of Q2 of the prior year.
During Q2, we returned $20 million to shareholders through share repurchases of 1.18 million shares. Approximately $45 million remains for our share repurchase authorization. Total head count at the end of the quarter was approximately 3,700 employees, compared to approximately 3,500 employees at the end of Q1 and 3,300 employees at the end of Q2 of the prior year. Moving to guidance. The growth we have achieved and our focus on operating discipline during the first half of the year is based on the core fundamentals of our business being strong despite the significant economic contraction caused by COVID-19. As we look to Q3, we expect recurring revenue and sales of our Evergreen and unified subscription services will continue to show strong growth, though significant uncertainty due to COVID-19 remains.
Similar to last quarter, we believe it is still not prudent to provide formal guidance. We are pleased that our total pipeline opportunity for Q3 has increased meaningfully compared to the total pipeline opportunity we saw for Q2. However, a greater proportion of the opportunities in our Q3 pipeline are at earlier stages compared to Q2. Although not considered formal guidance, our current internal view is that total revenues will be approximately flat sequentially. Moving to investments, we continue to exercise solid operating discipline throughout the organization, which has enabled us to invest in innovation and increase sales capacity during the first half of the year. We expect net incremental resource additions will slow during the second half of the year and will be concentrated on continued innovation. With our current views of Q3 revenue, we estimate that operating margin will be slightly below break even, near -2%.
To summarize, we are continuing to innovate and successfully navigate the business during an unprecedented economic contraction, including strong growth in our Evergreen and unified subscription services. Our broad customer base, strong partnership and commitment to our channel, and our strong growth in recurring revenues positions us for long-term growth. With that, we will now open the call for questions.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. In order to allow everyone time for questions, we ask that you please limit yourselves to one question and one follow-up. Please stand by while we compile the Q&A roster. Your first question comes from Pinjalim Bora from JPMorgan.
Hey, guys. Thanks for taking my question. Can I double-click on just the performance across the different segments? Could you maybe talk about, in terms of the bookings growth, how did enterprise do, how did mid-market do, how did cloud and public sector?
You bet. Hi, Pinjalim. This is Charlie. Good to hear your voice. We had, as you heard in the prepared remarks, really an excellent international quarter, and I think it reflects what happens when economies recover after a corona lockdown. That, we felt very strong about that. We also had very strong unified subscription and overall subscription revenues. Very positive there. On a relative basis, cloud and enterprise were much stronger. Of course, with the U.S. being down generally, especially in the area of commercial and net new logos, given that that was down, that of course depressed overall revenues. I wouldn't say that it was outside of commercial, that it was centered on any particular area. It was really just the reduction in the U.S. overall.
We did see, overall, across the portfolio, the kind of balance that we generally like to see in our products. We had a strong FlashBlade sales growth both across the world, but again, especially in Europe. The new products are doing well. The balance, pretty much what we'd expect, but we did see lackluster U.S.
Understood. Thank you for that. Kevan, on the guidance, seems like a decline of about 6%, if my math is right. Is that mainly on just the composition of the pipeline that you mentioned? Is there a factor of headwind from the subscription transition? Anything to call out?
I wouldn't call out a factor on the headwind from a subscription. I really would focus it on the pipeline and the fact that we're actually quite pleased to see what pipeline has done. It's an early signal for us, but we did see some sequential improvement in pipeline build, which we actually hadn't seen for some time. Just the fact that that's earlier stage for us really had us come in with some informal views of where we'd land for Q3 revenue.
Your next question comes from Simon Leopold from Raymond James.
Great. Thank you very much for taking the question. First, I wanted to see if maybe you could unpack the subscription business a little bit in terms of helping us understand the split and the trends of how much of your subscription business is on-prem and how much is in cloud. Is that something you can offer?
Yeah, absolutely. The vast majority remains on-prem because the cloud is a relatively new business, whereas Evergreen, of course, has been since our inception. The way that subscription operates, as you build revenue, it takes time to actually build revenue in it. We're very pleased with the adoption of the cloud portion of the revenue. Of course, I will say that Pure as-a-Service, which includes both the ratable service-oriented sale of storage on-prem, which is combined with a subscription to Cloud Block Store, has really unleashed a lot of opportunity for us and has really driven a lot of sales and, in fact, a lot of new customer sales.
We're very pleased with that, but there are a lot of customers that certainly are planning for cloud that haven't yet made the jump, but want to make sure that the purchases that they make are both ratable, that is subscription, but also transparent and allows them to move to the cloud at any time.
Thanks. Just as to follow-up, I wanted to see if you could talk a little bit about the linearity or the patterns you saw in the months of May, June, and July versus what you've seen historically. Thank you.
Yeah. In terms of linearity, it probably was a little bit worse, as we saw it later in Q2, but nothing that I would view as out of the norms, in terms of what we saw. Obviously with Q1, we saw some great tailwinds throughout the quarter, really driven by companies purchasing for mission-critical events and needs. As a result of that tailwind dissipating in Q2, we saw a more normalized linearity.
Your next question comes from Ittai Kidron from Oppenheimer.
Hey, guys. I guess I want to drill into this last point of the guidance and, I guess, the early cycle of the pipeline as it looks like right now versus previous periods. Charlie, is there a way to correlate this with execution quality on the sales side? Is there a thesis to be made that perhaps in the last quarter or two you over-harvested the install base, didn't pay perhaps enough attention into getting new customers, and now you're just kind of left with not much to harvest, and on the flip side, customers that have been squeezed already for what they need to buy?
Yeah. Ittai, I don't believe so. That's the first time that I've heard that thesis, to be direct. Our view is that we had seen, as Kevan mentioned, tailwinds in Q1. We did kind of expect them to continue through potentially May, but that did not occur, to be clear. You have to understand that, from a sales force perspective, they go from the way of selling that we and that everyone has been selling for years, to where everybody's now inside sales. It's a completely new way of selling, and for customers, a new way of buying. I think the majority, and I said this in my prepared remarks, the majority of the change was customers now living in a very new environment, both economically, but also completely reconsidering their digital transformation and what's important to them.
Whenever you have a reconsideration or replanning, you have some stasis. You have an interruption in buying patterns, and I think that's exactly what's taken place in Q2. The good news is we've seen it in Europe, that when the countries come out of the recessionary environment, when they come out of the pandemic environment and the lockdown, then they start to reopen their purse strings. We saw a tremendous quarter in Europe. I would expect that we see the same country by country as they come out of the pandemic. Unfortunately, in the U.S., we go in and out repeatedly, and it's almost state by state, and I think that it's certainly delayed the kind of recovery that we hope to see soon.
That's why it's hard for me to reconcile the comments. If you saw what you saw in the second quarter international properties, why would we not see that in the U.S. come third quarter? Where a lot of the opening has happened already in the May, June timeframe. In any given quarter, and how much of your business activity really comes from new customers versus existing ones expanding? I feel like new ones don't contribute that much for an in quarter. It's a lot of existing, in which case, again, why guide flat? Why should that number not be higher?
Well, actually, let me just challenge you a little bit. We've seen reopening and then reclosing in the U.S. over the last couple of months, if you just consider the infection rates and the amount of lockdown that's taken place, it's a very different picture today in the U.S. than it is in Europe. We are still seeing the effects of a muted U.S. economic response currently. I'll let Kevan handle the second part of that question.
Well, sure. Our net new logos for customers, as I said in my prepared remarks, it actually is quite substantial for us. Even in this quarter, the amount of bookings really generated from net new logos was over 20%, which we were quite pleased with. Just as a quick follow-on to Charlie's point, any upside that we get on the U.S. has not been considered in our Q3 informal views to Charlie's points that he laid out in terms of the uncertainty and timing and extent of the U.S. recovery. If there is a significant recovery that we see in Q3, we would see that come through on our results as well.
Your next question comes from Aaron Rakers from Wells Fargo.
Yeah. Thanks for taking the question. I have two as well. The first question, I think this is the first time you've actually, in the reported results, disclosed the RPO balance, and when I look at that balance at $956 million, up about 24% year-over-year, what to me stands out actually is the expansion that you're seeing above the deferred line. That being up over 40%, can you just help us unpack what exactly sits in the RPO balance that's not in deferred, and how we should think about that kind of translating to revenue going forward?
Yeah. Absolutely. When we think about the expansion over deferred, especially sequentially throughout the last several quarters, that's really due to the momentum that we're seeing from a unified subscription business. That's really the primary driver of that. Before that, we may have some integrated sales of solutions that are on bill that would be part of the RPO balance that would not be in deferred revenue. As we see the sequential increases over the last several quarters, that's really being driven by unified subscription momentum.
Okay, that's helpful. Then just as a second question, you talked a little bit about now that having the second generation of the C-series product with QLC in the market. I believe when that was launched, there was a lot of discussion about that being just a natural expansion of opportunity for you guys. Can you talk a little bit about what you're seeing in terms of the C-series product and how you're seeing that positioned or leveraged relative to your traditional FlashArray systems and the TAM expansion that you're actually starting to see?
You bet. FlashArray//C continues to be one of the fastest product launches we've ever had. Now this second generation is not only 100% QLC, but even less expensive because of that. We believe it's actually less expensive than hybrid arrays. Now you can get an all-flash array with all-flash performance at a lower price than hybrid arrays. It's a unique product in the market. Not only has no other vendor come up with a competitive product, no other vendor's come up with a competitive announcement, which after nine months of the first generation being in the market is really quite remarkable.
Your next question comes from Tim Long from Barclays.
Thank you. Just the first one, if I could just talk a little bit about competition, gross margins, any impacts there. Obviously still pretty strong product gross margin, but down a little bit from last quarter, so just talk a little bit about that. It seems like in the guidance, it's kind of staying around these levels. I have a follow-up.
Thanks, Tim. I'm going to start on the first part of the question around competition and let Kevan handle the gross margin side. Our win rates have stayed about the same, at bats pretty much where we would like. Of course, we'd always like to see more, but about where we'd like to see. The competition, I would say, is generally consistent with prior quarters. I will say that customers have been perhaps a bit more demanding in the COVID period, we're seeing a little bit of that. I'm going to let Kevan handle the gross margin question.
Yeah, thanks, Charlie. Just to reiterate what Charlie indicated, our win rates have been solid and consistent even compared to pre-COVID. That was a great signal for us as we look at it from the competitive landscape. Back to gross margins and product gross margins, we really do continue to be pleased with our gross margin performance, which is in line with our long-term view and really best in industry. Gross margins were year-over-year relatively consistent. We did see some movement as you suggested sequentially, Tim. I would attribute that to really kind of two factors. One is growth of our international business was representing a higher proportion of our sales, and that was a factor in this quarter as our international business traditionally has a little bit lower product gross margins.
There was also some larger opportunities we saw during this quarter where we made an investment in terms of pricing. These are opportunities where we're very excited about the long-term opportunities, including follow-on purchases and commits from these customers.
Okay, great. Thanks. Just follow-up, you talked about kind of the vertical mix with small commercial accounts being a little bit more challenging. Just talk a little bit, I think there's been a directive of the company to push more into the large enterprise. Can you discuss a little bit how maybe this economic situation might accelerate that move and where is Pure with further penetrating the larger enterprise accounts? Thank you.
Your question is right on. We did see, obviously, both at the beginning of the COVID-19 period and continuing stronger results in the enterprise accounts. On one hand, it's been very reassuring to us that not only has it been in existing enterprises where they've brought us in further into their infrastructure, but even winning new large enterprises with large first-time sales into the large enterprise. I believe we've now become the safe choice in many ways even for large enterprise. Commercial is struggling. I think that's well known throughout all of the IT industry that commercial accounts are having a harder time in the COVID-19 environment, and that is, of course, causing us to shift how we focus our sales team's attention with shifting more resources into larger enterprise, and for the time being managing commercial with the appropriate amount of sellers and support.
Your next question comes from Karl Ackerman from Cowen.
Hey, good afternoon. I hope you're healthy and avoiding the fume of wildfire smoke surrounding the Bay Area. Two questions, if I may. You did very well internationally this quarter. I was hoping you could address the competitive environment and whether bids have become more competitive. I ask because while your, I guess, primary competitor, EMC, has introduced a mid-range array that's well expected, Huawei recently also introduced OceanStor arrays. The U.S. Department of Commerce, I think, has severely restricted that company's access to silicon. If you could address the puts and takes in your ability to perhaps gain share in Asia going forward, that would be helpful.
Sure. As you may know, our sales in India and China and even South America are a relatively small portion of our overall sales, and that tends to be where Huawei has its greatest strength. We do see Huawei, but we don't see them a lot in Western Europe. They have crept up a little bit more over the years, but still a relatively small amount of our engagement is with them. The majority of our engagement continues to be with Dell. Frankly, our win rates against Dell continue to be very strong overall. You ask about the new PowerStore. Honestly, I did expect to see them much more often, or PowerStore much more often than we have. Honestly, we see PowerMax much more often than we see PowerStore.
PowerMax is usually brought in as a last gasp by Dell when they're losing the account to us on extra discount. PowerStore, we think, actually continues to be a great opportunity for us because Dell has effectively said we have to replace four products in the field. It's yet another forklift upgrade by them. It's not a good time to be introducing a 1.0 product, which is what it is. Whenever a customer now is running up against the end of sale of those other four products, we can claim to be, and we are the safe bet for them.
With Evergreen, which we introduced with our first product six or seven years ago, customers know they'll never have to do a forklift upgrade again, and that's been proven over six generations. Dell, they are our biggest competitor, but we feel very confident in terms of our positioning against them.
That's very helpful. For my follow-up, if I may, there's been much discussion on the growth of how distributed storage architectures from edge computing should drive significant opportunity in object-based storage software and hardware development. How do you see your role evolving with object-based storage, particularly in software and with your FlashBlade offering as edge computing evolves over the next few years? How does that influence your strategic planning for augmenting your Pure as-a-Service offerings around software? Thank you.
Yeah. That's a really interesting area, and of course, an up-and-coming one that's very important. First of all, we do believe in the container world. We believe that's going to be a very strong new set of implementations and changes that are going to be going into the entire virtualization environment. Of course, there are going to be applications that are developed directly on top of a container environment. We feel like we're well-placed with the FlashBlade to be able to support those very high-performance, very needy container environments with respect to being able to get high speed of object in particular. In addition to that, there'll be many customers that want to transition their existing application environments over to containers to make them more portable, more resilient. For them, we have our Pure Service Orchestrator, which is now in place with hundreds of customers.
It enables those customers to use their existing storage environment in any one of our products, and even with our Cloud Block Store, with containerized applications that they create from their existing environments. Again, it allows them to operate it on our unified subscription and so forth. It's obviously a very new space, but we feel like we're innovating in the right path for those customers that are going to be increasingly developing on containers.
Yeah. This is Matt Kixmoeller . I'll just add on specific to your question on the object part of it. When we developed FlashBlade, four-plus years ago now, we made a bet to make it a unified file and object platform. Frankly, at the time, people looked at that and said, "Object, that's the protocol people usually use for low-end, low-performance, low-cost storage. What's the reason for an all-flash object store?" The reason has really been cloud-native and modern applications that are increasingly using object as their primary storage. Just a great part of our FlashBlade business has been the growth of object. As you brought in the edge architectures, we very commonly see data created at the edge, but then centralized for analytics.
That ability to have an on-prem centralized really fast object store for analytics of data and IoT-type deployments is a key use case, and one we expect will keep growing.
Just to give you a sense of how far advanced we are, Pure Service Orchestrator just had a more recent release where we're actually the first to support the latest version of the CSI container storage interface put out in Kubernetes. We're tracking this very closely. Both object and containers are a core area of focus for us.
Your next question comes from Wamsi Mohan from Bank of America.
Hi, thanks for taking my questions. It's Ruplu filling in for Wamsi today. I was just wondering if you can help us bridge the expected sequential decline in operating margins between fiscal 2Q and 3Q. What are the puts and takes there? It looks like it's about a 480 basis points decline. Any color there would be helpful.
Thank you. First of all, I'll say that it is our intention and our expectation that the company will show an operating profit for the year. That's the focus that we are operating on. At the same time as we stated at the very beginning of the crisis, we intend to continue to invest in our customers, our support, and most particularly in our innovation capability and in our products. I believe what Alan Greenspan once said, which is that the one thing you know about all recessions is that they all end. We believe that we're going to exit this recession in a position to be able to re-accelerate once we come out of it, and we think it's going to be technology-led. Customers will respond and respect those vendors that continue to invest during the downturn.
Okay, thanks for that, Charlie. Just for my follow-up, last quarter, you launched Purity//FB 3.0 for FlashBlade. How has the reception been? Has that helped you get incremental customers? If you can just comment on how bookings are trending currently in the third quarter. Thanks.
Yeah. I'll start with the FlashBlade 3.0. It's already deployed on literally hundreds of arrays, so it's been a very fast uptake of the 3.0. It's been really notable how many customers have deployed the fast file and object replication, they've done it for a number of different use cases, data protection, excuse me, disaster recovery. They've done it between both on-prem and public cloud sites. I think illustrative is what we just did with Cohesity. We really have designed a system with them, but we've also added additional capabilities to our product to add additional security and features with respect to ransomware, so that customers can not only detect ransomware and protect themselves against it, but recover very rapidly, such as within an hour after a ransomware attack.
The strength, of course, of FlashBlade, and especially so with the 3.0 release, is that it is unified for both fast file and object. The big use cases are big data and analytics, log analytics, machine learning, as we've said in the past, but increasingly, especially with the new features, chip design, genomics, geophysical modeling, so all of the, as you might imagine, the high-performance use cases. Lastly, what I'll mention is it's being increasingly used for mixed use cases, which is something very different than in the past. In other words, it'll be used by some customers for analytics and at the same time, rapid recovery and ransomware protection, as well as just large-scale file repositories all at the same time. It can do that just because of the performance and the scale of the product.
Specific to Q3 in terms of current views, any of the views that we've seen early days really were part of what we've shared in our prepared remarks and how we're looking at Q3 in terms of our internal views and informal guide. That also plays into what we're seeing on pipeline in terms of increasing pipeline build sequentially from what we saw in Q2.
Your next question comes from Nehal Chokshi from Northland.
Thank you. Good to see continued traction with overall bookings growth. It looks like you had about $28 million in unbilled contract bookings. I think all that is associated with the Cloud Block Store and Pure as-a-Service. Can you give us a sense as to how it's split up between those two, though?
We really look at that, Nehal, as a unified subscription, because that's how we sell it, that's how we go to market. When we look at our subscription services as a category, you really have two major categories. One being Evergreen, which has been out there for some time and is still growing at an accelerated rate, and the other one is our unified subscription. We don't track, nor do we talk about it from a public standpoint, the breakout of our unified subscription, given that our selling motion and how customers are utilizing it both on-prem and in the cloud, that doesn't make a lot of sense for us.
Right. Okay. Your current view basically implies that there's going to be a pretty significant step-down in the year-over-year growth of product revenue. If you look out at the various companies that have a hardware element, that doesn't at least come as a surprise to me. Thank you for providing that view. I think that's going to prove to be unique, but I'm going to push you a little bit further here. Do you have a view on when on-premise hardware bottoms in terms of their year-over-year trajectory?
It's hard to say, but we do think that as the economy improves, you'll see. Let me phrase this another way. I think it's very clear now that the dominant view of enterprise is that their future is hybrid. That is some combination of on-prem and in the cloud. Really what they want to do is to unify that, to be able to create an environment where that choice for them is more economic than it is a decision about technologies. Where they can negotiate both with on-prem vendors as well as with cloud vendors to get the best possible economic and performance as well as full application and services position that they can possibly be in. We're seeing a very strong uptake of the hybrid cloud idea. What that really says is, your question really goes to when does IT spending start to really recover?
I think it depends a lot upon the trajectory of the pandemic in the U.S., and I would expect that when we start to see the economy recover, that is, GDP start to pick up and IT spending start to free up, that we'll see a recovery, and as you phrased it, a bottoming out of on-prem equipment spend.
Your next question comes from Erik Suppiger from JMP Securities.
Thanks for taking the question. First off, you had noted the commercial market soft. Can you just remind us h ow much contribution you have from commercial accounts and how you size commercial accounts. Secondly, you have a number of new product cycles. I'd be curious to know how you size the opportunity for the unified services versus the size of the opportunity for your FlashArray//C. How do you see those if you look out, say, three to five years?
Yeah. Well, of course, one always expects the new products to grow faster than the company overall. As we mentioned, FlashArray//C has had a huge start to it. We expect that to continue for some time because it extends into a large market, or because it's part of a very large market that no one has participated in before. If we look at FlashRecover, data protection is an $8 billion market, and we're just getting started in that. If you look at our new release, which we just released in the last week of our last quarter, which is file services on FlashArray//C, standard general purpose file storage is a market that we haven't participated in at all, and again, is a multi-billion dollar market.
I think as we look forward three to four years, if we have the kind of success in those products that we individually had in FlashBlade over the same three to four-year period, we're talking well over $1 billion, and close to $2 billion or more. We just see a great upside in the portfolio overall.
Yeah. One other data point I might just add, if you look at the overall enterprise storage market, we're still in a zone where more disk is sold than flash. Flash has obviously come in and eroded all of the high end of the use cases. There's still a lot of hybrid arrays that are sold out there that are a little bit of flash and a lot of disk on the back end. One of the unique things now with FlashArray//C, when we first launched it, we talked about how it got in the neighborhood of hybrid arrays. We now believe it's substantially less expensive to deploy FlashArray//C than a hybrid array, about 30% cheaper.
As we talk to our larger scale enterprise customers, it's just becoming a no-brainer to look beyond the Tier 1 and now look at their Tier 2 franchises that used to really have hybrid arrays to have the final transition to flash happen.
Just to answer your question on enterprise. We talk about from a new customer, total customers, our total customer base, about, what, 45% of those are Fortune 500. I think that's a good way to look at it. Bookings as a total share for enterprise would be north of that, generally is a good way to think about that. Obviously, you would still have commercial and then public sector with Fed and SLED.
Actually, just to make sure there's no confusion, we're in about 45% of the Fortune 500.
That's right.
Yeah. Yeah.
As a percentage of share of bookings, it's a good way to think about it, north of 45%.
Yeah. Maybe one final thing I'll mention. I think often we're asked how big the flash market is, Pure from the early days has said, "Look, don't define us in the all-flash market." Define us in the enterprise storage market as a whole. We've now talked really about three key areas that I think when you ask most people in the market, they'd say, "No, that's still disk." Where we've built substantial businesses in flash. One is in object storage, one is in backup and recovery, and now Tier 2 applications. So I think we're proving that we can really push flash into broad part of the market that people assumed was really the disk market previously.
Very good. Thank you.
Your next question comes from Mehdi Hosseini from Susquehanna.
Yes. Thanks for taking my question. I actually have a follow-up to your very last statement. When I look at the backup and recovery, it's about $ 1 billion of business, 8% of external storage. The hybrid is about a half of the external storage market. In that context, my question to you is, when you announced the agreement with Cohesity, is that aimed at displacing the backup recovery with FlashArray, or are you expecting incremental market opportunity? Back to hybrid, if half of the external storage is hybrid, how quickly do you think we're going to get to a third or less? Is that a matter of a year or two and improving global economy, or is this going to be a slow death? I have a follow-up.
Yeah. Let me start with the discussion on the Cohesity partnership. I'll turn it over to Kix on the specific market sizes. On the Cohesity product that we're putting out, we see it as enabling. Think of it as an appliance that is pre-configured, easy to set up. Customers can install it in less than a couple of hours, and it immediately provides them with a rapid recovery solution to protect them from any data outage, and in particular against ransomware attacks, et cetera. We really view that as perhaps the first of what we would call Pure Validated Designs, where we simplify the task of a variety of different storage application environments for our customers. This one being a ransomware attack, and offered, in this case, as an appliance, but perhaps in the future with other partners and other solutions provided by the channel as an integrated solution.
Yeah. Just to put some numbers around that, because I'm not sure I agree with the one you threw out there. The overall backup and recovery market is about $8 billion, and that goes down to about half software and half hardware solutions. On the hardware side, that was traditionally disk-based backup appliances, historically like Data Domain. We're really going after that whole market with this partnership because we can present an opportunity to really modernize the entire backup and recovery spend to modernize the software and the hardware side of things. We believe it's a substantial opportunity there to go after backup and recovery, and particularly drive fast recovery there.
In regards to your question around the hybrid storage environment overall, look, the hybrid market for hybrid arrays is pretty broad, from very large-scale enterprises who deploy them in mass for their Tier 2 franchises, all the way down to people who spend $5K, $10K, $15K for the only array they own. That latter part is not a market we're interested in going after. We believe for large enterprises who historically used hybrid arrays as their Tier 2 platform, that's really the sweet spot for FlashArray//C, and we think it's increasingly clear that when you're a large-scale enterprise, it's just too expensive to run disk anymore. You just look at the operational pain and the overhead and the complexity and the reliability issues disk introduces, it's just time to go all flash.
Got it. Thanks for the clarification. Just a quick follow-up. Last quarter, you highlighted FlashBlade, and actually, to my surprise, you attach a $55 million of revenue you recognized in the April quarter. Anything you can share with us regarding July quarter?
No, actually, that was a sizing we provided last quarter in connection with total sales, which is a little bit different than revenue. We haven't updated that sizing. We were very pleased with what we saw in terms of FlashBlade performance.
Your next question comes from Eric Martinuzzi from Lake Street.
Yeah. I wanted to explicitly address the Q3 gross margin assumption, given roughly flat sequentially on the rest. You guys have talked about a long-term range between 65% and 70%, but I'm wondering why Q3 gross margin would be substantially different from where we finished up Q2, given strength in international and continued growth in subscription.
We did not give any formal views or informal views around gross margin. We're pleased, as you mentioned, with our performance on gross margin. I wouldn't see anything unusual as I think about our gross margin performance in Q3. I did talk about our views of operating margin for Q3, and that might be what you're referring to.
I was just kind of back. You said the bulk of the delta between the EBIT was on the OpEx side, and I was trying to get you to explicitly talk about the GM, but I got my question answered. The headcount that you saw increase there, roughly 200 between the end of Q1 and Q2, is the impact in the OpEx going to be a full quarter of the 3,700 employees, or do you plan to add additional heads in Q3?
I think there'll be a mix in terms of how those costs come through for Q3. In terms of our hiring in the second half, still looking to have some incremental hires really focused on the innovation front, and will be less so than what we saw in the first half in terms of total hiring of net hiring in terms of increase of total headcount.
Your next question comes from Katy Huberty from Morgan Stanley.
Yes, thank you. Good afternoon. Sorry, I jumped on a little bit late. I know this has been asked a couple of times, but would love for you to double-click a bit more on the below the normal seasonality revenue trend in October. Specifically, you have significant exposure to cloud customers, which is a great secular growth market. Do you feel like there was some pull forward of demand from those customers, and so that pipeline is a little bit less mature, drier than it typically would be? Is there a lagged effect from the economic declines that we saw in the calendar's second quarter? Just sort of some of the factors that you think are playing into the much weaker than seasonal outlook for the calendar 3Q or the October quarter.
Yeah, Katy, thank you. Much more the second item that you mentioned, we think, which is a delayed effect from the lowered Q2 performance by U.S. across the board, just kind of being reflected then in Q3 actual numbers. Actually, whatever acceleration we might have had from cloud and large enterprise in Q1, I don't feel that it was of such a substantial nature that it's really affecting latter quarters.
Okay. Thank you. Just secondly, can you talk about, is there any makeup of customers that are driving the really strong 37% subscription growth? Is it skewed to certain regions? Are there particular verticals that are early adopters? Is there a trend in terms of customer size where you're seeing the demand, or is it truly just broad-based across the customer set?
Well, the trend is that it actually is going to broad-based. It started out with being dominated by one or two customers a quarter, very large customers a quarter dominating the revenue that we would get in a PAS deal. Now it is much more balanced across all million-dollar-plus customers, but just much larger numbers of them. That's very good to see, obviously, going to more broad-based and larger average customer size.
Yeah, I'd actually split it out between broad-based, both for the Evergreen. Charlie. We're getting huge interest, and continued interest in Evergreen. Our strong renewal rates are definitely contributing to that. That's broad-based. What we're seeing on the unified subscription is also broad-based with a lot of increase on net new logos.
Yes.
Yeah.
Your next question comes from Steven Fox from Fox Advisors.
Hi, good afternoon. Thanks for taking my question. Just one quick question on slide five. I'm just trying to understand, the discrepancy between how incremental purchases grow with your top 25 customers versus the overall number, which is only like $2 after the first 24 months. Is that macro-related, or is there some other trends in there that we should be aware of? Thank you very much.
No. This has been pretty consistent with what we've shown in the past. Nothing new to highlight on that front.
Okay. Thank you. If I can just squeeze in another since that one was, I guess pretty obvious. Just on vendor discounting and vendor financing that's picked up. How is that impacting either closing deals or how you have to price deals overall? Thank you.
As you may well know, we don't provide ourselves vendor financing. We provide Pure- as- a- Service that provides pay-as-you-go consumption model, which in most cases is a less expensive, and more resilient purchase capability or purchasing option for our customers because they only need to pay for what they use when they use it. We have found that to be a very competitive, and in many ways, a superior offering to vendor financing of our own gear. It's why you see many of our competitors attempting to come up with consumption type of services on their own. Given the limitations of their products, they're rarely able to do anything similar.
That was our last question at this time. I will turn the call back over to you, Charlie Giancarlo, for closing remarks.
I want to thank you all for taking the time to join us today. Pure, like many companies, we're very focused on how we can improve the experience of our customers and our employees. I do want to send my sympathies out to all of our West Coast employees, many of whom are not just sheltered in place, but in some cases, packing up and ready to flee their homes from fires and smoke. I want to send my thoughts and prayers out to all of them and everybody on the West Coast that are suffering from fires, and frankly, also many of our suppliers that are in the eye or at least in the bullseye of the upcoming hurricanes. We continue to be there for you.
We continue, we believe that the investments that we make in our customers, our channels, and our products in this extremely difficult period is going to truly allow us to accelerate our growth when the global economies, country by country, start to recover. With that, let me ask you all to stay safe, stay socially connected, but physically distant, and we look forward to speaking with you next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.