Earnings Call: Q2 2021

Aug 25, 2020

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 speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nicole Noutsios, Investor Relations. Thank you. Please go ahead. Welcome to Pure Storage Second Quarter Fiscal 2021 Earnings Call. My name is Nicole Noutsios, Investor Relations at Pure. Joining me today are our CEO, Charlie Giancarlo and our CFO, Kevin Chrysler and our VP of Strategy, Matt Tixmuller. 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-nineteen 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 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 and 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 a pure storage, Investor Relations website is being recorded for playback purposes. An archive of the webcast will be available on the IRID 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 The current environment continues to we are helping our customers navigate the crisis and accelerate their digital transformation during this difficult 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 fully dynamic to the of any cloud infrastructure is reliability and customers become even more acutely aware of this in times of crisis. I am pleased total availability across our installed base of tens of 1000 of arrays, including during all upgrade cycles which is 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 and with our renowned simplicity and cloud based pure 1 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 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 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 re planning for many organizations. Companies paused to consider the future and reassess their technology direction, aligning it fluid, we believe the second half of the year will see businesses return to and even accelerate digital transformation. The growth and strength we of increased demands for our solutions We continue to dramatically outpace our industry in innovation, and I am excited to share several technology announcements, expanded partnership and portfolio and subscription services momentum with you. Today, we announced the 2nd generation of FlashArray C the industry's 1st 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 disc arrays. With FlashArray C for capacity oriented workloads, FlashArrayX 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, which allows customers to further simplify and consolidate their general purpose file needs on the same platform. 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 ref define 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, our 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 elastic search and rapid restore environments onto a single unified, fast file and object platform. This quarter, the National Center for Missing And Exploded Children selected FlashBlade for its high performance replicated file storage, to expand and enhance their analysis 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. 2 weeks ago, we announced a partnership with co City to introduce pure Flash Recovery. This is the 1st fully integrated all flash Rapid Recovery solution on the market, and has been strong for an integrated solution 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 including Telstra, Dizeon Managed Desktop as a Service, bidFX, and AROenergy These customers are choosing our unified subscription because it is a true enterprise class utility that delivers ultimate flexibility for with the ability to 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 more adoption of our pure service orchestrator software, which enables automated, faithful 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 upon exiting the global crisis, We are the one company driving change in this $50,000,000,000 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 Kevin. Thank you, Charlie, and 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 403,700,000, Product revenue declined 9% year over year, while subscription services momentum continues, as revenue grew 30 7% 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 United States created by COVID-nineteen. Total revenue in the United States during $2,000,000, declining 4% year over year, and total international revenue grew 20% year over year to $122,000,000 during Q2. Given the ongoing macroeconomic uncertainty that persists, I will continue to provide additional color around months of the year grew 8.3% year over year. And during Q2, declined 3.3% year over year, due to the headwinds we faced in the United States. Global channel source sales continue to represent a growing and meaningful percentage of our total sales. We are very pleased Both average deal size for new customers and FlashBlade 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 at 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 $11,000,000 compared to a non GAAP operating loss of approximately $3,000,000 during Q2 of the prior year. Non GAAP net income during Q2 was $18,000,000 and non GAAP net income per share was 0 point 0 6 dollars. Non GAAP net income in Q2 of the prior year was $3,000,000 and non GAAP net income per share was 0 point 0 1 dollars. Weighted average shares used for the non GAAP net earnings per share calculation was 283,000,000 shares in Q2, and 271,000,000 shares in the prior year. For Q2 compared to $49,000,000 in the prior year, and free cash flows of 26,000,000 compared to $20,000,000 in the prior year. Total cash and investments at the end of Q2 remained very healthy at 1.29000000000 Total deferred revenue for Q2 was $725,000,000 compared to $706,000,000 at the end of Q1 and $607,000,000 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 $1,000,000,000 at 956,000,000 This compares to $912,000,000 at the end of Q1 and $770,000,000 at the end of Q2 of the prior year. During Q2, we returned $20,000,000 to shareholders through share repurchases of 1,180,000 shares, approximately $45,000,000 remains for our share repurchase authorization. Total headcount at the end of the quarter was approximately 3700 employees, compared to approximately 3500 employees at the end of Q1 and 3300 employees at the end of Q2 of the prior year. Now moving to guidance. Core fundamentals of our business 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-nineteen 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 However, a greater proportion of the opportunities And then 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 incremental resource additions will slow during the second half of the year and will be concentrated on continued innovation With our current views To summarize, we are continuing to innovate and successfully navigate 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 Your first question comes from Benjalmbora from JP Morgan. Hey, guys. Thanks for taking my question. Could you, can I double quick 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, Benjamin. This is Charlie. Good to hear your voice. We had, yes, you heard in the fair remarks. Really an excellent international quarter. And I think it reflects what happens when economies recover after the Corona, after a Corona lock down. So that we felt very strong about that. And we also had very strong, unified, subscription and overall subscription revenues, very positive there. On a relative basis, cloud and enterprise were much stronger. But of course, with the U. S. Being down generally, especially in the area of of commercial, right? Commercial and net new logos, given that that was down that, of course, depressed, overall revenues. But I wouldn't say that it was outside of commercial, that it was centered on any particular area. It was really 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 have a strong FlashBlade, FlashBlade sales growth. Both across the world, but again, especially in Europe, and the new products are doing well. So the balance pretty much what we'd expect, but we did see lackluster U. S. Understood. Thank you for that. And Kevin, on the guidance, seems like a decline of about 6% if I'm at 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? No, I wouldn't call out a factor on the headwind for 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. And then just the fact that that's earlier stage for us really had us come in with some in thermal views of where we had 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? Absolutely. The vast majority is, remains on prem because the cloud is a relatively new business, whereas Evergreen, of course, has been since our inception. And the way that, the way that subscription operates as you build revenue, it takes time to actually build to build revenue in it. We're very pleased with the adoption of the cloud of the cloud portion of the revenue. And of course, I will say that pure as a service which includes both the, 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. So we're very pleased with that, but there are a lot 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. And then just as a follow-up, I wanted to see if you could talk a little bit about the linearity or the patterns you saw in the month of May, June, July, versus what you've seen historically? Yes. 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. And as a result of that tailwind dissipating in Q2, we saw more normalized linearity. Your next question comes from Idai Kidron from Oppenheimer. I guess I want to drill into this last point of the guidance and I guess, the early cycle of the pipeline is 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 2, you over harvested the installed 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? Yes. Yes, Tay, 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 Kevin mentioned, tailwinds did wins in Q1. We did kind of expect them to continue through potentially May, but that did not occur to be clear. Also, you have to understand that, from a Salesforce perspective, they go from, the way selling that we and that everyone has been selling for years to where everybody is now inside sales. So completely new way of selling it. For customers, a new way of buying, but I think the majority, I said this in my prepared remarks, the majority of the their digital transformation and what's important to them. And 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 a the recessionary environment, when they come out of the pandemic environment in the lockdown, then they start to reopen their purse strings. And we saw a tremendous quarter in Europe. And 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. Well, that's why it's hard for me to reconcile. The comments, I mean, if you saw what you signed the 2nd quarter international properties, why wouldn't we not see death in the U. S? Around the third quarter, where all a lot of the opening has happened already in the May, June time frame. How much of, in any given quarter and how much 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, why, why, why guys flat? Why should that number not be higher? Yes. Well, actually, let me just challenge you a little bit. I mean, we've not seen, we've seen reopening and then re closing in the U. S. Over the last a couple of months. And if you just consider the infection rates and the amount of lockdown that's taken place, there's no it's a very different picture. Today in the U. S. Than it is in Europe. And so we are still seeing the effects of a muted U. S. Economic response currently. But I'll let Kevin handle the second part of that question. On net new logos for customers, as I said in my prepared remarks, it actually is quite substantial for us. And even in this quarter, the amount of bookings really generated from net new logos was over 20%, which we were quite pleased with. And 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 you laid out in terms of the uncertainty and timing and extent of the U. S. Recovery. But 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 Lakers from Wells Fargo. Yes, thanks for taking the question. I have 2 as well. The first question, I just I think the first time you've actually in the reported results disclosed the RPO balance. And when I look at that balance at $956,000,000, up about 24% year over year, what to me stands out actually is the expansion that you're seeing above the deferred line. And so 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? Yes, 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 And then before that, we may have some integrated sales of solutions that are unbilled that would be part of the RPO balance that would not be in deferred revenue. But as we see the sequential increases over the last several quarters, that's really being driven by unified subscription momentum. Okay. That's helpful. And 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. So 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 additional FlashArray systems and the PAM expansion that you're actually starting to see? You bet. So, Flasher AC continues to be one of the fastest product launches we've ever had. And now the 2nd generation is not only a high percent QLC, but even less expensive because of that. And so we believe it's actually less expensive than hybrid arrays. So now you can get an all flash array with all flash performance, at a lower price than, than hybrid arrays. So and it's a unique product in the market. Not only has no other vendor come up with a competitive product. No other vendors come up with a competitive announcement. Which after 9 months of the 1st generation being in the market is really quite remarkable. Your next question comes from Tim Long from Barclays. 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 staying around these levels? And then I have a follow-up. Yes. Thanks, Tim. I'm going to start with the on the first part of the question around competition. Let Kevin handled the gross margin side. Our win rates have stayed about the same. At that pretty much where we would like, of course, we'd always like to see more, but about where we'd like to see. So the competition, I would think, or sorry, 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. So we're seeing a little bit of that, but on the I'm going to let Kevin handled the gross margin question. Yes, thanks, Charlie. And just to reiterate what Charlie indicated, our win rates have been solid and consistent, even compared to pre COVID. So 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 2 factors. 1 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. And 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. And then just a follow-up, you talked about kind of the vertical mix, which, small commercial accounts being low 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 it's pure with further penetrating the larger enterprise accounts? Thank you. Yes. No, your question is right on. We did see obviously both at the beginning COVID period and continuing stronger results in the enterprise accounts has been very on the one hand, it's been very reassuring to us structure, but even winning new large enterprises with large first time sales into the large enterprise. So I believe we've now become the safe choice in many ways, even for large enterprise. But commercial is struggling as a I think that's well known throughout all of the IT industry that commercial accounts are having a harder time in the COVID environment. And that is, of course, causing us to shift how we focus our sales team's attention, with putting more shifting more resources into larger enterprise. And for the time being, managing commercial with the appropriate amount far, of sellers and support. Your next question comes from Carl Ackerman from Cowen. Hey, good afternoon. And, I hope you're healthy in avoiding the area. Two questions, if I may. You did very well internationally this quarter. Was hoping you could address the competitive environment and whether bids, have become more competitive. I asked because while, I guess, primary competitor EMC has introduced a mid range array, that's well expected, but Huawei recently also introduced ocean store arrays. But the U. S. Department of Commerce, I think, has severely to that company's access to silicon. So 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, outside, we, 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, where Huawei has its greatest strength. We don't see we do see Huawei, but we don't see them a lot in Western Europe. We 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. And frankly, our win rates against Dell continue to be very strong overall. You ask about the new power store. Honestly, I would have expect I did expect to see them much more often, or a power store much more often than we have. Honestly, we see PowerMax much more often then we see Power Store. And PowerMax is usually brought in as the last gasp by Dell when they're losing the account to us on extra out. So it's a power store, we think, is actually continues to be a great opportunity for us because Dell has effectively said we have to replace 4 products in the field. It's a fork yet another forklift upgrade by them. It's not a good time to be introducing a one point product, which is what it is. And 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 debt for them. So, with our ever Evergreen, which we introduced with our first product, 6 or 7 years ago, customers know they'll never have to do a forklift upgrade again, and that's been proven over generation. So, that was just they are our biggest competitor, but we feel very confident in terms of our positioning against That's very helpful. From 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 storage, particularly in software and with your flashblade offerings, as edge computing evolves over next few years? And I guess how does that influence your strategic planning for augmenting your Azure service offerings around software? Yes, it's 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 container world, and 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, locations that are developed directly on top of a container environment. And we feel like we're well placed with the fly blade to be able to to being able to get high speed of, object in particular. But 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. And for them, we have our peer service orchestrator, which is now in place, with hundreds of customers. It enables those customers to use their existing storage environment, with, in any one of our products. And even with our cloud block store, with containerized applications that they, that they create from their existing environments. And again, it allows them to operate it on our unified subscription and so forth. So we feel like we're it's obviously customers that are going to be increasingly developing hot containers. This is Kix. Maybe I'll just add on a specific to your question on the object part of it. When we developed FlashBlade 4 plus years ago now, we made a bet to make it a unified file and object platform. And frankly at the time, people looked at that and said, objects, that's the protocol people usually use for low end, low performance, low cost storage. What's the reason for an all flash objects store? But the reason has really been cloud native and modern applications that are increasingly using objects as their primary storage. And so just a great part of our FlashBlade business has been the growth of objects And as you brought in the edge architectures, we very commonly see data created at the edge, but then centralized for an analytic and 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 when we expect we'll keep growing. And 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 by, in Kubernetes. So 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 I was just wondering if you can help us bridge the expected sequential decline in operating margins between fiscal 2Q and you. 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. We, we continue to invest well, 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. And so that's the focus that we are operating on. At the same time, as we've 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. Because I believe what Alan Greenspan once said, which is that the one thing you know about all recessions is that they all end. And we believe that we're going to exit this recession in a position to be able to reaccelerate once we come out of it. And we think it's going to be technology led and customers will respond and respect those vendors that continue to invest during the downturn. Okay. Thanks for that, Charlie. And just for my follow-up, last quarter you launched PRD 3.0 for FlashBlade. I mean, how has the reception been? Has that helped you get incremental customers? And if you can just comment on, how bookings are trending currently in the the third quarter? Thanks. Yes. So, I'll start with the FlashBlade 3.0. Is really it's already deployed on literally 100s of arrays. So it's been a very fast uptake of the 3.0. And it's been really notable how many customers have deployed, the fast file and object replication. And they've done it for a number of different use cases, data protect a disaster recovery, and they've done it between both on prem and public cloud sites. So the and I think illustrative is what we just did with cohesity. We really have designed 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. So what the strength, of course, of FlashBlade and especially so with the 3.0 release is that it is unified for both a fast file and object. The big use cases are big data 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, And then 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 could be it will 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. And it can do that just because of the performance and the scale of the product. And then specific to Q3 in terms of current views, any of the views that we've seen early days really were part of what we shared in our prepared remarks and how we're looking at Q3 in terms of our internal views and informal guide, but that also plays into how 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 Chuxi from Northland. Open. Yes, thank you. So good to see continued traction with overall bookings growth. It looks like you had about $28,000,000 in unbilled contract bookings. So I think all that is associated with the cloud bookstore and Purace's service. Can you give us sense as to how it's booked out between those 2 though? We really look at that now 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 really 2 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. But we don't track to and nor do we talk about it from a public standpoint, the breakout of our unified subscription, given that our sell 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. And then 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. And if you look at, look out at the various companies that have a hardware element that doesn't at least come as a surprise to me. I guess, and thank you for providing that view. I think that's gonna proved 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, well, let me phrase this another way. 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. And 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 and where that they can negotiate both with 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. So we're seeing very strong uptake of the hybrid cloud idea. So what that really says is it's about Your question really goes to when those IT spending start to really recover. And I think it depends a lot upon the trajectory of the pandemic in the U. S. And I would expect that when we see the 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 phrase it, a bottoming out of on prem equipment. The spend. Your next question comes from Eric Siper from JMP Securities. Yes, thanks for taking the question. First off, you had noted the commercial market soft. Can you just remind us how much contribution you have from commercial accounts and how you size commercial accounts? And then secondly, you have a number of new product cycles I'd be curious to know how you kind of size the opportunity for the unified services versus the the size of the opportunity for your FlashArray C? I know they're very different products, but how do you see those if you look at say 3 to 5 years Yes. Well, of course, one always expects the new products to grow, faster than the company overall. As we've mentioned, FlashArray has had a huge, huge start to it. We expect that to continue to some time because it extends into a large market, or because it's part of a very large market that we didn't part that no one has participated in before. If we look at Flash Recovery, that's an 8 data protection is an $8,000,000,000 market, and we're just getting started in that. And then if you look at our new release, which we just released in the last week of our last quarter, which is file services on Flasher AC, standard general purpose file stores is a market that we haven't participated in at all. And again, is a multibillion dollar market. So I think as we look forward 3 to 4 years, if we have the kind of success in those products, that we individually had in FlashBlade over the same 3 to 4 year period, we're talking well over $1,000,000,000 and close to $2,000,000,000 or more. So it's a great we just see a great upside in the portfolio overall. 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 disc is sold than Flash. And Flash has obviously come in and eroded all of the high end of the use cases. But there's still a lot of hybrid arrays that are sold out there that are a little bit of flash and a lot of disc on the back end. One of the unique things now with FlashArray C, when we first launched it, we talked about how it got kind of in the neighborhood of hybrid arrays. We now believe it's substantially less expensive to deploy flasher AC than a hybrid array, about 30% cheaper. So as we talk to our larger scale enterprise customers, it's just becoming a no brainer to that 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 Appen. And then just to answer your question on enterprise, and we talk about from a new customer, total customers, our total customer base about 145 percent of those are fortune 500. And 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 that and then obviously you would still have a commercial and then public sector with Fed and SLED. I mean actually just to make sure there's no confusion, we're in about 45 of the Fortune 500. That's right. Rather than it's yes. But then as a percentage of share of bookings, it's a good way to think about it north of 45 percent. Maybe one final thing I'll mention. I think often we're asked how big the flash market is and 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. And we've now talked really about 3 key areas that I think when you ask most people in the market, they'd say, no, that's still disc. Where we've built substantial businesses in Flash. 1 is in object storage, 1 is in backup and recovery, and now Tier 2 applications. And so I think proving that we can really push flash into the broad part of the market that people assumed was really the disc market previously. Your next question comes Yes. Thanks for taking my question. I actually have a follow-up to your very last statement. When I look at that, the backorder recovery is about $1,000,000,000 of business, 8% of external storage. And then, the hybrid is about half of the external storage market. And in that context, my question to you is, When you announced the agreement with Cohessev, is that aimed at displace seeing the back of recovery with Treasury? Or are you expecting incremental market opportunity. And then 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 2 and an improving global economy, or is this going to be a slow debt? And I have a follow-up. Yes, let me start with the discussion on the cohesive partnership, and then I'll turn it over to on the specific market sizes. So 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 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, again, ransomware attacks, etcetera. We really view that as perhaps the 1st and pure 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 Ransomware attack and offered as a, in this case, as an appliance, but perhaps in the future with other with other partners and other solutions provided by the channel as an integrated solution. And then just to put some numbers around because I'm not sure I agree with the one you threw out there. The overall backup and recovery market is about $8,000,000,000 and that goes down to about half software and half hardware solutions. On the hardware side, that was traditionally disbased back of 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 we're on the hardware side of things. And so we believe it's a substantial opportunity there to go after backup and recovery and particularly drive fast recovery there. And 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 kind of Tier 2 franchises, all the way down to people who spend 5, 10, 15 K for the only array they own. That latter part is not a market we're interested in going after. But 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 disc introduces, it's just time to go off flash. Got it. Thanks for clarification. And just a quick follow-up Last quarter, you highlighted FlashBlade. And actually to my surprise, you attach a $55,000,000 of revenue you recognized in the April quarter. Anything you can share with us regarding July quarter? No. And actually, that was the sizing we provided last quarter in connection with total sales, which is a little bit different than revenue. But we haven't updated that sizing. But we were very pleased with what we saw in terms of FlashBlade performance. Your next question comes from Eric Martinuzzi from Lake Street. Yes, I wanted to explicitly address the Q3 gross margin assumption, given roughly flat sequentially on the res, you guys have talked about a long term range between 60 $5.70. But I'm wondering why, why Q3 gross margin would be substantially different from where we finished up Q3 to given strength in international and continued growth in subscription? And so we did 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. Yes. 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 be a full quarter of the $37,900 employees or do you plan to add additional heads in Q3? Yes, I think there'll be a mix in terms of how those costs come through for Q3. And then 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 you did would love for you to double click a bit more on the below the normal seasonality revenue trend in October? And 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 leg effect from the economic declines that we saw in the calendar second quarter? Just are some of the factors that you think are playing into the much weaker than seasonal outlook for the calendar 3Q with October quarter? Yes, Katy, thank you. Much more of 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 a lot of quarters. Okay. And then just secondly, can you talk about is there any make up 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? Like 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 1 or 2 customers a quarter, very large customers a quarter, dominating the revenue that we would get in a PAS deal. And now it is much more balanced across all $1,000,000 plus customers, but just much larger numbers of them. And so that was that's very good to see, obviously, going to more broad based, and larger average customer size. Yes, I'd actually split it out between broad based, both for the evergreen, Charlie, which we're getting huge interest and continued interest in Evergreen. And so our strong renewal rates are definitely contributing to that. That's broad based. And then what we're seeing on the unified subscription is broad based with a lot of increase on net new logos. Yes. Your next question comes from Steven Fox from Fox Advisors. Hi, good afternoon. Thanks for taking my question. Just on one quick question on Slide 5, 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 1st 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, and this has been pretty consistent with what we've shown in the past. So nothing new to highlight on that front. Okay, thank you. And then 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. Yes. As you may well know, we don't provide ourselves vendor financing. Instead, 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. And so we have found that to be a very competitive, and in many ways, a superior offering to vendor financing of our own gear. And it's why you see many of our competitors attempting to come up with consumption type of services on their own, but given the limitations of their products, they're rarely able to be able to do anything similar. And that was our last question. At this time, I will turn the call back over to Charlie Giancarlo for closing remarks. Thank you all for taking the time to 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. And I want to send my thoughts and prayers out to all of them and everybody in the west on the West Coast that are suffering from fires. And frankly, also many of our suppliers that are in the, in the eye or at least in the bulls eye of the upcoming hurricanes. So we continue to be there for you. We do believe we continue and 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 3 by country start to recover. So, with that, let me ask you all to stay safe, stay socially connected, but physically distant. And we look forward to Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.