Earnings Call: Q3 2020

Nov 21, 2019

Ladies and gentlemen, thank you for standing by and welcome to the Pure Storage Third Quarter Fiscal 2020 Earnings Conference Call. At this time Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Head of Investor Relations, Matt Danziger. Thank you. Please go ahead, sir. Thank you, and good afternoon. Welcome to the Pure Storage Third Quarter Fiscal 2020 Earnings Conference Call. Joining me today are our CEO, Charlie Giancarlo, our COO, Almond Ford, our Vice Chair, David Hatfield and our VP of Strategy, Matt Kixmuller. Before we begin, I would like to remind you that during this call management will make forward looking statements which are subject to various risks and uncertainties. These include statements regarding competitive industry and technology trends, our strategy, positioning and opportunity, our current and future products business and operations, including our operating model, growth prospects and revenue and margin guidance for future Any forward looking statements that we make are based on assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. As a discussion of various risks and uncertainties relating to our businesses contained in our filings with the SEC, and we refer you to these public filings. During this call, we will discuss non GAAP measures in talking about the company's performance and reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Pure Storage Investor Relations website is being recorded for playback purposes. An archive of the webcast will be available on the IR website for at least 45 days and it's the property of Pure Storage. With that, I'll turn the call over to our CEO, Charlie John Carlo. Thank you, Matt, and good afternoon, everyone. Thank you for joining us on today's and I will close with our guidance significantly faster than our major competitors accounted for the gap to global business environment as commented on by other large infrastructure suppliers. Despite these in quarter headwinds, TURE achieved all time high gross margins this quarter of 71.7% well above our guided range of 66% to 69%. Operating margin for the quarter was resiliency important changes to our leadership team at Pure. After almost 7 years, David Hatfield is starting a new chapter at Pure, transitioning device chair and serving as a strategic advisor to PURE reporting to me. Pat is moving into a role where he can leverage his passion. Focusing on delivering PURE's value and vision to new customers and partners globally. I'm very excited that Paul Mountford has joined PURE as Chief Operating Officer on November 4th. Paul was most recently CEO at Riverbed Technology, and earlier held the role to including sales, channels, alliances and marketing, as well as customer experience, including support and professional services. 3rd, we announced today that Kevin Chrysler will be joining PURE as our new CFO in early December. Most recently, Kevin was Senior Vice President of Finance and accounting officer at VMware. He will bring a wealth of experience both in finance and in building scale and has highly relevant industry experience. Prior to VMware, Kevin was a partner with KPMG, where he served both Multinational and emerging software and technology companies. He will participate in our next earnings call. These changes in additions to our team will set us up for an incredibly successful second decade. Turning to highlights from the quarter. We hosted our largest ever Accelerate user conference in Austin this past quarter. We introduced almost a dozen new products and services, which were which will power the next decade of PURE's innovation and growth. In Pure's 1st decade, we redefined what a modern data storage array looked like, fundamentally resetting the bar for the competitive landscape. Despite these advances, data storage still remains the least cloud like layer of technology in the data center. Delivering data storage in an enterprise is still an extraordinarily manual process, with storage arrays highly customized and dedicated to particular workloads. It is data that powers digital transformation. But data storage remains one of its biggest obstacles because of the limitations of today's thirty year old storage architecture. Pure is transforming storage to a modern, more cloud like model, helping our customers to run their operations as a true, automated, storage as a service cloud, delivering consistent data services seamlessly across on prem and public cloud infrastructure. PURE delivers this modern data experience through our products, solutions, and services built around 4 key tenets. First, we believe fast matters, whether we're helping customers launch rockets, detect real time threats, or compile code and push releases fast matters. When looking to deliver data for high performance applications or enabling multiple applications to access data, on one consistent platform, vast matters. We deliver solutions that push the boundaries on low with our new FlashArray with direct memory, high bandwidth for big data with our new twice as large FlashBlade. And greater efficiency with Organizations want to both transform their on prem operations to the cloud model and seamlessly link to the public cloud for IT agility. Customers also want a single, consistent data storage architecture for all clouds public and private. Cloud Block Store provides multi cloud consistent operations, including migration, test dev, disaster recovery, and protection for all applications. Our offering on AWS was made generally available this past quarter, and we recently previewed PureCloud, the Block Store on Microsoft Azure at the Microsoft Ignite conference. 3rd, is a core belief that simple is smart. As we all know, making things ridiculously complex is standard practice in IT. Making things simple is hard work. PURE has built a reputation for delivering products that manage themselves. And for those elements that don't, we leverage increasing intelligence from our pure 1 meta AI engine to deliver a self driving, self managing storage experience, preventing problems and enabling as a service automation. We are leveraging these capabilities to simplify the entire enterprise storage like a SaaS service in terms of continual upgrades and new functionality. With PURE's evergreen storage, every product a customer has bought in the past and every product they buy today will always be new and will constantly evolve towards an ever more modern data experience, all without service downtime or paying for the same storage twice. Pure is leading the industry in both delivering the modern data experience, as well as allowing customers to consume as a true 100 percent OpEx service. We have seen strong traction in adoption for PUREZA Service, formerly ES2. Signaling a trend from customers for this type of consumption model. Unlike other offerings in the market, Tour makes its entire portfolio available as a service. We have re imagined the box based enterprise storage environment as an integrated enterprise wide storage experience. We're delivering storage as a service to fuel our customer's digital transformation. Pure's modern data experience sets us up well to continue to grow Thanks, Charlie. We believe that our modern data experience is the way forward, enabling digital businesses to extract more value from their data while improving performance and reducing complexity and expense of managing infrastructure. Fierce's modern approach helps companies deliver on their most strategic initiatives empowering them to achieve outcomes that were not previously possible. Because of this, Pure is taking market share. And at our investor day, we shared that Pure was growing 10x faster than our closest competitor. Customers are being done a disservice by others in the industry who still require forklift upgrades and who are not innovating. While peers' customers benefit from our expanding technology portfolio, industry leading customer satisfaction, and differentiated evergreen ownership model. Jira is being chosen because we enable customers to modernize their existing applications and accelerate their adoption of multi cloud containers and real time analytics. Our focus on the cloud, enterprise, commercial and government segments continues to progress nicely. We finished the quarter with more than 7000 total customers, adding approximately 6 net new customers per day, equating to nearly 400 new customers in Q3. The government segment in particular continued to be a bright spot in Q3 with business doubling on a year to date basis. Turning to momentum in our portfolio. Our ability to make the modern data experience a reality for customers today and into the future has never been more evident. Our industry leading Pier 1 SAS platform makes it extremely easy for customers, to manage their hybrid cloud environments across our portfolio, including FlashArrayX, FlashArray, flashplay and cloud data services. Pure's simple and automated platform allows customers to consolidate their primary and secondary workloads, delivering faster access to more of their data at a much lower total cost of ownership. And is an ideal fit for next generation data analytics and rapid restore use cases. Following our announcement at Accelerate, we have seen the fastest growth In the quarter, ServiceNow, a leading SaaS company, an existing customer of FlashArray X and FlashBlade, has now added the all NVMe FlashArray seat to their environment, with the goal of eliminating spinning disc for Tier 2 workloads. We shared their vision of creating an all flash data center for better reliability, cost, and performance so they can continue to deliver world class service levels for their customers. Pure's cloud data services including cloud Block Store on AWS, enables data mobility and empowers customers to achieve on prem economics in the public cloud. And as part of our multi cloud strategy, we recently launched our technical preview of cloud Block Store on Microsoft Azure. At the recent Microsoft Ignite conference. With the growing set of products and unique pure as a service subscription model, customers can take advantage of our innovation on prem or in their preferred public cloud whenever and however they want. Today or in the future. We've always been the most innovative and now we are also the safest choice for customers. Lastly, on a personal note, I want to take a moment to thank our customers, partners and the Pure team for the past 7 years. They've been the most fulfilling and rewarding of my career. Together, we changed the industry with Evergreen Storage. Built an incredible company culture and grew the business from 0 to more than $1,500,000,000 as fast as any enterprise IT company in history. I'll be staying on in my new role to help with transition planning and strategy. I'm excited that Paul has joined the team as COO I look forward to partnering closely with While my role is changing, what will never waiver is my excitement and enthusiasm in our ability to make an impact on our customers every day. We are as optimistic as ever to execute and provide freedom for organizations to build for today and tomorrow. We truly are just getting started. And with that, I will now turn it back over to Charlie. Charlie? Thank you, Hat. Moving to key financial highlights. We finished the quarter with cash and investments of $1,200,000,000, an increase of $59,000,000 from the previous quarter. Free cash flow in Q3 was strong at positive $43,000,000. We delivered strong deferred revenue again in the quarter. At the end of the quarter, deferred revenue was $643,000,000, an increase of 39% over the same period a year ago. And included a record amount of In setting our guidance for the remainder of the year, we have taken into account the pricing declines we've seen in the past two quarters, as well as a more challenging global environment. We are highly differentiated as evidenced by our industry leading growth and gross margins. And accordingly, we remain focused on continuing to invest in a fiscally prudent manner as evidence by our operating profit guide, which is within the range that we offered last quarter. Revenues in the range of $484,000,000 to $496,000,000, $490,000,000 at the midpoint. Gross margin in the range of between 67.5% and 70.5%. And operating margin in the range between 10% 14% or 12% at the midpoint. For the full year of fiscal 2020, we now expect revenues in the range of between 1.635000000000 and $1,647,000,000 or $1,641,000,000 at the midpoint. Gross margin in the range of between 69.2% 70.1% and operating margin in the range of between With that, we'll Your first question comes from the line of Alex Kurtz from KeyBanc Capital Markets. Hi, Alex. Hey, good afternoon. Hat, it's been great working with you. Hopefully, we'll hear you on future calls. But thanks, Thanks for working with the investment community. Near term and long term question here. So real quick on the quarter, Charlie, when you look at units or deals or however you wanna look at it, like, excluding the ASP dynamic, did did you hit that number? Guess, trying to account for, was there deal slippage that was part of this, or is it really, on the pricing and you actually got to the the number of, you know, array shipped? And then longer term, go ahead. Sorry. Well, let me answer that and then you can I'll let you go on. So, yes, we shift all the units we expect to ship. So, it really was a overall pricing, overall pricing issue. And it may that made up for all of the all of the mess. It was entirely on target. Okay. And then I think longer term, the question is going to become customers get used to the lower pricing in the broader all flash market, right? And I think there's a fair skepticism among investors that even with the NAND environment being more favorable for you and your competitors over the next couple of years, perhaps, customers who aren't gonna respond and allow the market to see a pricing increase. So what what gives you the confidence that that's not gonna happen? That the customers aren't connected to the new pricing levels that we're seeing right now? Well, interestingly, Alex, it's good when customers get acclimated to the new pricing because it allows elasticity to take place. And to penetrate, remember, less than 20 flash is less than 20% of the overall storage market by bits, right? It's 30% by dollars, but less than 20% by bits. As pricing goes down, we get to take up more of the magnetic market. The issue is that when pricing drops so quickly in an individual quarter, the market doesn't catch up on elasticity. We saw a double digit drop in pricing each of the last two quarters. That's just that That's just very unusual. It was obviously difficult to predict that sort of thing because it's not normal. But now that pricing is where it is, that bodes well for volumes as we go forward and it can't continue to drop at that rate. Flasher AC takes advantage of this, right? Flasher AC is going to now start to penetrate, what are typically magnetic workloads, in the, the so called 2nd tier market. That's a very good thing for us. And pricing will eventually moderate, will reduce its rate of decline will continue to decline but reduce its rate. And that's very good for the Flash business, very good for us. All right. Thank you. Your next question comes from the line of Ittai Kidron from Oppenheimer. Thanks. And maybe Charlie, I'm going to follow-up on Alex's questions. Can you talk about how pricing was in the 1st 3 weeks of November? And what is your working with regards to your guide that you are a stable pricing from here, or there's more to come? And I have a follow-up. Yes. You know, pricing varies a lot week by week to deal dynamics, as you go through. So it's, it's, I can't say that there is a clear, I can't call exactly when pricing will ease in our market. What we do know is that the commodity level pricing has not just firmed up, but it's higher right now. Commodity pricing for NAND is in fact higher, as of this month. How long that takes to go through, you know, everybody's inventory and the market and pricing by the time it gets to array pricing, that's why this is a very right now, we're in a market that's a little bit more challenging to, to forecast. Got it. And as a follow-up, not that anyone doesn't appreciate good profits, but could one make the case that you're under investing in your business, you know, given the growth in your portfolio and and what it's reaching from a vertical, an enterprise tier, in application and use case tier, shouldn't you perhaps, invest more in your operating business, and how do you feel about productivity level? You haven't mentioned that I assume you're happy with productivity? So let me start with the first part of that and I'll pass the productivity over one over to Hat. Unfortunately one can't have it both ways. You know, that is to say, you know, investing aggressively in the business even during a, a period of headwinds, and also showing, you know, investors and your own company that you can be fiscally responsible. But more than that, honestly, every company, we're in a bit of a cyclical business and we take these opportunities to drive more efficiency out of the business and to allow the organizations to catch up on the growth that they've already put into place and make it more productive. So I actually view this as an opportunity to drive efficiency in the operation. And as the business hopefully picks up, which I expect it will at some point, we'll begin, some additional investment. Pat, do you want to talk about productivity? Yes, productivity is in line with our the latest cohorts that we brought in are our largest classes and they're coming in in line with the most productive cohorts from earlier on Now, we did put a lot of those into the enterprise segment. And the enterprise segment, we knew, as we shared in previous quarters, take long, to longer sales cycles, etcetera. And with some of the challenging environment that we're seeing, in the large enterprise, that may take a little bit longer for it to hit the bottom line. But we're very confident. We time those investments to be in line with the product expansion capabilities that we've got and the market share gains, and we know that the right long term bet the business. So there's no doubt that when things turn, we're going to be very well positioned to capitalize that in the enterprise. Your next question comes from the line of Aaron Rakers from Wells Fargo. Yes, thanks guys. And I apologize for the background noise here, but Two questions if I can as well. First of all, just kind of looking at the guidance, I'm, you know, the commentary you offered suggested that you are seeing signs of macro softening. Just curious of what you saw as far as the progression of those signs of of weakening through the quarter. And how do I how do I fit your guidance midpoint of guidance being up 62,000,000 sequentially in revenue versus like $50,000,000 last year on fiscal 4Q, $62,000,000 a year ago in 'eighteen when the storage market was healthy. Relative to that kind of softening macro commentary that you offer. I'm just trying to understand what's kind of embedded, you know, in the midpoint of your guidance here for revenue this quarter. And again, I do have a follow-up Yes. Thank you. Thank you, Aaron. So, as, as we weigh through the quarter, we do see my experience is that when you do see a little bit of macro headwinds that it is typically the, the enterprise that slows down their buying first. And by slows down, I just mean being slipped, second looks, longer decision cycles, etcetera. And we did have seen some of that. The second is we did term this, not so much as macro, but as global, globally economically challenging So we're seeing, we're seeing things that we think of as Brexit slowdowns, the trade tensions in the, with Asia, those are the things where we saw more slowdown than other areas. And that just indicates a little bit of, global economic headwinds. And how do I let you take the? Yes. I mean, I think the headline here is pricing were in line with our forecast, we would have been within the range that we had. So really do feel like it's pricing. You know, but we are looking at, you know, these international phenomenons in the UK specifically, Japan specifically, as well as some of the enterprise deals. We're not seeing loss rates decrease they're improving, if anything. So we see really steady win rates that are out there. So it's just a little bit more slowing of the decisions and more pushes. So we have that contemplated in our Q4. Right. And the last thing, just on the year to year comp, remember last Q4, we had that shipping issue that left the product on the dock so it affects the comps. Fair point. The follow-up question is, if I can, when we think about the pricing dynamics in NAND, and I could appreciate that NAND is still less than flashes to less than 20% of the bid shift. But to help us appreciate the pricing dynamic, would you say this quarter we saw an acceleration in the growth of your bit shipments relative to last quarter. So just trying to understand and put some context behind the elasticity Yes. This year, in general, the bid shipments are way way up. That's made up for a large portion of the decrease in prices. But as I said, when prices decline double digit within a quarter, as they have in the last two quarters, it's just difficult, just difficult to catch up. Your next question comes from the line of Simon Leopold from Raymond James. Great. Thank you. I've got one kind of near term and one longer term question. On the near term, when you're discussing the pricing environment, I'd like to get a better understanding of, is this about a particular price aggressor in the market, or is this the the general behavior of of everybody responding to, essentially the customer's willingness to pay? Is it coming from from competitors or from customers? And then I've got a follow-up. In my experience, it's coming from competitors. I think there are a variety of different competitive strategies the market, in our case, we are a value oriented competitor. We do not lead with price, but we do respond. There's at least one other competitor out there that I feel, operates in the same way, but there are competitors that I would, argue are cost plus competitors. So that, that is that when they see, they'll sell based on a gross margin model that they've built and they'll go go to price right away. And those are the ones that lead with price in the market and then we follow. So it's really how the cost flows through their, through their P and L, through their inventory. That makes the difference. Thank you. And then my follow-up is longer term oriented. I want to try to get a better understanding regarding, the prospects from the FlashArray C, you just announced that in September, presumably that's not really contributing much, but, but You've talked about TAM expansion. Could you put some numbers around how to think about what that product does for the the revenue opportunities? Thank you. You bet. So that product, it has had the fastest growth of any new product we've ever introduced, including our first product. So that's, of course, now of course, it was widely anticipated. It was something that we had been talking about with customers for some time, but we do but it is It bodes very well for us. Now when we say, when you say TAM expansion, let me just make sure we're all consistent here. You know, we discuss it as opening up more of the TAM that we've put into place. And we believe it opens up over the next year or 2, you know, another $5,000,000,000 of TAM that we can that we can expand into. So it's a big market. It opens up a new part of the market that we did not generally sell into before. Great. Thank you very much. Your next question comes from the line of Wamsi Mohan from Bank of America. Yes. Thank you. I apologize for the background noise in an airport. Hopefully, you can hear me. While you came in at the higher end of the range for operating margins, your incremental year on year is almost the same as the incremental OpEx. Are you running the business with these levels of investment with an expectation of acceleration in the future? Or are you expecting this mid growth rate, although much better than the industry as a new normal? And I have a follow-up. Yes, we're not viewing that as the new normal. We do believe that as we, add new products and as pricing stabilizes, the world will get better. But of course, we're not guiding, to next next year yet. But, obviously, as I said, I think, this has been a challenging year with the pricing declines. And, we believe, life will get better. See our FlashArray C, CBS, the products on Azure and so forth. We're very proud and pleased with the new products we're putting in the market. We believe we'll be the aggressor. You know, if we continue taking market share at the rates that we're taking market share in a market that is fundamentally $30,000,000,000 to $50,000,000,000. We've got a lot of opportunity at. Okay. Thanks, Charlie. And again, as a follow-up, you mentioned price elasticity. Mean, it feels like this was the year where you should have seen very significant price elasticity. And I think you said you did clearly that didn't translate into acceleration and revenue growth because of the pricing itself. Now as you look forward, why should there be an acceleration in revenue growth of, you know, price in Alaska City kicks in when the pricing doesn't go down quite as fast. So I guess I'm trying to just understand this in the context of what the actual true underlying commodity pricing is doing to the revenue growth? Sure. We've studied this over many years. Right? And as prices come down, elasticity goes up, flash takes over more of the magnetic market. So you have to have price coming down in Flash in order to take up more of the market. And that this is going to happen. Now, we would love a world where flash comes down predictably every single quarter and pricing follows suit a couple of quarters later, that would allow customers to plan and for us to be able to better guide. But the fact of the matter is that that flash prices vary dramatically with supply of new fabs and demand varying as we saw last quarter with or the quarter before rather with, with hyperscaler demand. And that fluctuation eventually makes its way to our market. But over the long term, the elasticity is real. And with very fast price dropping, it usually means slower price dropping in the following year. So while we can't predict it exactly, on a long term basis, you can. Your next question comes from the line of Rod Hall from Goldman Sachs. Hi, this is Bala Reddy on for Rod. Thanks for taking my questions. Just want to better understand the macro weakness that you cited here. So if the macro situation had been written in the quarter, then would that have compensated the price pressure issue that cited? I think what you're asking if the macro had been better would that have overcome the pricing? The pricing was by far the dominant reason for the gap to original guidance. But there's no question, I mean, we're only talking about 2% here on a stronger macro could easily have made that up. If I look at the full year revenue guidance, like, from the first time that you gave in fiscal Q4 last year, So the overall guide is down like 7% for the full year. Can you help us quantify each of the issues that impacted the revenues in the year. I know you cited the weakness in large enterprise as well a couple of quarters back. So just trying to better understand how to rank out of these issues here? It's the same issue really. It really is the vast majority is pricing, but of course, the stronger macro, we're not talking about a lot of percent of stronger macro might have been able to make that up. But again, when you're when you faced, really, this is this year is quite remarkable in terms of the pricing decline in the market. Thank you. Just a quick follow-up on the macro question. So I know that you have exposure to large, such a less mid market in addition to SaaS cloud to like which of this in the quarter, particularly which of the segments did not do as expected? Well, we actually had a nice progress as I mentioned in the public sector. Our commercial business was solid for the quarter. There were some ups and downs internationally, and I think those are tied largely to some of the macro issues. There's some execution in there as well, but the vast majority of it on the international front was tied to very specific markets that are challenged. Your next question comes from the line of Karl Ackerman from Cowen. Hey, good afternoon, gentlemen. Two questions if I may. The first is a follow-up question on demand. At your Accelerate conference, you spoke about how the deal funnel is shifting toward more larger deals. Do you see the incremental revenue or incremental revenue opportunity in the global accounts that are outside of the traditional realm of your SMB focus? And one of your peers spoke about how the chief procurer of storage is shifting away from the traditional storage IT manager. Are those 2 dynamics the primary influencers, of your performance this year? And I guess, how do we combat that going forward? Well, this is Ted. I'll take a crack at that. We've seen nice progress, in the segments that we serve. You know, like I just mentioned, you know, in the public sector government space and the commercial segment, And in the cloud business continuing to represent, you know, north of, 30% of our overall business. So we see sound performance there. Enterprise, a large enterprise was a little bit weaker than what we expected. And that we think is tied partially to the overall macro. The changing persona and the decision maker is something that we've been driving for the last few years. Our Next generation analytics platform with FlashBlade is largely sold into DevOps, is in sold into the business owner. And we've made a business in our traditional storage attack plan to go at the database admin or the virtual system admin or other folks that actually saw the benefits of flash removing latency. So, it's always been a multi threaded sales process. And so, we feel comfortable our ability to go attack that. A lot of what our focus with the modern data experience is shifting from a product by product business unit by business unit workload by workload kind of sales campaign into more of a platform and a portfolio sale and leading with our Pier 1 and our Pure as a service subscription model is really differentiated. It really does enable flexibility commercially for customers and technically, allows them to, you know, put their data where they to today and move it without penalty in the future. And so as that starts to continue to get traction, we believe that'll continue to help us higher up in the organization and sell a real differentiated platform solution versus a point product solution. I appreciate that. Going back to Flash Ray C for a moment, just curious on what level of room revenue assumption is implied for Flash Ray C in the December quarter. Guess, how do we how do you see that progressing over the next few quarters? And, what do you need to do to, drive increased reductions. It sounds like it's going well, but just any additional metrics there would be helpful. Thank you. Right. Well, as you know, we don't really provide metrics on a product by product basis, and especially on new products because new products tend to be lumpy as, as you're getting through the sales force, new customer experience and so forth. But that being said, as I said, this is the largest and fastest new product adoption cycle that we've seen at the company ever. I think it bodes well for us. It's a product that, by the way, is a FlashArray just with a lower, lower price, lower cost, storage module in it. So our our customers know it. Our field knows it. Our channels know it. So in that, from that sense, it's easy to sell. Kix, I think, Kix has some additional commentary here. Yes. I'd also just say that in the last call, there was some concern about whether it might be cannibalistic of FlashArrayX. And we made a point of being really close to all the the first deployments of FlashArray C, and we were really pleased with really the net new use cases and motions that it went into. You know, we largely targeted tier 2 applications, that might have been on disk as well as tier 2 Doctor and opening up new tiers of applications to Doctor. And really pleased with them being sold together as opposed to an alternative to one another. And I will add one other piece of color. We have 7 and 8 digit pipeline deals in the pipeline for this product. So it's a, clearly, it's something that stands out. Thank you. Your next question comes from the line of Katy Huberty from Morgan Stanley. Yes. Thank you. Charlie, can you just be specific around what you're assuming in the January quarter around price elasticity? It sounds like you didn't see that in the, in the October quarter expected to come through. Just not clear whether there's an assumption around whether you see it in January? And then I have a follow-up. Yes. We certainly didn't expect double digit this past quarter and we don't expect double digit this coming quarter. So we do expect it to moderate. And I wish we could be absolutely positive about that, but without knowing, you know, the other demand signals for NAND without knowing the inventory levels, past inventory levels of competitors. It's, as I said, it's hard to pin down growth in the January quarter because the prices, the lower prices have now been in the market for several months? Certainly. Certainly. Okay. Okay. And then just a follow-up on FlashArray C, can you talk about whether it's the type of customers by size or vertical or or what are the most popular applications that that you're seeing flash array so you get pulled into? Yes, this is Kix. I'll take this 1 as well. So I think the first thing to realize about FlashArray C is that it's lower cost per gig, but it's quite large. And so our key target has really been larger organizations who have big, big, big swaps of tier 2 data. And so we've seen it go into larger environments where they're just going up their tier 2 applications. We've also seen customers who deal with very large research data, very large, types of IoT data, etcetera become interested in the platform. Because it opens up use of Flash at a fundamentally different tier. Thank you. Your next question comes from the line of Mehdi Hosseini from SIG. Yes, thanks for taking my question. I want to go back to the trends in your product revenue and also deferred revenue. I see deceleration in both, product revenue and deferred revenue. And I'm just wondering outside of pricing pressure, is it a reflection of delay in the ramp of new products? It seems to me, you're still lagging that diversification in a product mix and in that context, is it going to take another fiscal year to see that in diversification improving? And is that really needed to see, a higher growth rate. And this is outside of the pricing trend. I'm just trying to separate pricing from product mix. Yes. Well, currently, you know, our product, our revenue was made up primarily of 2 physical products, FlashArray FlashBlade. And then, of course, the subscription and support activities surrounding those 2. And we do have our pure as a service model, but that's still a relatively small revenue stream associated with that. So by far, the deferred revenue is made up of those subscription streams. Now, as we mentioned at our Accelerate Off-site, we've seen big pickups in subscription, especially in the elongation of the contract period, for, for the subscription as customers have found great value in the evergreen service overall But you're largely correct. I mean, a lot of the growth rate that we expect in the future is based on new product, Flash or ACs off to a good start. Cloud block store, high interest level, but still very early days. And then, of course, we, are anticipating our file services coming out mid next year. So, you know, these are all things we look forward to and and, believe we'll, expand our opportunity. Just as a follow-up, if file services is coming out midyear, could that help with, acceleration in growth rate, or should we just assume that fiscal year 'twenty one altogether is a transitional phase for the company? Well, 1st, again, we're not going to, to guide fiscal year 'twenty one adjusted yet. But we don't invest in new products, just to give engineers fun things to work on. The expectation is that it will improve our growth. We're very focused on growing this company. We're very focused on being the leader in storage and that has a lot of years of growth left, to us to be able to deliver that. And of course, you know, we're delivering it as a very new and different architecture, you know, what we're calling the modern data that is going to make it Your next question comes from the line of Amit Dariani from Evercore. Thanks for taking my question guys. I have 2 as well. First, maybe just help us put some context on your gross margins, which came in well ahead of your expectations. I'm wondering why not the decision to perhaps be more pricing aggressive and keep the margins within your target and perhaps drive more revenue growth. Was there not that price elasticity for you to take advantage of or you just didn't want to go down that path? Well, I think you saw one of our, competitors also come in with higher, higher gross margin. So it indicates that there's been at least some, you know, with such drops as I mentioned, double digit price in, double digit drop in price during the quarter. So there's been a lot of price activity But obviously, cost activity was better than price activity for at least one of our, one of our competitors out there as it was for us. Now part of the gross margin improvement was based on mix. The mix is a shift towards larger arrays. Now I'm not talking about a mix between products, but a mix to larger systems. And the larger systems tend to have higher, higher gross margin. But we also benefited a lot, from, from, from a COGS reduction. Your your point is, look, yeah, the field has complete, flexibility to drive price. If it's going to win a deal, We don't ever want to lose on price. But as I say, we don't lead with price either. So, we're doing everything we can to to drive the top line. We're not going to hold it for additional margin, but it's the way it worked out this quarter. Understood. And then if I could just follow-up on cloud Block Store, just what feedback are you having or adoption you're seeing from your customers there? And perhaps you could talk about your appetite or the roadmap to have a comparable offering at other platforms beyond AWS? Yeah, so we announced the GA of cloud Blockstar and Azure, at Accelerate this year. And I'd say that the industry analyst and customer excitement around that was very high. And we saw both excitement around it, translate right into our core business, in terms of being able to have conversations around cloud Architecture and hybrid cloud. Frankly, we weren't invited to before. And then we saw customers really diving in with key use cases. Our key focus in this market has been to really focus tier 1 applications moving to the cloud and tier 1 applications run on block storage. And so to give you an example of, one of the first production deployments, We have a customer who runs SAP on prem, in, on pure, and they've taken advantage of cloud block store to really move test dev to the cloud. And so it's a perfect hybrid case. You have SAP running on on tier 1 on prem. You're replicating data to the cloud, refreshing it constantly. And that particular customer was able to get 40 to 1 data reduction in their test environment. So think about the ROI of saving the cloud savings there and enabling that new model for more agile test out. These are the types of use cases that we're really driving into the market with CBS. Perfect. Thank you guys. Your next question comes from the line of Jason Ader from William Blair. Yeah. Thank you. Guys, there's there's been some talk out there on some of the SaaS companies moving their data centers to the big 3 infrastructure as a service vendors. And, I'm wondering if that's something that you have seen at all in your SaaS vertical where, some of the some of your traditional customers are deciding to outsource their data centers to the degree and if so, what's your outlook on that segment of the business going forward? Yes, it's a great question, Jason. I think we actually see both. Activities. We we see people oddly enough moving to the cloud, but we also see people moving out of the cloud, especially their data storage, because data storage to be extraordinarily expensive, in the cloud environment. Cloud Block store is meant to make it easy to move in both directions. That is to say that, makes it easier to lift and shift into the cloud. If you're a cloud data experience, it looks similar, if not identical, to what's on prem. And of course, we have a lot of value in the cloud, as Matt just mentioned, lower cost, and higher performance But also it makes it easier if you decide if you're in the cloud, using our service and then want to move back on prem as many customers have done to reduce their overall costs. It also makes it easier to move in that direction as well. And from our standpoint, a terabyte is a terabyte between cloud and on prem, one contract, one price. So is it fair to say that your SaaS vertical segment, I see above If we we've really dug up. Like, Keith, you have this working? We've seen no effect honestly from the phenomena you're talking about with our SaaS, in our SaaS business. Okay. Thank you. Your next question comes from the line of Matt Kribel from Credit Suisse. Yes, thank you. You talked a lot earlier this year about ramping sales capacity by 40%. You touched on this a little bit earlier, but can you just talk a little bit more about where you are in getting that cohort productive just how you're thinking about your hiring plans going into next year given some of the revenue slowdown you're seeing? Yes. So as I mentioned, a lot of the sales capacity investments did go into the enterprise, knowing full well that it was going to take a bit longer for those to ramp and to hit the bottom line, but that it was the right long term move for us. You know, the new cohorts that we brought on board are ramping nicely. You know, they're really in line with what we had seen previously and what we expected out of them going forward. As we look at, you know, and as Paul and I kind of work together on the allocation, you know, of those sales resources across the globe and across the segments. As you do any year, you kinda fine tune that, to make sure you get the right mix of long term and mid term, ROI. But we're very confident the investments that we made are going to pay dividends for us. It may take a little bit longer. But we're very confident that we made the right bets going into the year. And then just how you're thinking about the hiring plans going into next year, given some of the revenue dynamics Yes. Well, clearly, we're not going to we invested ahead. We knew this year. We invested ahead. Those, those assets, those people that we hired are going to be, much more productive in the 2nd year as, as like in any, in any ramped environment. That allows us to be a bit more, let's say prudent or slow down our hiring for this coming year to really to match much more our growth rate as we go end. Got it. Thank you very much. Your next question comes from Steven Fox from Cross Research. Thanks. Good afternoon. I was wondering if you could just sort of give us a little more color on the gross margin. So If we think about the 230 basis points improvement quarter over quarter, how much of that was related to mix versus the benefits of cost over exceeding price declines? Yes. It was a little less than half of it was, was mix. You know, the largest part of course was the or the cost reduction compared to the price, reduction. So costs lowering or having lower. Remember, it takes about 6 to 8 weeks for, inventory to flow through our system. Right? So we started off with a lot of low cost, NAND and product in the pipeline as we went through the quarter. As I mentioned, towards the end of the quarter and certainly in this quarter, prices in NAND have gone, have literally gone up. So, the majority of it was priced, but, a significant portion of it was mix. Okay. That's very helpful. And then just, on the macro pressures you're now seeing, I think, like, 90 days ago, you sort of had your antennas up, but you really weren't seeing it as much as maybe some of your competitors where what changed relative to last quarter? Is it just sort of your geographic mix is reflected in the timing of you being hit harder now versus say competitors that flowed earlier or is there anything else we should think of? Thanks. Yes, no, I think it is the international mix tied to some of the dynamics that Charlie and I had referenced earlier. We continue to see larger deals and more bundling, but the dishes and cycles are just taking longer and people are pushing into longer periods of time to evaluate more looks at it, more executive needing to touch, deals, etcetera. And so more work. But the encouraging thing to us is that as our win rates continue to be super strong. And so we're not losing more business and we're actually seeing more terabytes included in every deal and more bundling, it's just that it's taken a little bit longer to close. And when you say international mix, you mean your direct not necessarily a second derivative of U. S. Customers who are having weaker business overseas? Yes. No, customers that are buying from where the deals are originating. And so, you know, we mentioned the UK, we mentioned, you know, Japan as a couple of those examples, that were lower than what we expected. Got it. Thank you. Your next question comes from the line of Pinjal Bora from JP Morgan. Hey, thanks for squeezing me in. Have great working with you. Could you talk about maybe a little bit more on what drove the decision for you to step away from leading sales channel? Was it thought out from a while ago? And then as we move into next year, should we expect any big changes in the sales structure processes has the new leadership take hold? Thanks, Benjamin, for that. I appreciate it. And it has been a great joy to be active in an operating capacity and helping build this. It's really a personal driver, to be, very direct. I have a health issue in my family that over the summer, became very acute. And I think over the last several quarters, Charlie and I have been talking about, what's right for Pure and Pure deserves somebody that's got 150% of their energy that they can put into it. And so as that health issue, kind of surfaced and might need to be a little bit more balanced, was clearly the right time. We're thrilled, to have gotten Paul on board, the company is going to benefit not only from his, you know, his 150% focus, but his scale experience and cross functional experience to go drive this. So I think, you know, the timing is never perfect for these situations, but it's definitely the right thing for me personally. And it's the right thing and very good pure to have somebody like Paul step in. The 3rd point I'd make is that I'm still here. I'm very excited. I love this place. And I, you know, as as Charlie mentioned, you know, my real passion is to be out in front, with customers and teams, helping drive And so I look forward to helping not only in the transition, but also playing a role, going forward, not only on strategy, but being able out in the field to help customers. So, I think it's kind of a win win for the company and for me. Your next question comes from the line of Matthew Sheerin from Stifel. Hi, thank you for taking the call. This is Alvin Park on behalf of at Sharon. I just want to confirm that revenue contributions from pure as a service and ES2 was not as material, not significantly material. And second of all, I was wondering if you could just give some color into the economics, the revenue recognition and the cost wreck and the cost recognition cadence versus your traditional CapEx sales. I mean, pure as a service? Sure. Well, 1st of all, I mean, just on an overall absolute basis, that is correct, that it's not as significant, but it's over well over 200% year over year. So it's growing very nicely. Secondly, it is recognized ratably on a monthly basis. You know, over the years, you know, as customers, as customers purchase, purchased the service overall, It's priced at a premium, currently to, a traditional, CapEx model. So, you know, in a, in a 3 year time horizon, you know, it tends to be, richer for pure. But it really helps those customers that really want to operate on an OpEx model overall. So does that answer your question? Yes. And a follow-up. So then in a CapEx versus an OpEx, you mentioned OpEx is ratable. So is it safe to say that an OpEx will be more with the with the subscription service afterwards will be front end heavy where most of the revenue and cost is recognized upfront and tempered down. The whole thing is ratable, both revenue and cost. On the CapEx, yes. Oh, no, CapEx, we recognize roughly for $100, we recognized approximately $70 upfront. And then we have roughly $10 each over the next 3, over the 3 years. So, okay. And then And so the pure as a service and what I just said about the the $30, the subscription base, those are recognized the same. They're both matched. Revenue and COGS. I see. And going forward, and then, do you have any projections or ideas what your sales mix might be between the asset services versus your CapEx model going forward? We've not really provided that breakout. I'd say the as a service model is still relatively new and the new meaning both to customers as well as our sales force. As we start to get more experience under our belt, that might be something that we highlight in a sort of in a high in a highlighted one of our calls, but at the moment, we've not really broken that out. And I'm not sure we're ready to. Just from an experience standpoint. Understand. Thank you for taking the questions. Your next question comes from the line of Seftinger from GMP Securities. Yes, thanks for taking the question. Apartment. 1, could you just talk what competitors specifically are you seeing the pricing pressures at both, Dell and NetApp or who are you seeing the pressure from? Then secondly, well, let me let me get that 1 and I'll have a follow-up. Yes, I wouldn't say there's any discernible difference between the large competitors from pricing dynamic in the marketplace. Dell's always been very aggressive and kind of operates in our view in kind of a cost plus model. You saw NetApp, A, announced 11 points negative on growth year on year and increased gross margin on the product line as well. So they saw some of the benefits from the COGS reduction as well. I just reinforced what Charlie said earlier, we are a very aggressive team. When we see an opportunity, particularly in the large enterprise, we sell on value, we make sure we establish that. But if we need to use gross margin points to be able to win a deal, we won't lose on price. And so that's something that we're continuing to be focused on, whether we're competing with NetApp or Dell. But I think the 25 points of delta between us and the only other company so far that's reported is indicative of how differentiated our value prop is and how much share we're taking in the marketplace. So we're going to continue to be aggressive if we could have put more of those gross margin points to work We would have that wasn't the gating factor. The pricing dynamic was really kind of across the board. And again, we believe that's temporary. Hopefully, it'll start to firm up in Q4 like we talked about, but we feel very good about next year. Okay. Then real quick, I just want to confirm, in the U. S, you did not see the macro, macro concerns. That was all international. Is that correct? No, we saw some of the international tied to those specific market dynamics trade and Brexit, most likely. We did see some slowness in the U. S. Enterprise And I think that's an area where we like the trends relative to pipeline. And with the narrow Hispanic control of our sales resources, we're getting in the at bats. And so we'll be able to bundle in multiple products and sell more terabytes. It's just taking a little bit longer from a deal push perspective. But when rates are holding nicely, as well. So, it's, we see a little bit of the international and a little bit in the large enterprise U. S. All right. Thank you. And your last question comes from the line of Nehal Chokshi from Maxim Group. Yeah. Thank you. It looks like, guidance implies OpEx will be flat, q or q, more or less for a second straight quarter in a row. So looks like there was effectively a hiring freeze that's been in effect since August. Y a is this correct in provided it's correct. And why do this considering the opportunity in what I presume invariably will result in an extended slowdown and top line growth? Right. Well, to be clear, there was a high rate slowdown, but certainly not a freeze. In fact, each quarter, the net hires will be slightly higher than the quarter before. But again, we have to respond to the market slowdown. We're not going to run at a, at a loss as a company. And also, as I mentioned earlier, I take this off opportunity to allow each team to catch their breath after a lot of hiring, and to rebalance their organization. So I actually view it, as an opportunity for each group to, to, plans that they're efficient and effective and that they rethink where they placed, their, how they've structured their team and, and, take an opportunity to rebuild before the next spurt of growth. So, you're correct in identifying that there's been a slowdown, but there's certainly not a freeze. Okay. And as a follow-up, you guys did a initiate a share repurchase program on the last earnings call. It looks like you didn't utilize it at all. Can you update your thoughts on, a, why you didn't utilize it? And b, what are the parameters around when you will utilize it? Well, you know, we, as we indicated, when we took out the the program that, we wanted that program in case of, you know, huge, what we saw as you, as huge price dislocations in the market. And, we have that facility at our disposal should we choose to use it? But, you know, it is really a discretionary. We're keeping it as a discretionary, opportunity. Okay. Thank you. You bet. So as we look ahead to the next decade, our goal is to take the fragmented and antiquated of the current data storage environment and recreated into a unified automated multi cloud data experience. By helping our customers to create a modern data experience, we help them to deliver real business value and we empower them to realize their digital transformation. I'd like to again welcome Paul and Kevin Chrysler to the team. And I want to thank Hat for his partnership and dedication to PURE these last 7 years. He's had a great impact on Stewart, and I'm excited to continue to work with him in his new role. For those in the U. S, I want to wish you all a very happy Thanksgiving, and I want to thank all of you on call for your time today. Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.