Earnings Call: Q1 2020

May 21, 2019

Afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Pure Storage First Quarter Fiscal 2020 Earnings Conference Call. All lines have I will now turn the call over to Matthew Danziger, Head of Investor Relations, you may begin your conference. Thank you, and good afternoon. Welcome to the Pure Storage First Quarter Fiscal 2020 earnings conference call. Joining me today are our CEO, Charlie Giancarlo our CFO, Tim Ritters our President, 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 periods. Any forward looking statements that we make are based on assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. A discussion of risks and uncertainties relating to our business is contained in our filings with the SEC and we refer you to these public filings. During this call, we will discuss non GAAP measures in talking about the company's performance, and reconciliation 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 and is being recorded for playback purposes. An archive of the webcast be available on the IR website for at least 45 days and is 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. We appreciate you joining us on today's earnings call. I will begin by sharing our high level results from the quarter. HAC will provide a go to market update and finally, Tim will offer a detailed review of our financials. The fundamentals of our business are strong. We are broadening our customer base. We are delivering new innovation through both organic and inorganic investments, and we continue to delight our customers. For Q1, revenue was $327,000,000, growing 28% year over year. While we are growing well above the industry average, we were 6%. Revenue was just below the low end of our guidance and consequently profitability was below our guidance. As you know, A particular area of focus has been to increase our at bats and expand our engagement with large enterprise customers. To that end, we have hired aggressively adding nearly 40% more capacity to our sales force this last year. With this additional investment, we are seeing We are aggressively going after legacy storage vendors. And now we are increasingly going after them in the largest enterprise environments. We are excited about these opportunities we continue to expand both our product portfolio and our enterprise business model. Changing for the good, but it to 27.5 percent annual growth. We continue to position PURE ahead of the relevant trends that our top priorities for CIOs, hybrid cloud, fast consolidated data architectures, AI and analytics, and rapid recovery from failure. I wanted to share some highlights on our work in these areas this past quarter. Pure is leading the industry with direct flash fabric, on FlashArray, a hyperscale architecture enabling large scale stateless compute. Hyperscale architecture leverages pure shared storage with direct attach performance for modern efficient application environments. Object engine, which became generally available in Q1, is resonating with customers, delivering on our vision that customers need rapid restoration Customers can now recover data in minutes versus hours or days by using Object Engine with FlashBlade on prem. And by using AWS S3, object engine becomes a cost effective archive destination for long term data retention. Enabling additional uses of data in the cloud. Object Engine is just one part of our comprehensive suite of cloud data services. We are enabling our core FlashArray software, Purity, to run natively in the public cloud, cloud Block Store, which delivers enterprise grade storage on the public cloud is now many months into beta use with great customer feedback. Lastly, this quarter, we acquired Compuverde, a leading developer of filed software solutions for enterprises and cloud provider their highly scalable software will accelerate our roadmap to provide a unified file and block offering. Opening new markets for Pure and expanding our file capabilities for Pure customers. We remain excited about the opportunities front of us. We have a $50,000,000,000 total addressable market in multiple product segments that are essential the and are extending our enterprise sales motion. And we have a strong pipeline of new and innovative products to enable continued growth of our business. We are confident in the investments to deliver the technology, the customer experience, and business model that enterprises want, setting the company completely apart from the industry. Our investments in and focus on the enterprise, largest cloud and service providers, and governments globally is working but it is changing the shape of our business and this impacted our Q1 results. First, we added over 40% new sales capacity in the past year including nearly 30% in the took more focus than expected. 2nd, the mix of large enterprise deals increased by 2x more than it has been historically. Reflecting solid progress as we move up market. However, these transactions tend to take longer to close and have more variability. As we enter Q2, the account transitions are behind us. The series of large deals we had in Q1 are still active and the changing shape of the business is reflected in our guidance for the year. The underlying metrics of repeat purchases, customer retention, partner leverage and win rates are all continuing to perform nicely. The core of our business, cloud, commercial and public sector is strong. Growing over 30% year over year. We finished equating to more than 5 new customer additions per day. In addition, we are pleased with our growth in international markets contributing to 30% of revenue in the quarter. Shifting to our portfolio. We continue to be excited with the speed of innovation supporting Pure's 4 growth areas. Hybrid cloud, fast consolidated data architectures, AI analytics, and rapid restore. These capabilities expand our TAM while also increasing the relevance with senior executives and new buying cloud Block Store beta customers, including Mid America Labs, have seen early success with key use cases such as disaster recovery, and application migration. This quarter, we also announced the expansion of our evergreen storage service, ES2, providing customers with a unified subscription model across hybrid environments. Enterprises can now use pure storage as a service model on premises hosted and in the cloud without the need to manage multiple subscriptions or purchase separate overlapping capacity. Next, we see continued progress with AI initiatives and Pure is paving the way with solutions from early inception to large scale production. This quarter, customers across several industries, including Disinger Health, have chosen the Aerie Converge platform from Pure, Nvidia, and Cisco as the backbone of their AI deployments to gain better insight into and the University of Texas MD Anderson Cancer Center have both chosen FlashBlade, signaling the excitement around our flash to flash to cloud architecture, and rapid restore use case. This is yet another proof point for Pure beginning to disrupt the roughly $8,000,000,000 data protection market. Shifting to our go to market momentum. Pure's partner ecosystem continues to broaden and deliver real impact to the business. We saw another good quarter from National Partners with solid year over year growth and increased net new logo contribution. Strategic Alliance partnerships were also a bright spot in Q1, particularly with next generation analytics use cases like Spark, Elastic, and Splunk. And perhaps most exciting as we execute on our cloud strategy, our relationship with AWS is advancing through further joint engineering development sales enablement and global alignment. We also continue to see success driving large enterprise and government businesses through global systems integrators. With a combination of sell to activities, migrating dozens of the largest global enterprises on to pure as part of their managed services In summary, we are as excited as ever with the added sales capacity, continued rate of innovation and expanding partner ecosystem. We continue to execute on our long term vision, are making great progress with large enterprises, and we are growing 3x faster than our competitors taking share in the overall storage market. Thanks, Hat. Q1 was a solid beginning of the year for Pure as we continued to demonstrate growth at scale, industry leading gross margins, and continued innovation across our product portfolio. Before I dive into the specifics, I'll make my usual note that the gross margin, operating margin, OpEx net income and free cash comparables as well as our full Q1 results and presentation are available on our website at investor. Purestorage.com. For the quarter, total revenue grew 28 percent year on year to $326,700,000 Product revenue grew 22% year on year to $238,700,000 and support revenue grew 45% year on year to of between 63% 68%. Total gross margins for the quarter were 68.1%, up 0.5 points sequentially. Our industry leading gross margins continue to reflect the value we deliver to our customers through consistent differentiation technological innovation and customer focus. Product gross margins were 68.7%, up 9 10ths of a point sequentially, due primarily to benefits we are seeing in component costs. Support gross margins were 66.3%, down 1 half point sequentially The sequential decrease in margins is due to continued investments in our professional services organization to serve our largest and most strategic customers. OpEx was $254,000,000 for the quarter as has been our pattern for the last several years, Q1 was an investment quarter, particularly in the hiring of our sales force and this year was no different. As you heard from Charlie and Hat earlier, we are pleased with the In Q1, operating profit was negative $31,200,000 or negative 9.6 percent of revenue. And compares to an operating profit of negative $15,300,000 or negative 6 percent in the year ago quarter. Operating profit was less than expected due to our lower than expected top line performance. This revenue shortfall directly impacts our bottom line. While we were not satisfied with our profit performance this quarter given our Q1 net income for the quarter was negative $27,600,000 or negative $0.11 per share. This compares to the year ago period The weighted average shares used for the per share calculations were 245,000,000 shares in Q1 224,000,000 shares for the year ago period. Moving on to the balance sheet and cash flow, we finished the quarter with cash and investments of $1,170,000,000. A decrease of $31,000,000 from the previous quarter. Our quarter on quarter decrease in cash was impacted by a $60,000,000 cash payment as part of the Compuverde acquisition. Without this impact we would have grown our cash balance for the 7th straight quarter in a row. We had another strong quarter of deferred revenue growth, which we believe is a key indicator of the success we are having in executing on our strategy and building long term relationships with our customers. Deferred revenue at an increase of 45 percent over the same period a year ago. Significant year on year renewals growth, longer initial service agreement purchases, and the early momentum we are seeing with our ES2 product line. Free cash flow in Q1 plan. Adjusting for the normal impact of our employee stock purchase plan, free cash flow was positive $4,300,000 in the quarter. Now, I into the business with an emphasis on our enterprise segment. Our focus on the enterprise has already yielded results, adding a significant number of large opportunities for our sales team to execute on. We're excited that larger deals are becoming a more important part of our overall business At the our outlook. For the second quarter of fiscal 2020, we expect revenues in the range of between $389,000,000 and $401,000,000, a $395,000,000 midpoint or 28% year over year revenue growth. Non GAAP gross margins in the range of between 65% 68% and non GAAP operating margin in the range of between negative 5% to negative 1% or negative 3% at the midpoint. For the full year of fiscal 2020, we now expect revenues of between $1,700,000,000 $1,770,000,000, a $1,735,000,000 midpoint or 27.5% year over year growth. Non GAAP gross margins in the range of between 65.5% and 68% and non GAAP operating margins in the range of between positive 1.5% and positive 5.5%. Or positive 3.5% at the midpoint. With that, I'll turn it back over to the operator for questions. Your first question comes from Alex Kurtz from KeyBanc. Hey, guys. Can you hear me okay? Yes, Alex. Hi. Good afternoon. Just a clarification then a question. So on, Tim, on on ES2, I know there had been some revenue headwinds created by that that service. I was wondering if there was any contribution this quarter. And then on the broader sales question, just wanted to take your temperature on the competitive environment. I know that, the incumbents are hearing to discount at pretty extreme levels to, you know, retain footprint. And I'm just kinda wondering if that's playing into all of this as well. Yes. So, Alex, this is Tim on ES2. ES2 is tracking very nicely to our expectations for the quarter. So, that business is performing, is performing where we expected it. So, not an explanation of the couple of points off our overall performance. Alex, this is Hat on the competitive landscape. I wouldn't say anything's materially different in the quarter than what we've seen historically. As you know, we focus on value, not price. And so when we get our TCO argument in place and people understand our technology and our differentiated business model, customer experience, our win rates are holding great against them. So, Dave, just Alex, I'd add though that in the net new logos in the large enterprise, they'll go to almost any length to keep us out. And so, our, the early entry into the enterprise is something that we're putting in special attention on. Okay. Thank you. Your next question comes from Steven Lenovich from Wolfe Research. Thank you. First of all, just want to be clear, last quarter, you had an issue with your EMS provider and the timing of deliveries. Is that completely passed? Was that a factor at all? And then, second, Charlie, when you first arrived, you talked about wanting to get more efficiency out of new sales people, get them effective faster. You're obviously bringing in lots of people, and it sounds like it's fairly recent. Do you feel like you're getting that efficiency from the cohorts or is it going to lag a little bit because you are going for these larger accounts? Right. So, on the ops question, no ops performed flawlessly that this quarter. So I think that's largely behind us now. And then let me just, start on the, on the productivity question. We do think we have a very good factory for new sales reps, that, that, and new SEs that, that come in. So we've got a pretty good factory But really, we had not only did we have a record number, but we had a record percentage add, this, this Q1 over the last 6 months. And so that always takes a lot of work and effort as Hat put in and, is something that we're going to pay a lot of attention to over the next quarter or 2. Thank you. Your next question comes from Aaron Rakers from Wells Fargo. Thanks for taking the question. I I'm gonna slip in too as well. Maybe first, a little bit of a clarification just so I understand, the model. Can you Can you explain or define exactly what enterprise deals are? What percentage of your revenue is in enterprise deals and maybe how that compares a year ago. I'm just trying to understand or put some context behind this business push to going after these enterprise deals. And then the second real quick question, I'll just put it out there right away. Is, Charlie, can you give us some flavor of how effective you've been, either be it metrics quantitatively or even qualitatively in selling a portfolio motion for the company, meaning deals that you sell both FlashArray and FlashBlade or any kind of metrics you can share on that front would be helpful. Yes. You want to start? So, A, when we think about enterprise deals, we're talking about a multimillion dollar large deal. So the shape of those is expanding and really nicely 2x over a year ago period. And then as a percent of the overall, we haven't broken everything out from a revenue mix perspective, but we did talk about now at 40% of the Fortune 500. So we're incrementally adding there and added over 100 enterprise customers in the quarter as well. So not only the quantity of new customer adds were great, but the quality were nice as well. Just to be clear, that's 100 new customers that were deal sizes greater than a 1,000,000 or not? I'm just I want to 2 different issues. So we're obviously working within our install And so the average deal sizes are growing in the mix of the larger deals as a percentage of the overall pipeline, is higher. 2x higher than we've seen historically. So we like that shape. Obviously, there's more variability in those deals and takes sometimes longer for those to close, but we like the strategic nature in which we're competing for the larger transactions. In a separate topic, you know, from an enterprise perspective, a combination of the Fortune 500 now at 40 percent and 100 new net new enterprise customer adds in the quarter. Our 2 good proof points in terms of the progress up market. Okay. And then on the portfolio motion? Right. On the portfolio, it had been something along the lines of 30 although I'm not, is that a correct fix, are FlashBlade and FlashArray customers or 30% of FlashBlade customers or FlashArray customers? I don't know the number off hand, but, we are absolutely seeing bundling working. And I think that was one of our key investments areas a belief that, not only can we get synergy between FlashArray and FlashBlade, but as we start to tie in rapid recovery and use cases that really drive closer synergies between them, we're just bundling take off. Okay. Thank you. Your next question comes from Pinjalimbora from JP Morgan. Hey, thank you. Just on double clicking on the performance, seems like the Doctor, at least outperformed our numbers, it grew massively. Is it possible to understand how much of a positive variance was Doctor? For you in Q1 versus what you had expected 90 days ago? Well, on deferred revenue, I guess say, we've known as we've looked at the business for the last several quarters that that flywheel and our strategy is indeed working. So you're seeing very nice customer retention rate so very nice customer retention rates results in an increasing deferred revenue balance. So that's obviously a positive trend. I think the other positive trend we're seeing there is that are taking and buying longer term subscription contracts with us from the get go, which basically speaks to us about making a longer term and a more pronounced, commitment to Pure. And obviously, we like that. That builds a deferred revenue balance as well. I think, again, we were expecting these types of performance and we're very happy with where the deferred revenue balance landed this quarter. Okay. And, and again, on tariffs, I mean, obviously, I don't think you will probably have much impact from it, but it was Was there any direct impact? And more importantly, was there, did you saw any kind of slowness in sales cycle as an indirect impact of tariffs type affecting spending environments, you know, leading to higher security and deal sign offs, etcetera, or was there any hangover from any, the government shutdown last last end of the year? Yes, I'll take the first part of the question, I have had to answer the second part of the question. On the COGS and bill of materials side, relatively small amount of our overall bomb is sourced out of China. So therefore, very, very little impact to us on the cost side. Yes. Similar on, on the sales cycle, directly related to that, we had a nice contribution, 30 percent of our revenue coming from our international markets. So those businesses are firing nicely. Your next question comes from Jason Ader from William Blair. Yes, thank you. I got a couple I want to slip into. Just on the continuing on the last thread, would you say the environment is tougher today? Just from a business standpoint, getting deals done versus a year ago. I mean, we saw NetApp have a challenge last quarter. We saw Nutanix have some struggles. I mean, it seems like maybe there's a larger, environment issue here. Yeah, you know, I would say last year this time, there was a bit of tailwind in the, in this market, overall growing or growing, you know, fairly well or better than it had been in several years. I would say today, there's, there's no tail. I, you know, we don't perceive a tailwind, but we don't see a lot of a headwind either from an overall macro standpoint. We think our challenges are our challenges. And we're still a relatively small player in a huge market. So it's really up to us to capture more of that share. Okay, great. And then secondly, maybe for Tim, when did you know you were gonna miss? And, were there, were these deals that slipped? Were they, or that didn't close? Were they, were they, lost competitors or do they slip into the Q2 period? Yes. So, so that's all of those deals absolutely are still active. Js So they slipped into the Q2 period. And I think again, that's that's what we talked about in our prepared remarks is that as you engage in these larger deals, they they go sometimes on their own cycle And so again, what we're happy about is we're absolutely, continue to be in the fight on these deals. Sorry, Jason. Go ahead. Go ahead. Yes. I mean, I think that we we did anticipate sort of every year you've got, you know, you have transition of accounts and new capacity, etcetera. I think The added capacity at the scale that we did at kind of order 40% created more transition from a territory management perspective than we have done historically. And so a good news is that's behind us. And I think on the larger deals, we love the size of deals that we're competing for and the relevant that we're having in the large enterprise. And so, the shape changes, but it changes for the better. And I think we factor that in a variability in for the balance of the year. Was this a was this a situation where you kind of thought you were going to hit numbers until, like, the very end and it just didn't come through or was this something that was, you know, problematic throughout the quarter and it just didn't, it was sort of you were behind plan all quarter? No, I mean, I get, we typically don't talk about variability in the quarter, Jason. What I'll tell you is that we had a good last half, last part of the quarter, very strong part of the quarter. Again, this is relative to our expectations. We're outside of guidance by a couple of $1,000,000. So again, it's not, you know, it's not a big number. It's really, we really look at the fact that continues to grow 28% and doing that at scale in this environment, something we're particularly proud of. Your next question comes from Karl Ackerman from Cowen. I think investors understand your weaker operating margin this quarter, given you're previously committed to invest in R&D and headcount, But in the event compute and source spending doesn't return as healthily in the back half, as you may expect, much capability do you have at pushing out R And D projects that perhaps don't yet have order rates attached to them yet? Right. Well, that's a perspective for the future. But in general, it's at real at this kind of gross margins that we're operating with. We've got a lot of leverage in the business. And so, and I've been clear that if investments don't yield the kind of results we expect on the top line in terms of growth, that, we will bring spending in line with that. So that's for the future right now. Right now, we believe we're making the right investments and it's going to yield the kind of growth that we've seen historically. And, so we feel very strongly about the investments that we're making currently. We have, as you might imagine, and if you look at it, we are bringing spending down more in line with our growth. But, at this point, we feel confident about the investments we're currently making. I appreciate that. If I may squeeze in 1 more. You previously suggested cloud data services, I think, would be in GA later this summer. But Computer Verde would seem to accelerate your efforts. So may you quantify the capabilities, Compuverde, you know, provides you, for cloud data service and whether you think you have all the pieces of your portfolio to compete more competitively in cloud file services? Thank you. This is Kix. I'll take that one. So, yeah, we're tracking well first off with cloud Block store, as well as our object and in cloud product, both are on track for, Jay in the second half of the year. And, more broadly beyond that, you know, the Compuverde acquisition was an acquisition for really bringing a software defined file capability in the company. Our first approach with that is really going to be to leverage it as part of the FlashArray product line. If you look at the unified space within the block world, there is a number of customers who buy just a few arrays and really expect both file and file protocol and block protocol out of those arrays. And so our first integration with Compuverde will be to help deliver unified capabilities for FlashArray. And we really think that sets us up well to go after the entirety of the file market. We're already doing really well at the high end with FlashBlade going after next gen use cases, going after really high performance use cases. This will allow us to feather in the more scalable, kind of lower part of the file market to really be able to have a solution and the right solution for every part of the market. Your next question comes from Andrew Nowinski from Piper Jaffray. Great. Thank you. I want to ask a question as it relates to your guidance for the year. So if we take out the $15,000,000 to $20,000,000 that slipped into Q1 from that contract manufacturing issue you had last quarter. Your revenue has only increased about 21%, which is well below the 27.5% growth you guided to for the year. So I'm wondering if you could just walk us through the puts and takes that give you confidence that your business can accelerate well above that normalized growth rate that you just delivered? Right. Well, as we stated last quarter, I mean, every quarter is a new quarter for sales operation. So you start from start from 0. And, we had incorporated in, the, Q4 results, obviously, into our Q1, at the time. So, you know, as we look, what we have done is we've taken the, the same kind of, of math that we do for, for our guide, and and in this case looked at the percentage of large deals in the pipeline and, adjusted for the greater variability of those large deals. And all of that gave us confidence in this new guide. And obviously, we are where we are today. We don't want to be in the same position. Later in the year, which was the primary reason for adjusting the guide. Well, and Andrew, I'd say a couple additional things as well. So first of all, sort of quoted the $15,000,000 to $20,000,000 number. And again, we've never, we've never said $15,000,000 to $20,000,000. Remember that a portion of that was ES2, a large portion of that was ES2. That $15,000,000 number is a bit high as you sort of think about how you sort of rolled your model from Q4 into Q1. I think more broadly though as well is that we talked about this at the beginning of the year. We talked about it again right now, which is new routes to market, new product innovations. Kix just talked about coming out later this year. Combined with a very significant increase in overall productive capacity in the form of quota bearing heads. All of those things bode well for our excitement of out what really is not that much, if any, reacceleration of the business, after you sort of normalize some of these revenue patterns we just talked about. Okay. And then your DSOs increased for roughly 5 straight quarters now kind of the highest level that we've ever seen. I guess Is that what we would expect given the increasing mix from enterprise? Well, I think you're absolutely right on a portion of that. Certainly we see enterprise customers that are a little bit more aggressive in terms of how they negotiate terms, you know, payment terms and, you know, candidly, that's easy, easy gift for us to get into an account and get good margin business. So you are going to absolutely see some of that. And then I think in Q1, you always have a the seasonal dynamic in terms of our DSOs. And so if you look back many years, it will spike in Q1 just because of seasonality. I think you're seeing both of those dynamics play out in Q1. All right. Thank you. Your next question comes from Katy Huberty from Morgan Stanley. Good afternoon. Two questions from me as well. How much contribution did you get from the large systems integrator deal that you talked about last quarter in April. And then what would you say is the right revenue run rate for the remainder of the year from from that contract? Hey, Katie. This is Hat. Yeah. So, the minimum commitment as we articulated was a couple year deal, and it continues to trend, very, very well. Much like the large enterprise, it's not linear every quarter. So there was no net new, contribution from that deal that we announced in this quarter. But we're thrilled with the progress. We're migrating currently dozens of the largest enterprise customers onto our platform, via the manage services agreements with this partner, that would take us a much longer period of time to get you on our own. So, serving as a route to marketing, getting access to some of the largest global customers, I think, is great. We also certified a number of joint offerings with that partner and our building pipeline against it. So, It's definitely on track and continuing to accelerate, but it's not going to be a linear contribution each quarter. Okay. Thank you. And then, and Charlie, maybe a question for you. How are you thinking about opportunities to expand the TAM and maybe even move up the stack over time and whether that would be organic or inorganic investments? Katy, it's going to be both. It'll be a bit of organic a bit of inorganic. And I'll give you one example. You know, what we discussed is our direct flash fabric, what I talked about on the, on my prepared, remarks of, hyperscale infrastructure and hyperscale architecture. That is a new that allows stateless compute in a data center scale environment. That's something that we put together internally. I can tell you that there are a number of internal projects on that, and we do look external for some capabilities as well to be able to deliver, you know, whole stack, compute in a hyper converged for hyperscale environment. So that is an area that we are very focused on, both internally and certainly. In addition to that though, as I mentioned, we're focused on a number of different areas. 1 is hybrid cloud, which is extremely important to us. And everything we're doing in that area, including object engine, cloud block store, cloud snap, etcetera. We've got a lot of activity there. The fast, consolidated data, what we're doing with Splunk and Cisco, Arista and others, be able to create an environment where, where data can be consolidated, not so many copies with many applications accessing same data at the same time. You know our work in AI and analytics, which is growing nicely. And then finally, the idea that companies don't want backup, they want restoration. And, bringing restoration from hours to minutes is really resonating well with our customer base. So quite a few things in the pipeline. You'll hear about a lot more about them at the Accelerate Conference in September, and I invite you all to come. Your next question comes from Rod Hall from Goldman Sachs. Hi guys. Thanks for the question. I just have 5 and I'm actually kidding. So I wanted to I wanted to just go back to the sales efficiency question and see if you guys could expand on that a little bit. It doesn't seem like the kind of thing that would crop up in a quarter. And drive weakness. So I'm just trying to understand, you know, what the color around that is, what what might have caused that to be one of the things you called out this particular quarter and why it sort of caught you by surprise. And then I also, I guess, would like to kind of understand a little bit better how things are going with FlashBlade on the AI front. Just any color you can give on market dynamics there? What you're seeing in terms of demand? Thanks. Hey, Rob, this is Hat. Yes, so we definitely that we were going to have transition in the quarter. You know, that I'm not a big fan of any big changes. And so we made incremental changes but didn't really change much under the hood. We just absorbed 40% more capacity. So the amount of change that happened in the quarter, took more focus than in years past. And so I think that contributed to a series of deals that we had that pushed in the quarter, that any one of those that we would have closed would have made a big difference. So when you're dealing with deals that are multimillion, they elevate in the organizations up to the CEO and to the CFO and things happen outside of your control. Even though you've got, technical win budget and executive sponsor and the rest of it. So, from a Q1 perspective, There was more disruption that we typically had. And that absorption, I think had an impact. The best news is that it's behind us and we feel great about the this quarter and the quarters ahead. On the FlashBlade front, we had a great FlashBlade quarter and continue to have momentum in that It's tied to AI next generation analytics use cases and rapid restore is the 2 primary use cases that are driving it and we see continued progress there. You guys wouldn't you? Real quick, this kicks. You know, if you look at at Gartner and IDC data, AI can use to be one of the top 3 CIO care about So when you look at something that helps us get into net new enterprises, this is a huge entry vector for Pure. We also announced a, an update to the area architecture this quarter where we embrace DGX2. That just helps us continue to grow at a larger and larger sites. And then the final thing I'll say is that our thesis of AI not existing in a vacuum, I think, is playing out well. Where people who do AI also do analytics at large scale. And so the power of FlashBlade is not only the power of the AI initiative, but really to look at that whole pipeline. And so we're seeing more and more of the analytics players really refactor for not only cloud, but on prem flash and using the F3 API. And so that's been a great area of growth for us. Any update on FlashBlade mix for the quarter? No. As you know, we've not been reporting on individual products now for for some quarters. But FlashBlade really is doing quite well for us and we're really pleased with it. Your next question comes from Steven Fox from Cross Research. Thanks. Good afternoon. Just going back to the new cohort hirings. Can you talk maybe step back and talk a little bit about the strategy, either by industry vertical region that you're going after. And, I guess within that strategy, is it clear to say that this was plan all along or did something change in terms of the opportunities that started to rise as you thought about the full fiscal year? And then, as a quick follow-up, You mentioned public sales growing. I thought you said 30%. I just wanted to clarify that. And if there's any color around that, that'd be helpful. Thanks. Yeah. Steven, this is Hat. So, no, no new strategy. This is exactly the strategy that we set out to go do. We wanted to add capacity and put the majority of that capacity in the most important accounts and opportunities business at a national level in the U. S. And we've broken it out across EMEA as well. And we saw very nice progress on our public sector business. And so as one industry vertical that we're starting to see really nice progress now consistently quarter in, quarter out, from the production there. And then in the large enterprise, we're focused at a territory level around industry solution groups around financials, service providers and telcos, healthcare, etcetera. And so when you get to application specific solutions by industry, it drives the portfolio motion as well. And so we're focused on 5 key industry verticals and we're continuing to invest up market in the largest accounts across each of verticals. So in line with what we planned on doing, I think the part that was a little bit different is just absorbing that amount of capacity in the quarter, just took us more time than we added. Understood. Thank you very much. Your next question comes from Simon Leopold from Raymond James. I wanted to see if maybe you could build a gross margin bridge to us in terms of some of the dynamics affecting your gross margin outlook. You had a good gross margin this quarter. We know memory prices are coming down, yet you're guiding to the 65 to 68 from a just over 68% this quarter. How much of this is competitive How much is customer mix? How much is, expectations on costs? Thank you. Yeah. Simon, this is Jim, in terms of the guide going forward, you know, it's really kind of how we thought about guiding the business in the past. I mean, if you watch guidance from us. It's pretty consistent kind of over the last couple of years. What it really does is it gives us flexibility, right? So we have the flexibility to use gross margin at our disposal Sometimes we run a little bit higher on gross margin, which is what you saw in this quarter, and that's allowed us to spend more on OpEx and hire more productive capacity. Other times, it may make sense to go and do some hyper discounted deals to sort of get into some really good and interesting foot right. So, we just want to leave ourselves the room and the flexibility to manage the business over the course of the next couple of quarters as the year sort of plays out. And that's really been kind of standard operating procedure for the last couple of years as a public company. And just to be clear, we're not signaling any major change, either in premium and we get in the market or in costs that that we see. Obviously, we expect the standard competition and the standard declining cost base. So just just to be clear, it sounds like your answer is to say you're being conservative to give yourselves the opportunity to discount, but Looking at the last four quarters, you've been in this 68% neighborhood. I I'm not quite sure I see any reason why that would change. Where I guess I would say it's slightly different. We're giving ourselves flexibility to invest in the business as we see fit, whether that be through OpEx. Or using those points of margin to our advantage to sort of get into better deals. Your next question comes from particular about the AWS relationship, you talked about 3 things that you're, you know, evidencing the closeness of the relationship, the engineering, the sales alignment, and then the the global alignment. I think all three of those things could be said about each of your competitors. And I'm wondering if there's is there anything you can point to that maybe differentiates your relationship with the biggest player in clouds? Yes, this is Kix. I'll take that one. So if you look at our cloud strategy, I think actually the differentiation with respect competition has gotten even more clear over the last quarter. You've seen most of the major storage vendors go down a path where they're largely putting their arrays in cloud connected data centers, kind of a pseudo cloud service off that connected to the hyperscale Well, that's an expedient thing to do because they can just partner in there, sometimes even just through a partner and, and kind of calling it their own service. It's not real cloud. And so I think as we've worked with, the hyperscalers, they're quite excited about our initiative and our focus to basically take our software and optimize it to run natively on the cloud writers. And so, as we said publicly, our our first goal is absolutely to have a a premium set of offerings on AWS. They're the market share leader. But our strategy is multi cloud. And so as we ship via AWS, we'll certainly move on. And we already have engineering efforts underway on, on more than AWS. And is that tighter relationship? Are you seeing that evidence in this large enterprise pipeline that you've discussed? It's definitely contributing to it. I mean, customers and CIOs are interested in a hybrid cloud strategy and what we're doing. They love the fact that we're doing software only. And embedding us natively inside of their environment. And ultimately, the goal is to make the data movement in and out of on prem or in a hosted environment or in the public cloud, very seamless, not only technically, but also commercially. And the expansion of what we talked about my prepared remarks around our ES2 offering, including providing that flexibility, makes it commercially easy. So, we really are an insurance policy to get them to the public cloud whenever they want, commercially. And we think that customers are responding well to that. Yeah. And I'd also just add that I think the technology approach we're taking is also a better go to market motion with the key cloud partners. You know, when we sell our software in their cloud, the customer also has to buy the native services to run that software. And so it's a win win for us and the cloud partner. It really aligns to go to market motion. Got it. Thank you. Your next question comes from Matt Cabral from Credit Suisse. Yes, thank you. Just wanted to circle back to the downtick in guidance for the full year. Just want to make sure, are you guys seeing a change in pipeline or win rates or anything for the balance of the year versus how you're thinking about it 90 days ago? Or is this just about adding in more of an element of variability just given the unknowns around deal timing? It's absolutely the latter, Matt, in terms of how we think about the business. Got it. And then just thinking about Q1 specifically and some of the prices that we've seen in terms of NAND, Is that having any impact on sort of customer behavior or decision delays as they sort of wait to see what happens in in terms of underlying commodity costs? No, I'd say that's the first time, you're mentioning is the first time I've ever heard that question. So, no, I don't think so. Thank you. Your next question comes from Matti Hosseini from SIG. Yes. Thanks for taking my question. I'm gonna go back to the sales productivity, and I realize question has come up a couple of times, but I'm gonna try to ask the same thing different way. I see, sales per number of employees down, perhaps single digit and down on a year over year and down double digit on a cube to cube. Should we expect as we exit this fiscal year, we would see a rebound in these metrics? Or is this more of a sometime next fiscal year? And I have a follow-up. No, Mehdi, this is Tim. It definitely should start to climb. I mean, as we've talked in the past, you follow story for a while now. It takes a while to ramp that productive capacity. And so you have the influx of people that Charlie and Hat talked about. It's going to take some time to ramp. So your aggregate productivity measures will look like they're going down, but that's really just a maturation of the sales force versus anything else. So you're thinking about it exactly right. I'll just repeat, you know, record number and record percentage of, you know, new sellers in the field. So, yes, and obviously they start at low productivity and then continue scaling up through a period of time. So we should see a rebound in the next two, three quarters, correct? Yes. Okay. And then the follow-up, which is more of a big picture, you have you and your peers have been highlighting hyper cloud infrastructure. Some of these arrays were installed 5, 8 years ago. There's also opportunity with the 10 k RPM replacement. And in that context, when should I expect a replacement cycle kick in and when, incremental opportunity from replacing 10 k RPM to materialize. Thank you. Yeah. So this is Kix. You know, I think there's 2 dynamics that I can talk to in our business. You know, first of all, just within our business, As you know, we run an evergreen cycle. And so, we constantly have the opportunity to go back to existing customers and deployments in which there are many now. And get them to upgrade to the latest thing and and to do so in a very positive motion for both the customer and for sure. And so that's, continues to be an important part of our business. Especially as our our install base out there grows. If you look at the market at large, though, I think the the days of the 15 k hard drive have been long gone. The 10 k hard drive is is not far behind it. And, you know, we feel like today we carry, economically compete with that. And I would say, there's a particularly strong octane in the market right now, which is the mid range product refresh from our competitor Dell. You know, they've gone out and publicly announced kind of a next generation product coming, you know, 6 to 12 months away. Meanwhile, 3 of their existing product lines essentially need to be converted to that. And so we think that's a huge opportunity to go out and bring people over to, on the vendor model. Great. If I may just a quick follow-up. Would it be fair to say that those opportunities have yet to come into your backlog? Those are the kind of opportunities that could actually help you with a continuing continued increase in deferred revenue and it would actually strengthen your enterprise mix of business in the in the coming quarters? Look, I think it's fair to say that, part of why we've been excited over time around the the the long term trajectory of flash getting less and less expensive is every time Flash gets a little bit less expensive, a new crop of hard drives out there come up for refresh that we we can now economically go target. And so think we remain very excited about, the coming years, where Flash continues to drive standardization, and we're on the cusp of a transition around QLC. Coming over the next few years and that just opens up even more of the market. Your next question comes from Nehal Chokshi from Maxim Group. Yeah, thank you. Appreciate the color on the adding over 100 enterprise customers that adds in the quarter and that now at 40% of Fortune 500, but I'm still trying to wrap my head around exactly what percent of your sales force? And I'd rather think about it in terms of mature sales force or at least, percent of your sales force that has been around for 1 year. Is focused on enterprise opportunities. And perhaps and then worse is 1 year ago. Could you try to help, tee that out for us? Yes. So the numbers that we provided are 40% increase in capacity, right. So that's new. And the majority of that capacity is moving into the enterprise. So, those investments take a little bit more time to mature. But what we love that we're seeing is, you know, on already larger number of deal sizes as a mix of the overall pipeline. So we're seeing some early results of that mix, but we haven't broken out the exact percentage of all of our seller in terms of how they break out by segment. And to be clear, in the year ago period, the percent of new sales reps that came in was well below the majority. The percent of new sales rep focused on enterprise opportunities was well below the majority. Is that correct? What we'll assist you with? I mean, we definitely have ramped up efforts because we see the opportunity, in the enterprise, you know, with the combination of our product portfolio, expanding. Our routes to market now are getting us access into those at bats that I've been wanting for the last several years. And so, you know, we think it's prudent to make those investments. So The GSI win that we talked about last quarter, it's not just 1, it's multiple GSIs and they are proving to be quite productive in getting us access to accounts that we've been trying to get access to on our own for years and are now actually deploying and migrating data. So we see more of that. We're going to keep investing. Okay, great. And if I might one for Tim, And I recognize that ES2 did, you know, where you expected and did not exceed and was not a factor in the underperformance. But future reference, I think it would be helpful if you could take us an exam take us through an example of how an ESU booking will differ from a FlashArray booking in terms of product revenue, service revenue, and deferred revenue. Yeah, I'll give you a quick, quick overview on that, Nehal. And then obviously we've talked about tucking more deep dive when we come up to our Analyst Day here later in the year. As we've typically said, for every $100 of a traditional CapEx deal, I think kind of between 70% 75% of those dollars get recognized immediately upon shipment and call it the remaining 25% to 30% gets amortized over 3 years. If someone signing up for a 3 year T with us on the ES2 product, that will get amortized in a third, a third, a third. So, obviously, very different sort of rev rec dynamics in the And does that all go to service revenue? Yeah. I'll roll up through support and subscription revenue. I'll I'll now line nothing in product. Thank you. Our last question at this time comes from the line of George Iwanyc from Oppenheimer. Alright. Thank you for getting me in. Touching on the the sales and the hiring again. When you look at the rest of this year, how much hiring do you anticipate And, when we follow through to the following year, how much seasonality is it going to be the same pattern where you anticipate a a very heavy upfront hiring pattern and possibly a repeat of the disruption? Yes. In the sales force, Q1 is our largest hiring It's not our only one, but the biggest hiring quarter for, I think, maybe obvious reasons, right? Sales guys that you're want to finish up their year wherever they are, tends to be in either at the end of calendar Q4. So in our Q4, or, early in Q1. So that tends to be the majority of hires, but we do continue to hire through the year, especially to cover any attrition that we have, but then a bit more. For the rest of the company, it's much more linear through the year. And if anything, we'd probably bring them in a little not in Q1 just because we know we're bringing in so much in the sales force in Q1. So Pat, do you want to? I just think you would see it tapering off for the balance of the year. I think we had a particularly strong Q4 of hiring, and a record Q1 and the combination of those 2, I think, made, you know, the absorption levels higher than we have ever seen in the past. But it'll follow more of the seasonal route, Q2 through the balance of the year. Able to taper off. All right. And with all the new product expansion, can you give us a sense of ES2 cloud data services? How much of a wild card, from a late year contribution standpoint they are? Or should we look at that more as a calendar year 2020, getting more mature and becoming a bigger contributing factor? Yes, George, this is Tim. I think it's too early to tell on those factors. As remember, those are going to be largely subscription as well. So you probably aren't going to see as much on the revenue side. You'd see it more manifest itself in the continued build of the deferred revenue line item. All right. Thank you. And that was our last question. At this time, I will turn the call back over to Charlie John Carlo for closing comments. Thank you. We're excited about the future of PURE. We're proud of our progress and the opportunities ahead of us in FY 2020. I want to we provide. This concludes today's conference call. You may now disconnect.