Good 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 second quarter fiscal 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Matt Danziger, Vice President of Investor Relations. You may begin your conference.
Thank you. Good afternoon. Welcome to the Pure Storage Q2 fiscal 2019 earnings conference call. Joining me today are our CEO, Charles Giancarlo, our CFO, Tim Riitters, our President, David Hatfield, and our VP of products, Matt Kixmoeller. 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 reconciliations to the most directly comparable GAAP measures are provided in the earnings material, press release, and slides. The call is being broadcast live on the Pure Storage investor relations website and is being recorded for playback purposes. An archive of the webcast will be archived 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, Charles Giancarlo.
Thank you, Matt. Good afternoon, everyone. Thanks for joining us on today's earnings call. I will begin the call with a summary of our Q2 results and highlights. Pat will then provide a go-to-market update, and finally, Tim will give a detailed review of our financials and our updated outlook. Q2 was an exceptional quarter for Pure Storage. Our Q2 performance was very strong and the team executed well. We saw great momentum in the business and achieved profitability in our seasonal Q2, reflecting the inherent advantage of our technology and the strength and leverage in our business model. Revenue for the quarter was $309 million, up 37% compared with the same period a year ago. Gross margins were particularly strong at 68%, up 1.7% sequentially, and operating margins were a positive 0.3%. All three measures exceeded the upper end of our guided ranges.
We expect this strength in gross margin to continue for the remainder of the year, we are raising our outlook, as Tim will share in more detail later. Pure's continued focus on customers and innovation has positioned us repeatedly as the technology leader in the data storage market. For the fifth consecutive year, Gartner has recognized Pure as a leader in their Magic Quadrant. In the most recent report, Pure was positioned farthest to the right and highest on both the execution and innovation axes. Our focus on software, next-generation applications, and bringing NVMe to the mainstream positioned us above all other competitors as we continue to democratize Flash for an increasing number of use cases. This strategy of democratizing Flash for the mainstream was on display at our Accelerate conference in May.
At the event, we highlighted our customer's journey to a data-centric architecture, replacing old-style scale-out direct-attached storage designs. The optimization of fast converge networks, compute and storage led by Pure, has enabled enterprises of all sizes to build modern data-centric architectures with shared accelerated storage. In Q2, we delivered on that vision. As you recall, last year, we announced FlashArray//X, the first all NVMe all-flash array. At Accelerate this May, we launched the full X family, which enables NVMe across the entire product line. In Q2, more than 50% of shipments were all NVMe. In contrast, our competitors are just beginning to bring their NVMe offerings to market, and only in their highest-priced products. The speed of adoption of our X family of products has been impressive, and we continue to expect that by the end of the year, the vast majority of our revenue will be NVMe.
In short, our democratization of NVMe is working. It was also a strong quarter for FlashBlade, as we saw expansion in our major use cases such as AI and rapid restore, as well as our largest customers expanding their purchases with a material number of new customers acquiring FlashBlade for the first time. During the quarter, we saw very promising momentum with our AI deployments of AIRI. We also recently completed the acquisition of StorReduce, Pure's first M&A transaction as a public company. StorReduce is a unique cloud-optimized, deduplication engine for object storage, which enables both hybrid and cloud-native architectures for managing large-scale unstructured data. StorReduce's technology is 100% software and was designed to be cloud-first, and we are excited about the natural integration points with both our current on-premise product portfolio and also its contribution to Pure's cloud integration and cloud services capability.
We welcome StorReduce customers and partners, and most importantly, the StorReduce team to the Pure family. When I spoke to you a year ago, we outlined three operating priorities, including focus on our customers, operational excellence, and innovation everywhere. With an NPS score that continues to rise, industry-leading and increasing gross margins, a healthy, profitable business model, and a product portfolio that continues to lead the competition, we will continue to achieve new milestones and look forward to increasing our leadership. With that, I'll turn the call over to Hat.
Thanks, Charlie. Q2 was indeed a stellar quarter for Pure, as our momentum continues to build. Pure's strategy to deliver unparalleled technology innovation, a differentiated business model, and a relentless focus on customer success has underpinned our consistent operating results. We are in a fantastic innovation cycle across our FlashArray, FlashBlade, FlashStack, AIRI, and Pure1 platforms. This innovation, together with the Evergreen architecture and business model that we pioneered, enables our customers to take advantage of these unique capabilities earlier and with no business disruption when compared with any of our competitors. Our differentiated innovation and execution is not only validated in the Magic Quadrant, but Pure also scored the highest of all vendors in Gartner's Critical Capabilities Report, being recognized as number 1 in virtualization, database and OLTP, and DDI use cases, three of the largest revenue segments in the AFA market.
Thousands of global enterprises turn to Gartner for guidance in identifying best-in-class companies to partner with. We are proud of this recognition for the fifth consecutive year. We are also pleased to share that for the fourth year in a row, Pure has increased its certified Net Promoter Score to an 86.6, up from 83.7 last year, retaining our spot in the top 1% of all B2B companies. Critics have noted that as companies scale, it's common to see Net Promoter Scores decline over time. However, it's rewarding to us, with our relentless customer-first focus, to defy this conventional wisdom. Our channel-centric go-to-market strategy to take these unique capabilities to market is working, especially when we see our largest competitors taking more business direct.
The new partner program that we unveiled at our Accelerate conference last quarter has been well-received and is showing quick results, particularly within our largest national partners. Our sales teams performed extremely well in the quarter and are benefiting from the differentiation in our current product cycle. We added nearly 400 new customers for a total of more than 5,150. We are pleased with the mix across our focus markets. Win rates remain very strong across the board. Along with our industry-leading gross margins, it showcases that our sales teams and partners are consistently able to quantify our unique value. FlashArray win rates increased sequentially and year-over-year, driven largely by our new all-NVMe FlashArray//X product line and the adoption of ActiveCluster.
Quite simply, we don't think anyone should buy an AFA in 2018 without NVMe at its core. Only Pure can deliver this fully parallel architecture cost-effectively to the market. We also had a very strong quarter with our FlashBlade offering. Our rapid restore use case continues to enjoy strong momentum. The Q1 launch of our AI-ready infrastructure solution, AIRI, together with NVIDIA, expanded in Q2 with AIRI Mini and has delivered strong early traction as well. Importantly, we're finding that the simplicity of AIRI Mini to kickstart AI deployments and then easily expand is a value proposition that competitive solutions just can't match. While still in the early innings, AI is proving to be a technology that cuts across many industries and all geographies.
We now have multiple AI customers in finance, government, social media, technology, healthcare, automotive, and AI services, with a balance of customers from early-stage startups to decades-old market leaders. Our data-centric architecture and consolidation message is resonating across all industries as well, with the number of million-dollar wins in Q2 the highest in our history. We were particularly pleased with our progress selling into the cloud, healthcare, and financial services segments in Q2. Our cloud segment continues to represent approximately 30% of our overall business and enjoys the highest win and repeat purchase rates across our customers. Across the enterprise segment, we saw continued progress in our customers consolidating business applications and next-generation analytics into a shared accelerated storage platform, including both FlashArray and FlashBlade.
In the quarter, we had wins across some of the leading healthcare and financial services organizations, including The University of Texas MD Anderson Cancer Center, the New York Genome Center, Desjardins Group, and the Royal Bank of Canada. As Charlie noted, we are thrilled about the acquisition of StorReduce. StorReduce has already forged strong partnerships with key public cloud providers, and their technology enables multiple cloud and on-prem use cases, including multi-cloud data tiering, migration, and protection. We look forward to sharing more on our plans for StorReduce integration and our overall cloud strategy in the months to come. The momentum in our business is fantastic. We're in a great innovation cycle, we're investing in the cloud, and customers and fellow Puritans are enthusiastic about the second half and the years ahead. It truly feels like we're just getting started.
With that, I'll now turn the call over to Tim.
Thanks, Hap. Q2 was a great quarter for Pure as we exceeded our guidance ranges on all three of our guided measures: revenue, gross margin, and operating margin. Before I dive into specifics, I'll make my usual note that the gross margin, operating margin, OpEx, net income, and free cash flow numbers I will use are non-GAAP, unless otherwise noted. A reconciliation of these non-GAAP metrics to their GAAP comparables, as well as our full Q2 results and presentation, are available on our investor relations website at investor.purestorage.com. Total revenue for the quarter was $308.9 million, or 37% growth year-over-year, and exceeded the upper end of our guided range. Product revenues were $241.1 million, or growth of 34% year-over-year. Support subscription revenues were $67.8 million, or growth of 51% year-over-year.
Revenue performance was driven by solid business fundamentals and strong execution by our go-to-market teams. Geographically, 74% of revenues came from the U.S., and 26% came from international markets. Total gross margin in Q2 was 68%, up 1.7 points from the previous quarter. This represents the highest gross margin performance we have seen in the company's history. These results illustrate the value we deliver to our customers and validate the significant differentiation between our software-centric products and our competitors' retrofit architectures. Product gross margin increased 1.6 points to 67.9%, driven by continued strength across all of our products, component cost savings, and the early adopter margin benefits associated with the launch of our FlashArray//X product line.
Support subscription gross margins increased 2.1 points to 68.4%, driven by a continued increase in amortization of ongoing support subscription contracts as a result of our growing install base, continued solid execution in our support organizations, and timing of certain renewal bookings during the quarter. Turning to operating margin, we delivered another quarter of profitability with Q2 operating margins at positive 0.3%, representing an 11-point improvement over the same period a year ago and a five-point improvement over the midpoint of our guidance. The outperformance in the quarter was driven by a strong revenue growth and gross margins above our Q2 guided ranges. Net income in the quarter was positive $2.4 million, or positive $0.01 per share, based on a weighted average share count of 263 million shares.
This compares to a net loss of negative $20.7 million, or negative $0.10 per share, based on a weighted average shares outstanding of 209 million shares in Q2 of the last year. Total headcount at the end of the period was more than 2,450 employees, which represents an increase of approximately 150 employees during the quarter. Turning to the balance sheet and our cash flows, we ended Q2 with cash and investments of $1.1 billion, which was up slightly from last quarter. Free cash flow was negative $18.9 million in the quarter, including $7 million from our employee stock purchase plan. This compares to free cash flows of negative $22.5 million during the year-ago quarter, which included $5 million from our employee stock purchase plan. As a reminder, Q2 tends to be the lowest point of cash flow generation throughout our fiscal year.
With that, we'll now turn to our guidance. For our third quarter, we expect revenues in the range of between $361 million and $369 million, or $365 million at the midpoint. We expect gross margins to be in the range of between 64.5% and 67.5%, or 66% at the midpoint. We expect operating margins in the range of between positive 4% and positive 8%, or positive 6% at the midpoint. For the full year, we expect revenues in the range of between $1.35 billion and $1.38 billion, a midpoint of $1.365 billion, which represents an increase of $20 million from our previously guided midpoint. We are raising our gross margin range to between 65.5% and 67.5%, or 66.5% at the midpoint. We are also raising our operating margin range from between 2.5% to 4.5%, or 3.5% at the midpoint.
The raising of our full year guidance is an indication of the strong momentum we are seeing in our business, a validation that our strategy is working, and a statement on the excitement we have for the second half of the year. With that, we will now open the call for questions. Operator?
At this time, I'd like to remind everyone, in order to ask a question, press star one on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question comes from Aaron Rakers from Wells Fargo.
Yeah. Thanks for taking the questions, and congratulations on the good quarter. I was wondering if you could just
Dig a little bit deeper into the gross margin drivers here. In particular, I'm curious of what you're seeing from a NAND pricing dynamic, whether or not you're able to abstract or that is a driver to any of the gross margin. I guess just given on a forward-looking basis, it sounds like you feel like some of these dynamics will continue. How much confidence do you have in that as we start to see NAND flash pricing decline and whether or not you would pass that through to your end users?
Yes. Hi, Aaron. Charlie here. Thanks very much for the question. I would break down the gross margin benefit that we had this quarter and what we see going forward on 3 different things. The first is, frankly, we're able to sell value, and we're able to, I think the coming out with the X Series, and just our increasing awareness of our Evergreen program is having the intended effect on our customer base. They understand the value that we bring, and clearly, we get a premium now for our products, and that's expanding. 2 is that, yes, we definitely, the X Series did bring more value to the customer, and also, because of that, because it actually gets enhanced performance out of the flash, that gives us a benefit.
3rd is, as we've mentioned in the past, we believe that we're able to take advantage of lower-cost NAND faster than anyone else in the industry. As we've been predicting for almost a year now, we thought we'd start to see NAND prices start to decrease, or that we'd be able to get the benefit of decreasing NAND prices starting this past quarter, and that's exactly what we saw. We saw the beginnings of that last quarter, and we feel pretty good. We know what those NAND prices are going to be for us for the next quarter or 2, so we feel pretty good about that.
Okay. As a quick follow-up, as we think about the growth and just in general, the storage market, your closest peer, NetApp, grew, what, 50% year-over-year in terms of the all-flash business. You guys grew 37%. I'm just curious, when you look at the overall market and what seems to be a pretty good demand backdrop, how do you think about traditional enterprise storage versus what you're seeing as far as a contribution from next-generation workloads, if you will, AI, rapid restore, within your product revenue stream?
Right. Well, let me just state flat out that we're competing for the entire storage market, okay? When we look at that, we grew 37% year-over-year, and the rest of our competitors, at best, were high single digits. Let there be no mistake. You can't compare replacing some magnetic installed base with putting in some new Flash disks and identify that as being the same kind of growth rate as what we're seeing. We're growing 37% as a company. Do you want to add some color on that?
Yeah, the only thing I would add is we were thrilled with our net new customer acquisition of nearly 400. That's six net new customers per day. I think the other folks have stopped talking about that because they really are relying on converting their install base. The win rates, I think, and gross margin are the two areas that are the headline here. Our win rates against NetApp and everybody else grew sequentially, and grew quarter-over-quarter and year-over-year, while we're expanding margin. We think that pretty much nails it.
The last thing that I'll mention, if I can add in here, is that as we do see pricing decline with NAND over time, elasticity's real. We will be getting more and more of what are traditionally tier 2 use cases. That's a market expansion opportunity for us.
Perfect. Thank you, guys.
Your next question comes from Mark Murphy from JPMorgan.
Thank you very much, and I will add my congrats on the healthy results. Want to ask you whether your confidence in 30% multi-year revenue growth increase is coming off a quarter like this, where the growth rates are higher than they were a year ago. You mentioned your Net Promoter Scores rose even higher as well. Does the confidence increase, and what factors do you think are essential to achieve sustainable growth at that scale, which is very rare in the technology markets?
We're very confident of the growth rate that we set out before. We're on track for $2 billion in a couple of years' time, and hopefully hitting that on a run rate basis next fiscal year. I would say that our confidence stems not so much from any one quarter's performance, but much more from the NPS scores that you identified. That is love of our customers and just as importantly, the pipeline of products that we have coming out the door. We just released the X Series, we have a whole pipeline of new capabilities that we'll be talking about over the next year, and we feel very good about the innovation engine that we have behind us.
As a follow-up on your cloud mix or cloud adoption, I believe you recently had a SaaS company make a seven-figure initial purchase. Can you update us on the traction and maybe the types of discussions that you're having with the cloud and SaaS providers and maybe what you think it's going to bring to you in the second half of the year?
As I mentioned, the cloud business continues to be really strong for us. Multimillion-dollar wins initially, the highest repeat purchase rates, and highest close rates. That continues to be a key area of focus for our selling teams in the Cloud 1000, and candidly, the top cloud providers overall. We're going to keep investing there. We were pleased with the upmarket bias emphasis that we had at the beginning of this year, and I think that's reflected in having the highest number of million-dollar wins in the quarter as well. The cloud business is a key growth driver for us, we saw great traction across enterprise and our commercial businesses as well.
Thank you very much.
Your next question comes from Wamsi Mohan from Bank of America Merrill Lynch.
Yes, thank you. Good afternoon. If you look at the competitive landscape, there's been a lot of talk about product SKU consolidation at EMC, some significant introduction of different channel strategies by others. You guys delivered the best gross margin quarter in your history. Are you leaving some revenue growth on the table with these margins?
Yeah, I know, Wamsi. Thank you for the message. We don't think so. I would say from a focus standpoint, we're focused on growth as a company. Now, we're not going to leave money on the table, and certainly, we take our premium as we can get it. I've said this in the past. We certainly don't win on price, but we're not going to lose on price either. For every opportunity that our product is the best solution for, we're going to win that deal.
Wamsi, I'll just add, there's no doubt that this product cycle is benefiting the sales team, but I've been doing this for almost 30 years, and I think we have the best sales team in this segment by far. I think that in conjunction with our channel-centric go-to-market is really paying dividends. I think we're growing in the national partners, we're growing at the larger partners, and that's a backdrop where the competitors are taking more deals direct. I just think we have a really nice competitive landscape to operate in with really great sales team and great capabilities to differentiate.
Okay, thanks for that. As a quick follow-up, you mentioned elasticity of demand as NAND price declines. As the NAND price declines have been fairly significant, what do you think that does to overall industry growth rates? Can we talk about a 10-point faster, potentially, growth for the industry? How do you guys think about sizing that opportunity in terms of elasticity of demand?
Wamsi, that's a difficult question, frankly, to answer. We know that elasticity is real, but it's hard to project. We of course see NAND pricing declines, but translating that into AFA market declines is a complex formula that's controlled largely by the large players more than us. It's difficult. As we mentioned in the past, we think they will not be able to take advantage of low NAND prices as quickly as we do, therefore, that may be longer in coming. A little bit difficult to predict, but what we do know for sure is as NAND declines, more of the magnetic market will come up for AFA replacement.
Wamsi, this is Tim. That elasticity is something that we've tracked a lot since we've been a company. That elasticity has proven itself out in all of these sort of scenarios of NAND going up, NAND going down. It's a trend that we feel very confident in.
Okay, thank you.
Your next question comes from Sherri Scribner from Deutsche Bank.
Hi, thank you. You guys have had very strong margins over the past couple of quarters, to some extent helped by the changes in NAND pricing. If you look at the guidance, it suggests margins come down a bit, but still kind of in the higher end of the range. I guess, what are some of the puts and takes on your business and the gross margins doing better as we move through, not just this year, but longer term than your long-term target, and what are some of the risks to the margins as you move into 2019 with NAND prices maybe stabilizing?
Right. Sherri, this is Charlie. Let me take the front end of that, and then I'll pass it to Tim on the other side of it, which is that the first thing, and I think this is very important, is that NAND pricing is part of our improvement in margins, but frankly, the new X series and the greater recognition of the value that we bring with Evergreen, and therefore, our ability to maintain a premium for our product is, I think, probably the greater advantage. The advantage in our overall solution, the model, the software that we bring, the capabilities that we bring with that software and the premium we're able to get for it, I would say is probably the larger contribution to that. Certainly NAND pricing helps, and I'll let Tim take that.
Yeah, I would just echo Charlie on all of those dimensions. I think I'd really sort of focus on the software innovation. We've been talking about this for a long time about how we were software designed at its core, which has allowed us to optimize on whatever NAND may be out there and whatever NAND may be most advantageous for us. And you've seen that in times of declining NAND. You've seen that in times of increasing NAND. There's a reason why we are at the top of the industry in product gross margins, and we expect that to continue.
Okay. I guess just following up on that, thinking about your long-term target, you're clearly at the high end of that, and the product mix, the value that you guys are providing, all seem to be big drivers of that, and those don't seem to potentially be going away. How should we think about those long-term targets? Are they maybe the low end is probably too conservative, and we should really be thinking about you being at the higher end long term?
Well, what we've guided to is the rest of the year, so we're feeling fairly confident there. We're not ready to change our long-term guidance on this. It's a bit too early. You alluded to mix. What you see in any new product line, such as FlashBlade, is that you get better margins as sales increase. I wouldn't put too strong a focus on mix going forward. As FlashBlade increases in sales, we'll get better gross. It is a lower gross margin product today, to be clear, but the margins are improving, and I expect that that's a normal course of events for new products.
You saw that certainly over the sort of medium term, Sherri, in terms of the guidance that we offered up, obviously raising a point and a half of gross margin for the full year gives a statement in terms of the position we are in right now where we have this significant lead in NVMe, the innovation cycle's working very well. We really like what we see in the medium term.
Great. Thank you.
Your next question comes from Katy Huberty from Morgan Stanley.
Yes, thank you. Good afternoon. There's been a lot of discussion about product margins, but you've seen an even more impressive range in support margins over the last couple of quarters. Would love your thoughts as to why that won't continue to expand as revenue scales, or is there some reason that you're approaching it differently on the support subscription margin?
Okay. Thank you, Katy Thank you. There's a lot of interference, Katy, on your line. I think you're asking about OpEx margin performance and why we might not expect that to continue going forward. Again, I'll start off with an answer and then let Tim conclude. As we've talked about in the past, our target was to get to mid-single digits profitability and then really pour on the gas in terms of growth rate overall for the company. That as long as we were profitable and that we could maintain growth in the 30%-40% or higher range, that our real focus as a company was going to be on maintaining growth. That is our aim.
We do have the foot on the gas in terms of growth. Each quarter has the vagaries of hiring and expense and so forth. That's our target is to really focus on growth.
Katy, our apologies. There was a little bit of noise and static here. I think you were also asking a question about support margins. You're absolutely right. Support margins, if you look over the last several quarters, they've been climbing very nicely. I think it's really a combination of great efficiency and effectiveness by our wonderful world-class support organizations. They're doing a fantastic job. Also just as that business scales, there's inherent leverage in the business. Finally, the Evergreen model is starting to kick in. We're seeing great renewal rates now at scale. Really that's providing that nice lift on the support gross margin side as well. A lot of things to be excited about on both pieces of gross margin, if you will.
Your next question comes from Alex Kurtz from KeyBanc Capital Markets.
Thanks, guys. Can you hear me okay?
Yeah.
Yep.
Yeah. Good afternoon. Just another clarification on the X series. Tim, is there. I'll throw this out to anyone. Because you're delivering a significant difference in price per IOPS than your traditional products with the X series, is there a segment of the high-end of your install base that are seeing real value there and maybe your product margins could just structurally be higher going forward because you're providing so much more value at the really high tier 0, tier 1 workloads? Maybe there's just a reset on the top end of your install base. I have a follow-up on the cloud.
Alex, on gross margins, we've always thought about our gross margins as a pool and a portfolio in the business. We sell, as you heard Charlie say earlier, value. Part of what you saw this quarter is those early adopters really putting X to the test and X to use, and they're delighted with what we're seeing. We're going to manage that pool. I wouldn't draw the next conclusion that gross margins keep going and going. We've always managed a pool, and with the X series, it's no different.
I guess I was just saying-
I'll chime in. I think in general, we just have never believed in the high-end niche performance segment. Back to the earliest days of Pure, we believed in democratization, and that's exactly what we've tried to drive with X, bringing NVMe to the masses. If you look at achieving 50% of our product line on NVMe now, we think the far bigger opportunity is to drive consolidation with the product line.
We can follow up on the call back on that. Just on the cloud, when you look at the year, what's the cadence of the growth rates there relative to the rest of the business?
Hey, Alex, it's Tad. Continued progress on the 30%. We think that's reflective of where we're going to continue to have it march. Our upmarket buys focuses on three key segments. The Cloud 1000 is obviously up at the top of the list. The Fortune 500, which is north of 35% now in the G2K and in the largest non-public kind of healthcare government agencies. We saw nice progress across all three of those.
All right. Thanks, guys.
Your next question comes from Andrew Nowinski from Piper Jaffray.
Great. Thanks a lot and congrats on the nice quarter. First I want to ask about ELAs. One of your competitors started offering ELAs to larger strategic customers. Does Pure Storage offer these yet? If not, are you going to begin offering these to the larger global customers?
Andrew, this is Tim. No ELAs at this point in time. As the business scales and we think about software, that might be something we take a look at. Again, remember, all of our products, how we've gone to market in the past is everything is included. That's one of the other reasons you're not seeing ELAs in our business right now.
Okay, understood. Last, I just want to ask about your hybrid cloud strategy. I saw your ES2 announcement at Accelerate. I guess how do you compete against NetApp if the client wants a storage platform that enables them to run the same operating system in Amazon as they do on-premise?
Yeah, this is Kix. I'll take that one. Look, I think we absolutely believe in the hybrid model of IT, and we've made a number of announcements and development initiatives around supporting that. Accelerate, we announced our CloudSnap offering, which allows us to integrate our arrays on-prem and be able to send data to the cloud natively. If you look at the acquisition we announced today, we're excited about a lot of the hybrid use cases that acquisition unlocks to be able to federate data across both on-prem and hybrid cloud.
Got it. Thanks, guys.
Your next question comes from Ittai Kidron from Oppenheimer.
Thanks, and congrats on a great quarter. Couple of questions from me. First for you, Charlie. Last call, you've talked about how you're working hard to scale the business. One of the main reason you came to this company is to make a lot of changes in the go-to-market and the enterprise approach. Help me think about some of the things that you've done. In what way are they already showing, and in what way are they still not showing, and they're still very much ahead of us to look forward to?
Yeah, Ittai, thank you. I wouldn't say that I came to make a lot of changes. I certainly would say that I came to help the company to continue to scale going forward. Some of the changes that we made which I think the company, to a large extent, was already embarked on, was this upscale bias and what that meant, in terms of channel programs, in terms of product structures, in terms of marketing programs and how we address enterprise and cloud-level opportunities. We've certainly done that. As you know, we reorganized the company as a business for a greater focus around business units, and that's certainly given us a greater focus for this year.
Other things that are perhaps less apparent to the outside was just making sure that we had really good alignment around the main areas that was going to make a difference for us going forward, such as what we do for enterprise customers, such as how we align all the way from supply chain to engineering to marketing to sales. I would say it was really just innovating around the edge or aligning what was already all the good practices at the company and refocusing around the ones that were going to make a bigger difference for us in the future.
Got it. Very good. Then for you, Kix, NetApp and NVIDIA also announced this relationship, I guess, around AI. How do I compare and contrast what you do with them versus what NetApp is doing with them?
They say imitation is the deepest form of flattery, that, I think, was certainly the case in those announcements. Look, I just point to a couple things. Number one, we're seeing real growth in our AI business, we continue to win jointly with NVIDIA and feel good about it. You can look at the public references we put out, I'm not sure any of our competitors have put out any public AI references as an example. The second thing I would say is that one of the things that really is an advantage of FlashBlade is its scale from small to big. Most AI initiatives don't start huge, they start small, but then they grow quickly as people get steam with them. One of the real advantages to our product line is you don't have to buy into our largest array on day one.
You can start with a small FlashBlade and grow seamlessly as your AI initiative grows.
Got it. Very good. All right. Good luck, guys.
Your next question comes from Jason Ader from William Blair.
Yeah, thanks. I have one for Tim and one for Charlie. For Tim, can you confirm that the X series has a better gross margin than the M series? Because that's what it seems to imply from the margins this quarter.
The short answer, Jason Ader, at this point, yes. X margins are better for us for the reasons I think we talked earlier on the call in terms of the value our customers are seeing and the value that we can capture from it. Yes.
Okay. From a cost-of-goods standpoint, is it roughly the same for you?
There's some benefits there because as Charlie alluded to earlier in the call, we're starting to see the benefits of NAND. We've seen a tight NAND market for the last year. We always thought that right around this time we'd start seeing some relaxing on that bill of material components, and that's indeed happening.
The other thing I would add is just with our DirectFlash architecture, we can now program directly to raw NAND. With X, we're buying raw NAND instead of buying finished SSDs, and that, of course, gives us an advantage as well.
Great. For Charlie, maybe following up a little bit on Ittai's thread. Just obviously the business looks really strong, but where do you think the company can be doing a better job? Maybe a vertical or a geo, I guess maybe it's as much per Hat here, too, just in terms of the sales and go-to-market side.
Coming into any company, I always view it as an antique car. You're driving down the road, having a wonderful time, but you're only miles away from the alternator going or a brake pad or something like that. Every company always requires just constant tuning. In any particular quarter, there are things we can do better and we want to make sure that we're well aware of those. Having a company that is very transparent as to where its challenges are so that you can address them rapidly is very important, and that's what we try to instrument here. I don't know that it's useful to go into specific areas. To be clear, we started our journey going focusing more upmarket. There's still a lot more work to do there, to be very clear.
We're excited about our technical team and technology and the acquisition that we're announcing today. There's more that we can do there. We plan on bringing out more. We continue to fill out a number of areas, both the features and capabilities of our product line, which, as we've said in the past, that we still have more to go there as well as our cloud story. We continue to build there. Lots of room for improvement, but we're proud of where we are and very optimistic about how as we continue to focus on these areas, how that'll improve the business going forward. Thanks.
Your next question comes from Eric Sefferer from GMP Securities.
Yeah. Thanks for taking the question. Congratulations. A couple of times you've referenced some of your competitors taking business direct. I assume that's EMC. Can you talk a little bit about what type of business you see that taking place and what actually has happened with some of your channel partners as that's opened up some opportunities?
Yeah, Eric, this is Ad. I wouldn't isolate it into one specific vendor. I think it's a trend that we're seeing across multiple. I think when we've got order 10 to 15 points of gross margin advantage in a differentiated product line that we just extended our lead even further, it's hard to compete with that. I think they're trying to do whatever they can do to win. Our success in competing with them is measured in terms of the expansion of the gross margin and the win rates. Dell, I think, has changed the culture a bit of EMC. We see a lot of those folks leaving. Many of them are leaving to partners of ours. They've got deep domain knowledge, and they've been beat by us quite a bit, so they will go over with a receptive embrace.
We also see them coming here. Right. It seems to me that the trend is they're more focused on top line. If they can get there with servers, they get there with servers versus focusing so much on storage. I think it's a general competitive landscape that benefits our uniqueness. We're very confident in the second half of the year.
Last question. Do you think you might start breaking out FlashBlade in the some foreseeable future, maybe in fiscal 2020?
Yeah, this is Charlie. We really, as I've said in the past, breaking out individual line items on a reporting basis for individual products, especially new products that tend to be lumpy and tend to go through learning curves, I think can distract from the way that we're followed. FlashBlade did have a good, strong quarter this quarter, so we're pleased about that, but I don't see breaking it out anytime in the near future.
Eric, just one thing to follow up, because you mentioned on the partner as well. The new partner programs that we rolled out have been really well received. The national partners, we're rewarding those partners that invest in us. There's a reciprocal relationship that as they're investing in practices and they're driving more leads to us, they benefit financially from that. That's an area we're going to continue to invest. I think it's that dynamic while the others are pulling away a little bit from the channel, at least as it appears to me and to us, is benefiting us from the largest national players.
Very good. Thank you.
Your next question comes from Simon Leopold, from Raymond James.
Hi, guys. This is Victor Chu in for Simon. I was hoping you could help us dig a little deeper into the longer-term opportunities and the role of Flash, specifically in newer applications like big data and AI. When we look back historically at how flash storage evolved, there was a time when it was considered an extravagance because of the performance was so far ahead of the rest of the parts of the data center that it was hard to make the case for it economically. Obviously, that's shifted as compute hardware has advanced to the point where legacy disk is obviously the bottleneck in a lot of situations, and flash is more standard. I guess my question is, should we think about the progression and advancements of GPUs and other specialized silicons as being analogous in this respect?
Are the current Flash platforms sufficient enough to meet the current needs, given that we're still in the early stages here? At what point, if ever, do they become bottlenecks versus more specialized solutions like FlashBlade?
This is Kick. I'll take this one. I think we're excited about expansion on both sides of the spectrum. As you noted with GPUs and AI and a renaissance on the top end of performance, that's creating demand that frankly only Flash can serve. That's helping us sell NVMe and some of the higher performance offerings. As you look at the forward motion of NAND cost price declines, we think we can go after even more terabytes of the data center that would have only been in the layer of disk before. The final thing, ultimately the StorReduce acquisition from us is about going after terabytes that might even have landed on disk or tape and modernizing those as well, leveraging cloud storage as the cheaper storage option as opposed to on-prem.
We think it's high time to modernize everything, and we're seeing good opportunities in both directions.
Okay. Thank you.
Your next question comes from Mehdi Hosseini from SIG.
Yes. Thanks for taking my question. Most of the good questions have been already asked. I have a couple of follow-ups. Looking at your acquisition announced tonight, it's very intriguing and very interesting, especially the dedupe feature of this acquisition. Two follow-ups. Do you see this acquisition running independent for a few years before becoming embedded into your Flash products, or is it going to be embedded into the FlashBlade as you try to scale your NAS or object-oriented products? I have a follow-up.
Well, that was a very good question, Mehdi.
Usually are.
Thank you for that. By independent, I think you mean will we sell it as software running on a standard hardware? The answer to that is yes. To be clear, though, for the immediate next several months, our plan is to continue to maintain and support their customers, but not to add new customers while we, you might call it purify the software, that is, make it compatible with our management, make sure that it has the kind of reliability that our large customers are going to expect, the kind of availability in that environment. We'll talk more about this towards the latter half of the year. We'll be able to describe exactly how this folds into our overall product line and the exact program of what the new product announcements are on that.
As Tim might have mentioned, both the expenses as well as the revenue are incorporated in our current guidance. We don't see it being a major-
To be clear, on the revenue side, Mehdi, for the rest of this year, we don't anticipate any dollars in the guide. Nothing's baked in the guide right now for that acquisition.
Okay. Got it. One follow-up on NVMe. When do you expect the NVMe over Fabrics solution to be supported by Fibre Channel?
I think as you're aware, when we look at the end-to-end NVMe opportunity, we saw the biggest opportunity to be implementing it within our systems. That's where most of the latency in a storage transaction occurs, so that's what we focused on first. We promised that we would be bringing out NVMe over Fabrics by the end of this year, and as we've stated publicly, our first goal is to actually start on the IP side and then follow that on the Fibre Channel side. We are absolutely on track with our deployment of the IP side this year, and we expect Fibre Channel next year.
Okay. Got it. Very clear. Thank you.
Your next question comes from Rod Hall from Goldman Sachs.
Hi. This is Bala Reddy in for Rod. Thanks for taking my questions, and congrats on good quarter. I have a couple of questions. On FlashArray, you noted that win rates have increased quarter-on-quarter. Just wondering, is it solely driven by NVMe FlashArrays or anything else that's helping in there? I got a follow-up.
This is Tad. The product cycle overall I think is contributing to that. There's no doubt that the FlashArray//X really extended our moat and differentiation is having a big effect on our biggest business.
That helps. Any particular geography or against any competitor that you are seeing better win rates?
We've seen them consistently across the board for years, that hasn't changed. I think we'll continue to focus on driving our success in the largest markets internationally, the largest segments that we've got. We did see a particularly strong quarter in the Americas in Q2, which we were thrilled with. Obviously it being our largest business, when that grows, it really helps the overall top line as well.
Great. One last question. What kind of trends are you seeing in FlashBlade business? You mentioned that you are seeing larger deals more frequently. Any further color on that would be helpful. Thanks.
I would just say, I'll hit the first part and Tiff maybe follow underneath it. We're seeing great traction in three real use cases. One is the rapid restore use case. Another one is in backup and sort of, pardon me, Exadata replacements. The third one is in these next generation analytics and AI. All three of those are very repeatable, and we're seeing great traction and success across segments. We talked about the New York Genome Center. It's one of the largest competitive installs that we're aware of in this area. We also talked about RBC, and this is a great win for us with one of the largest banks globally. There's a whole bunch of other successes that we had across healthcare, large SaaS companies, and public sector. We're seeing great adoption across those three use cases, across segments.
Perfect. Thanks so much.
Your next question comes from Eric Martinuzzi from Lake Street.
Question regarding StorReduce. Just wondering if this is, did you find that you were maybe lacking something in the product portfolio, not having this capability cost you maybe in some competitive bids? Is this really more about broadening your current offering to the install base so that you're there with them when they want to have a hybrid capability?
Look, I'd say a couple things. First off, we don't have dedupe today in FlashBlade, this is a natural fit in that sense. In the broader equation here, oftentimes when we go out and meet customers around big data, they have hundreds of petabytes of data. Bringing hundreds of petabytes to flash today probably isn't realistic. We often get into discussion with them about how we can move tens of their petabytes to flash, we need some lower tier for the rest of the data. We think the rest of the data should be in the cloud. If you look at a previous workflow from a decade ago, customers might have used three flavors of disk and tape. We think the future is flash and low-cost public cloud storage.
Okay. As far as the partner education, I understand you've got to do some integration on the technology side, what about the timeline for getting the partners smart on this capability?
Yeah. Once we engineer and purify the product as we talked about, it'll be a full Pure product that we'll launch just as we do with any, train all of our partners, work to drive technology partner integrations, all the normal stuff.
We feel like we've got the time to be able to do that. We feel confident about the timelines we have in place for that.
Yep. Pras, it's also useful to mention that this product also brings strength in new partnership areas. StorReduce was successful in creating a number of cloud partnerships as well, and we intend to embrace and extend those partnerships.
Got it. Thanks.
Our last question comes from Steven Fox from Cross Research.
Thanks. Good afternoon. I'll keep it quick. Just on the channel-centric focus and also the ramp-up into larger scale wins, it seems to be creating some operating expense leverage as well as gross margin leverage. Can you just sort of talk about whether your expectations for further OpEx leverage have changed, going forward, given the success you're having? Then I had a very quick follow-up.
Yeah. This is Tim. I think you're right in suggesting that there is leverage there to be had, I would sort of just point to the guidance that we issued here today, raising our full-year profit up. There is inherent leverage in the business. The business is performing well and very healthy. I don't think it's changed our long-term view of the dynamics in go-to-market and the success we've been having.
Yeah, I'd just add that a lot of the investments that we make upfront take some time to come through, we're seeing the benefits of some of that. Candidly, we're doubling down. I think our competitors in the market are going to feel us in the second half as we invest in our channel partnerships, invest in market awareness, and invest in additional capacity. We're really excited and motivated about the second half, and Kevin, this one's for you, EFD.
Tim, just real quick on the cash flows for the full-year guidance now. What does it say about, not necessarily cash flow from operations, you've been specific about that, free cash flow now as we think about your investments through the full year. Where do you think you come out for the year roughly on the free cash flow line?
Yeah, Steve, we've never really guided free cash flow. It just can be noisy. It has to do with cash collection spanning an individual quarter boundary or anything like that. I think all we've done is qualitatively said, "Last year, we were a positive free cash flow for the year, a small amount. We definitely anticipate being a stronger FCF generation year this year." Really point people on our progress to the operating margin, which is a much more stable and predictable number than any given quarter of FCF.
Understood. Worth a shot. Congrats on the great progress.
Thanks. Appreciate it, Steve.
I will now turn the call over to Charles Giancarlo for closing remarks.
Thank you, Mike. Everyone, we're proud of our progress this quarter, and we're proud of empowering our customers to succeed. I really want to thank the entire Pure team and our global partners for their tireless efforts and their dedication. Lastly, on behalf of all Pureians globally, I'd like to welcome again the StorReduce team, along with their customers and partners to the Pure Storage family. We believe that the StorReduce team has built an incredibly exciting technology that has the opportunity to make a major impact on the next generation of cloud storage architectures. Once again, I want to thank you all for joining us on this call today. It's been a pleasure talking to you, and I look forward to chatting with you in the days and weeks to come.
This concludes today's conference call. You may now disconnect.