Earnings Call: Q2 2019

Aug 21, 2018

Good afternoon. My name is Mike, and I will be your conference operator today. 2019 Earnings Conference I will now turn the call over to Matt Danziger, Vice President of Investor Relations. You may begin your conference. Thank you, and good afternoon. Welcome to the Pure Storage q22 fiscal 2019 earnings conference call. Joining me today are our CEO, Charlie Doncarlo, our CFO, Tim Ritters, our President, David Hatfield and our VP of Products, 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 businesses contained in our filings with the SEC and we refer you to these public filings. During this call, we will discuss non GAAP measures in talking about the company's performance and reconciliations to the most directly comparable GAAP measures are provided in 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, Charlie Joan Carlo. Thank you, Matt, and good afternoon, everyone. Thanks for joining us on today's earnings call. Q2 results and highlights. Hat 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. 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 309,000,000, 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 and 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 5th consecutive year, Gartner has recognized PURE as a leader in their Magic Quadrant. And in the most recent report, PURE was positioned far this to the right and highest on both the execution and innovation axis. 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 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 converged networks, compute and storage led by PURE, has enabled enterprises of all sizes to build modern datacentric 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 FlashArray. At Accelerate this May, we launched the full X family, which enables NVMe across the entire product line. And 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 we continue In short, our democratization of NVMe is working. Expansion in our major use cases such as AI and Rapid restore, as well as our largest customers expanding their purchases with a with our AI deployments of Aerie. We also recently completed the acquisition of StoreReduce, PURE's first M and A transaction as a public company. Store Reduce is a unique cloud optimized deep duplication engine for object storage, which enables both hybrid and cloud native arc textures for managing large scale unstructured data. Store reduces 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 store reduced customers and partners, and most importantly, the store reduced team to the Pure family. When I spoke to you a year ago, we outlined 3 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 Thanks, Charlie. Q2 was 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, ARI and Pier 1 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, 3 of the largest revenue segments in the AFA market. 1000 of global enterprises turn to Gartner for guidance in identifying best in class companies to partner with, and we are proud of this recognition for the 5th consecutive year. We are also pleased to share that for the 4th 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. Predictive 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 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 and we are pleased with the mix across our focus markets. Win rates remain very strong across the board and 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 flash array X product line and the adoption of active cluster. Quite simply, we don't think anyone should buy an AFA in 2018 without NVMe at its core and 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 and the Q1 launch of our AI ready infrastructure solution, Ares, together with Nvidia, expanded in Q2 with Aerie Mini and has delivered strong early traction as well. Importantly, we're finding that the simplicity of Aerie Mini kick start 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 a number of $1,000,000 wins in Q2, the highest in our history. We were particularly pleased with our Our cloud segment continues to represent approximately 30% of our overall business and enjoyed 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 health care and Financial Services organizations, including the University of Texas MD Anderson Cancer Center, the New York Genome Center, Djardin Group and the Royal Bank of Canada. Finally, as Charlie noted, we are thrilled about the acquisition of StoreReduce. DoryDuce 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 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, Hat. Q2 was a great quarter for Pier 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. Pierstorage.com. Total revenue for the quarter was $308,900,000 or 37 percent growth year over year and exceeded the upper end of our guided range. Product revenues were $241,100,000 or growth of 34% year over year. Support subscription revenues were $67,800,000 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 United States 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 percent, 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 percent, driven by a continued increase in amortization of ongoing support subscription contracts as a result of our growing installed base, continued solid execution in our support organizations and timing of certain renewal bookings during with Q2 operating margins at positive0.3 percent, representing an 11 point improvement over the same period a year ago, and a 5 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 positive2.4 or positive 0 point 0 $1 per share based on a weighted average share count of 263,000,000 shares. This compares to a net loss of negative 20.7 based on a weighted average shares outstanding of 209000000 shares in Q2 of the last year. Total headcount at the end of the period was more than 2450 employees, which represents an increase of approximately 150 employees during the quarter. Turning to which was up slightly from last quarter. Free cash flow was negative $18,900,000 in the quarter including $7,000,000 from our employee stock purchase plan. This compares during the year ago quarter, which included $5,000,000 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 $361,000,000 $369,000,000, or $365,000,000 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 $1,350,000,000 $1,380,000,000, a midpoint of $1,365,000,000 which represents an increase of point 5 percent and 67.5 percent or 66.5 at the midpoint. We are also raising our operating The raising of our full year and a statement on the excitement we have for the second half of the year. With that, we'll now open the call Your first question comes from Aaron Rakers from Wells Fargo. Yes. 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 and In particular, I'm curious of what you're seeing from a NAND pricing dynamic, whether or not you're able to kind of abstract or that is a driver to the any of the gross margin. And 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 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 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. And then third 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. And we've 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 quarter 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 are going to be for us for the next quarter or 2. So we feel pretty good about that. Okay. And as a quick follow-up, as we think about the growth and just in general, the storage market, your closest peer to 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 stay flat out that we're competing for the entire storage market. Okay. And when we look at that, we grew 37% year over year and the rest of our competitors at best were high single digits. So let there be no mistake. There you can't compare replacing some magnetic installed base with putting in some new flash disk and say 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? Yes. The only thing I would add is, we were thrilled with our net new customer acquisition, nearly 400. That's 6 net new customers per day. And I think the other folks have stopped talking about that because they really are relying on converting their installed base. The win rates, I think, in gross margin are the two areas that are the headline here. Our win rates against NetApp and everybody else grew sequentially. And grew quarter on quarter year on year, while we're expanding margin. So we think that pretty much nails it. And 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 is real. We will be getting more and more of the what are traditionally tier 2 use cases, and that's a market expansion opportunity for us. Perfect. Thank you guys. Your next question comes from Mark Murphy from JP Morgan. Thank you very much. And I will add my congrats on the healthy results. I want to ask you whether you're confidence in 30% multi year revenue growth increases 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. So does the confidence increase? And what factors you think are essential to, to achieve a kind of sustainable growth at that scale, which is very rare in the technology markets? Yes, we're very confident of the growth rate that we set out before. We're on track for $2,000,000,000 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 quarters performance, but much more from the NPS scores that you identify that is a love of our customers. And just as importantly, the pipeline of products that we have coming out the door over we just released the X Series, but 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 7 figure initial purchase. Could you update us on the traction and maybe the types discussions that you're having with the cloud and SaaS providers? And maybe what you think that's going to bring to you in the second half of the year? Yes. So 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. So that continues to be a key area of focus for our selling teams in the cloud 1000. And candidly, the top cloud providers overall. So we're going to keep investing there. We are 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 $1,000,000 wins in the quarter as well. So, again, the cloud business is a key growth driver for us, but we saw great traction across enterprise in our commercial businesses as well. Thank you very much. Your next question comes from Lonzy 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 consolidation at EMC, some significant introduction of different channel strategies by others, but you guys delivered the best gross margin quarter in your history. Are you leaving some revenue growth on the table with these margins? Yes, no, Wamsi, thank you for the message. We don't think so. We certainly, I would say, from a focus standpoint, we're focused on growth as company. Now we're not going to leave money on the table, and certainly we take our premium, as we can get it. But I've said this in the past, we certainly don't win on price, but we won't going to we're not going to lose on price either. So, for every opportunity that we that our product is the best solution for, we're going to win that deal. Yes, 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 a national partner growing to larger partners. And that's a backdrop where the competitors are taking more deals direct. So 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. And as a quick follow-up, You mentioned elasticity of demand as NAND price declines. As NAND price declines have been fairly significant, What do you think that does to overall industry growth rates? I mean, can we talk about a 10 point faster potentially growth for the industry? Or how do you guys think about sizing that opportunity in terms of elasticity of demand? That's a, Wamsi, that's a difficult question, frankly, to answer. We know that elasticity is real, but hard to project exactly what we, of course, see NAND pricing declines, but translating that into, you know, AFA market declines is a complex formula that's controlled largely by the large players more than us. And so it's difficult to as we mentioned in the past, we think they will not be able to take advantage of low NAND price as quickly as we do. And therefore, that may be longer in coming. So 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. And Wamsi, this is Tim. That elasticity is something that we've tracked a lot we've been a since we've been a company, and that electricity has proven itself out in all in all of these sort of scenarios of NAND, NAND going up, NAND going down, So it's a trend that we feel very confident in. Okay. Thank you. Question comes from Sherry Schreiber 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. And 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 'nineteen with NAND prices maybe stabilizing? Right. Sherry, 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 that I think is very important is that NAND pricing, our part is part of our improvement in margins, but frankly, the Nu X Series and the value that we've been 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 more the greater advantage. So 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 forward, I would say, is probably the larger contribution to that. But certainly NAND pricing helps and I'll let Tim take that. Yes. I would just echo Charlie on all of those dimensions. I think I'd really sort of focus on software innovation. And 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 Flash may be out there and whatever Flash may be most advantageous for us. And you've seen that in times of declining man. You seen that in times of increasing NAND. So there's a reason why we are at the top of the industry and 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. So how should we think about those long 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 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 Mick what you see in any new product lines such as FlashBlade is that with, you get better margins as you, as sales increase. So 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 approx today to be clear, but the margins are improving. And I expect that that's a normal some events for new products. And you saw that certainly over the sort of medium term, Sherry, in terms of the guidance that we offered up, obviously raising a point and a half of gross margin for the full year. Give the statement in terms of the position we are in right now where we have this significant lead in NVMe, the innovation cycles are working very well. So we really like what we see in the near 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 the bridge to support margins in the last couple of quarters. So, above your thought as to why that won't continue to expand as if revenue fails, or is there some reason that you're approaching it, if you're on the support subscription. Okay. Thank you, Katie. Operator, can you put Thank you. There's a lot of interference, Katie, on your line. I think you're asking about up margin performance and why we might not expect that to continue going forward. Also, again, I'll start off with an answer and then let Tim conclude So as we've talked about in the past, our target was to get to, mid single digit profitability and then really poor on the gas. In terms of growth rate overall for the company that as long as our as long as we were profitable and that we could maintain growth in the 30% to 40% or higher percent range, Then our real focus as a company was going to be on maintaining growth. That is our aim. We do have to put on the gas in terms of growth. And each quarter, has the vagaries of hiring and expense and so forth, but that's our target is to really focus on growth. And Katy, our apologies. There was a little bit of a noise in static here. I think you were also asking a question about support margins. And you're absolutely right. Support margins, if you look over the last several quarters, they've been climbing very, very nicely. I think it's really a combination of great efficiency and effect by our wonderful world class support organizations. They're doing a fantastic job, but also just as that business scales, there's inherent leverage in the business. And then Finally, the evergreen model is starting to kick in. We're seeing great renewal rates now at scale. And really that's providing that nice lift on the support gross margin side as well. So 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. Good afternoon. So 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 eye up than your traditional products with the X Series, is there a segment of the high end of your installed 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 kind of like a reset on the top end of your installed base? And then I have a follow-up on the cloud. Well, so, Alex, on gross margins, we've always thought about our gross margins as a pool and a portfolio in the business. And so, we sell, as you heard Charlie say earlier value. And so, 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. And so we're going to manage that pool. I wouldn't sort of draw the next conclusion that gross margins keep going and going and going. But we've always managed a pool. And with the X Series, it's no different. Guess I was just saying. I think in general, we just have never believed in the high end niche performance segment. Back to the early days of pure, we believed in democratization and that's exactly what tried to drive with X, bringing NVMe to the masses. And so if you look at achieving 50% of our product line on NVMe now, we think the high the far bigger opportunity is to drive consolidation product line. We can follow-up on the call back on that, but 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 Hat. Continued progress on that on the 30%. We think that's reflective of where we're going to continue to have at March. Our upmarket buys focuses on 3 key segments. The cloud 1000 is obviously at the top of the list. The Fortune 500, which is north of 35% now in the G2K and then the largest non public kind of healthcare government agencies. And 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. So, first, I want to ask about ELAs. 1 of your competitors started offering ELAs to larger strategic customers peer storage offer these yet? And if not, are you going to begin offering these to the larger global customers? Andrew, this is Tim. No ELAs at this at this point in time as the business scales and we think about software that may be something we take a look at. But again, remember, all of all of our products, how we've gone to market in the past is everything is included. And so that's one of the other reasons you're not seeing ELAs in our business right now. Okay, understood. And then last, I just want to ask about your hybrid cloud strategy. And I saw your ES2 announcement at Accelerate, but I guess, how do you compete against NetApp if a client wants a storage platform that enables them to run the same operating system in Amazon as they do on premise? Yes, this is Kix. I'll take that 1. Look, I think we absolutely believe in the hybrid model of IT and we've made a number of announcements and development issues around supporting that. So accelerate, we announced our cloud Snap offering, which allows us to integrate our arrays on prem and be able to send data to the cloud natively. And then if you look at the acquisition we announced today, we're excited about a lot of the hybrid use cases of that acquisition unlocks to be able to federate data across bolt 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. A couple of questions for me. First for you, Charlie, last call, you've talked about how you're working hard to scale the business. Now 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 you still not showing and they're still very much ahead of us to look forward to? Yes. 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 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 greater focus around, around business units. And that's certainly given a greater focus for this year. And other things that are perhaps less apparent to the outside, was just making sure that we had really good alignment around our, our, 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. So I would say it's really, it was really just innovating around the edge or aligning to what was already all the good is at the company and refocusing around the ones that we're going to make a bigger difference for us in the future. Got it. Very good. And 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? The same attention is the deepest form of flattery and that I think was certainly the case in those announcements. Look, I just point to a couple of things Number 1, we're seeing real growth in our AI business. And we continue to win jointly with Nvidia and feel good about it. You can look at the public references we put 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 that scale from small to big. And most AI initiatives don't start huge. They start small, but then they grow quickly as people get steam with them. And one of the real advantages to our product line is you don't have to buy into our largest array on day 1. 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. 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 to imply from the margins this quarter? The short answer, Jason, at this point, yes, ex margins are better for us 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. So yes. Okay. And 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 benefit NAND. I mean, 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 direct Flash architecture, we can now program directly to Ronan. And so with X, we're buying Ronan instead of buying finished SSDs And that of course gives us an advantage as well. Great. And then for Charlie, maybe following up a little bit on on ETA'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 it's maybe it's as much per hat here too, just in terms of the sales and go to market side. You know, coming in to any company, I always view it as an antique car. You're driving down the road, having a full time, but you're only miles away from the alternator going or the, or a brake pad or something like that. And every company always requires just constant tuning. So in any particular quarter, there are things we can do better and we are we want to make sure that we're well aware of those. And so 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 specific areas, but there are we could 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 have, we're excited about our technical, our team and technology and the acquisition that we're announcing today, there's more that we can do there. And we plan on bringing out more. And 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, we still have more to go there as well as our cloud story. We continue to build there. So lots of room, lots of room for improvement, but we're We're proud of where we are and very optimistic about, how these as we continue to focus on these areas, how that will improve the business going forward. Thanks. Your next question comes from Erik Suppiger from GMP Securities. Yes, 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, what type of business you see that taking place and what actually has happened with of your channel partners as that's opened up some opportunities? Yes, Eric, this is Hat. Yes, I wouldn't isolate it into one specific vendor. I think it's a trend that seeing across multiple. I think when we've got ordered 10 to 15 points of gross margin advantage and a differentiated product line that we extended our lead even further, it's hard to compete with that. And so I think they're, they're trying to do whatever they can do to win. And our our success in competing with them is measured in terms of the expansion of the gross margin and the win rates. And so, 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. So they've got deep domain knowledge and they've been beat by us quite a bit. So they will go over it with a receptive embrace. And we also see them coming here. Right? And it seems to me that the trend is they're more focused on top line. And if they can get there with servers, they get there with servers is focusing so much on storage. So I think it's a general competitive landscape that benefits our uniqueness And we, we're very confident in the second half of the year. Okay. Then last question. Do you think you might start breaking out FlashBlade in the some foreseeable future maybe in fiscal 2020? Yes, 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. Is, I think, can distract, from our, 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, there's one thing to follow-up as you mentioned on the partner as well. And so the new partner programs that we rolled out have been really well received. And the national partners, we're rewarding those partners that invest in us. And so there's reciprocal relationship, but as they're investing in practices and they're driving more leads to us, They benefit financially from that. So that's an area we're going to continue to invest. And I think it's that dynamic while the others are pulling away a little bit from the channel leases 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 Chiu 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 application like big data and AI, because 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. It was hard to make the case for it economically. Obviously, that's shifted as compute hardware has advanced to the point where legacy disc is obviously the bottleneck in a lot of situations and it flashes more standard. So I guess my question is, should we think about the progression in advance vents of GPUs and other specialized silicons as being analogous in this respect? And are the current flash platform sufficient enough to meet the current needs given that we're still in the early stages here. And at what point, if ever, do they become bottlenecks versus more specialized solutions like flash fleet? This is Kix. I'll take this 1. I think we're excited about expansion on kind of both sides of the spectrum. So as you noted, GPUs and AI and kind of a renaissance on the top end of performance, that's creating demand that frankly only flash conserve. And so that's helping us sell NVMe and some of the higher performance offerings. And then as you look at the forward motion of, kind of NAND cost price declines, we think we can go after even more terabytes with the data center that would have only been in the layer of disc before. And then the final thing, ultimately, the store reduce position from us is about going after terabytes that might even have landed on discret tape and modernizing those as well, leveraging cloud storage is the cheaper storage option as opposed to on prem. And so we think it's high time to kind of modernize everything and we're seeing good opportunities in both directions. Okay. Thank you. Your next question comes from Manny 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, very interesting, especially the due dedupe feature of this acquisition? And 2 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 flash blade as you try to scale your NASA object oriented products? And I have a follow-up. Well, that was a very good question, Eddie. We thank you for that. No, we so, by independent, I think you mean, will we sell it as software, running on a standard hardware? And the answer that is yes. We do plan so to be clear though, for the immediate next several months. Our plan is to maintain, 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 are going to expect the kind of availability in that environment. And we'll talk more about this towards the latter half of the year we'll be able to describe exactly how this falls into our overall product line. And the exact program of what the new product announcements are on that. As as Tim might have mentioned, we both the expenses as well as the revenue are incorporated in our current guidance. So we don't see it being a major And 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. And one follow-up on NVMe. When do you expect the NVMe or fabric solution to be supported by fiber channel? So I think as you're aware, when we look at the on the end NVMe opportunity, we saw biggest opportunity to be implementing within our system. So 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 now any of our fabric 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 fiber channel side. And so We are absolutely on track with our deployment of the IP side this year and we expect fiber channel next year. Okay, got it. Very clear. Thank you. Your next question comes from Rod Hall from Goldman Sachs. For Rod. Thanks for taking my questions and congrats on a good quarter. I have a couple of questions. I'm glad you noted that Middle East had increased quarter quarter. Just wondering, is it fully joined by your NVMe fashion race or anything else that's helping in there? And I got a follow-up. Yes, this is Hat. The product cycle overall, I think, is contributing to that. There's no doubt that the FlashArray X really extended our mode differentiation is having a big effect on our biggest business. Okay. That helps. Any particular geography or guess any competitor that you're seeing better win rates? We've seen them consistently across the board for years and that hasn't changed. So I think we'll continue to focus on driving our success in the largest markets internationally and the largest segments that we've got. So we did see a particularly strong quarter in the Americas in Q2, which we were thrilled with and 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're seeing like larger deals more frequently. Any further color on that would be helpful. Thanks. Yes, I would just say hit the first part and pick maybe follow-up, underneath it. We're seeing great traction in 3 real use cases. One is the rapid restore use case. Another one is in back bolt backup and sort of pardon me, exadata replacements. And the third one is in this next generation analytics and AI. And so all 3 of those are very repeatable, and we're seeing great traction and success across segments. We talked about the New York genome center against 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 1 of the largest banks globally. And so, there's a whole bunch of other successes that we had across healthcare, large SaaS companies and public sectors. So We're seeing great adoption across those three use cases across segments. Your next question comes from Eric Martinuzzi from Lake Street. Yes, question regarding store reduce. Just wondering if this is did you find that you were maybe lacking something in the product portfolio? So not having this capability cost you maybe in some competitive bids Or is this really more about, broadening your current offering to the installed base so that you're there with them when they want to have a hybrid capability? Look, I'd say a couple of things. First off, we don't have dedupe today in FlashBlade. And so this is a natural fit in that sense. But in the broader equation here, oftentimes when we go out and meet customers around big data, they have 100 of petabytes of data and bringing 100 of petabytes to flash today. Probably isn't realistic. And so we often get in discussion with them about how we can move tens of their petabytes to flash, but we need some lower tier for the rest of the data And so we think the rest of the data should be in the cloud. And so if you look at a previous workflow, from a decade ago, customers might have used 3 flavors of disc and tape, We think the future is flash and low cost public cloud storage. Okay. And then as far as the partner education, I understand you're got to do some integration on the technology side. But what about the, the timeline for, getting the partners smart on this capability? Yes. I mean, so once we kind of engineer and purify the product as we talked about, it'll be a full pure product that will launch as we do with any train all of our partners, work to drive technology partner integrations, all the normal stuff. And we feel like we've got the time to be able to do that. So we feel confident about the timelines we have in place for that. Yes. And, you know, perhaps 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? And then I had a very quick follow-up. This is Tim. No, no, I think you're right in suggesting that there is leverage there to be had, but I would sort of just point to the guidance that we issued here today. Raising our full year profit up. So there is inherent leverage in the business to build the business is performing well and very healthy, but I don't think it's changed our long term view of the dynamics and go to market and the success we've been having. Yes. I'd just add that a lot of the investments that we make upfront take some time to come through. And so we're seeing the benefits of some of that. And candidly, we're doubling down. I mean, I think our competitors in the market are going to feel in the second half, as we invest in our channel partnerships, invest in market awareness and invest in additional capacity. So We're really excited and motivated about the second half. And Kevin, this one's for you, EFD. And Tim, just real quick on the cash flows for the full year guidance now. What does it sort of say about not necessarily cash flow from operations? You've been specific about that, but free cash flow now as we think about your investments for the full year, where do you think you come out for the year roughly on the free cash flow line? Yes, Steve, we've never really guided free cash flow. It just can be noisy. I mean, it has to do with cash collection spending in individual quarter boundary or anything like that. I think all we've done is qualitatively said, last year, we were positive free cash flow for the year, a small amount. We definitely to pay it being a stronger FCF generation year this year, but really point people on our progress to the operating margin, which is a much more stable stable and sort of predictable number than sort of 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 Charlie 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 partner for their tireless efforts and their dedication. And lastly, on behalf of all Puritan's globally, I'd like to welcome again the store reduce team along with their customers and partners to the pure storage family. We believe that the store reduce team has built an incredibly exciting technology that has the opportunity to make a major impact on the next generation of cloud storage architectures. And 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 weeks to come. This concludes today's conference call. You may now disconnect.