Earnings Call: Q1 2022

May 26, 2021

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Pure Storage First Quarter Fiscal Year 2022 Earnings Release Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Mr. Sanjay Korana. Please go ahead. Thank you, and good afternoon. Year. Welcome to the Pure Storage First Quarter Fiscal 2022 Earnings Conference Call. My name is Sanjot Kurana, Vice President of Investor Relations Pure Storage. Joining me today are our CEO, Charlie Giancarlo our CFO, Kevin Chrysler and our Vice President and Chief Architect, Rob Lee. Before we begin, I would like to remind you all that during this call, management will make some forward looking statements, which are subject to various risks and uncertainties. These include statements regarding the COVID-nineteen pandemic and related disruptions, our growth and sales prospects, competitive industry and technology trends, Any forward looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted and reported results should not be considered as an indication of future performance. A discussion of some of the 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 site and is the property of Pure Storage. With that, I'll turn the call over to our CEO, Charlie Giancarlo. Hello, everyone, and thank you for joining us today. I hope you and your loved ones are healthy and looking forward to better days ahead as summer begins, Vaccination rates increase and the beginning of the end of COVID restrictions in many parts of the world comes into view. Our hearts go out to our friends in India and other countries still suffering from this courage and we pray that they will soon recover. Pure delivered very strong results in Q1. We drove double digit growth against a strong comparison with Q1 of last year. I'm also happy to report that our strong quarter was broad based with balanced contributions across every aspect of our business. We continue to see enterprise expansion validating our investment in world class enterprise Products, Services and our go to market teams over the past 2 years. In this quarter, we also saw our commercial segment strengthen its contribution, particularly in customer acquisitions where we increased net new customers year over year. Our U. S. And our international teams Both achieved double digit year over year growth this quarter and our new products again saw significant annual growth. Our industry leading subscription business saw fantastic growth, up 35% over the same quarter last year. Pure's unique evergreen and as a service models continue to resonate strongly with customers and differentiate us from the rest of the industry. Competitors are attempting to recreate our capabilities through financing, marketing and professional services, but can support. Pure has doubled the number of partners selling Pure as a service year over year and our channel partner bookings are growing nicely. And we recently announced new incentives and offerings to enhance subscription sales through our channel partners to build on this momentum. Our operating profit exceeded expectations this quarter, reflecting our revenue over performance paired with prudent expense management. The strong growth this quarter was achieved during continued COVID restrictions and is based mostly on improvements in our operations and our customers' increasing confidence in our brand. We have been reasonably accurate in our predictions of our business environment since the pandemic started. I feel confident that as vaccination rates increase globally and our markets return to some semblance of normal office culture that our business momentum will increase The significant annual increase in customer, prospect and partner participation at our Accelerate Conference is an indicator of how strongly our modern data experience strategy is resonating in the market. We reiterated our vision of Pure's modern data experience and showed how leading organizations like AEGIS Sciences, NASA and Roblox are using Pure's data platform to modernize their infrastructure, modernize their operations and modernize their business applications. We announced updates to the Pure One Digital Experience, of Portworx Enterprise. We also provided greater details on our bare metal as a service solution with Equinix and newest Purity Software enhancements. All of these new capabilities and more will continue to be featured in workshops throughout the entire month long Accelerate event. Customers have shown excitement for our promise of leading edge automated infrastructure that is continually improving without disruption. Pure's modern data experience delivers Modern Infrastructure that enables modern operations, supporting the needs of modern business applications. We believe that these three steps are fundamental in every company's digital transformation journey and are made possible by Pure's modern data experience. The first component of our modern data experience is enabling our customers to modernize their infrastructure. Our modern data infrastructure provides easy to deploy, reliable services, manageable by IT and developers alike through APIs and Code. We provide common services, interfaces and management across on prem and cloud. And with Pure as a service, We provide customers a single unified contract across clouds. Customers can operate both existing Business Critical Applications and Next Generation Cloud Native Applications in a hybrid cloud environment. Our founding vision of the all flash data center is being further realized with Pure's FlashArray C, the first all QLC flash array that In the last few years, we brought industry leading data protection to our entire portfolio, allowing enterprises and FlashBlade platforms with Safe Mode data protection and rapid restore capabilities to protect their mission critical data in the event of a breach. Meadville Medical Center in Pennsylvania is another customer who subscribes to Pure as a service We launched a new Safe Mode dashboard in Pure1 this quarter, which provides a consolidated view of the ransomware protection of all Pure arrays in structure with the ability to continually update technology and services without disruption to a customer's environment. In fact, 98% of our arrays that were deployed over 5 years ago are not only still in use, Our Purity Software, Evergreen Model and Pure One Management System uniquely position Pure to deliver a true as service modern infrastructure experience to our customers. The second component of our modern data experience is modernizing operations. After all, the value of modern infrastructure is deeply diminished if you operate it with yesterday's manual processes. Modern ops means standardizing service offerings and making them available to the organization via a service catalog and APIs. Doing that delivers DevOps, data science And we're very pleased with its growth this quarter. Launched in 2018, it unifies block, file and Object storage across all tiers of performance and private and public clouds into a unified data storage subscription and is the foundation of a true hybrid cloud experience. Customers such as the City of Denver use Pure as a service to automate data management. They use Pure to monitor and deliver performance, upgrades and even variable capacity for seasonal events like elections. With the flexibility of Pure's cloud block store for both AWS and Azure as an option in their Pure as a service subscription, we are seeing but also by the as a service user experience we deliver via Pure1, our meta AI engine and our proactive support experience. Pure1 has now broadened its predictive fault analysis and resolution Using telemetry gathered from across Pure's ecosystem, including bare metal, VMs and containers, Our expanded AI driven workload planner can now suggest the right service tier for Pure as a service subscriptions or infrastructure purchases. The Pure One service catalog was expanded this quarter, so customers can easily add, upgrade, suspend, resume, limit and renew Pure as a Service capabilities as needed. These SaaS tools work together to give customers the insight The investments we've made to modernize infrastructure and operations supports our customers' desire to develop truly modern applications, which is the 3rd pillar of the modern data Modernizing applications leverages cloud native architectures, specifically containers and Kubernetes The latest version of Portworx Enterprise announced that Accelerate gives customers an automated Kubernetes native storage experience for container based applications wherever they live. Portworx Enterprise Now delivers deeper integration across the Pure family, fully enabling both FlashArray and FlashBlade for enterprise scale and resiliency in production environments. It utilizes Pure Customers are using Portworx to enable containerized workloads to run seamlessly across the cloud, including pure storage arrays, bare metal infrastructure and even 3rd party storage solutions. Just 3 quarters since acquisition, we have fully Organizations are reducing the complexity of their data architecture with fast object storage, where Pure's FlashBlade remains the market leader. At nearly $1,000,000,000 in cumulative sales, it is the preferred choice for customers needing a unified Fast File and Object platform for their modern business applications. In fact, FlashBlade is the leader in Giga Ohms new radar for high performance object storage, validating Pure as the pioneer in the fast Object Space. Overall, our product and market leadership is expanding. We continue to deliver the industry's most advanced Kevin? Thank you, Charlie, and good afternoon. We are very pleased with the broad based strength of our Q1 results and continued momentum. We delivered double digit revenue growth despite both a tough compare as well as continued uncertainty of COVID-nineteen and its influence on markets across the globe. Our sales growth excluding cancelable orders also reflected strength growing 13% compared to last year. Our remaining performance obligations or RPO, which includes our committed In particular, what was most impressive about our performance this quarter was the strength across our entire business, double digit sales growth from our key geos, strong contribution from our channel partners, performance across our entire product and solution portfolio, Now turning to specific financial results for the quarter. Total revenue grew 12% to approximately 413,000,000 International revenue grew 14%, while revenue in the United States grew 12% compared to last year. Again, consistent with what we saw throughout last year, sales of our subscription services continue to reflect momentum. Subscription services revenue grew approximately 35% year over year and represents approximately 39% of total revenue. Non GAAP total gross margins continue to reflect the differentiated value of our software and solutions, improving sequentially to 70.5% in the quarter and continues to be on the high end of our long term expectations. Non GAAP product gross margins were 70.2% and non GAAP subscription services Product gross margins improved slightly sequentially and were 73.3% in Q1 of last year. Product gross margins this quarter reflect both accelerated growth of our flasher AC and increasing supply chain costs required to Secure product for our customers. We achieved slightly positive non GAAP operating profit during the quarter, which outperformed our expectation. Contributing factors include revenue outperformance, lower expenses due to the COVID environment, and approximately 3,800 employees. Cash flow from operations was $21,000,000 and capital expenditures were 28,000,000 We returned approximately $30,000,000 of capital to repurchase slightly over 1,380,000 shares as part of our 200,000,000 share repurchase program. Now turning to guidance. As previously mentioned, we are very pleased with our steadily increasing momentum over the last two quarters, while continuing to navigate the various challenges created by COVID-nineteen. We expect the challenges created by COVID-nineteen will continue to recede as we progress throughout the year and that our momentum will continue. Q2 revenue is expected to be approximately $470,000,000 representing double digit growth of 16%. We also expect non GAAP operating profit will be approximately $15,000,000 As I mentioned last quarter. We will be guiding 1 quarter at a time and will not be updating our annual view. But we will provide some additional color on how we are thinking about the impact of our Q1 overachievement for both revenue and operating income. We expect That we anticipate, we expect that approximately half of our operating income over achievement during the quarter will be accretive to our annual view. We are excited to build upon our broad based momentum in Q1 by continuing to create best in class to 1 question and one follow-up question. Once your questions have been answered, please jump back into the Q and A question and answer Your first question comes from the line of Call, Ackerman with Cowen. Yes. Thank you. Good afternoon. Two questions, if I may. With regard to your current outlook, Kevin, I was hoping maybe you could tell us regarding ex I guess what could you tell us regarding exabyte growth per box from your hardware business? I ask because in the context of ex of a NAND market that is seeing bit growth increase at a roughly 30% clip. The all flash Revenue is flattish on a year over year basis, but component pricing seems to And I'm wondering whether maybe some of the deflationary pressures from on prem enterprise spend still recovering abates going into the second half of the year. And then if you could speak to anything regarding the capacity points Per Array as we think about that growth in exabytes in the second half of the year as well. Yes. Carl, this is Charlie. Let me start on that while Kevin I think pulls together some of the stats on that. Overall, I would say that our overall there's been overall growth in our FlashArray product line, counting both FlashArray X and FlashArray And we were really pleased to see that growth for that product line continue. And I have to say That I remain very bullish that we'll continue to see growth in that product line in addition of course to FlashBlade and Portworx The growth that we're seeing in subscriptions and PaaS in particular, which does not show up immediately on the top line because of the accounting for subscription basis. We are seeing good growth overall. And I'll just comment for a moment on the supply year, that is the calendar year with some deflationary pressure initially. Through the remainder of the year, you're exactly correct. It's unlikely to see any downward pricing in NAND and actually likely to see some upward pricing on the raw NAND as we go forward. And that'll be overall industry affecting. And of course, because most of our sales are very competitive in nature, We also saw a slight increase in ASPs and I would expect ASPs to hold reasonably steady, plus or minus, Through the year overall. So I think you're correct, we're not going to see a lot of deflationary pressure this year. Yes. And I agree, Charlie. And I think one other thing I would add is the inflationary pressure is just broader than NAND as well. So we're seeing it across the Supply Chain. But again, that's been considered in terms of how we're thinking about our Q2 guide. And that's why in the prepared remarks, I commented that about half of our over And then finally on the exabyte, we'll definitely ship more exabytes this year than we did last year for sure. In terms of average, I think we're cautiously optimistic that the average will go up, but spending tends 2, I'm expecting that overall spending for data storage this year, will also increase for the market as a whole. So I hope that provides you some indication. That does. I appreciate that, gentlemen. For my follow-up, in your prepared remarks, You spoke about how PureCloudBlockStore is now GA at AWS and Azure. And so I'm curious Whether you'll be breaking out this business like your one of your primary peers and Maybe jumping the gun a little bit, but any thoughts on when this may reach $100,000,000 annual run rate? Thank you. Yes, Carl, let me just hit the first point on Cloud Block Store and how that combines really nicely with our unified And that's really why I think we're seeing a lot of continued demand and momentum with Pure as a Service. And we're quite excited about Cloud Block Store on Azure. And Rob, do you have some comments on that? It'd be great to share some thoughts on Cloud Block Store with Yes, absolutely. We're super excited just to see the continued growth in the overall cloud portfolio. Cloud Block Store, a key component for the modern sorry, The traditional applications and now expanding from AWS to Azure, we see that as adding just a ton of value to the unified subscription. As an example, we had a large FSI customer this quarter who was undergoing a tremendous growth on Azure to move their disaster recovery environment over to the cloud. And so I think that flexibility and the last issue we're able to deliver just goes to speak to the benefits of the software subscription, the software approach and just the overall unified subscription through which we deliver the cloud products. Thank you. Your next question comes from Sidney Ho of Deutsche Bank. Thanks for taking my questions. My first question is on gross margin. Clearly, you guys are doing very well there over 70%, Continue to be higher than the high end of the target range. Should we expect gross margin to stay at these higher levels Considering subscription services revenue will likely grow faster than product revenue, I think you guys talk about some deflationary pressure there. Really does it depends on what type of service is driving the growth or are there other considerations to think about? I think that's a great question. I think the pressure the inflationary pressure we're seeing really more lends itself to product gross margins. But again, we're very pleased with what we saw coming out of the quarter, really with strong gross margins throughout both on the product and subscription And to your point, above kind of a high end of our expectations. And as we progress through the year, on the product gross margin side, We would expect to see some pressure on product gross margins due to what we're seeing on the supply chain. But again, we've accounted for that in Maybe a follow-up question is on the enterprise side of things. You guys have been highlighting the strength in your enterprise business last quarter, this quarter. But the data points in general in the market hasn't been I would say it's kind of mixed. Some semiconductor companies would say it Still kind of weak, maybe just starting to get better. Can you talk about why you are seeing things differently? And if the overall market does start to improve in the second and have do you think your enterprise business will also accelerate along with the market just off a higher starting point? The answer to both is yes. The reason why we're seeing such good overall expansion of our enterprise business is because of the investments we made as a company. Remember just 2 or Years ago, we were largely a commercial company with some deployments in enterprise. We made major investments both in by a broader set, and really by the enterprise customer environment at large. And I think we've achieved that from a brand perspective, but we're still early, in many So really for us it's about penetration into what was for us a new market. And I think you're comparing us perhaps to companies that had a mature market in enterprise And therefore are not probably are still waiting to see the secular growth in the Enterprise segment. Secular growth in the Enterprise can only Your next question comes from Jason Ader of William Blair. Yes, thank you. Hey, Charlie, we've definitely heard in the last, let's say, 12 to 18 months, there's been an inflection point in demand for Microservices and Kubernetes Technology. And I was just wondering, obviously, you guys saw that and that's why you bought Portworx. But How is this manifesting, I guess, in terms of activity, pipeline, demand for Portworx. And then maybe can you give us a sense of when you think it's going to start to be more material for your business? Yes. Well, as you know, it is a subscription based business Therefore, it's a ratable it takes a while for ratable products to make a big difference to the top line. But I have to say that both revenue growth is we're talking in and around doubling of revenue growth And we've seen a much even larger expansion of pipeline. So I'm going out a little bit on the limb here, It's going very well. And the strategy of aligning and having single management and single layer that is the Kubernetes layer for customers to be able to manage both their traditional applications As well as their modern applications, so called cloud data applications, under one umbrella, supported by everything from A startup environment for or a new development environment with a small number With a small amount of storage under the original Portworx SDS layer and then expanding into a full multi petabyte production environment using highly reliable arrays, either FlashArray or FlashBlade. And to have that all done non disruptively, it's just a very powerful promise that we're able to deliver to our customers. So far so good. We're seeing a lot of interest. We're seeing, as I say, very fast expanding And as we mentioned in our last call or 2, it's probably going to be a year or 2 before It really becomes truly noticeable on a top line that's growing even outside of Portworx. Yes. And Charlie, maybe just to add on to that, we're quite pleased with the integration How that's going on there, right? We've got a new version of Portworx Enterprise that we're quite excited about. And the synergy that we're now seeing with our existing Pure customers is pretty strong as well. And I don't know if you or Rob wanted to give a little color on that. I'll talk a little bit about it. Just 8 months roughly after the close of the transaction. We've integrated all of our products now with more to come. The customers what we've seen in customers and we've indicated this, but it bears repeating. About half the customers are Pure About half of that is the buyers are people that we've been talking to for years and the other half of the buyers are new buyers for us, sometimes in the same account, sometimes new accounts, but on the development side. And it's a one two punch of us Being able to leverage what we already do and learn about a new area, that makes the acquisition a really compelling one, I And part of I'll just jump in there. Part of what makes that one two punch particularly powerful is this is a fast growing space. This is a significant and secular transition in how applications are built. Frankly, this is how most modern applications are being built today. And so we've really taken a strategy of investing in a full suite of data management capabilities to be able to help a customer deploy, build, deploy and get in multiple environments, whether that's on prem, in the cloud, hybrid cloud or multi cloud and across the whole spectrum of development life cycle, whether they're just getting started, getting into staging or going to global production scale. So early days, But really exciting. Thank you. Your next question comes from the line of Rod Hall of Goldman Sachs. Yes. Thanks for the question, guys. I guess I wanted to come back to the question of cost, not so much NAND because I think that's fairly seems like it's relatively predictable. But I'm wondering, Charlie, what are you guys seeing in other cost lines like freight and things like that? We hear a lot of people talking about various different upward pressure cost into their businesses. And then as a kind of add on to that, what do you think your pricing power is If you were to continue to see upward pressure on cost across the board. Thanks. Yes. Great questions. Look, we're seeing there is pricing pressure on the supply side across the board. I'd say it's more acute on some of the component area. NAND is seeing some, but it's true on all of the different components. Freight, a bit, I can't say that that's been a tremendous driver for us, but I'm going to take your guidance And I'll look at it, but it's the costs are going up. At the same time, as you probably know, Rod, a lot of our most of our Sales are competitive in nature. And so our pricing is determined much more by the competitive environment a particular deal, than it is by our costs. And so there will be some balancing with ASPs, I'm sure. Exactly how much that is, we can't be 100% confident. But as Kevin mentioned, we've incorporated our best guess into the guide. So we feel fairly good It may affect there may be some effect on our margins. I don't expect it to be severe, because again, we operate 100% of the time in a generally competitive environment. And then Rod, maybe I'll just add on a little bit more to that. So specific to what we saw in Q1 on the ASP front. We actually did see some improvement on ASPs and I attribute that related to 2 I think we're doing a really nice job continuing to sell the value of our solutions. But I also think the General inflationary issues we're seeing around the supply chain is playing into that. And so we'll just have to see how that plays out for the remainder of the year. But I think broader as well when we get back to the supply chain issues, look, we're we've got very strong relationships with our suppliers. And so we're very confident in terms of working with our suppliers, in terms of making sure we can meet our customers' needs. And we're just Being very cautious and monitoring very actively, I think our supply chain team is doing a tremendous job navigating us through this, No different than what they did in the COVID environment. So we're quite pleased with how things are progressing. But I think the themes are, yes, general concerns across the board, especially with some of the smaller componentry. And then we did see some improvement in ASPs. Yes, I do want to just underline that really our suppliers have been wonderful to work with. It's It's a tough environment out there. They're under a lot of pressure, but A, we have good relationships with them, but B, they've been they've been they've worked with us Really well and I couldn't be more pleased with the suppliers that we work with. Okay. Do you guys mind if I sneak another one in? I know that's a long answer, but Not at all, please. Okay. The other one is just Your product revenue was clearly negatively impacted through COVID. I'm assuming that you've got exposures to some of these industries that were affected that I don't remember exactly what you said about that. I'm just curious what you think your exposure to these reopening benefited industries, our travel, leisure, all that kind of stuff. What sort of industrial exposure you think you have to reopening? Thanks. Yes. Thanks, Rod. In the past, when we talked about the COVID exposure, it had more to do with the fact that as a new a relatively new vendor and one that was focused Growth. It was customers not being able to be in the office and their lesser willingness to try new things, whether that's Products, new vendors are new use cases, for existing products. And so the way we look at this That is as we return to an environment where customers are more willing to try new things, including maybe a new vendor, but it may just be one of our new products or maybe one of our existing products In a use case that where they currently use competitors products or it's a new use case entirely, they're going to be much more willing to do something And so that's what we're looking forward to. It was less about us being exposed to highly exposed segments and much more about reluctance to engage in new activities by our customers. Great. All right. Thanks a lot, Charlie. Appreciate it. Your next call comes from the line of Wamsi Mohan of Bank of America. Yes. Thank you. Sorry to get back on this inflationary topic, but can you be more specific on whether how much of that It sounded like you guys alluded to sort of the cost impact of not all the upside flowing through in the back half, What about revenue? And I will follow-up. Yes. Thank you, Wamsi. Well, Wamsi, look, in the context of it being a There being a lot of uncertainty in the supply chain. That being said, we feel reasonably confident about Q2. We feel reasonably good about Q2. It's very difficult to talk about Q3 and Q4 with high levels of confidence, but we have a high degree of confidence in both our own operations It seems that have really performed from a customer standpoint flawlessly throughout COVID and up until this day And with our suppliers who we work with very closely. We think it's been there are situations where every day where components that one thought were available Suddenly become unavailable, so component availability changes every week. And then one is looking for those components elsewhere. So it's both a supply issue as well as a cost issue. As We identified costs are going up largely on the supply side, I think less so on the logistics side, at least for us. And as I said, it's a bit of an uncertain world. But that being said, we feel reasonably confident on Q2 It won't affect revenue on Q2. And I would just want to put that caveat there, reasonably confident. And Q3 and Q4, we're just going to keep we'll update you every quarter as to how we feel Yes. And maybe I can go into a little bit more detail in terms of what we saw specifically in Q1. So we actually did see improvement in ASPs as I mentioned previously. Sweet. That was more favorable in terms of what we are doing on discounting. And again, I think that's both What we saw with the supply chain, but I also think our field is doing a really nice job in selling the value of our products. And frankly, what we saw with product gross margin this quarter, I viewed as very favorable, again, on the high end of our expectations, despite kind of navigating through what we're seeing on the supply chain side. And then obviously, we had some really great traction as we mentioned with FlashArray C. And given that that's a newer product for us, we had some gross margin pressure with FlashArrayC as well, which when you then look at the And If I could follow-up, we're seeing an increased proliferation in competitive offerings of as a service, on prem as a service, dealt with Apex now and GreenLake has been around with HPE. I think, Charlie, in your opening comments, you referred to Some competitive offerings that were largely financing, not necessarily technology enhancements. I was wondering how you would Yes. Thanks, Wamsi. So largely as you described it, I'll put more some additional detail behind Matt. As you could tell from both the prepared remarks, I know that some of you perhaps have been attending our Accelerate Conference as well. What you see us Delivering is a true as a service experience from a technology perspective. The way the customers interact with it, the way that they're able to manipulate it through Through code and API, the fact that it is continually improving without disruption, very similar to any type of SaaS offering. These are all service qualities, whereas most of our competitors are very much focused on financial constructs to make it look like a service. And a big telltale in From my point of view is that when we provide Pure as a service, we sign we are actually selling to our customer an SLA. It's not Array, it's not it doesn't have a product name. We are providing them a service level agreement that actually has teeth to the agreement. We have to deliver the service level that we Otherwise, there are financial penalties to us. Our competitors tend to provide an objective with no in it whatsoever and there are named products in it. So it really is a financing construct that they put together. For us, the fact that it's subscription basically The fact that what we're offering is a service and so naturally it becomes a subscription. The last thing I'll mention Is that it exists both on prem and across the cloud with CBS. The subscription, it doesn't matter where the customer puts their data And they manage it all through the same management system. So really it's a pan cloud, true technical service, and therefore of course a Your next question comes from Amit Daryanani with Evercore. Good afternoon. Thanks for taking my questions. I have 2 as well. I guess, first off, if I take your July quarter guide, the first The year we're going to do 14.5% growth give or take and your compares actually get fairly easy in the back half. And very simplistically, my tendency would be to say simpler, easier compares would suggest growth accelerates in the back half versus the first half. I would love to understand, so what are the factors we should consider as you go into the back half? Does the comparison suggest we should see an acceleration? Just What factors should we think about in the back half would be helpful? Yes, I'll start it more tactically and then Charlie feel free to jump on. And obviously we are expecting some acceleration In second half, with our where we landed for Q1 and our guide for Q2 and then looking at what that plays out to for second We get some ramp on that. And obviously, just to highlight as well that Q4 is generally our seasonally highest quarter in terms of sales, which is beneficial. But early signs of FlashArray C, I think that's going to parlay itself throughout the year. And I think in particular what was exciting across the board for us is what we saw from a broad based perspective. I mean, we saw really kind of everything driving with strength, whether that's enterprise, Commercial, this is the first time we were really seeing some strength on commercial and I think it's important to highlight that. We were very pleased To see that strength coming through this quarter despite still being in a COVID environment. So that was great to see. Obviously, Pure as a Service and what we're seeing Across the board with Portworx. So it's really this balanced strength that we've seen in Q1 that we really do think that momentum, which really started in Q4 will continue throughout the year. But Charlie, anything else you'd want to add to that? Yes. I would say that As we look at the year, Q1 was still the quarter we've just had 100% under COVID rules. We're still while we might be kind of seeing maybe some green shoots come up mostly around the promise of people getting back to the office, we've yet See any real pickup due to that phenomenon. We're We believe we may see that in Q2 and then we'll be in a better position Once we have our next quarter's earnings of being able to say what the rest of the year might look like. But Given that all the experience we've had to date this year have been 100% under COVID rules, a little bit hard to speculate as Fair enough. Hopefully, we don't have a 3rd wave and the acceleration sustains for you folks. If I could follow-up on the commercial segment, I know you talked about seeing better momentum over there. Can you just touch on What is driving the momentum here? Is it just a better engagement with the channel or the sales force is doing something different? And then are the commercial customers now engaging with the different products that with Pure versus what your traditional enterprise customers have done? I'd say there are a number of phenomenon That we're seeing at work. There's no question, I think we might have mentioned this in the prepared remarks, that we're seeing What we call partner sourced deals and a large part of that is commercial. So We believe that that is going to only continue. We're really seeing a good pickup by the partners overall. 2nd, we do think there's a bit of a resurgence of commercial that a number of them have gotten their feet underneath them, if you will, in this COVID environment and are back in the market. We think that's just beginning by the way. I don't think that's a big phenomenon, but I think that was a large part of it. And I do think that Flasher AC is in fact selling not just into the enterprise, but into the commercial market as well. And so I think that also opens up a bit of that. So I think it's a little bit of the 3 of those things, but I think a lot more to Yes. And I'd just add Pure as a Service too, Charlie. That's right. I think the thought many may think that Pure as a Service largely appeals to large enterprise customers, but we have a set of programs For Pure as a Service specifically in the commercial market, it's doing very well there. Perfect. Thank you very much. Thank you. Your next question comes from Simon Leopold of Raymond James. Thanks for taking the question. I'm going to ask maybe a little bit of an odd one, but my perception on this call was that, Charlie, you sounded more upbeat on the Flash Ray C and my recollection is that on the prior call, You sounded more upbeat on FlashBlade and I could be reading too much into it, but I guess I want to get a sense of whether that was Intentional and maybe how you think about sort of the new product cycles here? Is something shifted in your thinking or how do we kind of separate these two trends. Thank you. Yes. No, we just like to share the wealth and sometimes we'll spend a little bit more time on one than the other. So you shouldn't take any And I started to get I was getting tired of hearing myself talk. So I didn't want to bore you all to death with adding on even more. No, both products we're very excited about. They both fill different niches. The FlashBlade product, a very highly scalable product, a With File, a great what's called scale up platform now competitive with from a pricing level With hybrid disc for that secondary tier. So, no, we're very proud of both platforms. From quarter to quarter, you may hear us spend a little bit more time with different products, including BlockWorks PortWorks rather and FlashArray X. So you may hear us just spend different amounts of time each quarter for color on each product. Well, and Simon, I'll just add that this was a quarter we had strength across our business. And we had a plethora of options to choose from in terms of what we wanted to emphasize. And so the first thing is we just had strength across the board. And then obviously, C, we're very impressed with Going on with C. And I'll also say that FlashBlade acquired new unstructured data scale out customers at a much faster rate this quarter than what we saw in the previous year over year quarter. So good stuff happening all the way around And not meaning to ignore anyone in particular. Great. No, I appreciate it. And then follow ups, hopefully pretty easy, but Where are you in your thinking on your own organization maybe returning to sort of pre COVID expense levels in the sense of reintroducing travel and items like that. How should we think about your own internal planning for those kinds of activities. Thanks. Yes, you can imagine that we are putting a lot of work and focus on that. As we've discussed last quarter, we plan on adding to the bottom line this year years ahead. So as we start to reintroduce some of those other expenses, obviously we'll slow down other expenses. We do expect to grow into this. But I think the annual guide we provided last quarter for modest Bottom line growth, and Kevin's addition to that commentary on this call, you should expect us to continue down that path. So we expect overall that the percentage of expenses to total will come down so that we add more to the bottom line. Thanks for taking the questions. Thanks, Simon. Your next question comes from Tim Long of Thank you. 2, if I could as well. First, can you talk a little bit about kind of deal sizes and win rates and kind of some of those metrics. And if there's anything That's kind of different when we're looking at the commercial side and the larger enterprise in those metrics for you or And then second, I just wanted to dig into FlashArrayC a little bit more. It sounded pretty good in the quarter, double digit, but overall it was double digits. So given it's such a huge TAM when we're thinking about this as we go through the year and into next year, What's going to accelerate the growth rate there? Is it new use cases or pieces of your customer base that you got to Penetrate further. So what is it that kind of allows that product to really take on that much larger TAM? Thank you. Sure. Thanks. Win rates have stayed this is something we analyze all the time. Win rates have stayed roughly steady. It's very much in line. Whenever our win rates get a bit too high, we worry we're not in enough fights and we did expand the number of fights So the wind rate remains pretty much at historical rates. Kevin, do you have any comment On deal size, I don't have that off hand. I think it's roughly the same, but I don't have any Yes, overall deal size, we were very pleased with what we saw on deal size. Now obviously Q1 of last Cheer. We were fortunate to get some really large deals, in part due to folks working on mission critical and addressing their needs on that in terms of work for home. So I would say that the significant larger deals were a little bit less this quarter, but I was really pleased with the balance we Saw a multitude of deals over $1,000,000 So nothing to highlight in terms of significance other than it was broad based across the board in terms of what we saw and then lesser larger deals that we saw. Sea growth was You're right, double digits is a very wide range. But Seagroat, we also gave you a commentary that has been and continues to be our fastest new product from a growth perspective. So you can assume that it's a higher number that a significantly higher number than our average than our growth overall as a company. It does open up that 2nd tier market for us, both on the block side, but also Somewhat on the file side and as we add more and more features, we think it's going to add even more market for us on the file side. So it's still, while on the block side, it's mature product on the file side, It's still early days. And so we're going to see I think we're going to see continued expansion of our opportunity there. Thank you. Thank you. Your next question comes from Matt Sheerin of Stifel. Yes, thank you. I just wanted to ask regarding your commentary about the growth in the channel partners and the contribution to new customers as well as the commercial market. What's behind that? I know that you've put some new channel programs in place in the last couple of years. But what accounts for that traction? And do you see That roster expanding further, particularly given the rollout of Azure where there's very strong support base in the channel. Yes. Thanks, Matt. We do. I think there is several reasons for it. One is, we're a 100% Partner model, meaning that we don't go direct. So, one of the things that partners really like about us is They know that we're fair and that we'll work with them and that when the going gets tough in a competitive environment, we're not going to just take it away from them. So that loyalty is reciprocated by the partners themselves. I think we've continued to make it easier and easier for the partners to sell our product. First The product itself is very straightforward, very simple, requires relatively little busy work by the partners to To set up and to be able to operate and to be able to service and of course it's highly, highly reliable and that also makes for a better customer experience, which care about the customer experience because that's what gets the customer the partner more business from that Same customer. So I think the values of the company itself that we represent high NPS, high reliability, The fact that we don't stray to a direct model when the going gets tough. And you're right, we've worked a lot and we'll continue to work On our partner programs, especially aggressive growth programs, in specialized expertise programs with our partners to enable them to evolve as companies and enable them to provide a better experience overall for our customers. Okay. Thanks very much. Your next question comes from the line of Shannon Cross of Cross Research. Thank you very much. Just one for me actually, and it's a little bit big picture. I'm curious, when you think about recurring revenue, which I believe is now at about 39% of revenue and obviously growing given the mix shift that's going on. Where do you see that topping out or how do you see the migration continuing? I'm just curious if we get to a certain point where Customers would rather more of a CapEx kind of model or do you think this is something where eventually the entire model shifts there? Thank you. It's a great question, Shannon, and I'll start off. Look, our first big milestone that we're looking at is 50% of our revenue. It would be the Big next milestone for us. And look at the end of the day though, it's still customer first in terms of what they prefer with flexibility. So we won't force A particular model on them in terms of how they want to consume our technology and drive their outcomes. But I do think 50% is a good subscription, coming on board as we've talked about with Cloud Block Store, both AWS and Azure, I really will complement that and then following that and we've talked about that as well, which is Portworx and our solutions around modern apps. Anything else you'd want to add, Charlie? No. I think that covers it. Okay. Curious what long term sort of refers to. I mean, are you talking a couple of years out or further? Definitely. Yes, that would be a couple of years out and how we're looking at that and we'll give some more on that in our Analyst Day, which we're contemplating in the month of September. Great. Thank you. Thank you, Shannon. Your next question comes from the line of Catherine Huberty with Morgan Stanley. Thank you. Charlie, can you talk about some of the metrics that underscore your confidence in the second quarter? For instance, what did pipeline growth look like? Where was backlog versus normal seasonality? What sort of linearity did you see in in the quarter, just some of those metrics and leading indicators that drive the confidence? And then I have a follow-up. Sure. Thank you, Katie. Great Speak to you. So we saw a number of things. One is good linearity, but frankly improving through the quarter. So definitely seeing signs, as I said, green shoots and improvement as we went through the quarter. We don't give specific details on pipeline, but pipeline that supports the Q2 guide that we've provided based on the kind of metrics and analysis that done in the past and a hard look at that. We're not basing it tremendously on any kind of hope dramatic improvement in the whole COVID situation in Q2. We think it's fairly balanced from the standpoint of Not a lot of wishes or hopes for change to the positive. So we think it's sort of a prudent and balanced guide. Good support from things that are near term deals, near term pipeline. So nothing magic, I would say, in the guide. We believe we can get there with businesses as what we've seen over the last Couple of quarters. Great. That's helpful. And then just a follow-up, Kevin. As I think about NAND price inflation. In the past, the industry and Pure in particular has been able to pass through the higher costs such that it's somewhat neutral to profit dollars, maybe some pressure on gross margin percentage, but it is typically fairly neutral. Is there a reason that you would expect Did it play out differently this time or is it just a function that this is just getting started and there's a lot of moving pieces within dynamic as you move through the year. Katie, it's really much more of the latter that you articulated. And really, if this was just NAND that we were looking at. I think we would follow that thesis perfectly in terms of how we think about NAND pricing and be able to pass that off. But Look, I think the issues we're seeing around the supply chain are much broader and there's really broader general inflationary concerns that We've talked about at the component level, I mean the smallest components are driving our supply chain team with A lot of work and we do have inflation there. Now the interesting thing in Q1 is we were successful generally around Our ASPs and I do think in part that's due to the inflation that we were seeing. The question is, is can we maintain that with the broader supply chain constraints that we're seeing, and that remains to be seen. Obviously, we're confident in terms of our Q2 outlook, And but that is the reason why we were only talking about taking half of our over achievement for operating profit for the annual view. And if I might just insert, because I don't want there to be confusion, Katie, and I know you're aware of this, but it's not as if we pass Higher costs along. We've never raised prices. But what does happen is because our deals are competitive, we're competing every day against competition. And when their costs are higher like ours, all the vendors become more cautious in terms of their And that's why the ASPs tend to float a little bit with costs. But it's never quite one for 1 and timing This quarter versus next quarter, how long people's supply contracts are in place for and so forth That plays a role. So there's always a little bit of movement because of timing. That makes perfect sense. Thank you. Thank you, Katie. This concludes the question and answer session. At this time, I will turn the call back over to Charlie Giancarlo for closing remarks. Thank you, operator. I want to thank everyone on the call again. I want to thank I want to put out thanks to all of our customers and our prospects for the trust that they've put in the company and to our partners and suppliers for their really strong collaboration and their And also to all of our employees for the innovation and hard work over the past many, many quarters and throughout the COVID period. We're excited to ourselves to be getting back to work later this summer, and we wish all of you on the call a very happy summer. Take care. This concludes today's conference call. You may now disconnect.