Good morning, everyone. Thanks for joining us here at the BofA Technology Conference. I'm Wamsi Mohan. I cover IT hardware for for BofA. Thank you all for joining us this morning. Today, we're delighted to welcome Pure Storage. We have CEO Charlie Giancarlo.
Hi.
The CFO Kevan Klessel with us today. Before we get started, I do need to read, otherwise, Paul's gonna come up and beat me up over here. The safe harbor statement. Statements made in these discussions, which are not statements of historical fact or forward-looking statements based on current expectations, actual results could differ materially from those projected due to a number of factors, including those referenced in Pure Storage, most recent SEC filings on Form 10-Q, 10-K, and 8-K. With that, let's get started. Well, thank you again for being here. Charlie, you just reported a very solid quarter, right? Like, you beat by about $20 million. Your guidance came out also ahead in a fairly difficult macro backdrop. Can you talk about where you saw the upside relative to expectations?
Yeah, I think a couple of things are really working for us. One is, you know, we sell based on superior performance with a better total cost of ownership. That matters in an environment like we're operating in today. That total cost of ownership comes from, you know, what I'll go into later, but, you know, unique, competitive, sustainable competitive advantages that we have that, as I mentioned, you know, I'll go in.
We've been focusing a lot on sales force training, and as you might imagine, with the kind of euphoria that we've had over the last several years, the focus on getting back to basics and selling into a tight economy, you know, were perhaps not reinforced, and so we've reinforced that. Really focusing our sales force now on being able to go in and work with the customers to really be able to provide an infrastructure to satisfy all of their storage needs. Up until now, Flash could only address what was called primary storage, primary storage being the storage for the most highly performant environments because of Flash's higher cost relative to hard disk. We have a portfolio that can address all storage within a customer account.
All of the disk-based storage that traditionally was too lower price for Flash to be able to go after, we can now compete for the entire storage estate in our customer's environment, and getting our sales force, you know, fully engaged on that aspect. Between the TCO benefits, you know, being able to sell across the entire account, getting better at being able to sell into a tight economy, you know, I think that's starting to make a difference.
Yeah. No, absolutely. There's been a lot of talk about AI pretty much in every discussion, we wrote about your //E product, I think now several years ago. I guess, as you think about AI, what about Pure's architecture makes it sort of a good destination for AI workloads?
Yeah. Actually, there are a couple of very different reasons why we believe that our architectures are uniquely suited to an AI environment. First of all, we first built a product called FlashBlade five years ago in anticipation of AI workloads. FlashBlade is a product that's highly parallel, so-called scale-out architecture, able to deliver hundreds of gigabytes of data simultaneously across hundreds of different streams to GPUs. It's really made that product the go-to product for AI environments, machine learning environments. Part of the reason why Meta, in their AI Research SuperCluster, satisfied their requirement with FlashBlade.
The second reason, however, is not so obvious, I think, with all the AI euphoria that exists right now, and that is that the machine learning environment requires that very high performance. The inference environment, or rather the ability, once the models are created, to be able to use data for answers, requires data to be generally available in what you might call a warm environment. Doesn't require that type of, you know, highly, hugely performant, parallel environment. Just requires data to be available. Most data today is locked up in hard disks, in siloed environments that aren't even, in many cases, connected to an environment that can use that information as inference.
We believe that AI is going to drive enterprises to put more of their data in an environment, in systems that can support both their primary use case, which might be backup, but also things like analytics and AI. It's going to shift data from being in cold environments to warm environments. This is perfect for Flash, because now we can replace the disk environments at prices competitive with disk, but with much more highly performant systems. We believe that AI is gonna drive more data out of silos into warm environments. Between our high-performance systems to drive machine learning and the lower priced systems, that just takes data that's today trapped and putting it in available environments, we see great opportunities.
Well, what % of your workloads are AI-based workloads, and do you have a view on where that goes?
We really don't break it out, but it's a substantial number. It's a number that's meaningful every quarter. You know, it's one of those, we try not to. We don't make a practice of breaking out individual either products or product segments.
Do you have a view on whether AI is going to drive increased growth in on-prem storage spending?
I think this year is a year of planning for enterprise storage spending. As you know, you know budgets are constrained. I do think that certainly as we start to emerge from this, you know, tougher economic environment, I think it is going to allow, you know, the enhanced spending in enterprise IT to continue to accelerate going forward.
I know you guys, in your annual report, spoke about TCO advantages. Would you mind talking a little bit about TCO advantages relative to your competition, particularly other all-flash vendors? Maybe we can break this out in different ways, but first of all, maybe where is that advantage coming from for Pure Storage versus HDD players?
Yeah.
And then we-
Not just buying the system, operating it for a number of years. I had mentioned earlier that we have unique, sustainable competitive advantages, and that's where our superior total cost of ownership come from these advantages. You know, if I list them as four advantages, the first one is that we have Our operating system, which we call Purity. Purity is the only storage operating system out there in the world that operates on raw flash rather than SSDs. To put that in perspective, SSDs were a brilliant invention by the flash manufacturers, who wanted to get flash into things like laptops and desktops and servers, and storage systems. They said: Well, what's the best way for us to do it? We have a good idea.
That all those systems use hard disks today, why don't we design flash to look like a hard disk? In my opinion, that's like making, you know, a personal computer looks like a typewriter. You're taking a semiconductor and making it look like a mechanical device. It didn't require any of those systems to change their software. Of course, SSDs took over. Everyone, literally everyone else other than Pure, uses SSDs in their systems. Your laptops use SSDs, the servers inside the major data centers use SSDs. All of our competitors use SSDs, and to the extent that hyperscalers use flash, they use SSDs because they didn't have to change any of their software to do it. SSDs have, compared with us, higher cost, higher complexity, lower lifetimes, lower reliability.
It really limits, if you will, the power of the raw semiconductor. Our system uses a direct to flash. We control it out of our main software. We manage the flash across the entire array and even set of arrays, and that software is called Purity. That gives us better overall cost and performance of, than anyone else out there. Second, we have the most consistent and consolidated product line in the business. Most of our competitors have somewhere between 3 and a half dozen different system designs to handle that full range of high performance, low cost, but also a block, file, and object, and they have lots of different systems to do this.
We have 1 operating system, Purity, operating on 2 hardware architectures, scale-up and scale-out, both of which use the same digital flash module, all of which is. By the way, that same software operates on the hyperscalers as well, AWS and Amazon. All of it managed by 1 management system called Pure1. It's a highly consistent product line to cover the entire range of customer needs. Then you add on top of that our Evergreen program. Evergreen, and this is, again, something that's quite unique in the world. We're able to consistently and constantly upgrade all of our systems on a continual basis now for over a decade, non-disruptively, meaning we never take the customer's environment down when they do so.
It really is a SaaS service, regardless of whether it's on the cloud or on-prem, because the service is always up and operating and always looks like our latest release, not just software, but hardware as well. We have customers that have been upgraded over a decade now, where the system they bought 10 years ago looks like the system that we sold last week. That's a really unique set of capabilities. You put all that together, and it results in a much lower total cost of ownership. Taking it from a user's point of view, we are 10 to 30 times more reliable than not just hard to operate than our competitors. You know, that also results in lower total cost of ownership.
Those customers that have upgraded just pay us their subscription every year. They've never had to buy new hardware. That lowers the total cost of ownership. Compared to SSD manufacturers, our flash lasts twice as long. Instead of 5 years, lasts at least 10 years. We guarantee it forever, because by that point, you know, it's such a small portion of the price decline of flash, it's easy, it's easy to upgrade, so we protect them economically, you know, basically forever. Again, you add all those things together, and it's just not only a lower total cost of ownership. The customer can go to bed at night, can go away on the weekends or vacations, not have to worry about their storage systems failing.
Let's touch on the power and space as well.
Power and space, 2- 5 times, well, 10 times more power and space efficient than hard disk, and 2- 5 times more power and space efficient than our SSD competitors.
What drives that two to five times versus SSDs?
The density of flash that we can put in our systems, that are managed by those controllers versus SSDs. SSDs are far more complex. They can't become as dense. They require more processing power to manage overall. We're able to get, you know, more petabytes per rack unit and use far less common equipment to manage that than our competitors.
Charlie, you also mentioned the fact that your flash could last longer?
Yes.
What is the reason for that? Is this the wear leveling and algorithms that you use relative to what SSDs can do?
It's a variety of things, one of which is exactly that. Remember, we're doing wear leveling. It's hard. I'm glad you put that out pretty easily. We do wear leveling across the entire array, whereas our competitors don't do it. They allow the SSD to do it, and it's only doing it within the SSD itself. The SSD also is much more complicated. It has a lot of DRAM in there. It's the DRAM that tends to fail more often than the flash itself. They have supercaps in there. They tend to fail. They have bigger supercaps. They tend to fail much more often. Just a variety of different things.
Okay. Okay, that's helpful. You announced a large Cloud block.
We're operating natively on Amazon or on Azure. We support those two today. The way to think about it is, it's just like the Pure software that operates on-prem, but instead of controlling our digital flash modules, it's controlling internal Azure or internal AWS storage infrastructure. It's providing all of the enterprise features that customers expect for traditional workloads that we provide on-prem. All of the APIs, all of the interfaces are exactly the same. The reason why customers use it is, one, to get those additional features like snapshot and replication, things they expect from enterprise storage, that they don't get in the cloud, or they have to implement themselves.
Two, is we have advanced data reduction capabilities, everything from thin provisioning to deduplication, et cetera, so that the combination of what we charge and what they pay the hyperscaler for the storage underneath our system is far less than they would pay for the native cloud storage. The one customer that we announced this quarter was, we announced it because it was close to an 8-figure customer for this, for a Cloud Block Store. They estimate that it's gonna save them about half of their total storage spend. We estimate, I believe it's actually gonna be more than that.
Okay, that's really impressive. Can you talk a little bit about Meta and what sort of use cases has Meta used Pure for? Do you see that expanding to other use cases over time?
Well, you know, our audience really took note of the one- use case, which is the AI Research SuperCluster. To be clear, you know, we announced that for a variety of reasons. They announced it did affect our reporting; therefore, it was called out. Meta, of course, announced their entire AI Research SuperCluster, which they've advertised, and we agree, is the largest AI supercomputer in the world. It's not our only relationship with Meta. We've been supplying them in different areas of their business, you know, for quite some time.
That being said, we don't believe that the architecture that we've used in the Research SuperCluster is significantly different than what they would use, A, for any AI environment, but B, even for their mainstream environment. Let me just give a little bit of background on that. There are two major parts to our infrastructure for that RSC. One is the machine, the part that feeds the machine learning infrastructure. This is our very high-performant, scale-out, highly parallel FlashBlade system. This was the premier system that I mentioned we developed starting five years ago to focus on AI environments. It's machine learning environments require highly powerful streams of very, very fast data to keep the GPUs very busy. That's about 10% to 15% of the data storage that we shipped into the RSC.
Over 80% of the data storage we shipped into the RSC is what would be called bulk data. It is what, in turn, feeds those FlashBlade. It is much more price sensitive than the higher performance systems. That is just bulk data that's stored, it's the same kind of data that would be stored in their AI environment, that might be stored in their other bulk data environment, just Facebook. We believe that could be true in any hyperscale environment. That, as you see, when you're dealing with AI, you have what I'll call hot data, that has to be fed at these very high rates, but then warm data that has to be prepared, ready to go in those dates.
That warm data environment, which we ship now with our FlashArray//C, but also, our newest product, FlashBlade//E, exists everywhere. It exists in hyperscalers and is now price competitive with disk. Just 1 last thing. There were many reasons we won that RSC footprint. Performance was certainly 1 of them, but another 1, especially on the flak, they could have backended our FlashBlade with their software and their disk-based environments. We were the only vendor, the only system that could fit within their data center footprint, both power and space. Without our solution, they would have had to have built another data center at tremendous expense. They would also have had to source more power, and they didn't believe they could source more power.
You know, the power and space arguments, once you start running up against those walls, you know, it starts becoming a very compelling argument.
Yeah, that gets very real at scale. Maybe one for Kevan. Can you describe what's the impact to revenue and margins in periods of, like, NAND price, extreme declines or increases? How does that flow through the PNL for you?
Yeah, I mean, it's a great question, and frankly, we benefit from both scenarios. Actually, all three, whether NAND's stabilized, whether it's coming down, or frankly, when it's increasing, as we've seen historically. The reason being is, you know, if we think about the current NAND environment, where we've seen a pricing decline, that probably accelerated our FlashBlade//E offering by about a year in terms of coming out with FlashBlade//E. Obviously, our penetration of disk and that opportunity gets accelerated as our NAND pricing declines. We take advantage, obviously, with the fact that we can negotiate directly with flash vendors, that's been a huge benefit for us, especially as they've been challenged from a demand standpoint.
Obviously, that parlays itself from a margin profile, and you've seen a little bit of that in our product gross margin ticking above 70%. Ideally, we want to keep that in the high sixties because there's so much opportunity for market share capture for us. I do think there's a strong upward bias for us, especially in this environment. We do see NAND stabilizing potentially in the back half, so we'll see how that plays out. Even in a stabilization environment, given where we are with FlashBlade//E and other opportunities, we're looking at, I think the benefits to product gross margin continue in terms of strength, in terms of what we've seen, but also subscription gross margins.
Obviously, we can leverage the benefits from NAND on our Evergreen//One offerings, in addition to the fact that with our overall Evergreen model, we're leveraging these assets we're bringing back to modernize and refurbish and put them back out there in terms of our infrastructure, to service level agreements for Evergreen//One, which obviously helps us and enhances us on our subscription gross margins.
Okay. Yeah, that's super helpful. Charlie, you made a comment on last call, no new HDDs would be sold in 5 years from now, right?
Yeah.
As you think about the NAND pricing today, so 2 questions here. One is, yeah, HDDs are also evolving. There's HAMR technology coming. How do you think about sort of price per bit storage with respect to that? Second is, this has kind of been a very tough NAND pricing environment. Why aren't we seeing higher replacement of HDDs, given that this is probably as favorable NAND pricing declines, we will see in a, in a while?
Yeah. Let me start with the second one, and then I'll get to the first. First of all, if you look at SSDs, they're still quite a bit more expensive than hard disks, and they've not yet reached or the system levels system pricing using SSDs hasn't reached parity or even close to parity with hard disks. When I speak about our ability to match hard disk. Okay? That'll take... It doesn't at that level, it doesn't really matter.
Sure.
Right? The reason why we're so certain about hard disks is for a variety of reasons. One is, if you look at, first of all, whether it's HAMR or anything else, if you look at that, the price curve of hard disks, it's been flattening out for multiple years. They're not able to maintain the same rate of decline in terms of price per bit that they once had. Secondly, flash has been catching up on a price per bit over many years, and those two lines are going to intersect in the next 3 or 4 years, regardless. At a system level, we've already intersected, right? We believe we're gonna be there.
Furthermore, if you take, whether it's HAMR or anything else, just take the roadmap, you know, at face value, that the hard disk manufacturers have put out there, it's just not gonna keep up with ours. We're at 48 terabytes on a card today. We'll be at 75 later this year. We'll be at 150 next year. We'll be at 300 the year after that. You know, if you look at the hard disk roadmap, you know, they're talking about 24, 26, 28 terabytes. We're at 300. At one-tenth the space, power, and cooling. They just won't be able to keep up at a total cost of ownership level, and they're not gonna be able to keep up at a density level.
Finally, you have to look at their ability to invest. 10 years ago, hard disks were in everything. 15 years ago, they were in iPods, okay? You remember that the old iPod had a hard disk in it, okay? They were in all the laptops, they were in all the desktops, they were in all the servers, and they were in the hyperscalers, and they were in, you know, all of the enterprise storage systems. Today, they're only in two environments. They're only in the hyperscalers, and they're only in low-cost enterprise storage, right? There's no longer in primary.
Right.
Primary storage is all, is all flash. Once those two start to decline, there's no market left for hard disk. There'd be no more investment, capacity left for hard disk. It's gonna be a challenged environment, for sure.
The rate of declines that you've seen, though, on the flash side, when you think about the CapEx that is needed to continue to go down that pace of price declines, do you think that the flash providers are motivated to induce the amount of CapEx that's necessary to keep that going?
Well, to give you a sense, flash today is over twice the business that hard disks are, right? Total... I'm just looking at the semiconductor level, let alone at the SSD and at the system level. The CapEx is already there. One of the great things about flash is it's about five node generations behind processors, okay? There's a lot of old technology that they can continue to use to improve their overall performance. They don't rely on any, you know, dramatic improvements in physics. It's just following the generational curve that is set out by memory and by and by processors. No, I don't... There's no worries there.
30 minutes is I'm finding very little amount of time to get through so many things that I wanna talk with you, but maybe 2 things to wrap up, right? Like, so first, just on margins, maybe Kevin, like, can talk about what do you think is the right trajectory for margin improvement? I know last year had some one-times that's causing margins to dip this year, but as you think over the next few years, what is the right trajectory for operating margins for Pure?
Look, I think we've got a fair amount of opportunity for leverage throughout the business, and the way Charlie and I are looking at it is about 1-2 points of expansion per year of operating margin, is how we're thinking about it beyond this year.
That includes what kind of investment and sort of OpEx, or is that anticipating an OpEx investment commensurate with sales growth, under sales growth?
It's a great. Look, we're gonna still prioritize growth, profitable growth. We believe that's very feasible. And the areas where we think we'll get that leverage very easily will be the continued gross margin expansion of our subscription gross margins, where we think there's a lot of upside long term in that area. R&D spend, as we continue to expand our global talent of software engineers. We've been very successful both in Prague and Bangalore. Look, as we continue to penetrate with our portfolio, the enterprise and the hyperscalers, that's obviously going to give us more scale and leverage on sales and marketing. Lots of different opportunities for us as we see about the leverage for operating margin.
Okay, that's great. Well, we just have a minute or so, Charlie, maybe you want to take the opportunity to just talk to the audience about why, you know, Pure is a good investment at this point in time, and just maybe any wrap-up thoughts you have.
Well, you know, I think it really comes down to the fact that we do have these really unique, sustainable competitive advantages that our competitors, and even in a sense, the hyperscalers, are not going to be able to replicate on their own, or at least not very easily. That is, you know, the direct-to-flash system that we've developed over a decade, and continues, you know, every time there's a new flash technology, a new flash chip, you know, it's something that we have to continue to stay on top of to be able to leverage the best out of any new flash environment. Everybody else uses SSDs, and that gives us a distinct advantage. It's not easy to replicate it, and you have to start from scratch to do so.
You know, our, the fact that we have a single consistent product line that's very, very flexible. Our competitors leverage multiple technologies, multiple software, multiple management systems. You know, at the end of the day, if you're an enterprise, standardizing on fewer components is generally, you know, a very good thing. You might say, "Well, yeah, but customers don't like to have necessarily, you know, a single... They want dual sources of supply." Well, yes, but they don't necessarily want to use 6 different types of products for the same area, which is what they have to use when they rely on a different competitor of ours.
Finally, you know, our Evergreen system, where we provide a SaaS-like service, even for products that customers buy with CapEx, because after they buy the initial product, it stays relevant and updated forever after. It's why we call it Evergreen//Forever. The products never get old, which is, wouldn't we like that in the rest of our lives, to have something that never gets old, is always updated and never goes out of service? You know, I really believe that these are things that are gonna allow us to continue to thrive and to lead in this industry.
Excellent. Well, with that, unfortunately, we are out of time and have to wrap. Charlie, Kevan, thank you so much for being here, and look forward to seeing you at Pure//Accelerate next week.
Same. Thank you.