Pure Storage Inc (PSTG) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Pure Storage Third Quarter Fiscal 2020 Earnings Conference Call.

(Operator Instructions).

Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Head of Investor Relations, Matt Danziger.

Thank you.

Please go ahead, sir.

Thank you, and good afternoon.

Welcome to the Pure Storage Third Quarter Fiscal 2020 Earnings Conference Call.

Joining me today are our CEO, Charlie Giancarlo; our COO, Paul Mountford; our Vice Chair, David Hatfield; and our VP of Strategy, Matt Kixmoeller.

Before we begin, I would like to remind you that during this call, management will make forward-looking statements which are subject to various risks and uncertainties.

These include statements regarding competitive, industry and technology trends; our strategy, positioning and opportunity; our current and future products; business and operations, including our operating model; growth prospects; and revenue and margin guidance for future periods.

Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update them.

Our actual results may differ materially from the results predicted, and reported results should not be considered as an indication of future performance.

A discussion of various risks and uncertainties relating to our business is contained in our filings with the SEC, and we refer you to these public filings.

During this call, we will discuss non-GAAP measures in talking about the company's performance.

And reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides.

This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes.

An archive of the webcast will be available on the IR website for at least 45 days and is the property of Pure Storage.

With that, I'll turn the call over to our CEO, Charlie Giancarlo.

Thank you, Matt, and good afternoon, everyone.

Thank you for joining us on today's earnings call.

I will begin by sharing our high-level results and highlights from the quarter, Hat will provide a go-to-market update and I will close with our guidance for the remainder of FY '20.

Revenue for Q3 was $428 million, up 15% year-over-year, significantly faster than our major competitors and the market as a whole.

Continued pricing declines, which were higher than we expected, accounted for the gap to our revenue expectations at the beginning of the quarter, although we are also seeing signs of a more challenging global business environment, as commented on by other large infrastructure suppliers.

Despite these in-quarter headwinds, Pure achieved all-time high gross margins this quarter of 71.7%, well above our guided range of 66% to 69%.

Operating margin for the quarter was 6.8%, at the high end of our guided range.

These results speak to the resiliency of our model in the current environment.

Turning to executive leadership.

We recently announced important changes to our leadership team at Pure.

After almost 7 years, David Hatfield is starting a new chapter at Pure, transitioning to Vice Chair and serving as a strategic adviser to Pure reporting to me.

Hat is moving into a role where he can leverage his passion, focusing on delivering Pure's value and vision to new customers and partners globally.

I'm very excited that Paul Mountford has joined Pure as Chief Operating Officer on November 4. Paul was most recently CEO at Riverbed technology and earlier held the role of Chief Sales Officer.

His deep knowledge and experience makes him the right person to drive Pure's next stage of growth and extend our market leadership.

Paul assumes responsibility for all go-to-market activities, including sales; channels; alliances; and marketing; as well as customer experience, including support and professional services.

Third, we announced today that Kevan Krysler will be joining Pure as our new CFO in early December.

Most recently, Kevin was Senior Vice President of Finance and Chief Accounting Officer at VMware.

He will bring a wealth of experience, both in finance and in building scale, and has highly relevant industry experience.

Prior to VMware, Kevin was a partner with KPMG, where he served both multinational and emerging software and technology companies.

He will participate in our next earnings call.

These changes and additions to our team will set us up for an incredibly successful second decade.

Turning to highlights from the quarter.

We hosted our largest-ever Accelerate user conference in Austin this past quarter.

We introduced almost a dozen new products and services, which were all immediately available.

We also shared our vision, which will power the next decade of Pure's innovation and growth.

We call this vision the Modern Data Experience.

In Pure's first decade, we redefined what a modern data storage array looked like, fundamentally resetting the bar for the competitive landscape.

Despite these advances, data storage still remains the least cloud-like layer of technology in the data center.

Delivering data storage in an enterprise is still an extraordinarily manual process, with storage arrays highly customized and dedicated to particular workloads.

It is data that powers digital transformation, but data storage remains one of its biggest obstacles because of the limitations of today's 30-year-old storage architecture.

Pure is transforming storage to a modern, more cloud-like model, helping our customers to run their operations as a true automated storage-as-a-service cloud, delivering consistent data services seamlessly across on-prem and public cloud infrastructure.

Pure delivers this modern data experience through our products, solutions and services built around 4 key tenets.

First, we believe fast matters.

Whether we're helping customers launch rockets, detect real-time threats or compile code and push releases, fast matters.

When looking to deliver data for high-performance applications or enabling multiple applications to access data on one consistent platform, fast matters.

We deliver solutions that push the boundaries on low latency with our new FlashArray with DirectMemory, high bandwidth for big data with our new twice-as-large FlashBlade and greater efficiency with our end-to-end QLC-optimized FlashArray//C.

Second, we believe in cloud everywhere.

Organizations want to both transform their on-prem operations to the cloud model and seamlessly link to the public cloud for IT agility.

Customers also want a single, consistent data storage architecture for all clouds, public and private.

Cloud Block Store provides multi-cloud consistent operations, including migration, test/dev, disaster recovery and protection for all applications.

Our offering on AWS was made generally available this past quarter, and we recently previewed Pure Cloud Block Store on Microsoft Azure at the Microsoft Ignite Conference.

Third is a core belief that simple is smart.

As we all know, making things ridiculously complex is standard practice in IT.

Making things simple is hard work.

Pure has built a reputation for delivering products that manage themselves.

And for those elements that don't, we leverage increasing intelligence from our Pure1 Meta AI Engine to deliver a self-driving, self-managing storage experience, preventing problems and enabling as-a-service automation.

We are leveraging these capabilities to simplify the entire enterprise storage experience.

And finally, a subscription to innovation.

Unlike other products on the market, Pure products look and act like a SaaS service in terms of continual upgrades and new functionality.

With Pure's Evergreen Storage, every product a customer has bought in the past and every product they buy today will always be new and will constantly evolve towards an ever more Modern Data Experience, all without service downtime or paying for the same storage twice.

Pure is leading the industry in both delivering the Modern Data Experience, as well as allowing customers to consume as a true 100% OpEx service.

We have seen strong traction and adoption for Pure as-a-Service, formerly ES2, signaling a trend from customers for this type of consumption model.

Unlike other offerings in the market, Pure makes its entire portfolio available as-a-Service.

We have reimagined the box-based enterprise storage environment as an integrated enterprise-wide storage experience.

We're delivering storage-as-a-service to fuel our customers' digital transformation.

Pure's Modern Data Experience sets us up well to continue to grow our share of the large data storage market.

With that, I'll turn it over to Hat.

Thanks, Charlie.

We believe that our Modern Data Experience is the way forward, enabling digital businesses to extract more value from their data, while improving performance and reducing complexity and expense of managing infrastructure.

Pure's modern approach helps companies deliver on their most strategic initiatives, empowering them to achieve outcomes that were not previously possible.

Because of this, Pure is taking market share.

And at our Investor Day, we shared that Pure was growing 10x faster than our closest competitor.

Customers are being done a disservice by others in the industry who still require forklift upgrades and who are not innovating, while Pure's customers benefit from our expanding technology portfolio, industry-leading customer satisfaction and differentiated Evergreen ownership model.

Pure is being chosen because we enable customers to modernize their existing applications and accelerate their adoption of multi-cloud containers and real-time analytics.

Our focus on the cloud, enterprise, commercial and government segments continues to progress nicely.

We finished the quarter with more than 7,000 total customers, adding approximately 6 net new customers per day, equating to nearly 400 new customers in Q3.

The Government segment in particular continued to be a bright spot in Q3, with business doubling on a year-to-date basis.

Turning to momentum in our portfolio.

Our ability to make the Modern Data Experience a reality for customers today and into the future has never been more evident.

Our industry-leading Pure1 SaaS platform makes it extremely easy for customers to manage their hybrid cloud environments across our portfolio, including FlashArray//X, FlashArray//C, FlashBlade and Cloud Data Services.

Pure's simple and automated platform allows customers to consolidate their primary and secondary workloads, delivering faster access to more of their data at a much lower total cost of ownership and is an ideal fit for next-generation data analytics and rapid restore use cases.

Following our announcement at Accelerate, we have seen the fastest growth of any product we have ever launched with the introduction of our FlashArray//C targeted for Tier 2. In the quarter, ServiceNow, a leading SaaS company and existing customer of FlashArray//X and FlashBlade has now added the all-NVMe FlashArray//C to their environment, with the goal of eliminating spinning disk for Tier 2 workloads.

We share their vision of creating an all-flash data center for better reliability, cost and performance so they can continue to deliver world-class service levels for their customers.

Pure's Cloud Data Services, including Cloud Block Store on AWS, enables data mobility and empowers customers to achieve on-prem economics in the public cloud.

And as part of our multi-cloud strategy, we recently launched our technical preview of Cloud Block Store on Microsoft Azure at the recent Microsoft Ignite conference.

With a growing set of products and unique Pure-as-a-Service subscription model, customers can take advantage of our innovation on-prem or in their preferred public cloud whenever and however they want, today or in the future.

We've always been the most innovative, and now we are also the safest choice for customers.

Lastly, on a personal note, I want to take a moment to thank our customers, partners and the Pure team for the past 7 years.

They've been the most fulfilling and rewarding of my career.

Together, we changed the industry with Evergreen Storage, built an incredible company culture and grew the business from 0 to more than $1.5 billion as fast as any enterprise IT company in history.

I'll be staying on in my new role to help with transition, planning and strategy.

I'm excited that Paul has joined the team as COO, and I look forward to partnering closely with him to help set up 2020 and beyond for incredible success.

While my role is changing, what will never waver is my excitement and enthusiasm in our ability to make an impact on our customers every day.

We are as optimistic as ever to execute on our long-term vision to deliver the modern data experience and provide freedom for organizations to build for today and tomorrow.

We truly are just getting started.

And with that, I will now turn it back over to Charlie.

Charlie?

Thank you, Hat.

Moving to key financial highlights.

We finished the quarter with cash and investments of $1.2 billion, an increase of $59 million from the previous quarter.

Free cash flow in Q3 was strong at positive $43 million.

We delivered strong deferred revenue again in the quarter.

At the end of the quarter, deferred revenue was $643 million, an increase of 39% over the same period a year ago and included a record amount of Pure-as-a-Service deals, again, formerly ES2.

Now I will turn to guidance.

In setting our guidance for the remainder of the year, we've taken into account the pricing declines we've seen in the past 2 quarters, as well as a more challenging global environment.

We are highly differentiated, as evidenced by our industry-leading growth and gross margins.

And accordingly, we remain focused on continuing to invest in a fiscally prudent manner, as evidenced by our operating profit guide, which is within the range that we offered last quarter.

For Q4 of fiscal 2020, we expect revenues in the range of $484 million to $496 million, $490 million at the midpoint; gross margin in the range of between 67.5% and 70.5%; and operating margin in the range between 10% and 14%, or 12% at the midpoint.

For the full year of fiscal 2020, we now expect revenues in the range of between $1.635 billion and $1.647 billion, or $1.641 billion at the midpoint; gross margin in the range of between 69.2% and 70.1%; and operating margin in the range of between 2.6% and 3.9%, or 3.2% at the midpoint.

With that, we'll open it up for questions.

Operator?

(Operator Instructions) Your first question comes from the line of Alex Kurtz from KeyBanc Capital Markets.

Can you hear me okay?

Yes.

Hat, been great working with you.

Hopefully, we'll hear you on future calls.

But thanks for working with the investment community, as always.

A near-term to long-term question here.

So real quick on the quarter, Charlie, when you look at units or deals or however you want to look at it, like excluding the ASP dynamic, did you hit that number?

I guess trying to account for -- was there deal slippage that was part of this?

Or is it really on the pricing and you actually got to the number of arrays shipped?

Then longer-term -- go ahead.

Go ahead -- sorry.

Well, let me answer that, and then you can -- I'll let you ask -- go on.

So yes, we shipped all the units we expected to ship.

So it really was a overall pricing issue, and that made up for all of the mess.

So it was entirely on target.

Okay.

And then I think longer term, the question is going to become -- customers get used to the lower pricing in the broader all-flash market, right?

And I think there's a fair skepticism among investors that, even with the NAND environment being more favorable for you and your competitors over the next couple of years, perhaps, customers aren't going to respond and allow the market to see a pricing increase.

So what gives you the confidence that that's not going to happen?

That the customers aren't going to just acclimate to the new pricing levels that we're seeing right now?

Well, interestingly, Alex -- it's good when customers get acclimated to the new pricing because it allows elasticity to take place and to penetrate -- remember, less than 20 -- flash is less than 20% of the overall storage market by bits, right?

It's 30% by dollars, but less than 20% by bits.

So as pricing goes down, we get to take up more of the magnetic market.

The issue is that when pricing drops so quickly in an individual quarter, the market doesn't catch up on elasticity.

We saw a double-digit drop in pricing each of the last 2 quarters.

That's just very unusual.

Obviously, difficult to predict that sort of thing because it's not normal.

But now that pricing is where it is, that bodes well for volumes as we go forward, and it can't continue to drop at that rate.

FlashArray//C takes advantage of this, right?

FlashArray//C is going to now start to penetrate what are typically magnetic workloads in the so-called second-tier market.

That's a very good thing for us.

And pricing will eventually moderate, will reduce its rate of decline, will continue to decline, but reduce its rate.

And that's very good for the flash business, very good for us.

Your next question comes from the line of Ittai Kidron from Oppenheimer.

And maybe, Charlie, I'm going to follow-up on Alex's questions.

Can you talk about how pricing was in the first 3 weeks of November?

And what is your working assumption with regards to your guide?

That you are at stable pricing from here or there's more to come?

And I have a follow-up.

Yes, pricing varies a lot week-by-week, just deal dynamics as you go through.

So it's -- I can't say that there's a clear -- I can't call exactly when pricing will ease in our market.

What we do know is, at the commodity level, pricing has not just firmed up, but is higher right now.

Commodity pricing for NAND is, in fact, higher as of this month.

How long that takes to go through everybody's inventory and the market and pricing, by the time it gets to array pricing, that's why this is a very -- right now, we're in a market that's a little bit more challenging to forecast.

Got it.

And as a follow-up, not that anyone doesn't appreciate good profits, but could one make the case that you're under-investing in your business?

Given the growth in your portfolio and what it's reaching from a vertical, an enterprise tier, an application and use case tier, shouldn't you perhaps invest more in your operating business?

And how do you feel about productivity level?

You haven't mentioned that.

I assume you're happy with productivity?

So let me start with the first part of that, and I'll pass the productivity over -- one over to Hat.

Unfortunately, one can't have it both ways.

That is to say, investing aggressively in the business even during a period of headwinds and also showing investors and your own company that you can be fiscally responsible.

But more than that, honestly, every company -- we're in a bit of a cyclical business and we take these opportunities to drive more efficiency out of the business and to allow the organizations to catch up on the growth that they've already put into place and make it more productive.

So I actually view this as an opportunity to drive efficiency in the operation.

And as the business hopefully picks up, which I expect it will at some point, we'll begin some additional investment.

Hat, do you want to talk about productivity?

Yes.

I think productivity is in line with our expectations.

The latest cohorts that we brought in are our largest classes, and they're coming in, in line with the most productive cohorts from earlier on.

Now we did put a lot of those into the enterprise segment.

And the enterprise segment, we knew, as we shared in previous quarters, take long to longer sales cycles, et cetera.

And with some of the challenging environment that we're seeing in the large enterprise, that may take a little bit longer for it to hit the bottom line, but we're very confident.

We time those investments to be in line with the product expansion capabilities that we've got and the market share gains and we know they're the right long-term bet for the business.

So there's no doubt that when things turn, we're going to be very well positioned to capitalize that in the enterprise.

Your next question comes from the line of Aaron Rakers from Wells Fargo.

I apologize for the background noise here.

But 2 questions, if I can, as well.

First of all, just kind of looking at the guidance, the commentary you offer suggested that you are seeing signs of macro softening.

Just curious of what you saw as far as the progression of those signs of weakening through the quarter?

And how do I fit your guidance -- midpoint of guidance being up $62 million sequentially in revenue versus like $50 million last year on fiscal 4Q, $62 million a year ago in '18 when the storage market was healthy relative to that kind of softening macro commentary that you offer?

I'm just trying to understand what's kind of embedded in the midpoint of your guidance here for revenue this quarter.

And again, I do have a follow-up.

Yes.

Thank you, Aaron.

So as we went through the quarter, we do see -- my experience is that when you do see a little bit of macro headwinds, that it is typically the enterprise that slows down their buying first.

And by slows down, I just mean things slipped, second looks, longer decision cycles, et cetera.

And we did -- have seen some of that.

The second is we did term this not so much as macro, but as globally economically challenging.

We're seeing things that we think of it Brexit slowdowns, the trade tensions in the -- with Asia.

Those are the things where we saw more slowdown than other areas.

And that just indicates a little bit of global economic headwinds.

And Hat, I'll let you take the...

Yes.

I mean I think the headline here is, if the pricing were in line with our forecast, we would have been within the range that we had.

So I really do feel like it's pricing.

But we are looking at these international phenomenons in the U.K. specifically, Japan specifically, as well as some of the enterprise deals.

We're not seeing loss rates decrease.

They're improving, if anything.

So we see really steady win rates that are out there.

So it's just a little bit more slowing of the decisions and more pushes.

So we have that contemplated in our Q4.

Right.

And the last thing, just on the year-to-year comp.

Remember, last Q4, we had that shipping issue that left the product on the dock, so it affects the comps.

Well, fair point.

The follow-up question is, if I can, when we think about the pricing dynamics in NAND, and I could appreciate that NAND is still less than -- flash is still less than 20% of the bit shift.

But to help us appreciate the pricing dynamic, would you say this quarter, we saw an acceleration in the growth of your bit shipments relative to last quarter?

So just trying to understand, to put some context behind elasticity.

Yes.

This year, in general, the bit shipments are way, way up.

That's made up for a large portion of the decrease in prices.

But as I said, when prices decline double-digit within a quarter, as they have in the last 2 quarters, it's just difficult.

Just difficult to catch up.

Your next question comes from the line of Simon Leopold from Raymond James.

I've got one kind of near-term and one longer-term question.

On the near term, when you're discussing the pricing environment, I'd like to get a better understanding of, is this about a particular price aggressor in the market?

Or is this the general behavior of everybody responding to essentially the customers' willingness to pay?

Is it coming from competitors or from customers?

And then I've got a follow-up.

In my experience, it's coming from competitors.

I think there are a variety of different competitive strategies in the market.

In our case, we are a value-oriented competitor.

We do not lead with price, but we do respond.

There's at least one other competitor out there that I feel operates in the same way.

But there are competitors that I would argue are cost-plus competitors.

So that is that.

When they see -- they'll sell based on a gross margin model that they've built, and they'll go to price right away.

And those are the ones that lead with price in the market and then we follow.

So it's really how the cost flows through their P&L, through their inventory that makes the difference.

And then my follow-up is longer-term oriented.

I want to try to get a better understanding regarding the prospects from the FlashArray//C.

You just announced that in September.

Presumably, that's not really contributing much, but you've talked about TAM expansion.

Could you put some numbers around how to think about what that product does for the revenue opportunities?

You bet.

So that product, it has had the fastest growth of any new product we've ever introduced, including our first product.

So that's of course -- now, of course, it was widely anticipated.

It was something that we had been talking about with customers for some time.

But we -- but it is -- it bodes very well for us.

Now when we say -- when you say TAM expansion, let me just make sure we're all consistent here, we discussed it as opening up more of the TAM that we've put into place.

And we believe it opens up over the next year or 2, another $5 billion of TAM that we can expand into.

So it's a big market.

It opens up a new part of the market that we did not generally sell into before.

Your next question comes from the line of Wamsi Mohan from Bank of America.

I apologize for the background noise, I'm at an airport.

Hopefully, you can hear me.

While you came in at a higher end of the range for operating margins, your incremental year-on-year is almost the same as the incremental OpEx.

Are you running the business with these levels of investment, with an expectation of acceleration in the future?

Or are you expecting this mid-teen growth rate, although much better than the industry, as a new normal?

And I have a follow-up.

Yes, we're not viewing that as the new normal.

We do believe that, as we add new products and as pricing stabilizes, the world will get better.

But of course, we're not guiding to next year yet.

But obviously, as I said, I think this has been a challenging year with the pricing declines, and we believe life will get better.

C -- FlashArray//C, CBS, the products on Azure and so forth, we're very proud and pleased with the new products we're putting in the market.

We believe we'll be the aggressor.

If we continue taking market share at the rates that we're taking market share in a market that is fundamentally $30 billion to $50 billion, we've got a lot of opportunity ahead of us.

Okay.

And again, as a follow-up, you mentioned price elasticity.

I mean it feels like this was the year where you should have seen very significant price elasticity.

And I think you said you did.

Clearly, that didn't translate into acceleration in revenue growth because of the pricing itself.

Now as you look forward, why should there be an acceleration in revenue growth if price inelasticity kicks in, when the pricing doesn't go down quite as fast?

So I guess, I'm trying to just understand this in the context of what the actual true underlying commodity pricing is doing to the revenue growth.

Sure.

What -- we've studied this over many years, right?

And as prices come down, elasticity goes up, flash takes over more of the magnetic market.

So you have to have price coming down in flash in order to take up more of the market.

And this is going to happen.

Now we would love a world where flash comes down predictably every single quarter and pricing follows suit a couple of quarters later.

That would allow customers to plan and for us to be able to better guide.

But the fact of the matter is that flash prices vary dramatically with supply of new fabs and demand varying, as we saw last quarter with -- or the quarter before, rather, with hyperscaler demand.

And that fluctuation eventually makes its way to our market.

But over the long term, the elasticity is real.

And with very fast price dropping, it usually means slower price dropping in the following year.

So while we can't predict it exactly, on a long-term basis, you can.

Your next question comes from the line of Rod Hall from Goldman Sachs.

This is Bala Reddy on for Rod.

Just want to better understand the macro weakness that you cited here.

So if the macro situation had been better in the quarter, then would that have compensated the pricing pressure issue that you cited?

I think what you're asking, if the macro had been better, would that have overcome the pricing.

The pricing was, by far, the dominant reason for the gap to original -- our original guidance.

But there's no question -- I mean we're only talking about 2% here.

And on a stronger macro, could easily have made that up.

If I look at the full year revenue guidance, like from the first time that you gave in fiscal Q4 last year, so the overall guide is down like 7% for the full year.

Can you help us quantify each of the issues that impacted the revenues in the year?

I know you cited the weakness in large enterprise as well a couple of quarters back.

So just trying to better understand how to rank order these issues here.

It's the same issue, really.

It really is -- the vast majority is pricing, but of course, a stronger macro.

We're not talking about a lot of percent.

A stronger macro might have been able to make that up.

But again, when your -- when you face -- really, this is -- this year is quite remarkable in terms of the pricing decline in the market.

Just as a quick follow-up on the macro question, so I know that you had an exposure to large [SaaS] mid-market in addition to SaaS cloud too.

Like which of the -- in the quarter, particularly, which of the segments did not do as expected?

Well, we actually had a nice progress, as I mentioned, in the public sector.

Our commercial business was solid for the quarter.

There were some ups and downs internationally.

And I think those are tied largely to some of the macro issues.

There's some execution in there as well.

But the vast majority of it on the international front was tied to very specific markets that are challenged.

Your next question comes from the line of Karl Ackerman from Cowen.

Two questions, if I may.

The first is a follow-up question on demand.

At your Accelerate conference, you spoke about how the deal funnel is shifting toward more larger deals.

Do you see the incremental -- your incremental revenue opportunity in the global accounts that are outside of the traditional round of our SMB focus?

And one of your peers spoke about how the chief procurer of storage is shifting away from the traditional storage IT manager.

Are those 2 dynamics the primary influencers of your performance this year?

And I guess, how do we combat that going forward?

Well, this is Hat.

I'll take a crack at that.

We've seen nice progress in the segments that we serve, like I just mentioned, in the public sector, government space and the commercial segment and the cloud business continuing to represent north of 30% of our overall business.

So we see sound performance there.

Enterprise -- large enterprise was a little bit weaker than what we expected and that we think is tied partially to the overall macro.

The changing persona and the decision-maker is something that we've been driving for the last few years.

Our next-generation analytics platform with FlashBlade is largely sold into DevOps, is then sold into the business owner.

And we've made a business in our traditional storage attack plan to go at the database admin or the virtual system admin or other folks that actually saw the benefits of flash removing latency.

So it's always been a multi-threaded sales process.

And so we feel comfortable in our ability to go attack that.

A lot of what our focus with the Modern Data Experience is shifting from a product-by-product, business-unit-by-business-unit, workload-by-workload kind of sales campaign to more of a platform and a portfolio sale.

And leading with our Pure1 and our Pure as-a-Service subscription model is really differentiated.

It really does enable flexibility commercially for customers and technically allows them to put their data where they need to today and move it without penalty in the future.

And so as that starts to continue to get traction, we believe that will continue to help us get higher up in the organization and sell a real differentiated platform solution versus the point product solution.

I appreciate that.

Going back to FlashArray//C for a moment.

Just curious on what level of revenue assumption is implied for FlashArray//C in the December quarter.

I guess how do you see that progressing over the next few quarters?

And what do you need to do to drive increased customer adoption?

It sounds like it's going well, but just any additional metrics there would be helpful.

Right.

Well, we -- as you know, we don't really provide metrics on a product-by-product basis and especially on new products because new products tend to be lumpy as you're getting through the sales force, a new customer experience and so forth.

But that being said, as I said, this is the largest and fastest new product adoption cycle that we've seen at the company ever.

I think it bodes well for us.

It's a product that, by the way, is a FlashArray just with a lower-priced, lower-cost storage module in it.

So our customers know it, our field knows it, our channels know it.

So in that -- from that sense, it's easy to sell.

Kix -- I think Kix has some additional commentary here.

Yes.

I'd also just say that, in the last call, there was some concern about whether it might be cannibalistic of FlashArray//X.

And we made a point of being really close to all of the first deployments of FlashArray//C, and we were really pleased with really the net new use cases and motions that it went into.

We largely targeted Tier 2 applications that might have been on disk as well as Tier 2 DR and open up new tiers of applications to DR. And so we're really pleased with them being sold together as opposed to an alternative to one another.

I will add one other piece of color.

We have 7- and 8-digit pipeline -- deals in the pipeline for this product.

So it's -- clearly, it's something that stands out.

Your next question comes from the line of Katy Huberty from Morgan Stanley.

Charlie, can you just be specific around what you're assuming in the January quarter around price elasticity?

It sounds like you didn't see that in the October quarter, expected to come through, just not clear whether there's an assumption around whether you see it in January?

And then I have a follow-up.

Yes.

We certainly didn't expect double-digit this past quarter, and we don't expect double-digit this coming quarter.

So we do expect it to moderate.

And I wish we could be absolutely positive about that.

But without knowing the other demand signals for NAND, without knowing the inventory levels -- past inventory levels of competitors, it's -- as I said, it's hard to pin down with exact timing.

But are you assuming faster unit growth in the January quarter because the prices -- the lower prices have now been in the market for several months?

Certainly, certainly.

Okay.

Okay.

And then just a follow-up on FlashArray//C.

Can you talk about whether it's the type of customers by size or vertical?

Or what are the most popular applications that you're seeing FlashArray//C get pulled into?

Yes, this is Kix.

I'll take this one as well.

So I think the first thing to realize about FlashArray//C is that it's lower cost per gig, but it's quite large.

And so our key target has really been larger organizations who have big -- big, big swaths of Tier 2 data.

And so we've seen it go into larger environments, where they're just going after their Tier 2 applications.

We've also seen customers who deal with very large research data, very large types of IoT data, et cetera, become interested in the platform because it opens up use of flash at a fundamentally different tier.

Your next question comes from the line of Mehdi Hosseini from SIG.

I want to go back to the trends in your product revenue and also deferred revenue.

I see a deceleration in both product revenue and deferred revenue.

And I'm just wondering, outside of the pricing pressure, is it a reflection of a delay in the ramp of new products?

It seems to me you're still lacking the diversification in the product mix.

And in that context, is it going to take another fiscal year to see that diversification improving?

And is that really needed to see a higher growth rate?

And this is outside of the pricing trend.

I'm just trying to separate pricing from product mix.

Yes.

Well, currently, our revenue is made up primarily of 2 physical products, FlashArray, FlashBlade.

And then, of course, the subscription and support activities surrounding those 2. And we do have our Pure-as-a-Service model, but that's still a relatively small revenue stream associated with that.

So by far, the deferred revenue is made up of those subscription streams.

Now as we've mentioned at our Accelerate offsite, we've seen big pickups in subscription, especially in the elongation of the contract period for the subscription as customers have found great value in the Evergreen service overall.

But you're largely correct.

I mean a lot of the growth rate that we expect in the future is based on new product.

FlashArray//C is off to a good start.

Cloud Block Store, high interest level, but still very early days.

And then, of course, we are anticipating our File Services coming out mid next year.

So these are all things we look forward to and believe will expand our opportunity.

Just as a follow-up, if File Services is coming out midyear, could that help with acceleration in the growth rate?

Or should we just assume that fiscal year '21 altogether is a transitional phase for the company?

Well, first, again, we're not going to guide fiscal year '21 just yet.

But we don't invest in new products just to give engineers fun things to work on.

The expectation is that it will improve our growth.

We're very focused on growing this company.

We're very focused on being the leader in storage, and that has a lot of years of growth left to us to be able to deliver that.

And of course, we're delivering it as a very new and different architecture, what we're calling the Modern Data Experience.

That is going to make it more of a platform rather than a set of isolated boxes.

Your next question comes from the line of Amit Daryanani from Evercore.

I have 2, as well.

First off, maybe just help us put some context around your gross margin, which came in well ahead of your expectations.

I'm wondering why not the decision to perhaps be more pricing aggressive and keep the margins within your target and perhaps drive more revenue growth?

Was there not that price elasticity for you to take advantage of?

Or you just don't want to go down that path?

Well, I think you saw one of our competitors also come in with higher gross margin.

So it indicates that there's been at least some -- with such drops, as I mentioned, double-digit price -- in double-digit drop in price during the quarter.

So there's been a lot of price activity, but obviously, cost activity was better than price activity for at least one of our competitors out there as it was for us.

Now part of the gross margin improvement was based on mix.

The mix is a shift towards larger arrays.

Now I'm not talking about a mix between products, but a mix to larger systems.

And the larger systems tend to have higher gross margin.

But we also benefited a lot from a COGS reduction.

Your point is -- look, the field has complete flexibility to drive price if it's going to win a deal.

We don't ever want to lose on price.

But as I say, we don't lead with price either.

So we're doing everything we can to drive the top line.

We're not going to hold it for additional margin, but it's the way it worked out this quarter.

Understood.

And then if I could just follow-up on Cloud Block Store, just what feedback are you having or adoption you're seeing from your customers there?

And perhaps you could talk about your appetite or the road map to have a comparable offering at other platforms beyond AWS?

Yes.

So we announced the GA of Cloud Block Store and Azure at Accelerate this year.

And I'd say the industry analysts and customer excitement around that was very high.

And we saw both excitement around it translate right into our core business in terms of being able to have conversations around cloud architecture and hybrid cloud that frankly we weren't invited to before.

And then we saw customers [really] diving in with key use cases.

Our key focus in this market has been to really focus on Tier 1 applications moving to the cloud, and Tier 1 applications run on block storage.

And so to give you an example of one of the first production deployments, we have a customer who runs SAP on-prem in -- on Pure, and they've taken advantage of Cloud Block Store to really move test up to the cloud.

And so it's a perfect hybrid case.

You have SAP running on Tier 1 on-prem, you're replicating data to the cloud, refreshing it constantly.

And that particular customer was able to get 40:1 data reduction in their test dev environment.

So think about the ROI of saving the cloud savings there and enabling that new model for more agile test outs.

These are the types of use cases that we're really driving into the market with CBS.

Your next question comes from the line of Jason Ader from William Blair.

Guys, there's been some talk out there, some of the SaaS companies moving their data centers to the big 3 Infrastructure-as-a-Service vendors.

And I'm wondering if that's something that you have seen at all in your SaaS vertical, where some of your traditional customers are deciding to outsource their data centers to the big 3?

And if so, what's your outlook on that segment of the business going forward?

Yes, it's a great question, Jason.

I think we actually see both activities.

We see people, oddly enough, moving to the cloud, but we also see people moving out of the cloud, especially their data storage because data storage tends to be extraordinarily expensive in the cloud environment.

Cloud Block Store is meant to make it easy to move in both directions.

That is to say that it makes it easier to lift and shift into the cloud.

If you're a cloud data experience, it looks similar, if not identical to what's on-prem.

And of course, we have a lot of value in the cloud, as Matt just mentioned, lower cost and higher performance.

But also, it makes it easier if you decide if you're in the cloud using our service and then want to move back on-prem, as many customers have done to reduce their overall cost.

It also makes it easier to move in that direction as well.

It's -- and from our standpoint, a terabyte is a terabyte between cloud and on-prem, one contract, one price.

So is it fair to say that your SaaS vertical segments have seen above company growth rates like you have historically?

We've seen no effect, honestly, from the phenomenon you're talking about with our SaaS -- in our SaaS business.

Your next question comes from the line of Matt Cabral from Crédit Suisse.

You talked a lot earlier this year about ramping sales capacity by 40%.

You touched on this a little bit earlier.

But can you just talk a little bit more about where you are in getting that cohort productive?

And just how you're thinking about your hiring plans going into next year, given some of the revenue slowdown you're seeing?

Yes.

So as I mentioned, a lot of the sales capacity investments did go into the enterprise, knowing full well that it was going to take a bit longer for those to ramp and to hit the bottom line, but that it was the right long-term move for us.

The new cohorts that we brought onboard are ramping nicely.

They're really in line with what we had seen previously and what we expected out of them going forward.

As we look at -- and as Paul and I kind of worked together on the allocation of those sales resources across the globe and across the segments, as you do any year, you kind of fine-tune that to make sure you get the right mix of long-term and mid-term ROI.

But we're very confident the investments that we made are going to pay dividends for us.

It may take a little bit longer, but we're very confident that we made the right bets going into the year.

And then just how you're thinking about the hiring plans going into next year, given some of the revenue dynamics?

Yes.

Well, clearly, we're not going -- we invested ahead.

We knew -- this year, we invested ahead.

Those assets, those people that we hired are going to be much more productive in the second year as -- like in any ramped environment.

That allows us to be a bit more, let's say, prudent or slow down our hiring for this coming year to -- really to match much more our growth rate as we go in.

Your next question comes from Steven Fox from Cross Research.

I was wondering if you could just sort of give us a little more color on the gross margin.

So if we think about the 230 basis points improvement quarter-over-quarter, how much of that was related to mix versus the benefits of cost over exceeding price declines?

Yes.

It was -- a little less than half of it was mix.

The largest part, of course, was the cost reduction compared to the price reduction.

So costs lowering it or having lower -- remember, it takes about 6 to 8 weeks for inventory to flow through our system, right?

So we started off with a lot of low-cost NAND and product in the pipeline as we went through the quarter.

And as I mentioned, towards the end of the quarter and certainly in this quarter, prices in NAND have gone -- have literally gone up.

So the majority of it was priced, but a significant portion of it was mix.

Okay, that's very helpful.

And then just on the macro pressures you're now seeing, I think, like 90 days ago, you sort of had your antennas up, but you really weren't seeing it as much as maybe some of your competitors were.

What changed relative to last quarter?

Is it just sort of your geographic mix is reflected in the timing of you being hit harder now versus, say, competitors that saw it earlier?

Or is there anything else we should think of?

Yes -- no, I think it is the international mix tied to some of the dynamics that Charlie and I had referenced earlier.

We continue to see larger deals and more bundling, but the [decision] cycles are just taking longer and people are pushing into longer periods of time to evaluate, more looks at it, more executives needing to touch deals, et cetera, and so more work.

But the encouraging thing to us is our win rates continue to be super strong.

And so we're not losing more business, and we're actually seeing more terabytes included in every deal and more bundling.

It's just that it's taking a little bit longer to close them.

And you would -- when you say international mix, you mean your direct mix, not necessarily second derivative of U.S. customers who are having weaker business overseas?

Yes -- no, customers that are buying from international where the deals are originating.

And so we mentioned the U.K., we mentioned Japan as a couple of those examples that were lower than what we expected.

Your next question comes from the line of Pinjalim Bora from JPMorgan.

Have great booking with you.

Could you talk about maybe a little bit more on what drove the decision for you to step away from leading sales channel?

Was it [not] thought out from a while ago?

And then as we move into next year, should we expect any big changes in the sales structure processes as the new leadership takes hold?

Thanks, Pinjalim, for that.

I appreciate it.

And it has been a great joy to be active in an operating capacity and helping build this.

It's really a personal driver.

To be very direct, I have a health issue in my family that, over the summer, became very acute.

And I think over the last several quarters, Charlie and I have been talking about what's right for Pure.

And Pure deserves somebody that's got 150% of their energy that they can put into it.

And so as that health issue kind of surfaced and my need to be a little bit more balanced, it was clearly the right time.

We're thrilled to have gotten Paul onboard.

The company is going to benefit not only from his 150% focus, but his scaled experience and cross-functional experience to go drive this.

So I think the timing is never perfect for these situations, but it's definitely the right thing for me personally, and it's the right thing and very good for Pure to have somebody like Paul step in.

The third point I'd make is that I'm still here.

I'm very excited.

I love this place.

And as Charlie mentioned, my real passion is to be out in front with customers and teams helping drive this.

And so I look forward to helping not only in the transition, but also playing a role going forward, not only on strategy, but being able out in the field to help with customers.

So I think it's kind of a win-win for the company and for me.

Your next question comes from the line of Matthew Sheerin from Stifel.

This is Alvin Park on behalf of Matt Sheerin.

I just want to confirm that revenue contributions from Pure-as-a-Service/ES2 was not as -- not significantly material.

And second of all, I was wondering if you could just give some color into the economics, the revenue recognition and the cost recognition cadence versus your traditional CapEx sales from Pure-as-a-Service?

Sure.

Well, first of all, I mean, just on an overall absolute basis, that is correct, that it's not as significant.

But it's up over -- well over 200% year-over-year.

So it's growing very nicely.

Secondly, it is recognized ratably on a monthly basis, over the years, as customers purchased the service overall.

It's priced at a premium currently to a traditional CapEx model.

So in a 3-year time horizon, it tends to be richer for Pure.

But it really helps those customers that really want to operate on an OpEx model overall.

So does that answer your question?

Yes.

And a follow-up.

So then in the CapEx versus an OpEx, you mentioned OpEx is ratable.

So is it safe to say that an OpEx will be more -- with the subscription service afterwards, will be front-end heavy, where most of the revenue and cost is recognized upfront and tempered down?

No, no, no.

The whole thing is ratable, both revenue and cost.

On the -- from a CapEx?

Yes.

No.

CapEx, we recognized roughly -- for $100, we recognized approximately $70 upfront and then we have roughly $10 each over the next -- over the 3 years.

And so the Pure-as-a-Service and what I just said about the $30, the subscription base, those are recognized the same.

They're both matched, revenue and COGS.

I see.

And going forward, do you have any projections or ideas of what your sales mix might be between the as-a-Services versus your CapEx model going forward?

We've not really provided that breakout.

I'd say the as-a-Service model is still relatively new and -- the new meaning both the customers as well as our sales force.

As we start to get more experience under our belt, that might be something that we highlight in a -- sort of in a -- highlight in one of our calls.

But at the moment, we've not really broken that out.

And I'm not sure we're ready to, just from an experience standpoint.

Your next question comes from the line of Erik Suppiger from JMP Securities.

One, could you just talk what competitors specifically are you seeing the pricing pressure?

Is it both Dell and NetApp?

Or who are you seeing the pressure from?

Then secondly, well, let me get that one, and I have a follow-up.

Yes, I wouldn't say there's any discernible difference between the large competitors from a pricing dynamic in the marketplace.

Dell has always been very aggressive and kind of operates, in our view, in kind of a cost-plus model.

You saw NetApp announce 11 points negative on growth year-on-year and increased gross margin on the product line as well.

So they saw some of the benefits from the COGS reduction as well.

I'd just reinforce what Charlie said earlier, we are a very aggressive team.

When we see an opportunity, particularly in the large enterprise, we sell on value, we make sure we establish that.

But if we need to use gross margin points to be able to win a deal, we won't lose on price.

And so that's something that we're continuing to be focused on, whether we're competing with NetApp or Dell.

But I think the 25 points of delta between us and the only other company so far that's reported is indicative of how differentiated our value prop is and how much share we're taking in the marketplace.

So we're going to continue to be aggressive.

If we could have put more of those gross margin points to work, we would have.

That wasn't the gating factor.

The pricing dynamic was really kind of across the board.

And again, we believe that's temporary.

Hopefully, it'll start to firm up in Q4, like we talked about, but we feel very good about next year.

Okay.

Then real quick, I just want to confirm, in the U.S., you did not see the macro concerns.

That was all international, is that correct?

No, we saw some of the international tied to those specific market dynamics, trade and Brexit, most likely.

But we did see some slowness in the U.S. enterprise.

And I think that's an area where we like the trends relative to pipeline.

And you know what, with the narrow [span and] control of our sales resources, we're getting [in the at bats].

And so we'll be able to bundle in multiple products and sell more terabytes.

It's just taking a little bit longer from a deal push perspective.

But win rates are holding nicely as well.

So it's -- we see a little bit of the international and a little bit in the large enterprise, U.S.

And your last question comes from the line of Nehal Chokshi from Maxim Group.

Yes.

It looks like guidance implies OpEx will be flat Q-o-Q, more or less, for the second straight quarter in a row.

So it looks like there was effectively a hiring freeze that's been in effect since August.

Why, a, is this correct?

And, b, provided it's correct, then why do this, considering the opportunity in what I presume invariably will result in an extended slowdown in top line growth?

Right.

Well, to be clear, there was a hiring slowdown, but certainly not a freeze.

In fact, each quarter, the net hires will be slightly higher than the quarter before.

But again, we have to respond to the market slowdown.

We're not going to run at a loss as a company.

And also, as I mentioned earlier, I take this opportunity to allow each team to catch their breath after a lot of hiring and to rebalance their organizations.

So I actually view it as an opportunity for each group to really make sure that they're disciplined, that they're efficient and effective and that they rethink where they place the -- how they've structured their team and take an opportunity to rebuild before the next spurt of growth.

So you're correct in identifying that there's been a slowdown, but there's certainly not a freeze.

Okay.

And as a follow-up, you guys did initiate a share repurchase program on the last earnings call.

It looks like you didn't utilize it at all.

Can you update your thoughts on, a, why you didn't utilize it?

And b, what are the parameters around when you will utilize it?

Well, we -- as we indicated when we took out the program, that we wanted that program in case of huge -- what we saw as a huge price dislocations in the market.

And we have that facility at our disposal, should we choose to use it.

But it is really a discretionary -- we're keeping it as a discretionary opportunity.

So as we look ahead to the next decade, our goal is to take the fragmented and antiquated architecture of the current data storage environment and recreate it into a unified automated multi-cloud data experience.

By helping our customers to create a Modern Data Experience, we help them to deliver real business value, and we empower them to realize their digital transformation.

I'd like to again welcome Paul and Kevan Krysler to the team, and I want to thank Hat for his partnership and dedication to Pure these last 7 years.

He's had a great impact on Pure, and I'm excited to continue to work with him in his new role.

For those in the U.S., I want to wish you all a very happy Thanksgiving, and I want to thank all of you on the call for your time today.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.