Pure Storage Inc (PSTG) 2018 Q1 法說會逐字稿

Good afternoon.

My name is Mike, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Pure Storage Q1 Fiscal 2018 Earnings Call.

(Operator Instructions) I will now turn the call over to Matt Danziger, Head of Investor Relations.

You may begin your conference.

Thank you, and good afternoon.

Welcome to the Pure Storage Q1 fiscal 2018 earnings conference call.

Joining me today are our CEO, Scott Dietzen; our CFO, Tim Riitters; our President, David Hatfield; and our VP of Products, Matt Kixmoeller.

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

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

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

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

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

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

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 approximately 45 days and is the property of Pure Storage.

With that, I'll turn the call over to our CEO, Scott Dietzen.

Thanks, [Danzy], and welcome to the team.

Good afternoon, everyone, and thanks for joining the call.

Pure had a successful first quarter with both revenue and operating margin above the high end of our guidance.

Pure is benefiting from or becoming a preferred choice for 3 growth markets: the data platform for clouds 4 through 1,000; next-generation data-driven application, including AI and machine learning; and bringing our cloud-capable platform to enterprise IT.

As a result of our exposure to these markets, Pure is on track to deliver $1 billion in revenues this year and to cross over to cash flow positive in the second half.

Let me double click on each of these markets before turning our attention to innovation, customer success and our expectations for the year.

Let me start with new data-driven workloads.

Our customers are now using Pure's data platform for facial recognition, autonomous driving, medical diagnostics, advertising optimizations and security assessments.

Several of these use cases employ deep learning and other AI techniques.

According to analysts, AI-associated storage will grow 78% a year to $6 billion by 2020.

And Pure's purpose-built flash platform delivers the parallel performance necessary for advanced predictive analytics.

We find our legacy competitor less likely to be considered, as their disc-centric design, even when retrofitted with all flash, slow down as the SSDs get larger, making them big and slow, while Pure is big and fast.

Second, the cloud.

More than 1/4 of Pure's business is selling to clouds 4 through 1,000, as our more than 500 software as a service, infrastructure as a service and consumer Internet customers choose to build their own clouds with Pure, delivering a higher quality of service for lower cost.

And finally, private clouds for IT.

Where the roughly 80% of enterprise workloads not currently a candidate for public cloud, our enterprise customers are remaking their IP environment to deliver more of the simplicity, agility and subscription to future innovation afforded by the cloud model.

Pure now serves nearly 25% of the Fortune 500.

Our legacy competitors simply can't deliver on the promise of the cloud.

Their solutions are too labor intensive, too difficult to scale, require customers to rebuy the same storage over and over and to disruptively migrate data.

While we occasionally compete with the big 3 public clouds in all 3 of our markets, our business will continue to thrive as our customers use Pure's data platform in conjunction with the public cloud, particularly for data sets that are too large to move across the Internet.

At our Accelerate user conference next month, we will showcase tightly coupled coprocessing between Pure and the public cloud.

And now let me share a quick update on product innovation.

While FlashBlade only became GA at the start of the year, momentum is strong, with sales growing roughly twice as fast as FlashArray at the same stage.

With unprecedented performance and density, FlashBlade is transforming the unstructured data market in the same way FlashArray revolutionized structured data.

Last month, we launched FlashArray//X, which incorporates some of the secret sauce of FlashBlade to drive another multiyear leap forward.

Of the major storage vendors, only Pure is protecting customer investment in route to the all-NVMe future.

Our strong innovation storage is reflected in our nearly 700 patents granted or pending worldwide, the vast majority of which are software or cloud related.

That's up by 200 from a year ago, demonstrating the continued excellence of our all-star engineering team.

Bottom line, Pure's data platform wins.

We're helping customers accomplish things that weren't previously possible, and we're just getting started.

Please join us next month at Accelerate where we'll introduce substantial new releases of our software for both FlashArray and FlashBlade, continuing the best year of innovation in Pure's history.

And now I'd like to invite Hat to give you some color on how we're helping customers.

Hat?

Thanks, Dietz.

As I said last quarter, only Pure is delivering a complete data platform for the cloud era.

We're providing the all-flash foundation for new, cutting-edge workload, while also radically reducing the cost and complexity of enterprise IT.

The combination of our FlashArray//X, FlashStack and FlashBlade solutions enables customers to put their data to work for both their existing and new unstructured workloads under one software platform, helping customers analyze data from racecars, rockets, airplanes, trains, cargo trucks, garbage cans, medical devices and even cows.

IoT systems have transformed from periodic batch analytics to real-time control systems, increasing the need for low-latency, high-bandwidth and mission-critical reliable storage, which Pure is uniquely positioned to deliver.

In the quarter, we were thrilled with the momentum across our portfolio, spanning a number of use cases and industry verticals.

Perhaps, most significant, FlashBlade was recently selected to power one of the largest AI platforms in the world.

Coupled with deep learning GPU-processing technology, FlashBlade delivers unmatched performance density and allows for faster data insights.

These combined capabilities will enable profoundly better customer experiences, new revenue stream and competitive advantage for this company.

In another case, a Fortune 50 enterprise customer is relying on Pure to build a private cloud that offers their customers higher quality of service at lower cost than public cloud or legacy alternatives.

This customer is standardizing on FlashArray for block storage, with upwards of 100 petabytes of usable storage purchased so far, and is now leveraging FlashBlade for their structured environment, starting with big data analytics.

Consolidating on Pure's data platform provides the same attributes of simplicity and agility as a public cloud, while delivering higher performance and lower costs.

Let me briefly mention some other noteworthy customer successes in the quarter.

For next-generation, data-driven workloads, the City of Davenport, Iowa, a long time FlashArray customer for running their cities core applications, is now using FlashBlade to process video generated in real time from body, car and other police surveillance systems.

KKG, a Swiss nuclear power plant, similarly purchased FlashBlade for best-in-class performance, fast access of data and ease of use.

For cloud, MacStadium, the world's largest hosting provider of dedicated Apple Mac computers, selected FlashArray//X to deliver the best possible performance and density for their fast-growing cloud hosting business.

Fujitsu Cloud Technologies in Japan chose FlashArray to support the expansion of its new cloud portfolio with cost-effective, consistent performance.

Churchill Downs, home of the Kentucky Derby and one of the country's largest gaming and entertainment companies, selected FlashStack to power Derby Day online wagering system.

For enterprise IT, Oppenheimer and Co.

chose FlashArray to address rapid data growth, while cutting its data center footprint from 166 racks to 5. And Cabela's, a leading outdoor retailer, chose FlashStack for its unparalleled simplicity and to reduce total cost of ownership by $4.3 million over the next 7 years.

We're enthusiastic about how our technology, business model and customer experience are helping to transform our customers' digital businesses.

In order to maximize the adoption of this innovation, we have focused our growth strategy on 3 key pillars: platform selling, pipeline and partnerships.

I'll give you a brief update on each.

We've made significant progress with our platform selling goal.

We delivered more than 50% of our FlashBlade wins from existing FlashArray customers.

Our company gross margin is holding, demonstrating our ability to differentiate and sell value; and our competitive win rates have improved across our top 3 competitors.

Additionally, new FlashBlade workloads, as outlined above, are opening the door for net new customers in the EDA, media, genomics, cloud and other segments, pulling through FlashArray and FlashStack opportunities.

Turning to pipeline.

We are pleased with the Q2 pipeline, and that's reflected in our guidance of the 34% year-on-year Q2 revenue growth.

As we scale the company, we are excited to share that Todd Forsythe has joined Pure as our Chief Marketing Officer.

His background in building world-class marketing organization, including multi-billion dollar pipeline at Oracle, Cisco, Salesforce and most recently, Dell-EMC, uniquely qualifies him to help take Pure to the next level.

We're thankful for all that Jonathan Martin has contributed to Pure.

He will stay on through our user conference, and we wish him well as he moves on to other opportunities.

And finally, let me briefly discuss our partnership strategy.

Pure's channel momentum continues, with our partners contributing more than 70% of net new logos in the quarter.

In particular, we benefited from the increasing field engagement with Cisco and our shared partners.

We're continuing to explore alternative routes to market with managed service providers, embedded solution providers and OEM, and we are deepening our relationship with the big 3 public cloud companies.

More on this to come next month at Accelerate.

With delighted customers, a robust partner community and more innovation than we have delivered in our history, we have great confidence in our goals for 2017 and beyond.

Dietz, back to you.

Thanks, Hat.

Before passing the baton to Tim, I'd like to reinforce the factors underlying our confidence in our billion-dollar guide for the year.

First, success in platform selling, with more customers deploying FlashArray, FlashStack and FlashBlade.

Second, we're seeing strong and predictable repeat purchase behavior within our installed base.

Third, sales productivity continues to climb.

And finally, our win rates remain high, with improving success against our top 3 competitors: Dell-EMC, HP Enterprise and NetApp.

With that, I'll turn the call over to Tim to discuss our results, guidance and our drive to profitability.

Tim?

Thanks, Scott.

As Scott said, Q1 marks another solid quarter and a strong start to our fiscal 2018.

We are pleased with the excellent execution around our operating model as we focus on consistent top line growth and continued year-over-year improvement in operating leverage.

We are delivering on the key growth drivers that we laid out at the beginning of the year and remain confident in our $1 billion target for fiscal 2018.

Before I dive into the specifics, I'll make my usual note that the gross margin, operating margin, OpEx and free cash flow numbers I will use are non-GAAP unless otherwise noted.

Reconciliation of these non-GAAP metrics to their GAAP comparables as well as our whole Q1 results and presentations are available on our website at investor.purestorage.com.

Total revenue grew 31% year-on-year to $182.6 million in Q1, more than 4% above the midpoint of our guidance.

Our Q1 revenue growth demonstrates the robust health of FlashArray as well as the growing momentum of FlashBlade.

As Scott and Dave have already noted, we believe that our unique, software-centric approach is enabling us to win a new application as well as continue to take share from traditional vendors.

Product revenue grew 24% year-on-year in Q1 to $138.4 million, driven by strong repeat purchases among our existing customers and new customer additions.

Consistent with prior quarters, across our entire customer base, for every dollar that our customers originally spend they spent an additional $2 on average over the next 24 months.

In terms of FlashBlade, we are now a full quarter into general availability.

And as you heard from Scott, FlashBlade is ramping very nicely.

We are excited about the long-term growth opportunity offered by FlashBlade, particularly as we continue to add new features and functionality to address the whole of the unstructured data market.

Support revenue in Q1 grew 57% year-on-year to $44.2 million, driven by revenue recognition of ongoing support contracts.

Looking at Q1 fiscal 2018 from a geographic perspective, 80% of our revenue came from the U.S. and 20% from international.

We continue to observe notable growth across all our regions.

Total gross margins in Q1 of 66.4% increased 0.3 point quarter-on-quarter and decreased 0.9 point year-on-year.

We continue to operate within our long-term target model of between 63% to 68% total gross margin.

Product gross margin, up 66.6%, remained consistent with Q4 and was driven by both continued strength in our FlashArray business and a strong performance from our FlashBlade product.

Our industry-leading gross margin demonstrates the value our customers receive from our offering, validate the clear differentiation between our products and those of our competitors and, finally, illustrates that the software-first, purpose-built strategy we took from day 1 to maximize flash efficiency is working.

We are especially pleased with achieving these results against the backdrop of the current component market and while managing new product introduction.

Support gross margins of 65.8% improved 8 percentage points year-on-year and 2 percentage points quarter-on-quarter, reflecting our expanding customer base and the corresponding amortization of deferred revenue as well as our continued efforts at driving operational efficiencies in our support business.

Turning to operating margin.

We continue to make excellent progress in our drive to profitability and toward our long-term operating margin target of between 15% and 20%.

Our operating loss was negative $30.5 million in Q1 or negative 16.7% of revenue compared to a loss of negative $41.1 million or negative 29.4% of revenue in the year-ago quarter.

This represents a 13-point improvement from the year-ago quarter and an 8-point outperformance from the midpoint of our Q1 guidance.

The strong year-on-year improvement is due largely to the inherent operating leverage of our business, plus a small benefit from the timing of our Accelerate conference shifting from Q1 last year to Q2 this year.

The 8-point overperformance from the midpoint of our guidance is driven by a combination of factors.

Number one, a notable outperformance on our top line; number two, better-than-expected product gross margin; and number three, modestly lower operating expenses.

We are very pleased with the leverage in our business, and we will continue to execute on our strategy of driving efficiency, but investors should not expect the same magnitude of outperformance on operating margin in Q2.

Total headcount at the end of Q1 was over 1,800, up from over 1,700 at the end of Q4 and up from over 1,500 a year prior, largely reflecting ongoing hiring in both our sales and R&D organization.

Moving on to the balance sheet and cash flow.

We finished the April quarter with cash and investments of $536 million.

Our free cash flow was negative $27.1 million or negative 15% of revenue compared to negative $17.6 million or negative 13% of revenue in the year-ago quarter.

Please note that this includes $9.7 million of cash impact related to our employee stock purchase plan.

Note that our free cash flow this quarter was also impacted by a series of opportunistic prepurchases of flash inventory, which results in an increase in inventory on our balance sheet.

These efforts are part of our overall strategy of actively managing component costs within the current NAND supply environment.

Let's now turn to our guidance.

For the second quarter of fiscal 2018, we expect revenues of between $214 million and $222 million.

This represents 34% year-on-year revenue growth at the midpoint and is based on strong momentum in our FlashBlade business, solid growth in our current FlashArray portfolio and the addition of our new FlashArray//X product offering.

We expect Q2 fiscal 2018 non-GAAP gross margin in the range of between 63.5% and 66.5%.

We have been operating within our long-term gross margin targets for 6 quarters now and remain focused on driving industry-leading gross margin.

We will do this while continuing to invest strategically in building our still new FlashBlade business as well as prudently managing through the current component supply environment.

We expect Q2 operating margin of between negative 16% to negative 12% as we continue to make thoughtful investments both to fuel our innovation and growth our go-to-market efforts.

We will invest in the business, while continuing to drive year-over-year improvement in our operating margin performance.

This guidance represents a 5-point year-on-year improvement from the year-ago quarter even after including the cost of our Accelerate event in this year's Q2, a cost that was in Q1 last year.

On cash flow.

We remain on track with our goal of turning sustained free cash flow positive during the second half of the current fiscal year.

Looking at next quarter, consistent with prior year, Q2 tends to be the seasonally lowest point of free cash flow for the company, given timing of bookings and investment dynamics.

Turning to the full year.

Our strong start to Q1 gives us more visibility on and increased confidence in our full year fiscal 2018 guidance, which is revenue of between $975 million and $1.025 billion; total gross margin of between 63.5% and 66.5%; and operating margins of between negative 9% and negative 5%.

The factors that underpin this guidance and our long-term success remain the same.

Repeat business continues to deliver, with existing customer business representing approximately 70% of Q1 results.

We continue to acquire new customers at a very steady rate.

Our customer count is up over 70% year-on-year.

Sales productivity continues to climb nicely.

FlashBlade is tracking well.

And finally, we are just getting started with new innovation, including FlashArray//X, synchronous replication and a host of new software capabilities.

As you can see, we've had an excellent start to the year, with a solid quarter on both the top and the bottom line.

The factors behind that performance provides further evidence that our strategy is working, that our market position is strongly differentiated from our peers and that this is delivering both strong revenue growth and operating leverage.

And it's this that gives us the confidence both this year and beyond.

In closing, we look forward to seeing many of you at our Investor Day in June.

And with that, we'll open the call for questions.

Operator?

(Operator Instructions) And your first question is from Aaron Rakers from Stifel.

I wanted to first talk about FlashBlade.

I know that you've talked about the ramp being in line with what your initial expectations were at 2x that of the FlashArray.

But I'm curious if you can give us a bit of context of what you've seen as far as the deal sizes for the FlashBlade when you compare that relative to the FlashArray.

And I do have a quick follow-up as well.

So Aaron, this is Hat.

We saw great momentum in FlashBlade, obviously in line with our expectations.

We're thrilled with the big AI platform win, but that was one of many, and we're starting to see repeatability across use cases.

We don't comment obviously on the specific deal sizes, but you're talking about petabyte-level replacements and so -- in mission-critical environments.

So the platform-selling motion is working.

And I think that is a nice tailwind for the overall productivity metric that our sales team's have been able to enjoy.

Okay.

And then as a real quick follow-up.

I'm curious if you could talk a little bit more about your relationship with Cisco.

How meaningful that is?

Any kind of qualitative or quantitative commentary you can provide?

And then in your commentary, you also alluded to the potential for OEM opportunities.

I wondered if you could talk a little bit about that.

What type of opportunities would be natural fits for somebody like a Pure?

Sure.

Yes, so first on Cisco.

The combination of the competitive landscape and the bottlenecks shifting back to the network with these large AI, machine-learning workloads just creates a natural alignment between Pure and Cisco.

And so we're seeing a real natural momentum in the field.

And so that's a positive.

That's reflected in our year-over-year FlashStack growth.

We're also continuing to do -- establish a deeper relationship with the product organization.

So you'll see us do more and more integrations with them and announced that through CBDs.

So just in general, we think there's great momentum that's just naturally formed by the competitive landscape and the fact that you're going to need to shift to 40 gig and 100 gig networks as AI and these really data-intensive workloads make their way to market in a more mature and more mainstream fashion.

Relative to OEMs, in embedded and managed solutions, managed services providers, there's a plethora of opportunity for us that are vertically specific in either oil and gas or in media that we can go get embedded in that we're having active discussions as well as continuing to think about how we power the cloud companies that we support today but deliver a better managed service offerings for customers.

So more to come on that.

We think there's a big opportunity for us to pursue and get different -- at bats and routes to market.

(Operator Instructions) Your next question is from Steve Milunovich from UBS.

First, I just wanted to clarify.

Do you have more or less confidence in your $80 million FlashBlade expectation for the full year?

And then I wonder if you could talk a little bit about your win rates.

You mentioned that they're a bit higher relative to some of the large competitors.

Why would that be the case at this point?

So Steve, we have more confidence in hitting the $80 million target for FlashBlade just because we've had a quarter of execution under our belt.

And I would say we're particularly excited by some of these next-gen, data-driven, predictive analytics applications, especially those that include deep learning, because that's such an exciting market.

There's a report out that says storage for AI-specific workloads is going to grow to $6 billion.

And we think we are uniquely well positioned in storage to play for that TAM.

And of course, we have the platform-selling motion where we're seeing nice crossover for FlashArray into FlashBlade customers as well as upselling FlashBlade to FlashArray.

And that was only one part.

The other part of the question?

Your win rates?

Oh, yes, sorry.

So specifically, yes, win rates against the competitors we see most often which are Dell-EMC, HP Enterprise and NetApp.

We saw an uptick in those win rates.

I believe this is product innovation predominantly that's driving it, right?

You've seen the launch of FlashArray//X, of course the launch of FlashBlade this year.

And we've got a great payload of software innovations that are going to hit take at the Accelerate conference coming up.

And so I think it's that best 6 months of launches of innovation in the company's history that's really helping the uptick in the win rates.

Your next question is from Maynard Um from Wells Fargo.

I wonder if you can talk a little bit about your philosophy around profitability.

It looks like the back half of this year, but more importantly, as you start to turn a profit, can you talk about the philosophy around letting the upside flow through to the bottom line?

Or do you anticipate managing your profits and reinvesting the upside back into revenue growth and share gains?

I guess, how do you balance the profits versus growth?

Yes.

So Maynard, this is Tim.

In terms of driving leverage, we've been driving leverage for several years now.

Philosophically, we'd like to cut that operating loss rates roughly about 50%.

We've done that the last 3 years in a row.

And based on the guide going from 13 -- negative 13 this year to negative 7 for this year explains kind of just how we see us getting that breakeven point.

We're not providing any sort of guidance yet in terms of once we cross over that threshold, how much we reinvest back in the business.

But I would put a shameless plug in for coming to talk to us at Investor Day, where you'll hear us talk a little bit more about the road ahead and how we think about the next step for Pure once we get past that point.

Certainly, the intent is to continue to drive operating leverage in the business as we cross over to profitably.

But we want to do that prudently, right, because the goal is to -- we have a $35 billion TAM that we want to go capture as much of as possible.

The next question is from Katy Huberty from Morgan Stanley.

First question is on FlashBlade.

How much are you leveraging the channel versus your own direct sales force for that business in particular?

And then, Tim, just as a follow-up.

DSOs were up year-on-year and sequentially quite a bit.

Does that speak to a shift in more direct sales?

Or what's driving that?

All right, Katy, maybe I'll take the first question, and I'll hand it over to Tim.

Thanks for that.

Certainly, the channel that we have today is the same channel that we'll be leveraging to get into FlashBlade.

We saw great progress.

They're eager to get into AI and machine learning and a bunch of new applications.

And many of them have a state and established relationship with the competitive vendor that candidly just doesn't have the competitive differentiation that our FlashBlade technology does.

So you have our existing channel, which we think will be our primary route to market.

Similar with our FlashArray in the early days, we do have our FlashBlade account specialists engaged on these deals, training them up and walking customers through.

But it's a very straightforward value proposition that we think they'll be able to take and run with just like they learned to do with FlashArray.

Secondly, I'd say that there is a group of specialist channel partners that are out there that are focused on high-performance computing and other areas of specialization that extend our channel ecosystem as well.

And so we're establishing partnerships with them in addition to our existing channel.

And Katy, on the question of DSO.

What you're seeing there primarily is seasonality becoming more pronounced given the growth rates are more moderate than they've been historically.

So we had quarter-on-quarter decline of revenue, circa 20%.

The AR balance goes down 20% as well.

But you average against the high AR balance coming out of Q4.

So you're going to get those DSO spikes.

The one thing that we look at internally is what we call weighted average days to pay, and that number has stayed remarkably consistent for quite some time now.

So there's no real change in the types of partners or the terms we're extending.

It's all pretty similar.

It's just a function of seasonality on the balance sheet.

The next question is from Alex Kurtz from Pacific Crest Securities.

Question, a quick clarification.

Tim, if you weren't dealing with component costs, elevated component costs, as well as the lower volume that you have in Q1, could you've gotten close to 70% on the product margin?

And then the clarification is on the productivity improvement.

Would you say that your bell curve reps are closer to hitting or exceeding quota than they were last year?

So Alex, on the first question, I think that 63% to 68% gross margin range we still like, right?

If you recall kind of a year ago, we were up in the high 60s, kind of 69% on the product side.

And we felt that, that was just about getting out of the range where it was the right trade-off to grow and keep the velocity going in the business.

And so I think getting closer to 70% is probably not the right thing for the business.

But we certainly like the industry-leading gross margins kind of mid- to high 60s that you've seen for us for several quarters now.

So that's how I think about and I think that's how the management team thinks about overall product gross margin.

And then to the second question, you have -- remind me again the question there, Alex?

Yes, just goal attainment by the average -- yes.

Oh, productivity.

Yes, what we've seen -- it's really been a great phenomena for us.

We talk about this a lot, but every class that we bring in we continue to see that, that new class of the year is climbing faster than their cohorts of previous years.

And that's a dynamic we've talked about in several calls.

And we saw it again this year.

So that calendar of 2017 Q1 class performed very, very well.

And it's something we're really happy about.

The next question is from Jayson Noland from Robert Baird.

I wanted to ask on international at 20%.

That's a little below recent trend.

Is there anything to highlight outside the U.S.?

Yes, this is Hat.

So year-over-year, actually, I believe we were 81% mixed.

So I think we're kind of in line with where we were on a year-over-year Q1 basis.

And we had great contribution from APJ, EMEA, South America and Americas.

So we feel like we're right in line with expectations.

The next question is from Mehdi Hosseini from Susquehanna Financial.

This is David Ryzhik for Mehdi.

Tim, can you help us understand OpEx for the July quarter?

When we look over the past 4, 5 quarters, the average quarterly increase was around $4 million per quarter, and SG&A has been pretty flattish.

How big is the Accelerate as an item for this quarter?

And is there anything else that we could expect for OpEx given your implied guide?

I guess, I would say a couple of things.

We won't disclose exactly what the Accelerate budget was.

But I will say it has -- have a little bit of an impact on the operating margin.

Basically, consistent with last several years of how we've operated the business, the biggest investment quarter is Q1 and then followed by Q2.

And then as the back half sort of unfolds, you get a lot more leverage in the business.

And so that game plan, if you look at how we've invested in prior years on a seasonal basis, is probably a good yardstick I would use to help continue to understand the business going forward.

And just a follow-up for Scott, kind of high level.

It seems like FlashArray is doing pretty well.

Why wouldn't FlashArray -- just alone on FlashArray, why wouldn't you be able to even hit your revenue targets just on that alone and -- without even any FlashBlade?

Just curious what your thoughts are on that market and the growth rate in that business.

There's no question that there is a very large totally addressable market for FlashArray.

And we believe we're pulling away from the competition with the innovations that we've already launched this year in the X as well as of the new software innovations to come at Accelerate.

So we have a huge opportunity in that market, but we're equally as excited about FlashBlade.

And long term, this is about the platform, right, that we are providing a data platform that works for the combination of different workloads that our customers face and works well together and integrates with cloud so that they can deploy the hybrid cloud solutions they need to run their businesses today.

The next question is from John Lucia from JMP Securities.

I think of AI and machine learning as often being a component within a product or a business process.

Can you talk about how you're specifically targeting AI and machine-learning workloads?

Does the sales motion change?

Or is there channel education that's required?

And then, what type of customers, who are the buyers here for the product in those specific workloads?

Yes, this is Kix.

I'll take this one.

I'd say in general I think we've been surprised at the diversity of industries and types of customers that are jumping into this.

Just to give you an example.

Within Pure ourselves, we have a group that's doing advanced AI and ML on our own data.

We're very serious about being an IoT company ourselves.

And so across a broad set of industries, we see this happening in this journey.

I'd say it generally starts within the analytics team, where you've seen people move from big data to try to kind of understand this new era of intelligence and so taking analytics, moving it to real time and starting to see these new next-gen models around AI, neural networks, machine learning, et cetera.

And so in general, one of the nice things from a product point of view is it really changes the storage mix.

And we think it's an area where there's a real mode compared to traditional competitors.

If you look at this transition and success, for example, in [Invictus] is having in the space with GPUs, it's all about the massive parallelism that GPUs can bring.

And so the same transition needs to happen in storage.

You need widely parallel, superfast, high-bandwidth storage to feed those -- that parallelization that's happening in the servers here.

And so that's the opportunity we see.

So John, I'll just add to that, I guess, from a selling motion perspective, it's a pretty easy thing for our field reps to be able and our partner reps to go qualify new workloads.

And oftentimes, the DevOps, it's the application owner, it's other people that really own the business outcomes.

And so there is education that needs to happen within our sales team and within our partner community.

And it's important also note that this is our first quarter of GA on the product.

So it will ramp, and we'll spread the word.

But success begets success.

And so we're thrilled with the success cases and the use cases that we'll be able to repeat from Q1 and beyond.

The next question is from Nehal Chokshi from Maxim Group.

Can you characterized your distribution of upside between FlashArray and FlashBlade?

It sounds like it's primarily coming from FlashArray.

Yes, Nehal, this is Tim.

We had a good quarter on both of those businesses.

And so we don't split them out at this point in time, given the relative magnitude of each, but I would just finish up saying both of the businesses we're very happy about the performance.

Okay.

And then for that large platform AI win, I guess, was that within your plan of being 2x of FlashArray?

Or was that bonus on top?

Yes, we're in line with the 2x multiple that we provided last quarter.

That was our expectation.

And it'll be a combination of these use cases, as Kix noted, that are next-generation use cases within net-new industries and companies as well as going after traditional filer and object installed base.

So that was just part of our plan.

And I want to reinforce that the wins that we're enjoying in FlashBlade are broad and diverse.

This is not a concentrated business yet, despite this very exciting and compelling win.

The next question is from James Kisner from Jefferies.

So appreciate the comments in inventory around having to secure supply.

But the inventory is up an awful lot sequentially.

Is there any additional drivers there?

Is there more FlashBlade inventory?

Is it preparing for the ramp in revenue sequentially?

It just seems like it's up quite a bit.

And just maybe if you'll comment more on just how aggressively you've stockpiled NAND?

Is it 2 quarters worth, 1 quarter worth?

Just any kind of thoughts you can give us on that would be helpful.

Yes, James, going from about $20 million up to about $40 million, rough and tough, the majority of that was raw material for both the FlashBlade product and the FlashArray product.

We were able to secure some very nice pricing on NAND that really sort of drives that visibility and that confidence in the next couple of quarters.

There are timings of other inventory movements, but the majority of it out there was this opportunistic purchase.

Okay, that helps pretty much.

And just also on services margin.

I mean, you've talked about product margin, but it seems to keep going up.

I mean, does it have a natural ceiling here?

And could it keep drifting higher?

Like, what do you think?

Yes, the support organizations here have been doing a fantastic job of driving industry-leading customer satisfaction yet driving a very, very efficient business.

We're particularly proud of all the work that these guys do for us.

In terms of going forward, I think that we'll still continue to see some nice leverage on it.

It's a natural scale business.

And so there's some opportunity there.

But again, remember, that what we've always done is guided overall gross margin.

So we like that kind of mid- to high 60 range for our overall gross margins.

The next question is from Steven Fox from Cross Research.

Just going back to the comments you made about taking a platform approach within your sales force.

Can you give us a sense for how well built out that approach is across the sales force is it -- given that the new product ramps are relatively new beyond FlashArray?

And how would you sort of describe this potential to sort of broaden in the next couple of quarters?

Steven, this is Hat.

So we've been very deliberate in rolling out FlashBlade.

We had a directed availability process to make sure that the use cases were understood in the second half of last year.

That helped ramp the education and awareness within our sales teams.

It's also been really great to take our early cohorts who were great builders and evangelist of new technology who've been building Pure over the last 4 years and understand our partner network and understand our customers, understand all of our sales teams, and place them into these roles so they can be the specialist.

So it's a very natural engagement.

The AEs that are out there in the field selling the core products want to get these world-class sales people involved in their business.

And so it's a very natural kind of overlay model where you deliver kind of a one to many leverage.

So I'd say the momentum in that has been as expected and very positive.

And we're not breaking out, obviously, the mix, but we're very confident in the $80 million this year with that team and with this model.

I think as we get more and more wins, heading into next year with the market success that we have, we see this as a great contributor to our business for the long term.

Great, that's very helpful.

And then just real quick on the cash flow side.

So as the company moves across into the black for cash flows in the second half of the fiscal, I guess, I'm just trying to understand if there's any risk around sort of further purchases of NAND that maybe could have that slip a quarter or 2?

Or do you feel like you're comfortable even with what's going on with the NAND market?

Steven, that's deliberately why we've given some room in terms of the second half.

So I think right now we feel confident in terms of where we've been from a NAND purchase perspective and what the quarters look like ahead of us.

The next question is from Rod Hall from JPMorgan.

This is RK on behalf of Rod.

I wanted to follow up again on that -- on the NAND supply dynamics.

I know you have talked previously about how you use flash efficiently and that you've got good relationships with your suppliers, so you see a impact from the supply constraints.

But did you see any impact at all to your gross margins this quarter?

Well, this is Tim.

And we were particularly pleased about continuing to sustain that industry gross margin.

As you saw in the product side, it was flat year-on-year.

We have strong relationships with all of the suppliers.

We've been multisourced from day 1 using consumer-grade flash.

And that mix and match and how we design the efficiency of our software from day 1 also has allowed us to continue to work through this environment and still drive that sort of high 60s range product gross margin.

And maybe I'll add.

I do think the constrained supply in some ways helps our business, right?

We get 2 to 5x the flash efficiency of our core competitors, which drives down cost.

We can use consumer-grade flash because were able to harden it with our software for enterprise workload.

And our competitors don't enjoy those luxuries.

So I mean -- I think in some ways it's actually helped us continue to accelerate the business.

Just a follow-up on that.

So if your -- if NAND prices keep going up until maybe mid next year, would you still see very limited impact?

Or what do you expect is [happening] from more material impact on your margins?

So I think you would have to quantify that scenario a bit more specifically than that.

And we feel like we're doing a very good job managing our business based on the significant insights we have into how supply is going to continue to evolve in this market.

And so we feel confident that we can stay within our operating margin range for the next several quarters.

And by the way, there is more capacity that will be coming online as fabs are retooled for 3D lithographies.

The next question is from Eric Martinuzzi from Lake Street Capital.

Yes, just a question regarding new logos.

Obviously, with the 2 -- with FlashArray and FlashBlade, in some cases when you're winning a new logo -- with the FlashBlade now, have you seen any change in where the incumbents, 1 of your top 3 competitors, how they're trying to respond to your entry with juxtaposing FlashArray versus FlashBlade?

Yes, Eric.

So first, we're pleased with the net new logo, new customer acquisition for the quarter at 300 and the progress that we had in the Fortune 500 from 20% over the last several quarters, now up to 25% being Pure customers.

So we like that progress, the new logos.

I think as it relates to the new workloads that are coming from the -- for the FlashBlade specifically, so that's opening up markets like EDA, genomics and media where actually the competitive landscape is a little bit more long in the tooth.

We haven't really attack these guys until this last quarter, and we're recognizing that we can win there, candidly, we think with a more differentiated product value proposition than what they've seen in years.

So I don't want to say that it's easier, but I certainly think that we've got a huge opportunity to go differentiate with the FlashBlade technology as it compares to what's there today.

Okay, just one housekeeping item for Tim.

When you do turn profitable, the weighted average share count, what are you using for your EPS count there?

Yes.

So Eric, the fully diluted will turn over to fully diluted.

And that's about 278, 279 fully diluted shares.

The next question is from Srini Nandury from Summit Redstone Partners.

I'll ask a big picture question.

Can you ask -- can you talk about your thoughts on hyper-converged infrastructure and outlook?

What do you think the [hits here] impact is on network storage?

So the opportunities -- the markets that we're playing in favor converged infrastructure over hyper-converged.

So if you look at what's going on in cloud numbers 4 through 1,000 that we're playing in, if you look at the markets for these next-generation, data-driven applications, which include AI, but a lot of other predictive analytics as well as the enterprise data center, all of those markets strongly favor converged infrastructure over hyper-converged.

We do see hyper-converged in our business.

It tends to only be on the enterprise side, and it tends to be down market, remote and branch office and smaller businesses.

But the core growth markets that we're playing in, the large enterprise data center, the cloud and these next-gen, data-driven workloads, hyper-converged is really not a factor.

The next question is from Simona Jankowski from Goldman Sachs.

I just wanted to expand a little bit more on the upside in gross margins, especially in the context of the higher input cost.

So I guess, firstly, is FlashBlade coming in at lower margins as you had expected?

Or is that actually turning out to be a bit better in its profile?

Secondly, some of your competitors had talked about pushing through price increases.

So curious if that's something you've undertaken as well?

Or if you see that out in the market and how it's affecting you competitively, perhaps you're benefiting from that?

And then just lastly, I think your customer adds in the quarter at 300 were less than last quarter, but curious if that shift to existing customers might have also helped on the margin side.

Yes.

So Simona, on your first question around gross margin in terms of overall product gross margins.

We were -- continue to be happy with where those gross margins are in terms of component cost.

We were able to sort of continue to sustain those gross margins.

On the FlashBlade side, we've always said that FlashBlade right now is running a bit south of where FlashArray is.

It's part of our plan.

I would say this quarter we were surprised that FlashBlade margin ran higher than what I was expecting, again still below our FlashArray margin, but we turned in a very good quarter.

We had some really good marquee wins, and we sold value there.

So that was a part of a strong showing in terms of our overall 66% product gross margins.

So I think the only thing I'll add there is that we have not increased our prices.

So in fact, it's been kind of paradoxically a bit of a tailwind for us.

And I think it maybe has contributed somewhat to our increased win rates, although it's still kind of early to determine if that is material.

But I think the fact that we're actually able to sort of accentuate our value propositions and leverage the platform selling motion of selling the complete suite, those are contributing, I think, more handily.

But paradoxically, I do think it is actually a nice tailwind that's influencing our win rate.

And Simona, to your last question around 300 adds.

Yes, it's down a bit from Q4.

But we're not -- 300 a clip -- at 300 a clip, that's still roughly 4, 5 new customers every single business day, which we're particularly proud about.

And to put it also in the context, we're up 73% in our overall aggregate customer count from the same time last year.

So a lot of good opportunity to see those repeat business metrics that we talk about kick in for the new set of customers that we've acquired over last -- the course of last year.

Yes, I know, and that last question was just more in the context of margins because my impression is that new customer adds may come in at lower margins.

So just curious if that mix shift was beneficial to margins in the quarter.

Not significantly, not significantly.

I think it goes right back to what Dave was talking about in terms of just being very focus on selling value.

We fundamentally have a differentiated product.

Our customers tell that all the -- tell us that all the time, and that's what we've been able to do here for the last several quarters in terms of operating in that's sustainable gross margin range.

The next question is from Mark Moskowitz from Barclays.

This is Dan Gaide on for Mark.

So just quickly.

Can you talk about the adoption of FlashBlade versus FlashArray just in different verticals, like the cloud vertical that you've mentioned?

And then we understand that your corporate run rate is still pretty consistent and high, but has that differed between FlashBlade and FlashArray?

Yes, so this is Kix.

I'll take the different verticals question.

I think one of the things that's been awesome about FlashBlade thus far is that we're seeing kind of a duality of where we can sell it.

On one hand, it opens up a whole new set of use cases that we weren't able to go after with FlashArray and so in the whole area of AI and all that we've talked a little bit about here, but also the broader area of engineering and simulation-type workloads, planes, trains, automobiles, ship designs, genomics, oil and gas, media, et cetera.

On the flip side though, we're also seeing a pretty big uptake in just general purpose analytics.

And the nice thing about that is as the world continues to march towards digitization, pretty much every company in every industry is a digital business at this point.

And they've all got a big investment in analytics and data.

And so we're seeing this kind of graduation from the first generation of big data, where big data was kind of big but slow, to be able to be bridge over and give people a world of big and fast data.

And so that's kind of sales that's working.

And I think we've talked about this before as well, but I think we've been pleasantly surprised about the pull in both directions.

So we've seen good interest from our existing flash rate base selling into new parts of their businesses.

But we've also seen people buy FlashBlade and then turn around and buy FlashArray within IT.

So it's a nice kind of helpful trend in both directions.

And for the purposes of our reporting on win rates, were talking about aggregate win rates across the platform.

So that is rolling together FlashArray and FlashBlade wins.

And that's the way we're going to continue to run the business is we'll give you a blended win rate rather than trying to break them out per product.

Yes, maybe the only thing I'd add to that just from the competition point of view is that one of the reasons that were excited about the FlashBlade business is that we just don't see as much natural competition.

I mean, you essentially have the legacy NetApp environment and the Isilon environment from EMC.

We've seen both of those vendors kind of do retrofits and just put big flash drives in those systems without doing any fundamental innovation.

And we've now gone head to head against the all-flash versions of both those products and are faring quite well.

So we're quite excited about what we see there.

The next question is from Simon Leopold from Raymond James.

I wanted to see if we could get an update on how you see the competitive landscape.

In particular, I presume you've benefited to some extent from some of the disruption of delving integrated into EMC and HP Enterprise and its various transition; Cisco is sort of shifting its business model.

So our impression is that these companies maybe a little bit less focused on the areas where you're playing.

So I want to see if you could give us an idea of how much that's benefited you and how you see that playing out as maybe your competitors get a little bit more focused on competing directly against you.

So as we've described in the past, we continue to compete roughly along market share lines, right, so things like public cloud or hyper-converged factor in a very small single-digit percentage of the competitive engagement.

Most of the time, we are going up against the legacy players.

In general, these are products that were designed north of 20 years ago, long before there was flash memory and long before there was a cloud model of computing.

And that's why these technologies are -- they're just not designed to fit into cloud workloads or these new data-driven applications.

And those are 2 markets that are relative greenfields where the competitors don't play well.

Enterprise IT is the one that is the more competitive.

I would say the biggest material uplift we feel is from the partners.

There's a very strong Cisco partner community that we're already plugged into.

Concerns they have around Dell-EMC competing with corresponding Cisco products, I think is bringing business in our direction.

But the reality is this is a sea change, right?

We're benefiting from the secular shifts away from this complicated, expensive, fragile technology to something that is designed to deliver on the benefits of the cloud even in the customer data center and the performance that only purpose-built engineering can provide in flash that retrofits will never be able to offer.

Our last question at this time is from Jason Ader from William Blair.

So my question, guys, is on the X series.

Can you talk about some of the early use cases you're seeing for the X series?

And then, do you see the X as incremental to the M?

Or is it more just there was an M Series opportunity and now it's just going to be filled by an X series?

Yes.

So this is Kix.

I'll take this one.

As we might have noted, we did both announced but also shipped X last quarter.

And so our engineering team overdelivered on that nicely, and we're able to count some wins in even this quarter.

But I think we're really excited about the opportunity that NVMe brings to the business kind of from 3 perspectives.

First off, it's just an obvious competitive mode for differentiation.

We saw NetApp come out at their IR day and say NVMe adoption was 2 years out.

We saw EMC World a few weeks ago -- sorry, Dell EMC World, and no stated plans for a NVMe rollout and not just a lot of detail on that front.

And so we continue to believe we have a nice clear advantage here that we intend to take advantage of.

Second area is that we absolutely believe it's a scenario we can drive a price premium.

And so it's one where when you can deliver dramatic performance improvements, performance density improvements, you can charge more for that.

And so we see that to be something that can be positive for our business.

And the third area, to get a little bit more of your question, is we see a net-new set of use case that it opens up, certainly, faster database, net workloads, traditional workloads, but also really going after consolidation and type -- and cloud-type providers.

A lot of the cloud vendors out there have really consolidated on server DAS over the past few years.

And as -- and now we have an opportunity to go in there with NVMe and take the flash out of each of those servers and consolidate it at the top of the rack to drive more efficiency for them.

And then, I guess the final thing I'll just sum up with was this transition from M to X I think it has been a great feather in our cap to show the value of Evergreen.

And all of our competitors are going at this likely from a position of going in once again and coming out with new products and big transitions.

We're able to deliver this to our existing FlashArray//M customers in a way that's totally transparent and allows them to piecemeal upgrade, and just blows people away that that's even possible.

So to wrap things up today.

We had great success, delivering on 3 priorities in our business: innovation, growth and our path to profitability.

And all of that is setting up 2017 to be Pure's best year yet.

We're making our data platform indispensable to our 3 core markets: clouds 4 through 1,000; next-gen, data-driven applications that we discussed; as well as modernizing enterprise IT.

And we're widening our lead over the competition.

So we're on track to deliver the $1 billion in revenue that we have guided for the year.

There are numerous quantitative proof points around that, the predictable, repeatable selling into our install base that should deliver 70% of that revenue; the platform-selling model across FlashArray, FlashBlade and FlashStack; continued improvements in our sales productivity; and the uptick in our competitive win rates against the top 3 competitors that we see.

Why?

Because we're launching more innovation in the first half of this year than we've ever done in the history of our company.

And at the same time, we're protecting our customers' investments.

This is a rapidly changing market, and only Pure is providing every customer we onboard with investment-protecting path to this future.

We look forward to sharing much more about the road ahead at Accelerate, our user conference, which is June 12 through the 14th in San Francisco.

Please join us.

Thanks, as always, for your time with us today, and we'll speak to you again next quarter.

Cheers.

This concludes today's conference call.

You may now disconnect.