Pure Storage Inc (PSTG) 2018 Q3 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 Q3 Fiscal 2018 Earnings Call.

(Operator Instructions)

I will now turn the call over to Matt Danziger, VP of Investor Relations.

You may begin your conference.

Thank you, and good afternoon.

Welcome to the Pure Storage Q3 Fiscal 2018 Earnings Conference Call.

Joining me today are our CEO, Charlie Giancarlo; 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 trends; 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 reconsidered 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.

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

This call is being broadcast live on Pure Storage's 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, Charlie Giancarlo.

Thank you, Matt.

Good afternoon, everyone, and thanks for joining today's earnings call.

We'll begin with a summary of our operating results and my observations after my first full quarter at Pure.

I will then turn the call over to Hat for some customer highlights and finish with Tim who will provide a detailed review of our financials.

Q3 was a strong quarter for Pure.

Revenue was a record $278 million, up 41% from a year ago, beating the high end of our guidance.

Non-GAAP gross margin was 66% while non-GAAP operating margin was a negative 0.7%, also above the high end of our guidance.

We finished the quarter with a positive free cash flow and grew our cash balance by $28 million.

As we look ahead, we remain on track to deliver our first $1 billion in annual revenue and our first profitable quarter.

It has been 3 months since I joined Pure, and as you would expect, I've spent a lot of time diving into the business, meeting with customers and partners in addition to spending time with the Pure team discussing our company and our strategic imperatives.

These discussions reaffirm my belief that tomorrow's world will be driven by information, big data workloads, data and analytics, machine learning and AI.

Information has become the strategic business imperative that requires fast, simple, scalable solutions.

Aging architectures of legacy vendors are struggling to meet the needs of next-generation data-rich environments.

Even in today's world, on traditional applications, data storage is costly and complex.

Storage designed by legacy vendors can't shed decades of needless complexity and still require the need to migrate data with every new generation of equipment.

Pure's Evergreen Storage model eclipses the competition in speed, simplicity and cost, bridging the transition from today's environment to the next generation.

Quite simply, customers with traditional workloads that have migrated to Pure have stated to me repeatedly that Pure is the best product they have ever purchased.

They are asking for us to provide them more.

They view Pure as one of their most strategic vendors and want to see us replace more of their existing infrastructure with our technology.

In the spirit of doing more with more customers, we will focus on 3 growth areas: one, growing our roster of cloud customers; two, cementing our lead as the core data infrastructure for next-generation applications like artificial intelligence, machine learning and analytics; and three, expanding our footprint in the world's largest enterprises and government organizations.

Each of these growth areas is a large opportunity on its own and, together, they represent a huge market opportunity for Pure.

Our product portfolio is strong.

FlashArray has had a great quarter and continues to deliver record results, in part due to the introduction of FlashArray//X and the new features we announced at our last user conference.

FlashBlade, launched earlier this year, continues to grow faster than FlashArray did in its first full year.

And while it is now somewhat off its early 2x pace, it remains on a very strong growth trajectory.

We are excited about the customer momentum for FlashBlade, which Hat will talk about later.

We have a business that is delivering greater value to customers, that is investing in the future and that is positioned for growth at scale.

As we look to the future, we have set 3 operating priorities.

First, customer focus.

It's our Northstar.

Every group at Pure, each decision and every action we take will focus on customers first.

We will continue to focus on driving industry-leading customer satisfaction at every stage of engagement.

And by customer, we mean both current and future customers.

Second, operational excellence.

To compete at the highest levels, we will strive to deliver against the best possible benchmarks and results in every part of our company.

The best teams always strive to do better.

Third, innovation everywhere.

We will not only innovate with our technology portfolio, but also in every part of our business model.

Every organization in Pure is enthusiastic about driving new innovations in how they perform their work to deliver better overall value to all of our stakeholders.

By focusing on innovation and customer delight, we empower our customers to turn data into intelligence and advantage.

Pure has exceeded my initial expectations, and I could not be more excited and thrilled about all the opportunity in front of us.

I have been with companies that have experienced growth at scale, and in Pure, I see the same critical elements for continued growth.

And with that, I'd like to hand it over to Hat to highlight some customer successes of the last quarter.

Thanks, Charlie.

It's great to have you here.

The excitement across our customers, partners, prospects and sales teams is incredibly strong as we continue to deliver our unique data platform built for the cloud era.

The combination of our differentiated technology, superior customer experience and evergreen business model are winning in a competitive landscape where the legacy companies' historic approach is being challenged at every level.

This quarter, we added over 300 new customers, bringing our total to more than 4,000, up 54% from the same time last year.

And contributions from cloud customers continue to represent more than 25% of our business.

Our repurchase rates are holding nicely with over 70% of our business coming from our existing customers, and our profoundly better support experience continues at scale.

In addition to happy customers, we've seen validation through our audited Net Promoter Score of 83.7, which places us in the top 1% of enterprise technology and 2 to 3x higher than our competitors.

Our partner ecosystem continues to build momentum.

The contributions from leading national partners continues to be a focus, and key investments with global system integrators had resulted in a notable multi-million dollar win with a large financial services institution in the quarter.

We're confident that our strategy and focus on being the preferred solution for our partners is right and it will continue to be an integral driver of our go-to-market velocity.

Our sales team's morale is high, and our most recent new hires, which represent our largest cohort classes, continue to produce of the highest initial productivity on record.

Internationally, we were very pleased with our momentum across all 3 theaters, which contributed 31% of revenue this quarter, up from 26% last quarter.

As Charlie mentioned, we continue to be hyper focused on the 3 growth markets: Cloud, next-generation workloads and the largest enterprises as they cloudify their on-premise IT.

I'd like to dive down into one of these areas each quarter.

This quarter, focusing on our progress in driving the adoption of next-generation data, AI and analytics.

While still in the early days, we are seeing key design wins and adoption across industries.

With analysts forecasting a 78%, 5-year compound annual growth rate for storage in AI, along with our differentiated capabilities, we are confident we are positioned perfectly to take advantage of this trend.

We continue to see great progress with our partner, NVIDIA.

This relationship started through our customers and joint sales teams and, in Q3, extended the global co-sponsored events worldwide.

We also entered into a formal agreement with PNY Technologies, the European distributor of NVIDIA enterprise products.

As the essential instrument for AI research, the NVIDIA DGX-1 is at the heart of many of the world's most demanding deep learning and analytics environments.

FlashBlade is uniquely suited for organizations investing in these emerging workloads, ultimately shortening the time to innovation and enabling faster time to development.

Net-net, Pure is to storage while NVIDIA is to compute for AI.

Additionally, FlashBlade won the Best Innovation in Artificial Intelligence award at a recent AI Summit Conference.

As I mentioned, the traction is strong across multiple industries, most notably financial services, health care, service provider, automotive and cloud-native businesses.

Customers include 4 of the top autonomous driving companies.

And in Q3, we've added a number of new SaaS accounts within the areas of revenue management, web analytics and hospitality distribution.

This is an incredibly exciting time at Pure.

We're on the eve of delivering our first $1 billion in annual revenue and the data platform strategy is working.

We are enjoying fantastic customer and partner momentum, and we have the combination of both Charlie and Dietz.

We truly are only just getting started with the right technology, business model and customer experience at the right time to help transform organizations globally.

With that, I will turn to Tim to provide details on the quarter.

Tim?

Thanks, Hat.

Q3 was another strong quarter of execution for Pure as we continued to deliver strong revenue growth and achieved positive free cash flow.

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.

Reconciliations of these non-GAAP metrics to their GAAP comparables, as well as our full Q3 results and presentation, are available on our website at investor.purestorage.com.

Total revenue grew 41% year-on-year to $277.7 million, more than 2 points above the midpoint of our guidance.

Product revenue grew 39% year-on-year to $223.2 million.

Repeat purchases and solid new customer base growth helped drive our product revenue in the quarter.

Total customers reached more than 4,000, up more than 50% from the same period a year ago.

Momentum in FlashArray was particularly strong, and we continue to gain traction with FlashBlade.

Support revenue in Q3 grew 50% year-on-year to $54.5 million, driven by continued revenue recognition of ongoing support contracts.

Looking at Q3 from a geographic perspective, 69% of our revenue came from the U.S. and 31% from international, an all-time high for the company.

We are very pleased with the performance of all of our regions in this quarter.

Q3 total gross margins were 66.4% compared to 67.1% in Q2.

We continue to drive industry-leading gross margins and have been operating in our long-term target range of between 63% and 68% for the last 8 quarters.

Product gross margins of 66.3% decreased 1.2 points quarter on quarter as expected.

As a reminder, last quarter, we outlined a handful of onetime benefits that positively impacted product gross margins, including lower cost components from pre-purchased inventory and onetime logistics benefits.

Q3 results are more in line with our historic norms and well within our long-term operating range.

Support gross margins of 67% improved quarter-on-quarter by 1.1 point, reflecting our expanding customer base and our continued efforts at driving operational efficiencies.

Turning to operating margin.

We continue to make excellent progress on our march to profitability and achieving a long-term operating margin target of between 15% and 20%.

Our operating loss in Q3 was negative $2.1 million or negative 0.7% of revenue compared to negative $19.4 million or negative 9.8% of revenue in the year ago quarter.

This represents a 9-point year-on-year improvement and more than a 2-point outperformance from the midpoint of our Q3 guidance.

Our net loss for the quarter was negative $1.9 million or negative $0.01 per share.

This compares to the year-ago period net loss of $20 million or negative $0.10 per share.

The weighted average shares used for the per-share calculations were 213.3 million and 195.8 million, respectively.

Total headcount at the end of Q3 was up over 2,000, up from over 1,900 at the end of Q2 and up from over 1,650 a year prior, largely reflecting ongoing hiring in both our sales and R&D organizations.

Moving on to the balance sheet and cash flow.

We finished the October quarter with cash and investments of $551 million, which is a $28 million addition to our overall cash position from the previous quarter and represents the first Q3 of positive cash flow generation in the company's history.

We look forward to another quarter of free cash flow generation in Q4.

Our free cash flow was positive $14 million or 5% of revenue compared to negative $35.8 million or negative 18% of revenue in the year ago quarter.

This includes $2.5 million of impact related to our employee stock purchase plan.

Excluding this amount, free cash flow would have been positive $16.5 million or 6% of revenue compared to negative $30.4 million or negative 15% of revenue in the year ago quarter.

Now we'll turn to our guidance.

For the fourth quarter, we expect revenues of between $327 million and $335 million.

This represents 45% year-on-year revenue growth at the midpoint and is based on momentum in the overall business combined with our seasonally strongest quarter of the year.

We expect Q4 non-GAAP gross margins in the range of between 63.5% and 66.5%.

We continue to focus on operating within the sweet spot of our long-term model of between 63% and 68%.

We expect Q4 non-GAAP operating margins of between positive 3% and positive 7%, which represents our first profitable quarter as a public company, another significant milestone in Pure's journey.

As we mentioned last quarter, as we drive to profitability, I want to remind you that our weighted average shares used for EPS will increase once we turn profitable as we move to a fully diluted calculation.

Please refer to our earnings presentation for further details on our fully diluted share count.

For the full year, we expect revenues of between $1.012 billion and $1.020 billion, a midpoint of $1.016 billion; non-GAAP gross margins of between 65.6% and 66.6%; and non-GAAP operating margins of between negative 4.9% and negative 3.5%.

In summary, Q3 was another strong quarter for Pure with strong revenue growth and positive free cash generation.

We are well positioned to finish the full year with revenues of greater than $1 billion and deliver Pure's first quarter of operating profits in the upcoming Q4.

With that, we will now open the call for questions.

Operator?

(Operator Instructions) Your first question is from Aaron Rakers from Wells Fargo.

Actually, I have 2 quick questions, if I can.

So first of all, I'd like to understand a little bit better the FlashBlade commentary.

You talked about trending a little bit below the 2x the FlashArray ramp.

Just help us understand where you stand relative to that $80 million of revenue expectation for the full year.

And then also, Charles, I'm interested, as you kind of look forward and you kind get your arms around the portfolio that's continued to expand, I'm interested in your thoughts around investing in terms of sales capacity, coverage and distribution relative to continually driving operating margin leverage of the model as we start to look into the next fiscal year.

You bet.

Thanks very much for the question.

We are very pleased still with the FlashBlade growth, and it continues to be much faster than FlashArray in its first full year.

Relative to the $80 million, and this will probably be the last time I talk about that, we're in the ballpark.

So I just want to make clear that in terms of my style, I prefer not to break out individual products on a quarterly basis, so we're going to push that aside from now on.

Having been in a multiproduct company, you know that from quarter-to-quarter, we optimize on the total top line not on individual products per quarter when you see things go up and down or grow faster or slower than others.

But I will say that we are, if anything, even more optimistic and more pleased with FlashBlade than when we first introduced it.

We continue to see new opportunities for it, we're getting great feedback from customers, and we couldn't be more optimistic about the product.

Oh, I'm sorry, then on the model leverage.

The way we think about it, we talk about this from time to time, is -- and Tim outlined at our meeting last year, our users conference, what our long-term model is.

We see that we're going to continue to invest in sales and marketing, but that -- at our current level, that's going to come down on a percentage of overall revenue.

Now to the extent that we grow faster, it'll obviously be a bit higher.

To the extent we grow slower, we're going to take -- we'll take that down.

So long term, you're going to see an overall reduction in sales and marketing.

You're going to see an increase in the bottom line, but that will be moderated somewhat by how fast we're able to grow the company overall.

Your next question is from Wamsi Mohan with Bank of America Merrill Lynch.

If we step back and look at the pace of growth in all-flash revenues across the vendors, I mean, the standouts are you guys, Pure, and then NetApp.

Can you address why you think NetApp is growing so much faster on a larger revenue base?

Is it just the footprint and then selling it to installed base?

Or has it got something to do with pricing?

Would love to get some thoughts around that, and I have a follow-up.

Look, I think that NetApp obviously had a great quarter, and my hats off to the -- George and the entire team over there.

But I'll remind you that on an overall basis, on a total company basis, we're growing much, much faster.

And if you have a large installed base as they do, simply replacing your existing environment with flash is going to produce flash revenues that look much greater.

But on an overall growth basis, we're much higher, and I expect that to continue.

And I think it's a single-storage market at this point in time, and I think you should be looking at companies from a total revenue perspective.

Are you seeing anything, from a pricing dynamic, that has surprised you in the market in this past quarter?

No.

I would say that we've not seen any significant changes in overall pricing.

The market -- of course, every single deal is tough from a competition standpoint, but no significant movement in pricing this quarter.

If I could ask one last one.

You mentioned that sales and R&D hires have been quite significant through the course of this past year.

Can you just give us some sense of where specifically your sales hires are being focused to either in vertical markets or whichever way you'd like to perhaps kind of provide that regionally?

Hey, Wamsi, this is Hat.

Thanks for the question.

We're evenly distributing them across the globe.

We're thrilled with our performance in international.

All 3 theaters produced nicely, and we see the productivity and capacity coming online very nicely there.

And we're also continuing to see that our latest cohorts of classes are producing the highest productivity levels on record.

And so as long as we continue to see those kinds of forward-looking metrics, we're going to continue to invest in sales and marketing.

The next question is from Katy Huberty with Morgan Stanley.

Charlie, first question's for you.

When you think about the 3 growth vectors that you laid out, do those require you to expand the product portfolio in the future, perhaps even to adjacent markets to storage?

Or does the current product portfolio allow you to go and achieve all those goals?

And maybe answer in the context of R&D growth that's materially lower in the just reported quarter versus where you were growing that line a year ago.

Katy, thank you very much for the question.

I think the answer is really both, Katy.

First of all, the existing product line that we have allows us to continue to expand in those markets.

But technology advances constantly.

And so the more -- we have a lot to do in each of the product lines that will allow us to expand even faster in those markets.

We do believe that our differentiated business model is characterized by a higher rate of R&D spend than many of our competitors in this market, and it's all focused on the future.

So -- and I'll let Tim answer the question on the R&D spend because we don't really see -- on a long-term basis, we really see that as something that we're going to continue to invest in, and this is just an anomaly in the quarter.

Yes, yes, quarter on quarter, Katy, on an R&D basis, obviously, the leverage, the quarter revenue is growing at 25%.

You're going to just get natural leverage.

And we have some programs over the summer that sort of tend to spike the R&D number a little bit there as well.

So we're going to continue to invest is the headline.

I wouldn't read anything into the sort of decel Q-on-Q.

Okay.

And then Tim, just a follow-up for you.

How would you characterize the availability and pricing of SSDs in the quarter?

And what's your outlook in January?

And then to the extent that pricing starts to come down over the next year, how much do you think that helps your gross margin?

Yes.

So Katy, the first part of your question, we continue to be very comfortable of our supply for the rest of the year and out into next year as well.

As you know, we've been watching this dynamic for quite some time and have managed very, very well through it and continue to expect to do so going into calendar 2018.

In terms of cost dynamics, what I would say is rather than think about what that means to gross margin, we always talk about this sort of mid- to high-60 sweet spot that we like to play in.

We've been doing it now for 8 quarters, and that's the way I look at it.

So we may pass some of that onto customers to capture more markets and we may put some of it in our own pockets as well.

But as long as we stay within that range, that's what's important to us from a management principle perspective.

Good.

And If I may, just one quick more.

Tim, if you think about normal seasonality in April, that could bring your April quarter revenue down below what you just reported.

Do you think you can remain profitable in that scenario of normal seasonality?

Or how should we think about the sustainability of profitability after the January quarter?

Yes, Katy, we're not naturally guiding for the next year, but I would take a look at the year that we're just in.

Obviously, Q1 is going to be the lowest from a profitability perspective and Q4 is going to be the highest from a profitability perspective.

So as you're thinking about modeling, that's the way I would look at it.

The other thing, you ask about seasonality, we think about seasonality both on the bottom line and the top line.

And I know this was a topic last sort of year as well.

But as we start stabilizing our overall growth rates, and we talked in the analyst they about having 30% CAGRs, what you really want to take a look at is our full year revenue growth rate, approximating a lot of the quarters as well, right.

Because now you're getting to a stabilization, you really shouldn't see big differences between the individual quarters and the full year, if that makes sense.

The next question is from Mark Moskowitz with Barclays.

I apologize if this question was already asked.

I dropped off for a second.

But did you guys talk about how we should think about the profitability cadence on a full year basis as we think about calendar '18?

You obviously are -- do some really good things here in terms of leverage now.

But can you be profitable for a full year calendar '18?

I guess, that question is more for Tim.

And another question is for Charlie.

Clearly, the enthusiasm is very palpable here on the call today across the C-suite here.

Just want to get a sense in terms of the cloud.

You kind of signaled previously AWS and Azure integration opportunities are there, didn't hear too much about that today.

Can you give us a little more in terms of when investors could see some of that enthusiasm actually be monetized over the next 12 to 18 months in the cloud?

So Mark, I'll take the first question on profitability and then turn it over to Charlie on the second question.

On profitability, we naturally aren't going to guide for the full year next year, but we do see seasonality in the profit number.

You see that throughout this year.

You see that throughout years past, so I would think about it very much the same way as we get into next year.

And our march is to profitability.

We're right now -- what kind of in the -- for the full year negative single digits, low single digits.

So you can infer from that, that we're moving in the right direction.

Mark, and this is Hat.

I'll take the winning in the cloud.

I mean, I think the key statement here is that the explosive growth data are fundamental premises that they're going to operate in a multi-cloud world.

With sensors and AI, machine learning and all the data that's created by machines forecasted to be 40 or 50 zettabytes in the future and total Internet storage capacity over the next few years to be a fraction of that, call it, 2.5 or 3 zettabytes, customers are going to need to operate in the edge, they're going to need to operate on-prem, they're going to need to operate in the public cloud and their partners.

And so we built our platform to enable the cloud.

So SaaS, together with IAS and PaaS and native cloud businesses continue to contribute 25%.

We have some of the largest cloud scale environments as customers.

They're big companies.

They have a lot of different use cases.

And you'll see us continue to work with them on integrating and building go-to-market motion in the future.

There's a really great series of conversations going on and we're optimistic for integrating with them in the future.

The next question is from Steve Milunovich with UBS.

Charlie, as you've been able to dig into the company a bit more, where do see room for improvements and things that you've learned at large companies that you can bring to Pure to help it scale?

Yes, thanks for the question.

We mentioned some of them in the call, right, which is a movement upmarket.

I think part of that is not me per se, but simply the natural progression of the company as it grows more -- more and more larger customers and larger parts of their environment.

And that just requires some modification of the selling motion, distribution motion, marketing motion and so forth.

So that's part of it.

I think, given that we're now a multi-product company, the way you manage in a multi-product company changes to some extent.

And then simply just the fact that we're now over 2,000 people, the way that one needs to communicate and coordinate across the company, those are things that we're making some modification to.

But none of these things are either rocket science or newly coined.

These are things that every company that goes through this level of scale goes through.

So I see it as something that's very straightforward, and the team was hungry for it and have jumped right on it.

And then I wanted to ask you, you have a familiarity with Arista.

And there seem to be some similarities between Pure and Arista, but I'm sure there's also some important differences.

Maybe you could talk about your observation of the 2 companies.

Absolutely.

The similarities is that we are deep -- both companies are created with deep technologies set at its core that really understand the technology, really understand the market and are really, if you will, fighting for the advancement of computing and performance of technology.

I would say, in terms of the differences, that Pure is a much more of an enterprise-oriented company at the moment, whereas Arista is more cloud-oriented, with each one of us trying to build up more momentum in the other segment.

So we're maybe starting at opposite points on the compass, but headed towards the center.

The next question is from Jason Ader with William Blair.

I had a question first for Hat on the federal vertical.

Is that an area that you guys are investing in?

Do you feel like you can be a winner there?

And then for Charlie, what's happening with your win rates against Dell-EMC?

I mean, I see the FlashArray business doing very well, and some of our checks seem to suggest that you're seeing more displacements of big EMC accounts.

Can you comment on that?

Jason, it's Hat.

Thanks for the question.

Yes, we are investing in public sector overall.

The key markets that Charlie mentioned that we are hyper focused on are cloud businesses, next-generation use cases and the large enterprise.

And in the large enterprise it includes federal agencies as well as large state and local organizations and health care.

So you'll see us talk more about those wins in the future.

Right.

In terms of our win rates, I'd say that our win rates are stable, but we are just competing for more deals.

The next question is from Alex Kurtz with KeyBanc Capital Markets.

This is Steve Enders on for Alex.

I was wondering if you could talk about trends you're seeing in account rep yields in 3Q and heading into 4Q.

And I know you guys aren't speaking to fiscal '19 yet, but are there any new class of hires that we could expect that may affect yields beginning next year?

Steve, this is Hat.

I'll take the first part, and maybe Tim will jump on afterwards.

We're seeing great productivity, continued motion from a sales capacity perspective.

The latest cohort classes that we brought in continue to be outperforming our most productive cohorts.

So we see a great sales capacity there.

I think the key contributor there from my point of view is the data strategy -- data platform strategy is working and our channel ecosystem is contributing nicely.

So I think those 2 motions, that portfolio of selling motion together with our continued focus on the channel is driving and creating higher sales yields, and I think that will continue in the future.

Yes, Steve, on an investment philosophy perspective into next year, obviously, not guiding, but historically, the first half of the year has been when we've invested most notably in the sales and marketing organization.

That's the best time to get the quality salespeople that we're looking for and get them trained for the seasonally stronger second half.

We've been doing that now for 3 or 4 years, and I don't anticipate any changes in terms of how we go-to-market next year.

Okay.

And I just want to ask, you guys highlighted at your Analyst Day, (inaudible) run rate goal in 2021.

I was wondering if anything has changed that will affect that outlook.

Not at all.

That continues to be absolutely the longer-term target after we pass through this billion-dollar number.

The next question is from Eric Martinuzzi with Lake Street.

Yes, your international growth was really standout.

I'm wondering if that has more to do with just going off a smaller base or is there a different -- difference in the competitive landscape internationally?

Yes.

No, Eric, I think this is -- what we're seeing is just the capacity coming online.

Making investments in international markets takes time, so I think it's a combination of brand awareness, sales capacity coming online and the channel maturing.

We see continued execution across all of our theaters, and so we see nice growth in Americas as well.

So I don't -- I think on an overall contribution basis, we anticipate that we're going to continue to see a larger and larger contribution from our non-North American markets.

Okay.

And then just a housekeeping item for Tim.

The -- if you made it crystal clear in the press release, I missed it.

But the diluted weighted average share count, I think the last time you talked about it was around 237 million shares, but we've seen a pretty substantial increase in the stock price.

So I was wondering if -- is there a better number for that as we cross into adjusted EPS profits?

Yes.

So Eric, what I'd say is that this last quarter, had we been profitable, we would have had a 243 million share count for purposes of EPS purposes.

That will creep up a little bit as we grant more options and awards.

There's a table in the deck that shows across various stock prices what that adjustment will be.

So I think if you're in that 240 to 250 range, you're probably safe in terms of how you think about it from a modeling perspective.

The next question is from Jayson Noland with Baird.

A follow-up on international.

Were there any big deals worth calling out?

Or do the GDPR play a role there in that strength?

Yes, we did have a significant win in a large global financial services organization that I referenced in our prepared remarks, but nothing that was material that would really swing it.

We see nice penetration in the enterprise, great -- in the public sector, and our continued cloud efforts have been paying off in all of those markets.

So I think more of the same, we believe it's sustainable.

Okay.

And then a follow-up.

Software only, and I don't know if this would apply, but is it possible in the future to see Pure IP on a white box or in the cloud or that's not really something that would make sense?

I'm going to hand that over to Kix.

Look, anything is possible.

Obviously, our solutions are powered by software, and software is a key part of our value-add.

Today, we focus on deep integration between the software and hardware for both ease of use and overall simplicity and also the best performance.

But as we continue to look at delivery models, we'll keep everything on the table to consider over time.

The next question is from Simon Leopold with Raymond James.

I wanted to see if we could take a little bit of a look into fiscal '19, calendar 2018 in terms of a couple of aspects.

First of all, just want see if you could review your thoughts on seasonality given that your April quarter usually has a pretty pronounced sequential decline.

Just want to make sure we're all on the same page in terms of how to think about seasonality.

And then in terms of the full year, I just want to see if you could revisit the commentary you gave us, a nice grid perspective of FlashBlade and all-flash growth leading to somewhere in the 30% range growth.

So just want to see if we could revisit how you're thinking about the growth outlook for the full year.

Yes, Simon, I'll take your full year question first and then I'll get into the seasonality within the quarters.

On the full year, you sort of articulated perfectly.

If you think back to our Analyst Day, we talked about a variety of different scenarios that get us above that 30% CAGR over the course of the next handful of years.

And I think that nothing's changed in terms of how we think about the business and the targets that we're sort of executing on.

So I think you're thinking about that just like we are here at the company.

As it relates to the quarters, I made a remark earlier in this Q&A, is that now that we're in that stable sort of growth phase of the company, really looking at each quarter on a year-on-year basis and compare it to the full year numbers, those growth rates should, all else being equal, really be very similar, right.

You shouldn't see big deltas between a Q1 growth rate and a Q3 growth rate or a Q1 growth rate and a full year growth rate.

It should really be stable.

And when we think about that, should we be looking at the January quarter that you've guided to, which is midpoint around 45% year-over-year growth rate, that's well above 30%.

I assume you're not suggesting we should think about 45% as the new normal.

Yes.

No, naturally, Simon, we're lapping another year.

We're going to post $1 billion.

And every time you lap a year, those comps obviously get tougher.

So I think you're thinking about it right.

Great.

And then just one last kind of big picture.

If you could help us understand how to think about the addressed market.

When you think about machine learning, artificial intelligence, what's opening up?

We're struggling to try to think about a TAM expectation.

I know it's still early, but any metrics you could help us frame this?

This is Kix.

I'll take that one.

So I think the first thing I'd say is that we believe a big chunk of that market is all net new.

And so I think everyone like yourself is struggling to understand how big it can be.

The thing that I think we've been excited about over the last few quarters is to see it grow from a few very focused industries, like self-driving cars and things of that nature, to really seeing ourselves starting to have AI conversations in almost every industry.

We highlighted the Man AHL example on this call because we thought it was a great breakthrough of these types of technologies into more classic financials.

And we're having these conversations across a wide range of industries.

We think this is something that most CIOs will look at as something to put some of the innovation dollars towards, and it's going to be a huge growth driver.

And so there's been a few studies out.

The number we called out on the call was 78% CAGR, but I think we're also hoping to see more of analyst community jump in and size the opportunity.

The next question is from Tim Long with BMO Capital Markets.

Yes, 2 quick ones if I could.

First, could you talk a little bit about deal sizes?

Are they growing?

It sounds like the win rate is similar with a little bit more activities of bids that you're in.

If you talk about the deal sizes that you're seeing.

And then secondly just talk a little bit about as the revenues may shift around between the verticals.

Particularly if you get more into that cloud customer base, how should we think about gross and operating margin or profitability potential for some of those different verticals?

Tim, this is Hat.

So no material difference really on the average deal sizes.

We're competing for more of bats, and our win rates are holding or improving against every competitor that we have out there.

So it's more about getting additional at- bats.

We will anticipate seeing larger opportunities inside of FlashBlade over time.

But as that becomes more a meaningful contributor, that could influence things.

But right now, we're seeing great stability in the win rates and the deal sizes and seeing more of bats, and those are things that we're focused on.

Yes, and I'll talk a little bit about this, this is Charlie.

I'll about the margin question relative to cloud.

I think the way to think about it -- first of all, we have a mix of cloud customers today, right.

So -- and you have our financials today.

So you see already what a blend of this looks like.

However, I think as -- if and as cloud gets larger, one might see -- we would expect stable operating margins not to affect the operating margin line.

Obviously, the amount of expense or the amount of cost on COGS versus the amount of spend on SG&A will be different.

But I would expect it not to affect operating margin.

Your next question is from Erik Suppiger with JMP Securities.

First off, Charlie.

You said you're very pleased with FlashBlade despite of some slowing in that growth rate.

What is it that gives you the confidence that the FlashBlade is not going to slow further?

And then, secondly, you had talked about ability to leverage your sales and marketing better going forward.

Where do you see the ability to really drive the operating leverage of the sales and marketing front?

Right.

Yes, thank you for the question.

I have been through a significant number of new product introductions in the past, and this one is as fast as any that I've ever seen.

And as we continue to identify, it's faster than FlashArray in its first year, and that was a very fast-growing product.

So in any 1 quarter, you're going to see variation of new products, especially in a field environment that sells multiple products.

So it doesn't concern me at all.

What I do hear is from customers.

The customers that -- of this product, and now there are quite a substantial number of them, are very pleased with it, plan on buying more, are looking to see what new opportunities they can bring into inside their own environment.

And we're getting better at spotting the best and, if you will, the most efficient areas in which to sell the product.

So there's just a lot of good reasons to be optimistic about the product.

And on the sales and marketing front?

Right.

Sorry about that.

I can only remember one question at a time, apparently.

No, sales and marketing front, it's really scale economics -- so A. B is moving into larger accounts, and C is a more efficient channel environment that becomes more independent in selling into the mid-market.

Also, I'll say that brand recognition is improving as well, and that makes it somewhat easier to not only penetrate new accounts, but frankly, to expand inside of existing environments.

So I think all those things are quite natural in a growing company like ours to help us to really improve overall efficiency on the sales and marketing line.

Your next question is from Nehal Chokshi with Maxim Group.

Very good quarter, especially when you take into account that DSOs declined 10 days year-over-year, and it looks like 5 days below typical levels.

So I think that does imply a much more linear selling quarter.

So my question is, presuming all those things are true, is it fair to say that had the linearity been like prior years, revenue and bookings would have been correspondingly higher?

Nehal, this is Tim.

We haven't historically offered any commentary on inter-quarter linearity in the call.

I would just refer back to the fact that we reaccelerated growth here again, 41% growing at scale and on our way to $1 billion.

Those are the measures we talk about publicly, and obviously, put in a really good quarter.

The next question is from Edward Parker with BTIG.

Just a quick one on FlashBlade.

A piece of feedback, but I think some of us have heard from your partners, at least in the enterprise channel, it sounds like the product may be lacks some maturity in terms of features and other capabilities that enterprises require for their own structured data requirements.

So I guess my question is, is that fair?

And what do you think you need to add in terms of the capability to the product for it to become more of a mainstream buy for enterprises, and when might we expect that to happen?

This is Hat.

So there's 2 distinct markets for FlashBlade as we're getting more stick time with it.

First is the next-gen AI, machine learning and real-time analytics segment.

That is a great fit and completely differentiated from anything else in the market in that world.

I think the second area is the replacement of legacy IT, and this is going after the NAS and the object stores that are out there.

And this is actually taking the fight to NetApp.

Well, we really haven't focused in their file-based world, and that -- it is a first-generation product, and so you're going to have years of features that we're going to build-out to be able to hit more and more of that addressable market.

But we're having great success in both of those categories today.

And maybe I'll hand it to Kix for either commentary on it.

Yes -- no.

I'd just add, I think, the strategy's working.

When we started a couple of years ago, we made a choice to say, do we go after the legacy existing market, which we knew was a feature game, or do we try to really build something that no one had seen before to go after the next-gen use cases?

And we've decided to go after the next-gen use cases, we're winning there, and we'll, of course, have the features over time and be able to broaden it to the whole market.

The next question is from Steven Fox with Cross Research.

Just a couple of quick questions on top line.

First of all, Tim, on the 41% year-over-year growth, is there any way to maybe qualify how much came from existing customers versus new customer acquisitions and whether deal size on a year-over-year basis is contributing to the growth on an average?

And then, secondly, do you see any constraints in terms of the top line because of how tight NAND is?

Or do you think this is a pretty trued-up growth rate for you guys given the NAND supply environment?

Yes, so Steve, on your first part of your question, the relative split between new customers and existing customers has stayed about the same, a very healthy number on each side of that equation, if you will.

Deal sizes, there was a question earlier -- we don't talk really a lot about deal sizes, but they still -- they've continued to hold where we like to see them, so we're very happy about that as well.

And as it relates to NAND supply, we continue to manage very well and have good line of sight and visibility.

That is not something -- supply constraints are not something that concerns us from a revenue perspective.

And that was our last question.

I will now turn the call over to Charlie Giancarlo for closing comments.

Well, thank you, and thank you all very much for joining us today.

In closing, we had a very solid Q3.

We believe the future will be driven by information, and all of us here at Pure are focused on helping customers build a better world with data.

Momentum remains strong across our leading technology portfolio, and we really look forward to a strong finish for the year.

Thank you again for joining us, and that's the end of the call.

Thank you.

This concludes today's conference call.

You may now disconnect.