PSTG - NYSE

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Pure Storage First Quarter Fiscal Year 2023 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference call, Mr. Sanjot Khurana. Please go ahead.

Thank you, and good afternoon. Welcome to the Pure Storage First Quarter Fiscal 2023 Earnings Conference Call. My name is Sanjot Khurana, Vice President of Investor Relations and Treasurer at Pure Storage. Joining me today are our CEO, Charlie Giancarlo; our CFO, Kevan Krysler; and our CTO, Rob Lee. 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 the COVID-19 pandemic and related disruptions, inflation and macro environment, our growth in sales prospects, competitive industry and technology trends, our strategy and its advantages, our current and future product offerings, our sustainability goals and benefits and our business and operations. Any forward-looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted, and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties relating to our business is contained in our filings with the SEC, and we refer you to these public filings. During this call, we will discuss non-GAAP measures in talking about the company’s performance and reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. Additionally, when we refer to sales in our prepared remarks, we mean total bookings, excluding castable orders. 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 and is the property of Pure Storage. With that, I’ll turn the call over to our CEO, Charlie Giancarlo.

Hello, everyone, and thank you for joining us today. Pure once again delivered very strong results this quarter in the midst of a highly dynamic environment. We drove 50% year-over-year revenue growth with exceptional performance in both U.S. and international markets. Enterprise expansion continues, experiencing strong growth year-over-year. The Pure brand is now both highly recognized and highly respected in enterprise customers worldwide and is considered a must-have in any storage consideration. We were especially delighted this quarter that a large telecom customer expanded their relationship with Pure, selecting our FlashArray product line for their 5G deployments. Our industry-leading subscription services business grew 35% over the same quarter last year. Pure’s unique Evergreen and Pure as-a-Service models continue to resonate strongly with customers and differentiate us from the rest of the industry. Next week at our Annual //Accelerate conference in Los Angeles, we will announce further expansions of our Evergreen portfolio. Customers such as [Knight Systems], which provides predictive behavioral analytics, will share stories of how multigenerational Evergreen upgrades have provided huge benefits including lowered operational costs and complexity, increased uptime and lower energy consumption, yielding greater environmental sustainability. On this very topic, we released our first-ever environmental, social and governance, or ESG report this past quarter. On particular note, we were proud to show that our products make a significant and immediate reduction of data center energy usage. Pure positively improves our customers’ environmental footprint by requiring substantially less power, space and cooling and by producing less waste than both legacy solutions and current competitive systems. Customers that deploy Pure are able to reduce direct energy usage in their data storage systems by up to 80%. They are also able to reduce their data center’s contribution to e-waste. More than 97% of Pure Arrays purchased 6 years ago are still in service benefiting from our industry-leading Evergreen program, which actively reduces e-waste while also saving customers’ time, money and effort. In our ESG report, we commit to extend our leadership by further reducing our Scope 3 emissions by 66% per petabyte by 2030. Operating profit was very strong this quarter, continuing the trend of past quarters and benefiting from the combination of increased scale and prudent expense management. Our investment in research and development remains strong, demonstrating our commitment to innovation and belief that data storage and management is high technology and requires the same level of investment as other critical technologies. Too many competitors in our industry actively promote and invest in storage as a commodity. For both enterprise customers and developing modern private and hybrid cloud solutions as well as cloud service providers, Pure delivers the flexibility, simplicity and agility required by today’s operations and applications environments. A key milestone we achieved last month was releasing both Pure Fusion and Portworx data services for general availability. Pure Fusion provides an end-to-end storages code platform for organizations that want to create a cloud operating model to automate and deliver data services to their organizations. Portworx data services deliver single click deployments of multiple data services for search, event streaming, no SQL databases and more. Together, these 2 products allow customers to create a cloud operating model, automating data management tasks and delivering customized data services to developers and applications, through a simple unified control plane. With these products, customers will be able to modernize their data center operations, avoiding existing highly manual and costly operations for both traditional and cloud-native workloads. FlashArray, FlashArray//C and FlashBlade all saw strong growth during the quarter, setting multiple individual records. Unstructured file and object data makes up the majority of data worldwide, and FlashBlade has taken the lead in penetrating the file and object workloads that require high performance such as EDA, advanced analytics and AI and rapid recovery. However, the vast majority of unstructured data continues to exist primarily on lower cost disk-based storage systems. Please join us next week at our //Accelerate conference for a game-changing announcement on FlashBlade. We continue our progress towards creating the all-flash data center, expanding into higher performance Tier 0 workloads with FlashArray//XL while also expanding our leadership in QLC. With our unique DirectFlash technology, we’re using QLC to close the price gap with magnetic storage. Using the latest developments in solid-state storage to overtake the lower-cost magnetic market requires sophisticated software and years of experience. We believe we have a multiyear advantage in delivering this price performing QLC technology, and we’ll showcase this next week. This past quarter, I had the opportunity to meet with many of our customers, partners and team members in Europe and the Middle East for the first time in over 2 years. It was wonderful to strengthen existing relationships and build new ones. And it’s impossible to overstate the pleasure and the effectiveness of resuming face-to-face meetings. These meetings made clear that our customers’ confidence in Pure is high, that our brand is strong and getting stronger and that we are clearly differentiating ourselves in the market. Simply put, our messages are being embraced, that data storage is high technology, not a commodity as our competitors promote, that customers can build the cloud operating model for themselves and that Evergreen is a better way to buy and operate their infrastructure. We are also aware of current industry and customer concerns. Of course, one of these concerns is supply chain. This remains a challenge across industries and around the world. Pure’s focus on a simplified, consistent and efficient architecture across our product line has served us and our customers well as fewer components means lower cost, lower waste and less supplier risk. Our architecture and world-class hardware design team means that we can quickly address component supply disruptions with design modifications. And as we’ve stated before, we have invested for years in strong relationships with our supply partners and flexible, multi-sourced global operations. I’m very proud of the way our extended team have worked together to continue meeting customer demand with minimal disruption. Another area of concern is inflation and its effect on the economy and on demand. We believe inflation will be present for some time and will also cause both stock market rebalancing as well as monetary and fiscal responses. And this will certainly have economic effects in our market. However, we believe its influence on IT customer behavior will be muted in aggregate and even less for Pure. First, enterprises have now made digital transformation top on their list for the success of their organizations. Next, we believe Pure has entered a second phase of growth, enabled by an expanding portfolio of highly differentiated and leading products as well as sales and business models spanning commercial, enterprise and cloud customers. Another area of concern is cost inflation, coupled with the so-called great resignation. We have seen higher-than-average levels of attrition over the last year, but lower than what has been reported for the industry as a whole. While we do expect somewhat higher labor costs this year, we expect labor cost increases to moderate going forward. Recently reported slowdowns of hiring in the tech space will soften the demand for technology professionals, which will, in turn, reduce attrition and wage inflation. We believe that this marks the beginning of a return to the old normal. Pure is a great place to work as validated by both external recognition and our own internal surveys, which has enabled us to recruit and retain top talent. Our brand and our strong talent acquisition team are attracting top performance across industries, and we are hiring to our planned targets. The final item I’d like to touch upon is the European economy given the effects of general inflation and Russia’s invasion of Ukraine. Inflation, especially in energy, is projected to dampen European economies in the near term. While this may somewhat reduce overall investment capacity of European-based businesses, European customers have indicated that investment in IT is required to make up for the loss of other business modalities, as noted earlier. Furthermore, higher energy costs are already increasing demand for IT equipment that is energy efficient, something that Pure excels in. We believe that this represents another opportunity for Pure to pick up more market share. The bottom line is that technology is now the #1 driving force of enterprise strategy and business transformation. And Pure is the innovation and customer experience leader in one of the largest segments of technology investment. We believe that we are now positioned to see secular growth, less affected by this economic cycle than our competitors. Our full views of the impact of all these events are taken into consideration in our guidance. Overall, we have never been more optimistic about Pure’s opportunity and growth prospects. Despite pandemic, war and market turmoil, Pure has thrived and grown. We have only gotten stronger over these last several years, and we expect to delight ever more customers in the years ahead. I’ll now turn the call over to our CFO, Kevan Krysler, for a deeper look at the numbers.

Thank you, Charlie, and good afternoon. Robust demand across our portfolio, outstanding execution and high resilience continue to be the constant, contributing to our sustaining momentum and our very strong performance this quarter. We again saw solid demand across our portfolio of solutions, services and geographies. We saw impressive growth in our key international geographies as well as the U.S. We continue to minimize delays and deliver for our customers as the backdrop of a challenging supply chain environment has not improved. We also achieved increased profitability in cash flows during the quarter, resulting from our revenue growth and continued operational discipline despite broad-based inflationary pressures. The strength of our subscription business continues as subscription annual recurring revenue, or ARR, grew 29% to $900 million, remaining performance obligations or RPO grew to $1.43 billion. Our RPO balance when compared to Q1 of last year reflects a reduction of approximately $32 million relating to product shipments for an outstanding commitment with 1 of our global system integrators. Excluding these product shipments, our RPO also grew 29% year-over-year. We continue to be very focused on growth of our new customer business, which has improved as we increase our travel. Our total customer count reflects the acquisition of approximately 360 new customers this quarter and includes approximately 54% of the U.S. Fortune 500 customers. Total revenue for the quarter was exceptional, growing over 50% to over $620 million. Approximately $60 million of our product revenue upside this quarter was with several of our larger enterprise customers in the U.S. that we had originally forecasted to close in the second half of our fiscal year. Our customers were pleased we were able to deliver our solutions against the earlier schedule, which is a testament to the agility and resilience of our technology and supply chain. Revenue growth when excluding these transactions was still a very strong 36%. Revenue in the U.S. grew 57% and international revenue grew 33% year-over-year. Subscription services revenue grew approximately 35% year-over-year and represented approximately 35% of total revenue. Non-GAAP total gross margins were solid at 70.6% this quarter. As we have continued to highlight, we believe our integrated software and hardware designs continue to be a key differentiator that our customers appreciate and value. High performance, simplicity, sustainability and resilience of our solutions are key factors contributing to our product gross margins of 70% this quarter. Non-GAAP subscription services gross margins also continue to be strong at 71.5% this quarter. We were very pleased with achieving non-GAAP operating profit of over $85 million and non-GAAP operating margins of 13.8% this quarter. The strength of our operating profit and margin during the quarter was further improved by transactions that occurred during the quarter but were forecasted to close later in the year that I mentioned earlier. Now let’s turn to the balance sheet and cash flows. We ended the quarter with over $1.29 billion in cash and approximately 4,400 employees. Cash flow from operations was over $220 million this quarter. High collections benefited both from robust sales in both Q4 and Q1. Higher profitability was also a contributing factor. Capital expenditures were approximately $33 million during the quarter. As mentioned last quarter, our outstanding credit revolver balance of $250 million was paid at the beginning of this fiscal quarter. We returned approximately $66 million of capital to repurchase slightly over 2.1 million shares during the quarter. We have approximately $184 million remaining from our $250 million share repurchase program. Now turning to guidance. Clearly, we are executing well against our strategy of driving strong revenue growth and continued improvement in profitability. We expect continued demand strength in Q2 with estimated revenue to be approximately $635 million, growing approximately 28%. We expect non-GAAP operating profit to be approximately $75 million in Q2, representing approximately 11.8% non-GAAP operating margin. Given our Q1 performance and outlook for Q2, as well as consideration of the current macro environment, we are raising our annual guidance for the full fiscal year. We now expect that revenue for FY ‘23 will be $2.66 billion, growing approximately 22%. Non-GAAP operating profit is estimated to be approximately $320 million, representing approximately 12% non-GAAP operating margin. Revenue and estimated profits from transactions that were projected to close later in the year, but closed during Q1 were included in our original annual guidance. In closing, our team and partners continue to deliver as the results this quarter were exceptional. Our sustained commitment to innovation provides our customers with solutions that are highly performing and reliable. On integrated software and hardware that require fewer components consume substantially less energy and space and produce less waste than other flash storage alternatives in the market. Strong demand for our market-leading solutions and excellent execution, in particular to our supply chain, providing our leading storage and data management solutions to our customers when and where they need it, will help us deliver 22% annual revenue growth, along with 12% non-GAAP operating margins. With that, I will turn it over to the operator so we can get to your questions. Operator?

[Operator Instructions] The first question is from the line of Simon Leopold with Raymond James.

I wanted to first to help -- get a little help on, Charlie, your comments around the macro. It sounds like you’re acknowledging the environment is more difficult, yet you sound quite upbeat. I’d like a better understanding of what’s really informing your view of how Pure should be more resilient than its peers? And essentially, what are your customers telling you that give you the kind of confidence that you’re essentially giving us yet acknowledgment that the macro is more challenging. What -- how do we put these things together? And just as a very quick follow-up, if you guys could give us a little bit of insight regarding the recent announcement you made with a partnership with Snowflake. I’d like to hear about that as well.

Very good. Thank you, Simon. I hope you’re well. So Simon, our -- what we’re seeing is strong momentum in the market overall. All of our products, customers buying more, the fact that we have a stronger and broader portfolio now being brought into a much greater set of opportunities in large existing customers and a stronger brand that’s allowing us to penetrate net new logos and to penetrate with larger opportunities in larger companies as a net new logo. So we’re actually seeing strength. And just to address your question, I would say that our -- the way we’re looking at the macro is a little bit different. I would say we have not yet seen affects -- the macro affecting us or the customers that we speak to, but we are not blind to the fact that the macro and the possibility of economic slowdown can affect us going forward. So I would say what we’re currently seeing -- what I’m currently seeing in the market through last quarter, continues to be strong demand by IT customers and then a greater acceptance for Pure overall, just the strengthening, if you will, of our brand and our value proposition -- and the breadth of our value proposition to our customers. And I’m going to let Rob answer the question on Snowflake.

Yes, Simon, this is Rob. So to answer your question on Snowflake, look, we’re super excited about the joint hybrid cloud analytics solution that we announced earlier this month. This is the first step in a strategic partnership that we’re forging with Snowflake. And we think that this joint solution is going to be a great fit really for customers who would benefit from the power of cloud-based data warehousing, but would also benefit from holding either tighter control or -- over their data or want to manage and operate that data in their on-premise environment. We see early customer demand for these types of solutions for security reasons, customers that need to hold and manage the data more tightly for security compliance as well as customers who are generating a lot of data in the on-premise environment, that may want to share that data across multiple tool sets. And so like I said, early days, but we’re seeing good signs of early interest, and we think this is just a great joint solution to bring the 2 technologies together for customers.

The next question is from the line of Pinjalim Bora with JP Morgan.

Charlie, Kevan and everyone else, it seems like a really solid quarter. I had to look at the number twice, again, I guess, for the second quarter in a row. But Charlie, I wanted to ask you on supply chain. Pure obviously has done an incredible job in managing the supply chain until now, and it seems like you’re not getting affected at all. However, we do see casualties all over in the field. So -- are you -- as this kind of elongates or prolongs, I should say, for a longer time, are you seeing any streams developing which investors should be aware of that might impact Pure over the 6 to 12 months if this kind of environment prolongs on the supply chain side?

Thank you, Pinjalim. It’s a great question. Let me characterize the supply chain environment now. We generally -- and if you were to ask our supply -- our operations team or engineering, they would tell you that the situation has not gotten better. It’s changed in character perhaps a bit, but we still see surprises on decommits. Obviously, things like Shanghai shutting down means a lot of background work to rebalance and to find new sources of supply for various subassemblies and so forth. So it’s a constant stream of challenges that are being thrown at us from a supply chain perspective. I would say that we’ve minimized to the point of almost nonexistent, the effect on our customers. but it’s certainly affecting us a lot. Our teams are very, very busy, and I want to take my hat off to them because there’s a lot of work that goes into this. But as Kevan mentioned, as did I in our prepared remarks, we have fewer parts that we need to worry about. That gives us more optionality. We have -- because we design our own hardware rather than most of our competitors are using commodity parts, they have less choice, less flexibility. So it gives us greater flexibility and our goal is to make sure we have a minimum effect on our customers. And we were fortunate to actually be able to accelerate some of the shipments this quarter, as Kevan noted. But I knock on wood as I talk about these things because the supply chain remains challenging.

Two other things I’d add to that is high confidence with the risk that Charlie alluded to. I’d say the -- the other thing I’d add to it is our supply partners are doing a terrific job as well. And the 3 factors combined, I think, really drives the sustainability confidence that we have around the supply chain even acknowledging the risks that we’ve alluded to. The other thing I’d point out is NAND is not subject to the same types of challenges and constraints that we see across -- really around the IC side and semiconductor side. And so obviously, that’s the biggest part of our BOM and materials, and that’s an important call-out as well.

Understood. And a quick follow-up for Kevan. I had to really squint to find [indiscernible] the press release. But I want to ask you on the subscription revenue side, it seems it was in line to consensus. When I look at the sequential growth, it seems like it’s not that much. And then when I look at subscription ARR, net new growth seems like it’s decelerated a bit. Was this mainly kind of a CapEx led quarter versus unified subscription led?

I think that’s right. That’s a good way to be thinking about it. I mean we had a lot of volume coming through on the CapEx side. But look, the subscription business continues to be strong. ARR growing 29%. I would be expecting variability quarter-to-quarter. We’re very focused on accelerating growth with our partner ecosystem, a lot of great energy out there and looking forward to accelerate and talking to our partners around Pure as-a-Service. We’ve got some key milestones that we’ve identified around general availability for Pure Fusion and imported data services. And really, this takes us on a roadmap that we’ve talked about that Charlie has laid out around really establishing a cloud operating model for every customer no matter where their workloads are being run. I’d say stay tuned, too. We’re very excited with some new announcements of Evergreen at //Accelerate as well.

The next question is from the line of Aaron Rakers with Wells Fargo.

And congrats on the great results. I guess the first question I wanted to ask is that when I look at your gross margin at 70% on the product line, it would really imply that you’ve not seen any incremental deployments with one of your large hyperscale cloud customers. So I guess first question is, is that a fair assessment? And I guess, on the heels of that, how are you thinking about that hyperscale customer, Meta, fully deploying their AI project through the course of this year, how that factored into the expectations?

Yes. Thanks, Aaron. So you’re correct. We’ve not seen this quarter substantial revenues from the nature of the hyperscaler that you spoke about before. We do -- but we’ve also been making good progress on both the discounting front as our -- as the market has stabilized, if you will, from a pricing standpoint as well as the ability to extract more value from our products overall. So I would say that we’ve been able to manage the gross margin, I think, very well. And I’ll let Kevan answer the question. Well, actually, I’ll take this one. As we discussed when we first started speaking about the Meta win, and that was before they permitted the use of their name, we indicated that these types of sales tend to be somewhat episodic as they build out their data centers on specific quarters. And this is one of the light quarters, but we continue working with them. We’re certainly optimistic on future orders, but it will be on their time frames.

Yes. And I think to be clear, that was expected, right?

Very much expected. We’re not expecting the sales this quarter. That’s correct. Right.

Yes. That’s very helpful. And I guess I’m just curious, given the momentum that you not only saw this last quarter, but you’ve seen these last couple of quarters, how has the competitive landscape reacted? What have you seen? I know that Dell EMC saw a little bit of growth, 9% growth this last quarter in your storage business. I’m just curious, have you seen any changes on the competitive landscape at all?

Yes. It’s relatively minor to be honest with you. We tend to be competing against the same set of products in the same type of environments with the same set of customers. Obviously, as we expand our sales force, we’re competing across a greater set of customers, a larger set of customers, which is a good thing. We get in more fights and more at bats. And our win rates are very good. So I would say -- and our brand is certainly helping. The fact that we’re now -- I think customers believe that we have to be in any competitive bake-off that they may be performing. So I would say that -- and I’ll let Rob contribute here, but I haven’t seen anything terribly substantial from the competitors in this space.

Yes, Aaron, I’ll just add. I think the biggest takeaway is that, from my view, we really remain standouts as we look at the competitive set in terms of having really differentiated technology as well as, as Charlie talked about in his prepared remarks, our thesis in investing in innovation to further expand those -- that differentiated technology. If you look at what we’re doing with QLC to go after disk and hybrid. If you look at what we’re doing with FlashArray and extending that family into XL, to go after higher performance, with Pure Fusion, now GA and with Portworx Data Services, and not to mention significantly more to come next week. I think this is just an area where we see a great opportunity set out there for us, a lot of runway ahead of us to go grab more market share. And I think the biggest standout is that we don’t see any of the competitive announcements materially changing that landscape.

Actually, Aaron, let me also answer it with 1 additional comment, which is we’re just playing a different game than our competitors. Our competitors play a commodity game. They’ve been marketing their products. They’ve been marketing storage as a commodity. The customers should only care about price and nothing else. And we’re playing a high technology game. We invest in it like it’s high technology. It’s an entirely different business strategy, and it’s going to be very difficult, I think, for them to respond.

The next question is from the line of Amit Daryanani with Evercore.

Congrats on a great quarter. I guess my first one is really, Charlie, you sort of talked in your prepared comments about Pure has entered a second phase of growth in its journey. I’m hoping you could talk a little bit about what does that mean for Pure? Because when looking at the new customer additions, for example, that definitely inflected higher pretty materially. But what is the second phase of growth mean for the company? Are you seeing engagements with bigger enterprises? Or are you seeing a quicker land and expand? Just maybe help frame what does this mean? And does that potentially inflect growth higher as you go forward?

Yes. What we mean by second phase is if we look back, our first phase of growth was building an award-winning product in a unique environment where really for many years, it was the only product of its type, and therefore, allowed us very, very rapid early growth. And as our competitors started to respond, they were able to use their larger sales forces and their greater portfolio to compete with us more effectively and so our growth slowed a bit. We’ve responded over the last several years as our long-time investors know, with continued investment in R&D and in particular, an investment in broadening out our sales focus and capabilities, sales and support such that we could support enterprise customers with a larger portfolio. And now we’re seeing the fruits of that bear out. And so the second phase of growth is the fact that we can penetrate more into larger customers with an expanded and superior portfolio, and that’s going to give us a runway, a pretty long runway to continue what I believe is going to be a second phase of growth. And we’re now -- we now have the scale, if you will, to compete with any of our competitors and deploy our unfair advantage of leadership products. So that’s how I phrased the second phase of growth.

Got it. And then if I could just follow up really quick. The upside in growth -- in revenues, I’m sorry, that we saw in the quarter, right? And I think, Kevan, the way you laid it out, it was sounding like $60 million of that, call it, was from pulling from the back half and $40 million was more organic. I’m curious is the outgrowth that Pure is seeing more a reflection of the fact that you are resonating better with customers on the engagement Charlie is that what you talked about? Or is it very simply the fact that you probably have better supply ability and so you’re getting incremental market share because you are the one with better supply versus your peers. I’m curious do you think better supply is playing a part in this outgrowth? Or is it more fundamentally driven?

Well, look, I mean -- this is Kevan. I’ll start with that, and I’ll let Charlie add to it. I’m not sure it makes sense to decouple supply versus the power of our portfolio and our technology. I mean when you look at the architecture of our technology and how we’re leveraging software and how we -- from an architecture standpoint, require less components, simpler in terms of architecture. That’s obviously helping us a lot on the supply side. But then that’s also what really resonates for customers, right? It’s performance, it’s resilient. It’s simple to use. And the -- our ESG report, we’ve got some just kind of stunning stats in terms of what we’re doing in terms of sustainability and in energy reduction with the architecture that we’re leveraging with our portfolio. So I would actually say that the 2 go together from my perspective. Charlie, any other thoughts?

That says it all, Kevan. Really do. Mic drop.

The next question is from the line of Rod Hall with Goldman Sachs.

I wanted to go back to the $60 million and just try to understand how we should be thinking about that? In other words, are we -- should we be thinking about it as backlog that you had good execution against supply so you were able to kind of go ahead and deliver it? Or more a customer coming back to you and going, "Hey, we were thinking about doing this in H2. We really want to accelerate that." I’m just kind of trying to figure out how we should come and sensically think about that $60 million? And then I have a quick follow-up.

Rod, it’s a great question. It was very much the latter. We -- obviously, we have visibility with these large enterprise customers in terms of our plan. In terms of our discussions, they came back to us requesting earlier delivery. I could appreciate those requests given the environment, but it’s really the latter to your point, Rod.

Okay, great, Charlie. And then on Portworx, I noticed all these -- the Portworx GA announcements mid-month. And I feel like that’s a pretty exciting part of the Services portfolio. I’m just curious what you think the funnel looks like there? What kind of interest have you had expressed? Kind of how does that affect ARR as we move through the next few quarters?

Well, as we spoke about in the past, Portworx is still a relatively new product and because it is, as you point out, it’s ratable and goes into ARR. We are seeing very good growth in that product line overall. As I mentioned in my opening remarks, I’ve spent a lot of time this past quarter -- or actually over the last quarter and this quarter, in Europe and the Middle East, a lot of excitement by customers and our sales teams and partners in the product. So I think it has -- what we’re -- we believe it has a really strong future as we go forward. Obviously, it will take a little bit of time before it really starts making a tangible difference, a reportable difference, if you will, in our ARR.

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

Yes. I guess I want to understand, Kevan, on the comment on macro and how you -- when you thought about the guidance for the year, you baked in macro? Does that mean that you changed any of your assumptions on close rates or deal sizes or geographies or customer behavior?

Yes, it’s a great question, Jason. And then I think the simple answer is no. There were no significant changes to our assumptions. Look, the first thing we evaluated pretty carefully was demand signals. And as Charlie mentioned, demand continues to be quite strong. Obviously, a lot of noise out there from a macro perspective that we’re digesting and understanding what, if any, impact that will have for us in second half. But when I really break it down and look and compare against our initial guide for the year, we’re outperforming. We saw that from a demand standpoint in Q1. We see that in terms of our guide for Q2 and then obviously increasing our annual guide for the year. So I think it’s business as usual with the outperformance that we’re seeing in Q1 and Q2.

Okay, great. And then, Charlie, for you, just in the last couple of quarters have been off the charts. And I understand that there’s been some kind of, let’s call it, near-term spikiness to the business, and you’re going to have some deceleration as you move through the year here. But is the storage market just that much better right now than it’s been in a while? Or is it just that you guys are taking just gobs of share?

It’s an interesting question, Jason. Obviously, the numbers speak for themselves. We’re clearly taking share. The market is very benign at the moment. It’s a strong market despite everything that’s going on. Prices at ASPs have stayed strong. That’s always helpful. So I think it’s been a benign market, and we’re taking share. It’s probably the best way to put it.

And is there a lot of pent-up demand still from the pandemic that’s helping? In other words, should we be moderating our expectations for 2020 -- for fiscal 2024 because of pent-up demand sort of will be -- that tailwind will be gone in 2024.

Honestly, we’ve not really been seeing -- even over the last year, pent-up demand playing a role here. It’s usually new developments, new infrastructure, expansions -- fundamental expansions, not pent-up demand. So I would say pent-up demand, at least for us, has not been playing a big role. Remember, we don’t get refreshes of equipment. Our Evergreen means that the equipment is always upgraded on a regular basis. And when customers need additional capacity, they pay for that, but they don’t pay for any replacement of existing capacity. So we don’t get the same benefit that maybe some of our competitors get by pent-up demand because we don’t have replacements. We have Evergreen. And so I would say, again, that pent-up demand has not really been a factor for us. This is all basically new demand or expansion of existing environments.

Yes. It is interesting too, Jason, when you look at seasonality, pre-COVID for us and growth rates and you normalize for the $60 million that we alluded to. I’ll tell you that the seasonality is matching kind of the pre-COVID days in terms of first half, second half growth rates. So that’s another data point for thoughts as well.

The next question is from the line of Meta Marshall with Morgan Stanley.

Great. Maybe taking it away from macro, but a little bit more micro into your -- you guys do have about 30% exposure to cloud customers. And so just want to get a sense just as we’re seeing some kind of changes in the technology, hiring environment, whether that’s trickled down to anything you’re seeing from that customer set? And then just maybe diving into the $40 million kind of an additional upside that you guys saw in the quarter. Just any indications of whether that’s from more like of your commercial or enterprise customers?

So overall, I would say we’ve seen just strong demand and growth across the entire set of customer segments that commercial enterprise what we characterized as cloud in the past. These were all strong segments for us. I don’t think, other than the continuing exceptional growth of enterprise, I wouldn’t say there’s been a dramatic change in the overall character of the revenues coming in. And I’ll let Kevan answer the question on the accelerated shipments.

Yes. And I would call out actually that international had a fantastic quarter along with U.S. And so to Charlie’s point on broad-based performance, we saw that from a geography standpoint, I was really pleased with what we saw in the international side, which really, when you normalize for the $60 million in the U.S., it’s really tracking with the U.S. growth rates. And as Charlie talked about commercial, we saw some good strength there. Public sector was a highlight for us as well in terms of how we look at it. So again, when we look at the $40 million of outperformance, I would, again, talk about the power of the portfolio we have. Enterprise is absolutely a workhorse for us, but we’re seeing it across the board.

The next question is from the line of Sidney Ho with Deutsche Bank.

I want to go back to the full year guidance. Obviously, you raised it by a little bit, but that would imply second half will be up about 10% year-over-year, but maybe 15% of your account for the revenue pulling you talked about. Can you walk us through your thought process there? Are you just being prudent in your guidance? Or are there more revenue being pulled in from second half into second quarter? And the follow-up to that is if I look at the operating profit, you also raised it. But you’re seeing high revenue in the second half, but the operating profit dollar is roughly flat in the first half of the year. Just can you walk us through maybe that dynamics as well.

Yes. That sounds great, Sidney. Let me start with revenue growth. And look, we’re very pleased with the raise of our annual guide to 22%. I think that’s very strong. Obviously, an outlier in terms of what we’re seeing, especially in this environment. So not backing away from that annual growth rate, which I think is very strong. You’re seeing strong growth in the first half, and you’re seeing some moderation in the second half. Some of that is seasonality. The $60 million that we alluded to that really was contemplated and forecasted for second half. But when normalizing for this seasonality, the expected growth rate in the back half is still in the high teens, which is quite strong. And then again, as I talked with Jason about when you look at our growth rates, first half, second half from a seasonality standpoint, we’re kind of getting back to what we saw in the pre-COVID days, which is great. A couple of other thoughts. As we progress through the year, we’re also working with strong comps. I mean, we had a fantastic year last year, and that’s only growing. We also had an extra week in the fourth quarter. So that’s a consideration as well. And we are being thoughtful about the macro environment as well. But without a doubt, we’re pleased with our revenue growth outlook for the year. Now if I move to operating profits, which was really the second piece of your question, we feel really good about the current view and increasing profitability. This is our execution against our strategy that Charlie laid out, which is absolutely prioritizing innovation and growth while at the same time improving profitability, and that’s what you’re seeing here. So we’re quite pleased with the operating profits in the quarter. Expect 12% operating margin for the year. And obviously, our profit overachievement this quarter was helped by the transactions that were moved into Q1. We’re also doing very well on hiring in Q1. We’ve made great progress in hiring talent, and we continue to invest thoughtfully and we’ll continue to be focused on operating discipline and operating leverage as we monitor the effects of inflation at time that is on. So hopefully, that answers your question.

Yes. That’s helpful. Maybe 1 quick follow-up. If I look at the product gross margin for Q1, it’s definitely improved more than we expected. But was NAND pricing a headwind in the quarter as you expected that may be able to raise prices to offset that. But the real question is, how are you thinking about gross margin for both products and subscription services for Q2 and the rest of the year?

Yes, we might be a broken record on the product gross margins. Look, I still think longer term, I’m very happy with product gross margins being in the high 60s. I think once again, we’ve overachieved and I’m very pleased. I think the sales team is doing a tremendous job selling the value of our solution, and we’re seeing that in the average selling prices as we navigated Q1. So I think that’s a large driver on it. In terms of subscription gross margins, what we’ve been tracking is pretty consistent in the low 70s, and that’s a good kind of corridor that I like in terms of subscription gross margins.

The next question is from the line of Nehal Chokshi with Northland Capital Markets.

Yes. And a fantastic quarter of execution. I take a tick on this. But subscription year-over-year growth did decelerate to 35% year-over-year growth from 42% in the prior quarter. Why did that happen? And then also why subscription ARR growing slower than the revenue line? I think you did mention that there is some lumpiness. And so if you go into why there’s that lumpiness that would be helpful as well.

Yes. I mean, look, I think when you look at the subscription revenue growth, I mean, that’s really a late indicator. I mean that’s revenue coming off the balance sheet over time. I think when I really look at the health of our subscription business, I’m looking at our subscription ARR balance as well as how we’re doing from an RPO standpoint, which grew 29%. And look, I’m very pleased with that. That’s very strong growth. We’re set up well. We’ve got a lot of good things happening in terms of our accelerated announcements on Evergreen. And so -- and obviously, you’re going to get a little bit of variability on subscription ARR as well as RPO growth. But again, if I’m looking at the revenue and rolling off the balance sheet to the top line, I think that’s really not a strong indicator in terms of the health of the subscription business. Now the other thing, Nehal, that I would highlight to you is when you’re comparing quarter-to-quarter and you’ve got to build in the extra week in Q4, which would have a bearing on that as well.

Yes. Okay. All right. Understood on that. That’s a good point. And then Charlie, in an earlier question, you had made a point of saying Pure Storage is doing a technology sale versus competitors doing a commodity sale. Can you expand on what do you actually really mean by that?

You bet. I’ll take it back to R&D. We invest heavily in R&D, which means that we consistently build a product that leads the market. Our competitors -- generally our largest competitors spend less than 5% on R&D. I used to run a very large R&D shop. You can barely keep the lights on at 5% R&D. They can’t keep up with us from a technology development perspective. And if we’re correct that data storage and management is high technology and requires continuing development of advanced capability. It’s going to be very difficult for them to change their business models to accommodate that higher R&D, not just from a financial standpoint, but from the standpoint of managing a top tier -- top class R&D staff. You get a reputation. And so we -- as I said, we play a very different game. And customers have been used to buying storage as a commodity, used to substandard support and capability and assuming that all of them were alike, they’re learning very quickly that Pure is very different than the other vendors that we require far less labor, that we’re highly automated, that we require less space power and cooling and that they have a superior experience overall with our product, and that’s being now increasingly appreciated.

I think the results of that are pretty apparent if you look across the portfolio, but if you look at FlashArray//C., we’ve been shipping that product for 2.5 years now, going after hybrid and disk completely unmatched out in the market. You look at FlashBlade. What we’re doing for some of the high-value use cases out there, whether it’s analytics and AI, whether it’s technical computing, chip design, simulation, modernizing data protection, rapid recovery. And if you look at Portworx and the entire suite of products that we have there, that just gives you some small hints of really the results that this focus on R&D and innovation is driving, much less what we have to discuss next week at //Accelerate.

The next question is from the line of Wamsi Mohan with Bank of America.

I was wondering -- I apologize if this has already been answered, jumping across calls here. But can you talk about the second half guide? I mean, you’re attributing about $60 million to pull forward, but also effectively lowering the second half implied guide by the same amount. So are you actually saying that the demand environment has not changed because I mean, there’s all the companies are saying that the demand remains robust. There are supply chain issues, but demand remains robust. So I just want to clarify if you’re saying that the macro environment is not actually impacting demand thus far? And what’s the methodology where you’re effectively calculating the $60 million pull forward? I know you have obviously visibility into the deals in your pipeline. Can you talk about how broad-based that was in terms of -- was it just an isolated like a few customers where you saw this pull forward? Was it much more broader? And if you could address profit seasonality as well in the second half relative to the first half?

Yes, you bet. So we can only report on what we are actually seeing and what we’re actually seeing is demand remains robust. At the same time, we’re certainly taking note of the increase in inflation. The public debate around a slowdown in the economy, possible -- even some discussion about possible recession. And so we -- our outlook has to be a bit more -- I have to keep that in mind and not get ahead of ourselves. And so I think that our forecast reflects exactly that thinking. But for -- through the last quarter, demand remains strong without -- and even at the end of -- at the end of April, even though at that time, there were warning clouds on the horizon with respect to economies. Certainly, energy in the -- prices in Europe, et cetera. At the same time, we were hearing from our IT customers that their budgets and their focus on investment in IT was remaining strong.

Yes. And then just to answer your question in terms of the $60 million, that would have been a couple of large customers, so it was limited. Obviously, for these large enterprise customers, we’re working with them very closely with their demand planning. So I would put it in more of the isolated bucket, very easy for us to quantify, very binary in terms of understanding in our demand planning with the customer that, that was second half. So that’s a shift in seasonality. And that’s how I view it. It’s simply a shift in seasonality. It has nothing to do in my mind with demand drop-off as one might have alluded to in the second half. Demand looks strong. Revenue, as I mentioned, I went through a fair amount of detail, Wamsi, in terms of revenue first half, second half as well as operating profit first half and second half, and we can take you through that in more detail as well.

The next question is from the line of Tim Long with Barclays.

Yes, two, if I could, as well. First, Charlie, you mentioned something about a win with a large telco for FlashArray for 5G. Could you talk a little bit about kind of application there? And just give us a little color on this as a potential new vertical. How important can this be as the wireless world moves to more of a data-centric architecture? And secondly, just one more on the Op margin, just 22% revenue growth, but only moving overall Op margin a little over 100 basis points for the year. So can you talk about what’s limiting that? Is that just return to office and T&E -- or is there any other reason we’re not seeing as much leverage on a really strong revenue growth here?

Thanks, Tim. I’ll let Kevan handle the second part. As far as 5G, what an exciting opportunity and an exciting -- and call-out we were able to make for this quarter. It’s one of the top telcos in the world. They’re not the only ones we’re talking to about 5G, but it was great to get one of the first large orders associated with 5G deployments. The fact that we’re smaller, we’re denser, more power efficient and generally more performance than other products in the market have certainly helped in this environment. We think it’s -- as I mentioned, we are talking to quite a few other telcos about 5G deployments. I’m optimistic about this space. And I’m going to invite Rob who worked on this opportunity to tell us a little bit more about this specific deployment.

Yes. So I think this is a testament really to the quality of our products and the reliability and performance, all the attributes that Charlie just mentioned and really the suitability of those attributes to 5G deployments. In many ways, it’s a great validation that just like the hyperscale environments, which we’ve spoken to you previously about. In these large telecom environments, really share a lot of the same requirements. They’re highly available, highly performance demanding, very mission-critical environment, highly automated as well. And I think those are all attributes where Pure’s products and services are uniquely well positioned to go and serve. And so I think we’re super pleased with the win. I think I’d also mention that in this particular environment, we were chosen to replace what was initially a custom design built around open source software as customer had really tried to build out part of the environment themselves and then turn back to us to -- when they couldn’t achieve the reliability performance and really the ease of management and automation required of these very demanding environments.

And I’ll just hit the operating profit question again. And really, this just comes back down to our strategy really around prioritizing innovation and growth that’s paying off. We’re seeing it. We’ve been seeing it for several quarters. And at the same time, we’re increasing our profitability. Now we’re balancing that. We had some great hiring, as I mentioned. I think we quarter-over-quarter, hired over 170 folks and new talent worldwide, which we’re really pleased with. We are navigating some higher wage costs as to be expected, and all that’s being balanced and incorporated while we’re increasing profitability for the year. So hopefully, that’s a helpful context.

The next question is from the line of Eric Martinuzzi with Lake Street.

Just curious, I wanted to go a layer deeper on the product gross margins. Curious to see if there’s any let up. Obviously, you’re putting up good gross margins in a tough supply chain environment. But expedited shipping fees, anything there where you’re seeing relief or forecasting relief?

I would say not at the moment. We had hoped back in Q3 and Q4 that the supply chain constraints would start to ease by Q1 or Q2. Unfortunately, we’ve not seen that. One situation after another just continues to extend. It changes the nature of the supply chain problems, but it extends the supply chain problems. To be clear, we’ve not seen it get worse, but we’ve not seen it get better either. And it’s across the board, as you’re pointing out, everything from logistics shipping, but the ones that -- we can absorb all of that, the ones that always concern us is components and availability of components because that can get you to shut -- or border closures, right? Those are the ones we’re most concerned about. But it’s still across the board.

It’s across the board. And where the advantage again comes to us is really around the fact that we have less parts that we have to navigate in terms of exposure. And that’s really paying off for us, both on the inflationary side as well as supply constraints and how we’ve been able to navigate against that headwind.

This concludes the question-and-answer session. At this time, I will turn the call back over to Charlie Giancarlo for closing remarks.

Thank you, operator. Our strategy to deliver a simple and Evergreen data platform, enabling our customers and companies around the world to turn their data and innovation. It continues to deliver exceptional results across our business. We’re growing share in our market segments as customers turn to our leadership in digital transformation and that’s critical to their future, and this promises to sustain us for quite a few quarters and hopefully years ahead. I want to thank once again our customers, our partners for their trust, our suppliers for their collaboration and to all of our employees for their innovation and their hard work. And I thank -- I’d like to thank all of our listeners today and look forward to seeing you next week at //Accelerate. Thank you.