PSTG - NYSE

Good day, and welcome to the Pure Storage Second Quarter Fiscal Year 2024 Earnings Conference Call. Today's conference is being recorded. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. [Operator Instructions] And at this time, I'd like to turn the call over to Mr. Paul

Thank you. Good afternoon, everyone and welcome to Pure's second quarter fiscal 2024 earnings conference call. On the call, we have Charlie Giancarlo, Chief Executive Officer; Kevin Krysler, Chief Financial Officer; and Rob Lee, Chief Technology Officer. Following Charlie's and Kevin's prepared remarks, we will take questions. A press release was issued after the close of market and is posted on our website, where this call is being simultaneously webcast, the slides that accompany this webcast can be downloaded at investor.purestorage.com On this call today, we will make forward-looking statements which are subject to various risks and uncertainties. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings and competitive industry and economic trends. 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 related to our business is contained in our filings with the SEC and we refer you to those public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures, other than revenue, remaining performance obligations or RPO and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Pure Storage Investor Relations website, and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Pure Storage. Our third quarter fiscal '24 quiet period, begins at the close of business Friday, October 20, 2023. With that, I'll turn it over to Charlie.

Good afternoon, everyone, and welcome to Pure Storage's Q2 conference call. We are pleased with our financial results this quarter. While the macro environment continued to be challenging, we outpaced our competitors and saw a strong growth in our strategic investments, particularly in FlashBlade//S, FlashBlade//E, and Evergreen//One. Our results demonstrate that we continue to lead our market and that our strategy is working. Pure is delivering extraordinary outcomes for our customers, by transforming data storage, from a highly fragmented solution set to a single consistent platform. Pure is today, the first and only data storage company that can deliver a single, consistent, non-disruptive, operating and management environment, leveraging the most advanced flash technology, across all of data storage needs. With the introduction of the E family, our all-flash products now stand from the highest performance systems to the most cost effective systems for bulk data. Uniquely in our industry, all of Pure's products are based on one operating system, Purity, the only storage software that operates natively, direct to flash rather than using less efficient commodity SSDs. All of Pure's products are managed with our Pure One management system, and have consistent APIs. All of our products support non-disruptive upgrades forever. Through our Evergreen technology and subscription programs and are all available to consume as a service through Evergreen//One. The data storage industry has for decades been plagued with different tailored software and hardware solutions for the wide range of the storage protocols, formats, performance levels and price points needed to cover the market. The storage portfolio of legacy data storage providers was generally assembled by acquisition and are collections of disparate inconsistent environments. That approach left customers with a complex infrastructure, with multiple software operating environments, with different management systems and multiple differing operational processes. As a result, legacy storage environments are complex, they vary for each use-case, they require downtime for upgrades and require forklift replacements roughly every five years. Pure is the only company that provides customers a single, consolidated operating environment for all of their data storage needs, including block, file and objects. Q2 was the first full quarter of shipments for FlashBlade//E, sales and pipeline have exceeded our expectations and it is experiencing the fastest growth of all prior new product releases. At purchase FlashBlade//E with three years of Evergreen subscription has an acquisition cost competitive with hard disk based systems and has substantially lower operating costs. It enables our customers to move ever more of their cost sensitive workloads, to all flash. The E-family of products allows Pure to now cover the entire spectrum of data storage, inclusive of low priced bulk storage, providing customers with a consistent, modern and reliable product line for all their storage needs. Flash-array E will become available later this year, joining FlashBlade//E. FlashArray//E will enable cost effective storage for bulk data or capacities from one to four petabytes. And as part of the E family, it can also reduce customers' total operational costs, by up to 60% and produce 85% less e-waste, compared to hard disk based system. We are seeing continued momentum and opening new opportunities with our cloud strategy. Last week, we announced an expanded multi-year partnership with Microsoft Azure services and its Azure VMware solution known as ADS, using our Pure Cloud Block Store. This offers a new age of cloud migration that can drive faster, more cost effective adoption of cloud services. Combining Pure's industry leading data reduction, with our ability to decouple storage needs from compute, customers can significantly reduce their total cloud costs, while increasing hybrid cloud capabilities. In addition to operating in the cloud, our cloud operating model allows our customers to operate their storage environment like the cloud to offer services like the cloud, to better build for the cloud and also to consume storage like the cloud. Pure Fusion enables our customers to manage the Pure portfolio as a fleet, as an integrated pool of storage across datacenters and across clouds. Pure Fusion allows customers to offer their developers access to bespoke data services through APIs. Portworx, the most highly rated Kubernetes data platform for deploying cloud native applications was chosen for the fourth consecutive year, by analysts from GigaOm as the leader for enterprise Kubernetes data storage, and cloud native Kubernetes data storage. Evergreen//One, allows our customers to also consume like the cloud, based entirely on a service level agreement with Pure to allow them to store their data, whenever and wherever they want. Evergreen//One is available for all of Pure's product offerings. The growth of subscription services contributed significantly to our success in Q2.. Evergreen//One, the industry's leading storage as a service offering saw sales double again year-over-year. Our Evergreen technology and programs revolutionized the industry and provide Pure a sustainable competitive advantage ending traditional legacy hardware replacement practices customers and turning every sale into a storage as a service relationship. With our Evergreen forever subscription, company's upgrade both hardware and software to the latest technology, without paying additional capital continually without downtime forever. As we discussed last quarter, Generative AI and ChatGPT have brought artificial intelligence to the top of mind for all customers. And AI creates two sets of opportunities for Pure. First, we can supply products for AI training environments, such as the creation of large language models or LLMs short. And second, we can support enterprises to prepare their data architecture for AI inference, meaning the use of LLM's on their own data. Most customers will leverage third-party LLM's their base. They will return and retrain these models on their proprietary data within their own organizational boundaries. By adding guard rails they will enable AI inference to achieve outcomes specific to their business. The former requires very high performance, while the latter is enhanced with the replacement of low performance secondary hard disk systems with our E family of cost-effective flash storage. During the quarter, FlashBlade//S one a Generative AI footprint in a production environment in the low eight digits. Portworx also saw multiple wins in early AI development environments. Customers purchased Portworx to ensure reliable data management during the training and inference process. Over the last five years, well over a 100 customers have chosen FlashBlade to accelerate their AI and machine learning environments. With the introduction of FlashBlade//E, AI customers are able to take advantage of a single operating and management environment for both their hot and their bulk data, dramatically simplifying their data storage infrastructure and reducing its cost and environmental footprints. For the last few months, I have visited customers, partners and resellers across the US, Asia-Pacific and Europe to highlight Pure's new ever more powerful position. Customers immediately grasped the benefits of and the need for a unified operating and management environment for all of their data storage needs, blocks, file and object. From the highest performance to the most cost-effective. They responded enthusiastically to the ability to operate their storage and data environment, as consistent storage pools, across datacenters and clouds. And they welcomed the advantages of our Evergreen technology and subscription available across our entire data storage platform. Pure's products uniquely stand out in the industry, due to our single operating environment and consistent APIs across our products. This is powered by our consistent use of Purity and our Pure one management system across all our products. Our new E family of products leverage our latest direct to flash capabilities of Purity software to unlock the most cost effective QLC flash to penetrate the bulk data market for the first time with all flash technology. Our high density direct flash modules or DFM's, work with Purity to power this event. This enables better performance, better longevity, better reliability and ultimately better price performance than both hard disks and even SSD based systems. We have been shipping 48 terabyte DFMs for the last three years and we will introduce our 75 terabyte DFM later this year. Today, Pure's DFM's are 2 to 4 times denser than the largest hard disk and SSDs in competitive use and our advantage and density is accelerating. Our roadmap calls for a 150 terabyte DFM next year and a 300 terabyte DFM by 2026. Our improvements in performance and density of direct flash versus commodity products will enable us to increase our competitiveness in the industry by a wide margin not only in performance and cost but also in energy efficiency and e-waste reduction. Speaking of energy and e-waste we issued our second ESG report last week. It details the advancements we continue to make across our technology portfolio, operations and people. Our largest area of contribution continues to be the extraordinary energy e-waste and space savings of our products, which enable our customers to achieve their environmental sustainability goals. Pure products can reduce the total energy and emissions from data centers globally, by upwards of 20% as Pure's flash optimized systems use up to 5 times less power than competitive SSD based systems up to 10 times less power than the hard disk systems we will replace. In closing, I have never been more confident in our long-term growth strategy, or in our opportunity to lead this market. I'll now turn the call over to Kevin Krysler. Kevin?

Thank you, Charlie. Revenue of $689 million in Q2 grew 6.5% year-over-year and exceeded our revenue guidance. We achieved record sales of our entire FlashBlade portfolio including FlashBlade//E in saw continued high demand for our Evergreen//One subscription services, as sales more than doubled year-over-year. While the spending environment remains relatively consistent to what we have seen over the last couple of quarters, our customers are choosing to invest in our high technology data storage solutions for their key, strategic projects. As we have seen with the sales performance of both our FlashBlade and Evergreen//One offerings this quarter. Momentum we saw across our entire FlashBlade portfolio included specific AI and ML use cases, including a significant Generative AI win that Charlie highlighted. We are excited with the historic ramp for both sales and pipeline of FlashBlade//E throughout the quarter. Customers no longer need to settle for hard-disk systems and can now choose Pure's higher performance flash solutions at competitive price points. Q2 operating profit of nearly $112 million exceeded expectations, due to the performance of our products and subscription gross margins. Our unique Purity security software architecture working directly with raw flash rather than less efficient and shorter lived SSDs contributed to the strength and product gross margins. Leveraging our Purity software, the majority of the capacity we now ship is based on QLC raw flash. More aggressive discounting behavior from our competitors, during the quarter, slightly offset product gross margin expansion. In Q2, subscription services annual recurring revenue grew 27% year-over-year to $1.2 billion and included strong growth from our Evergreen//One storage as a service offering. Close to Evergreen//One contracts where the effective service date has not yet started are excluded from the subscription ARR calculation. Subscription ARR growth would have been 28% when considering closed Evergreen//One contracts, where the service date has not yet started. Remaining performance obligations or RPO grew 26% to $1.9 billion. Similar to the remarks we've made in previous quarters, our RPO previously included an outstanding commitment with one of our global system integrators. During Q1, this remaining outstanding commitment was fully satisfied and when excluding the impact of the past outstanding commitment RPO grew 30% year-over-year. Subscription services revenue of $289 million comprised 42% of total revenue, which is 6 points higher than Q2 last year. U.S. revenue for Q2 was $495 million and international revenue was $194 million. We acquired 325 new customers during the quarter and our total customer count now exceeds 12,000. As previously mentioned, we were pleased with our continued strong gross margin performance of 72.8%, with product gross margin of 71.5%, and subscription services gross margin of 74.5%. Our head count increased slightly to approximately 5,400 employees at the end of the quarter. Pure's balance sheet and liquidity remains very strong, including $1.2 billion in cash and investments at the end of Q2. Cash flow from operations during the quarter was $102 million and capital expenditures totaled $55 million. In Q2, we repurchased nearly 600,000 shares of stock returning nearly $22 million to our shareholders. This represents a lower level of repurchase activity than recent quarters, as a result of the fixed trading parameters that were in-place throughout the quarter. We have approximately $190 million remaining on our existing $215 million repurchase authorization. Now turning to guidance. We expect Q3 revenue to be $760 million, representing double-digit growth of over 12% year-over-year. Our Q3 revenue guidance assumes continued strong subscription revenue growth fueled by our Evergreen//One subscription services. We continue to execute on aligning our cost structure with expected demand. The results of our continued operational discipline and the economic benefits we are seeing with our unique architecture of Purity software working directly with flash is reflected in our Q3 operating profit guide of $135 million, or 17.8% operating margin. Our annual revenue guidance we previously communicated remains unchanged and assumes revenue growth in the mid to high-single digits, as we expect significantly stronger year-over-year revenue growth for the second half of FY '24. As a reminder, revenue for our Evergreen//One subscription service offering is recurring and is recognized over time. The sales strength of our Evergreen//One offering through the first half of the year has outperformed our expectations and this momentum is expected to continue throughout the remainder of the year. The success of our sales of Evergreen//One subscription services, has been considered in our annual revenue guidance as the growth of this offering creates a near term headwind to the total revenue growth rate, as revenue is recognized over time. We also continue to assume no significant improvement or worsening of macroeconomic conditions from what we have seen over the last few quarters. Finally, we are increasing our annual operating margin guidance from 15% to 15.5%, driven by our continued operational discipline, as well as the benefits we are seeing as a result of our unmatched flash management technology, powered by Purity software. In closing, treating data storage and management as high technology as demonstrated through our continuous innovation across our portfolio and business models, we have established an extraordinary advantage in reducing power consumption, real estate space, labor and e-waste for our customers. Our business value and total cost of ownership advantages are unmatched against our competitors. With that, I will turn it back to Paul for Q&A.

Thanks, Kevan. Before we begin the Q&A session, I'll ask you to limit yourselves to one question consisting of one part, so we can get to as many people as possible. If you have additional questions, we kindly ask that you please rejoin the queue. And we'll be happy to take those additional questions if time allows. Operator, let's get started.

Thank you. [Operator Instructions] We'll go first this afternoon to Amit Daryanani at Evercore.

Yes. Good afternoon. Thanks for taking my question. Yeah. I was hoping you could talk a bit more about the FlashBlade portfolio. I think in the press release you talked about record sales over here. So I'd love to understand where is the strength coming from, what's driving the success you had given a challenged macro. And we are really related to this, any sense on FlashBlade//E adoption is looking and is there (ph) some traction there. I think NetApp recently talked about how they're equivalent product at least is having a very strong launch. So love to hear you, whereas FlashBlade broadly resonating with customers. And is there any way to quantify what you're seeing that would be really helpful. Thank you.

Absolutely. Thanks, Amit. Well, I just as a reminder to the audience. We launched FlashBlade about five or six years ago now. And then more recently, a little over a year-ago updated it with what we call our FlashBlade//S program, which shares our direct flash modules with our FlashArray series, as well as more recently just last Q1, our FlashBlade//E product. FlashBlade//S addresses the high performance end the market and FlashBlade//E, as I mentioned in my script actually addresses the high capacity but bulk data, lower cost market overall. To answer your question directly, I believe the greater focus around AI certainly helps in FlashBlade sales, but frankly FlashBlade has continued to grow, especially since the introduction of FlashBlade//S, which gave it even greater compatibility with our FlashArray series, ever since we introduced that product. And now that we've introduced the E, it really allows customers to look at the full range of price performance for their high capacity workloads with one consistent platform. And, I think completing, if you will, the family with E, has really helped FlashBlade sales overall.

Yeah. Absolutely, Amit. This is Rob just to jump into the second part of your question. Look, I think it's important to realize that E really has no equivalent on the market. E as Charlie mentioned is really enabled by our highly differentiated Purity software and direct flash technology that's designed for that software, which really sets us far apart not only from disk, which is largely the displacement market we're going after, but also any of the competitive set that might try to follow us with SSD based technology. And as Charlie mentioned, we started using this technology, leveraging and bringing -- using it to bring QLC into the enterprise over three years ago with FlashArray C, at a time to displace a hybrid disk-based systems and then now with E, with both FlashBlade//E and FlashArray//E joining later this year, I really see a complete portfolio to go after the entirety of a customers' data storage needs. And again, as Charlie said, being able to do that and offer it with a very consistent, hardware, software and management approach.

Thank you, Amit. Next question, please.

We go next now to Aaron Rakers at Wells Fargo.

Yeah. Thanks for taking the question. I guess, I wanted to ask about the AI opportunity. Charlie, if you can, can you unpack a little bit about the eight-figure deal that you won in AI this quarter. Have you revenue recognize that just kind of any context on that? And then also just to clarify the Meta deal, are you continuing to not assume any kind of follow-on from that footprint deployment, next generation data center opportunity at Meta in your guidance for fiscal '24? Thank you.

You bet. So the eight-figure deal was nice as I said low eight-figure deal, but in a production environment that has opportunity for expansion. So very excited and it was that, the largest Gen AI deal of it -- of its type, which is why we wanted to highlight it not be not be only AI deal that we did in the quarter, but just because of its scale is something we wanted to highlight. I would also say that, it's an area that where we are seeing additional interest overall in the market. That being said, as I said last quarter, I'm just excited by the opportunity to upgrade customers’ existing data environment, to the lower performance environment, because of the needs of wanting to use that data for AI inference in the future. So I'm seeing both of those opportunities in front of us. Separately, with respect to the Meta RSC which we've commented on the past, because when new shipments happened into that tends to have an effect on our overall P&L. Yeah, as I've stated in the past we have there's really no change from prior quarters. It continues to be an environment that Meta is happy with, our relationship with them is very good. There are no change as far as we know of their plans to expand in the future. In other words, that's still our expectation, but we don't know the exact timing.

Kevan, did you want to make a comment about revenue recognition for that eight-figure deal that was included in our revenue.

Yes. Its included in our revenue. Yes. Thank you, Paul.

Okay. Thank you, Aaron. Next question, please.

Next now to Meta Marshall at Morgan Stanley.

Great. Thanks. A couple of questions from me, just coming out of accelerate. You guys have made some very bold statements, just about kind of customers not named us anymore, and I just wanted to get a sense of how you found that message resounding with customers and what pieces of the portfolio, do you feel like or pieces of the roadmap that you need to demonstrate over the next kind of coming years to demonstrate to customers that they can have more comfort in that transition. And then, just maybe a clarification on FlashBlade//E, just kind of typical order to ship time. Thanks.

So, I can answer the first part of that question in a number of different ways. First of all, I believe that customers have already experienced the disk to flash benefits when they went with their primary storage from disk to flash and what they found was smaller footprints, higher reliability, less maintenance, less effort, overall, especially when they move to Pure flash. And so they already recognized that as a positive effect. And so, when we can now go in at these lower-price points, lower priced performance levels, they get very excited about it. But as I had mentioned in my prepared remarks, what gets them even more excited is consolidating their overall environment to a more consistent hardware, software environment, because it reduces the complexity and their overall IT datacenter reduces their complexity, when they want to move to the cloud, just reduces complexity generally. So it's not -- E is interesting, not just in the -- just in the flash transition, but in the ability of customers to move to a more consistent portfolio overall.

And Meta, just to jump-in here. I think part of your question had to do with building comfort with customers around the transition. Look I think it's important to realize that the transition from hard disk to the flash we're offering with E, is completely seamless. All right. An other way to look at it is, there are basically no reasons that our customer says, hey, I would like to get disk. I would like to keep disk, there really no puts and takes. The only reason that customers have held onto disk in a lot of these environments, historically, has been price. And then now with our technology with what we've been able to do with E, we have effectively neutralized that. And so, I think. I think that's something that perhaps goes less appreciated. And I think we'll use that transition, because it's not a re-architecture, it's not a redesign. It really is, just a seamless and really instantaneous improvement on all dimensions.

And let me just touch on that last question on order to ship time for FlashBlade//E, consistent with what we see across our portfolio. So no significant difference there.

Thank you, Meta. Next question, please.

We go next now to Pinjalim Bora at JPMorgan.

So great, guys. Congrats on the quarter. Staying on the AI theme. I wanted to ask you about Portworx seems that was a little bit surprising. I don't think people are thinking about Portworx and AI together, maybe talk about that AI opportunity with respect to Portworx, what are you seeing? What kind of workloads are these on-premise or cloud attaches? Are this is more of a training or influence time of AI that would be helpful. Thank you.

Yeah. Thanks, Pinjalim. Well, first of all, it's both influence and training. And as you might imagine, a lot of these new developments are being made in container based and Kubernetes based environments. And Portworx is without equal, in terms of its ability to manage storage of all types, for Kubernetes and containers and to do it both -- can do it on bare metal could do it in the cloud can do it on-top of our infrastructure. And so, these are very large environments. Portworx has always been really superior, when it gets too large scale production and so before going into a development where the developers know it's going to go large scale when they when they scale out, they're starting off with Portworx for their stateful data management.

And Pinjalim just to just to add-on to that. I look at the Portworx and cloud native piece of this puzzle is, really a part of the overall set of environments that we see as being impacted by the uptake of AI technology, positively impacted. And so, certainly, number one, AI training infrastructure and environments, we've talked to you a lot about that. Number two, is really the demand to store more and more data in the enterprise, remove the silos and really move more of that cold data into the warm. And then as Charlie says, number three, looking at the application environments that the trend AI models are connected to. If you look at, where a lot of that data is coming into enterprises, it's coming from multiple sources, it is coming from business data, databases, IoT sensors, machine data all over the place. A lot of these applications sets environments, very highly dynamic, very aligned to open source, cloud native technologies. It's also important to realize that, getting these training -- trained AI models deployed and connected to real time systems is ultimately the goal for a lot of these enterprises. And so, when you look at the application environments driving these real time systems that folks want to plug, chat bots or what have you into, again, all very heavily based on and built on cloud-native architectures, open source software and they have the needs for agility, scalability elasticity, that those architectures afford, while at the same time, having the enterprise capabilities that technologies like Portworx can offer. And really that's what we're seeing out there today.

Thank you, Pinjalim. Next question, please.

We'll go next now to Wamsi Mohan at Bank of America.

Hi. Yes. Thank you so much. Charlie, we've not really seen a large uptick on-premise AI-driven workloads, but you mentioned sort of this large inference opportunity at enterprises. Any thoughts on when that can happen, do you see that in calendar '24 or '25 from a materiality perspective? And if I could like subscription ARR has been decelerating over the last four quarters. How should we think about the growth trajectory here? Thank you.

It's an interesting question. I would say that we do see opportunities on-prem for AI in -- I would say, highly specialized environments. And so, I think that is a real thing, of course, many of them are waiting for delivery of GPU and AI based processing systems and environments. And I would say that a lot of focus has been on the -- are currently on the compute side of it, a little bit less focus by the customers, because they've been so focused on the compute side, a little less focused on the storage infrastructure. I believe that's just starting to become a better known and understood requirement for these AI systems. But I'd say that, I just -- I would disagree, Wamsi, I'd say that we do, we are starting to see interest. If not yet deployments on-prem.

And Wamsi, let me touch on the subscription ARR growth definitely pleased with what we saw in terms of subscription ARR growth especially Evergreen//One, which is outperforming our already strong expectations that we had at the beginning of year. And as a reminder, in my prepared remarks, closed Evergreen//One contracts, where the effective service date has not yet started, are excluded from the ARR calculation. And our subscription ARR growth would have been 28% had we included those contracts, where the service date had not begun. And look, is it just, as a result of product revenue being lower for our CapEx sales. We do have less attach of our Evergreen subscription, which is also reflected in our subscription ARR growth rate.

Thank you, Wamsi. And just kind of reminder to everyone to please ask one question consisting of one part, and we'd be happy if you'd like to ask another question later on in the queue. Next question, please.

Next now to Krish Sankar at TD Cowen.

Yeah. Hi. Thanks for taking my question. Charlie, I had a question on AI too. From a storage standpoint, where do you think benefits the most for AI workloads between block storage and object , whether you think benefits the most. And also, can you help us clarify what products in your portfolio today support InfiniBand and how to think about it into future?

Absolutely. I would say that, a lot of the -- a lot of the AI environments use block because it's very straightforward. Especially with programmers and block can be utilized for any structure that you want underneath, but increasingly, it's moving to an object based environment, because over time block is easier. It's more efficient and it's less, it requires less state the -- than what's generally necessary in a block environment. So, I think we're starting to see that shift, but it's been taking a lot of time to get to very high performance object. Rob do you want to add?

Yeah. No, Wamsi, I think. Sorry, Chris. A couple of things. Look, I think if we step back from the application sets we're seeing AI technology being applied to today and we look at the long-term drivers. I think it's going to have a positive effect on all forms of storage. And why -- and what makes me believe that is look, the source data that enterprises are looking to feed into AI technology and get benefits from are coming from all over the place. They are coming from business systems that are coming from traditional databases, they're coming from more modern databases they are coming from unstructured data, log files, images, and that really spans the gamut, block file and object. I also think that the enterprises, are kind of source data that they're collecting through those means today and is going to increase in the future. I think that's the larger opportunity set. AI is clearly a fast-moving technology space that every enterprise is looking to adopt, and looking to take advantage of, and that's just going to drive a greater demand to collect and store data across the enterprise. I think just to address the second part of your question on InfiniBand, look, we've really focused on addressing the AI space as one of several very important segments in the portfolio. One of the things that really sets us apart in the market and really with our customers is the benefits we can deliver by having a consistent, hardware, software and management experience across all of their workloads sets. And this is where we see the benefits of ethernet based technologies, we see the benefit of more ubiquitous technologies, that again as the current application sets that you see perhaps an AI training environments broaden, and those environments needs to connect to other parts of the customers datacenter, special-purpose, technologies, if you will, such as InfiniBand really hinder that really get in the way. And so in InifiniBand is nothing new, we'd spent around for quite some time, but mostly found in more specialized environments. We see the bigger demand and value to the enterprise and being able to give them a complete solution set, not just for the AI training environments, but for all of the data environments that are going to be impacted by the uptake of AI technology.

Thank you, Chris. Next question, please.

Next, now to Sidney Ho at Deutsche Bank.

Great. Thanks for taking the question. My question is on the remaining purchase obligation. That is still showing really good growth in 26% growth year-over-year, but the unbilled portion really accelerated in the past few quarters. Can you talk about what's driving that acceleration, does it have anything to do with the new products or maybe Evergreen just growing rapidly. Thanks.

All right. I appreciate the question and it's a real simple answer. You're exactly right, it's due to the Evergreen//One acceleration and just timing of billings is really what it comes down to.

Thank you, Sidney. Next question, please.

We go next now to Shannon Cross at Credit Suisse.

Thank you very much. You mentioned that E is exceeding your expectations. I'm wondering, if you can talk a bit more about how the customer conversations are going, how much you're seeing this being sold into existing customers versus some of the new customers? Is it's opening up a new opportunity for RF to bid on new RFPs, just any more color you can give there. Thank you.

Yeah. Let me let me start. It -- first of all it is are exceeding our expectations, both in terms of the revenue that we saw in our first full quarter of shipments, as well as in the pipeline growth, which continues at unprecedented rates very-very fast. The conversations are, first of all, they are happening all-around the world, they are happening across a very broad set of use cases. And in some cases at prices higher than what the customer would be paying for new disk environments, because of the lower total operating cost, that they are able to get, and the better performance that they're able to get-out of the all-flash E environment. So, and I would say that it's really. I have yet to hear of a use-case around for an existing disk based system that flash FlashBlade//E was not able to address.

Great. Thank you, Shannon. Next question, please.

We'll go next to Jason Ader at William Blair.

Yeah. Thank you. Hey, guys. Can you quantify the revenue growth headwind over the last 12 months from Evergreen//One? And also just start, any color on materiality to the total services revenue, I mean, can you give us a ballpark of how big it's becoming?

Yeah. It's a great question and Evergreen//One performances is simply been terrific. In the first half and we're expecting that momentum to continue. And you're right, there is a short-term headwind on revenue, as a result of revenue being recognized over-time. And when we think about it from an annual lens, it's probably about one to two points is how we're thinking about it currently, and then we don't -- we're not quantifying Evergreen//One specifically at this point in time, Jason.

Okay. Thanks.

Thank you, Jason. Next question, please.

We'll go next now to Mehdi Hosseini at Susquehanna.

Yes. Thanks for taking my question. I wanted to better understand the dynamics of the folks that you're talking to decision makers at the customer side and how is that changing. And I'm asking you, because I'm looking at your OpEx that is on-track to grow in the low-teen versus revenue growth target of mid to high-single digit.

Yeah. Regarding the type of customer environment the new positioning. the new messaging, we're talking about is definitely getting us into the C-Suite, increasingly, and it's both, that message is made-up of several parts, one is an extremely consistent environment, that first of all can take care of all of their storage needs and the same with the same environment, therefore, lowering their total operating costs. The dramatically lower power space and cooling that both lowers costs but it improves their ESG their own ESG ratings, which is extremely important. And then also as I mentioned in my prepared remarks, the ability now to be able to rise above just individual arrays attached to individual use cases and enable customers to create an environment where they can have consistent storage pools across their entire enterprise, multiple data centers, multiple clouds. This is really a new message, it's one that addresses the concerns of CIOs of CTOs, even business units and developers. So this is getting us certainly a higher level attention in major accounts.

Thank you, Mehdi. Next question, please.

Next now to David Vogt at UBS.

Great. Thanks, guys. So Kevan and Giancarlo. I just want to go back to the current demand environment and the macro. You touched on the challenging macro backdrop and FlashBlade//E was a really strong launch during the quarter. Just curious about what did you see from customers, was there any sort of potential spin down, where it did make sense to maybe use more lower-cost all-flash solution in the quarter. At the expense of maybe a little bit more performance solutions in addition to maybe disk replacement. And then how do you think about that sort of dynamic, as we move through the balance of the year. It doesn't sound like the macro is getting dramatically better, and so should we expect to see, obviously on the Blade E side and then ultimately on the Array E side, sort of be a key growth driver in the second half of the year? Thanks

Yeah. We haven't really seen that type of what do you call-it a spin down or cannibalization. We track this very-very closely, as you might imagine when we bring in a lower-price performance product to see if customers are trading down. We really don't see that, it really did open up net-new opportunity for us to go into go into new areas. I think we were at a better economic environment. All of these numbers would be would be enhanced, but no. I think it's just the. We'd all love to see even stronger growth than what we're seeing now and of course we're pedaling very hard to drive more performance out-of-the team overall but the economic effect has been broad-based. And, I would say if anything, when you have an economy that started-off the year the way it did customers reduce their intention to spend and they have their high-priority projects and because we announced the disk to flash transition after the beginning of the year. I think if anything it's muted and will be increased next year as customers start to plan for it, you know in there in their budgets. So, no, I think it's more of an economy than anything else.

Great. Thank you.

Next question, please.

Next now to Thomas Blakey at KeyBanc.

Hey, guys. Thank you for taking my question. I just wanted to circle back to the subscription service line, and from a puts-and-takes perspective Evergreen//One doing great, off to a great start. Just what maybe focus on the other areas that maybe you're experiencing some pressure, specifically want to know it's like maybe there is just understanding how you relatively start smaller and grow with your customers, if there's any pent-up demand that you can see there heading into next year from that, for many pressures in the other areas of the Evergreen products. Thank you.

Yes. I know this is Kevan and I'll start-off and then have Charlie add-on any more commentary, but it's a good question. And again, we commented on the strength of our subscription ARR, which really has been driven and fueled by our Evergreen//One subscription offering. Now, obviously, with demand being a bit lower on the CapEx side, the attach of Evergreen subscriptions, whether that's forever or foundation, is impacting somewhat our subscription ARR growth rate, which I've talked about a little bit earlier. Now if we look at -- and really that's the only thing going on that. I would highlight, in particular. If you're looking specifically at our subscription revenue growth rate. Do you want to let you know, we've got professional services in that line-item as well. And obviously, that's not growing at the same pace as our subscription offerings. And so, that would be driving your difference that you might be noting.

Thank you, Tom. Next question, please.

We go next now, to Simon Leopold at Raymond James.

Great. Thanks for taking the question. I wanted to see if we could maybe step-back and help us size the AI opportunity, as to sort of where it is now and where it's going? I think in the past you've talked about sort of where FlashBlade is and that maybe AI use cases, not just generative we're probably more than half of those use cases. You've given us some customer metrics, wonder if we could get some revenue metrics as well, even a ballpark. Thank you.

Yeah. We don't, you know Simon, we don't generally like to break these things out. I would say though that AI is a significant contributor to our revenue. It's not an -- it's not a dominant one, nor frankly do I expect it to be. It's a very exciting new area without a doubt. And we expect to see growth, growth in that, but plain old -- plain old data storage, both for high-performance databases, as well as for lower performance bulk data, will continue to dominate our market. What is exciting about the AI environment is high-performance systems generally are high-profit system environments, which is good and we do hopefully anticipate like the Meta RSE, that we might see environments where the scale of it really starts to grow. But I would say still -- and I think this is true for everyone except for the GPU builders, while it's an exciting new area. It's probably going to be a small, let's say low-double-digit portion of their overall revenues in general revenue.

Thank you, Simon. Next question, please.

We go next now to Nehal Chokshi at Northland Capital Markets. And Nehal your line is open, if you do have a question.

Yes. Thank you. Hey. Thank you for the question and I really like the new presentation content format, it's really great, thank you for that. So, FlashBlade//E, it sounds like you've had better-expected revenue and pipeline with respect to pipeline, are you assuming a lower conversion rate of that pipeline, for the remainder of this fiscal year, that's more or less driving the -- no change in forward guidance here?

Yeah, Nehal. It's a great question and the answer would be no. Our conversion rate, especially for FlashBlade//E is quite healthy. And we considered that in our overall annual revenue guide, that we provided. The other thing to highlight as well as and we've highlighted that in my prepared remarks, is the strength of Evergreen//One, which needs to be considered as well, because obviously that takes more time to make its way to revenue. And that's been considered as well as we've looked at our overall annual guide for this year. So hopefully that's helpful for you.

Thank you, Nehal. Next question, please.

We go next now to Matt Sheerin at Stifel.

Yes. Thanks. My question is on the recent Azure VMware announcement. Could you help us understand the significance of that, in terms of your position with Microsoft, within that, the Azure ecosystem, how that positions you versus competitors in the cloud and how we should think about the product roadmap going-forward?

Yeah. We consider it to be a very significant announcement. It is a combination of VMware in the cloud Azure VM services, VMware services as well as our Cloud Block Store, providing a simpler methodology for customers to move their existing workloads into the cloud. And also at the same time, dramatically reducing their overall cloud costs. So it's really a one-two punch that's hard to beat. We consider the relationship with Microsoft, very strong and continuing. We're looking-forward to doing more things with them as we, as we go-forward and I think this is going to be a very competitive offering in the market. Rob?

Yeah. No, I mean I would just add-on to that Charlie said, I think one of the things that really makes us unique is the integration that we've undertaken with in partnership with the Azure team really over the last year-plus to bring this service to-market. We have had a number of Cloud Block Store customers that have really been, pushing both of us in this direction and have been part of early previews and beta activities. And they're very excited now to be able to move into production. And look, overall, we just see this as a continued validation of the benefit that customers are seeing from the Cloud Block Store technology, and reducing their cloud costs. And really, giving them a much better environment on the cloud. Infrastructure to run their production workloads. As we mentioned last quarter, we had our largest individual sale, in the quarter, of cloud blocks to a large healthcare organization that organization is now moving into production and frankly it's seeing, even better-than-expected cost reductions and savings, as a result of that. And so overall, we see this is just continued validation of the great technology, the ability to go drive meaningful savings for customers. And then now in partnership with Azure, tightly integrated to a very-very important use-case for our customers.

Thank you, Matt. It looks like we have time for one more question. And I'm happy to say we have a person who's rejoined the queue. So this will be second step back. So our last question.

We will take that now from Mehdi Hosseini.

Yes, sir. Thanks for opportunity. I want to go back to my original question. And as you're engaged more of C level executives. Obviously, opportunities are reflected in your subscription, is there another metric that we could track and to better understand your longer-term revenue growth, because you're spending -- your OpEx growth is much higher than this year's fiscal year revenue growth, but obviously it helps in sustainability of revenue growth. And I'm just wondering if there's any other metric that we can look at to better measure your longer-term revenue growth?

Nothing specific that Mehdi , I would point you to that other than the rich amount of in our portfolio and the opportunity associated with that portfolio across our entire data storage platform. So obviously navigating through this year, I provided a guide for this year and as we navigate through the second-half we will be looking at next year as well.

Thank you, Mehdi, before we conclude. I think Charlie has some final comments.

Thank you. Customers appreciate our new capabilities and the positioning as I had mentioned, the only consistent, consolidated, data storage and management platform for all of their data storage needs. I want to thank our customers and partners, suppliers, employees and investors, your collaboration, your innovation, your hard work and your trust, propel us forward. So we look-forward to meeting you around the world. We have a number of accelerate roadshows set-up in various major cities around the world. We look-forward to seeing you all there. Thank you.