Liz Lemon – Vice President-Finance and Development Scott Dietzen – Chief Executive Officer David Hatfield – President Tim Riitters – Chief Financial Officer Matt Kixmoeller – Vice President-Products.

Steven Milunovich – UBS Simona Jankowski – Goldman Sachs Alex Kurtz – Pacific Crest Securities Rod Hall – JP Morgan James Kisner – Jefferies Jayson Noland – Baird David Ryzhik – Susquehanna Financial Ittai Kidron – Oppenheimer Aaron Rakers – Stifel Munjal Shah – Wells Fargo Richard Kugele – Needham Victor Chiu – Raymond James Jason Ader – William Blair Eric Martinuzzi – Lake Street Capital Nehal Chokshi – Maxim Group John Lucia – JMP Securities Dariush Ruch-Kamgar – Bank of America Merrill Lynch.

Good afternoon. My name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the Pure Storage Q4 2017 earnings call. [Operator Instructions] Thank you. I will now turn the call over to Liz Lemon, VP of Finance and Development. You may begin your conference..

Thank you and good afternoon. Welcome to Pure Storage’s Q4 fiscal 2017 earnings conference call. Joining me today are our CEO, Scott Dietzen, our CFO, Tim Riitters, our President, David Hatfield, and our VP of Products, Matt Kixmoeller.

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

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

Any forward-looking statements that we make are based on assumptions as of today and we undertake no obligation to update them. Our actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance.

A discussion of risks and uncertainties relating to our business is contained in our filings with the SEC and we refer you to these public filings. Also during this call we will discuss non-GAAP measures in talking about the Company’s performance.

Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on Pure Storage’s Investor Relations website and is being recorded for playback purposes.

An archive of the webcast will be available on the website for approximately 45 days and is the property of Pure Storage. With that, I’ll turn the call over to our CEO, Scott Dietzen..

Thanks, Liz. Good afternoon and thank you for joining us. Pure just wrapped up another great quarter and year, beating both our top- and bottom-line guidance. Over 3,000 customers have now adopted Pure’s platform to accelerate data-driven applications.

These customers are gaining new insights for optimizing their businesses while substantially reducing cost and complexity with our cloud-based management and business model. Pure just keeps growing, maintaining our high win rates in a competitive market.

We’ve got a product pipeline bursting with innovation and this year we expect to reach $1 billion in revenue for the first time. We’re going to take a different approach to today’s earnings call. Most calls focus first on the past. Today I’m flipping the script.

We’re going to start with our vision about what’s ahead and then dive into the details of the most recent quarter. At Pure we’re building the data platform for the cloud era. The storage market is in rapid transition to silicon and cloud-capable storage to keep up with the demands of data growth and predictive analytics. After all, data is paramount.

Data sheds light on the most important opportunities and challenges faced by an organization. At Pure, our mission is to enable our customers to put data to work to improve their businesses.

We compete with mainframe and client server era technology designed 25 years ago which can simply no longer cope with today’s volume and velocity of data and the increasing performance required for predictive analytics and machine learning.

We now have thousands of examples across our customer base that reflect the value that Pure uniquely delivers to data-driven applications. Our President, David Hatfield, us joining us today to share more about this customer point of view. Hat, over to you..

Thanks, Deitz. Only Pure is delivering a complete data platform that is purpose built for silicon in the cloud era.

We dramatically improved traditional applications while providing the bridge to the modern new stack applications, enabling real time analytics, cloud agility and machine learning and this year our exciting software development pipeline will take our platform and technology lead to a completely new level.

Our end-to-end platform, including FlashBlade, FlashArray and a converged offering with Cisco, FlashStack, is powered by innovative software that’s cloud connected for management from anywhere on a mobile device and supported by our evergreen business model.

Similar to what customers expect from the public cloud, with Pure 1 and Evergreen, our customers benefit from near zero administration and a subscription to the latest innovation, but with much higher performance and lower costs. Take an example for a Fortune 100 digital internet company that is running a leading cloud platform on Pure.

They’re leveraging our evergreen model to flexibly scale capacity while collecting and analyzing data in real time and decreasing operating costs globally.

Unique to Pure, our customers never have to re-buy a single terabyte they already own and they can scale their storage performance and capacity on demand and without costly and risky data migrations.

Over the next year we’ll be offering new software innovations for our flagship FlashArray and FlashStack technologies, including the debut of synchronous replication, a key enterprise resiliency feature and enhanced cloud integration for data protection and hybrid cloud use cases.

While others may bolt these features on, adding complexity and cost, those capabilities will be native to our core software for our customers to leverage with a non-disruptive online upgrade.

As we mentioned in the last call, our unique implementation of NVMe flash will unlock new levels of performance and efficiency and will be available to all of our customers to take advantage of as a simple online upgrade for expansion this year.

Additionally, the highlight of the most recent quarter was announced in the general availability of FlashBlade, our new product that enables flash to transform the unstructured data market in the same way FlashArray does for the structured data. It’s still early, but adoption so far has been robust, much faster than the early days of FlashArray.

For two different customers this past quarter we replaced over 20 racks of spinning discs with a single 4U FlashBlade, just the size of a microwave. Early FlashBlade customers report dramatic improvements in performance and sharp reductions in operating costs.

In fact, we’re finding that the core Pure tenets of building efficient, effortless and evergreen storage may be even more impactful to this market as FlashBlade is often sold to data scientists and engineers who have even less tolerance than IT buyers for the complexity of legacy storage.

One leading insurance company is using FlashBlade to cut the analysis time for the average claim to under 30 minutes from more than three hours while reducing both hardware footprint and associated staff costs.

A large scale university genomics project is using the exciting new stack analytics package of Apache Spark on FlashBlade to speed genome sequencing which previously took 12 hours in a leading cloud provider to only 30 minutes on FlashBlade.

Our continuous innovation, coupled with our evergreen architecture and unique business model, enable us to capitalize on a meaningful portfolio effect, which enhances our selling motion, we believe will help drive higher revenue per customer and continue to drive great r differentiation for us as a business.

This is translating into two exciting trends. First, we have hundreds of customers now spending greater than $1 million and many spending $5 million, $10 million, $20 million or more by easily expanding their initial FlashArray deployments to consolidate multiple applications and retiring their legacy footprint.

We believe that roughly 90% of the tier 1 refresh to All-Flash is still ahead of us. Respondents to a 451 research survey of those open to a new provider ranked Pure among the top three alternative vendors for consideration, alongside AWS and Azure, which we believe puts us in a great position.

Second, we are benefiting from a steady pull-through of new products as our data platform expands and continues to meet and exceed the needs of our customers. 50% of our FlashBlade customers have come from our existing FlashArray install base, expanding into new workloads and use cases.

We’ve also seen the reverse, where FlashBlade has enabled us to serve customers in new markets like chip design, engineering simulation, genomics, media and oil and gas for their technical computing workloads and then pull through FlashStack and FlashArray for core IT opportunities.

There are hundreds of stories that bring to life the benefits of our complete data platform across all 3,000 plus customers.

Every day, we’re helping healthcare providers improve diagnostics through packed image analysis, SaaS companies gain deeper customer insight through real-time analytics, aerospace and automotive customers simulate and develop their next generation of intelligent vehicles, network providers offer security monitoring to their customers, investment firms model portfolio risk in real-time and retail sites deliver targeted messaging based upon social media streams, to name a few.

We are confident this rich pipeline of innovation and shift to portfolio selling will be key drivers for our customers, partners, and our own success in 2017 and we could not be more excited about the opportunity ahead. Deitz, back to you..

Thanks, Hat. Now on to results for the quarter and the 2017 fiscal year. Pure’s Q4 revenues were $228 million, up 52% from the year-earlier quarter and above the high end of our guidance range. Pure also continues to move closer to breakeven.

Non-GAAP operating margin was well ahead of expectations at negative 2%, a full 12 percentage points ahead of the year-ago quarter. For the full year, revenues were $728 million, up 65% from the prior year and again above our guidance range. In fact, Pure has grown revenues 2.7 times in the six quarters we have reported since our IPO.

A few other stats, in the quarter we added 450 new customers, bringing our total for the year up to 1,400 customers added. This increases our customer count to over 3,000 total, including well over 100 from the Fortune 500 and roughly 70% of the net new logos in the quarter were driven by the channel.

Q4 additions included the streaming video service Hulu, restaurant chain Subway, healthcare tech and lighting giant Royal Phillips, Japanese entertainment company Konami and cloud-based healthcare company Phreesia. New FlashBlade customers included the National Hockey League, the law firm Keker Van Nest & Peters and geo-science company Ion.

Cloud companies account for more than 25% of our total sales and the repeat metrics are higher than the rest of our customer base. We now serve over 500 software as a service, infrastructure as a service, and consumer Internet cloud customers.

And since inception, 8 of the top 10 telecommunications providers have collectively spent over $100 million with Pure. This reflects the scale of our platform as hundreds of Pure’s customers have graduated from app-by-app deployments to investing north of $1 million in leveraging Pure’s data platform across their business-critical applications.

To sum up, as we continue to focus intensely on the All-Flash array and cloud segments, which make up the majority of the market, our opportunity remains vast. We are convinced 2017 will be Pure’s best year yet. We are thrilled that our data platform is in a position to drive $1 billion in revenue in just our sixth year of selling.

Pure is uniquely well positioned to win as the inevitable transition to silicon and cloud-capable data storage unfolds. With that, I’ll turn the call over to Tim to provide further details on our financials.

Tim?.

Thanks, Scott. As Scott said, Q4 marks another solid quarter and a strong end to our fiscal 2017. We’re pleased with strong execution around our operating model, highlighting consistent top-line growth and notable year-over-year improvements in operating leverage.

As we approach the $1 billion revenue mark this fiscal year, it’s clear we have both the technology and the business model for continued growth and industry leadership.

Before I dive into Q4 specifics and fiscal 2018 guidance, please note that the gross margin, operating margin, OpEx and free cash flow numbers I will use are non-GAAP unless otherwise noted.

A reconciliation of these non-GAAP metrics to the GAAP comparables is available in our press release and in our earnings slide deck, which are available on our website at investor.purestorage.com.

For full details on our Q4 and fiscal financial results, please refer to our press release and our earnings slide deck, also available on our Investor Relations website. As Scott said, Q4 total revenue grew 52% year on year and 16% quarter on quarter to a record $227.9 million, which is 2% above the midpoint of our guidance.

For the full fiscal 2017, total revenue was $728 million, or 3.3% above the midpoint of our full-year guidance, and represents 65% growth year on year. Product revenue in Q4 grew 47% year on year and 16% quarter on quarter to $186.8 million, driven in part by a record 450 new customers and excellent demand from our existing customers.

This quarter, across our entire customer base, for every $1 that our customers spent initially they spent an average of an additional $2 within the next 24 months. We announced in January that our FlashBlade products are now generally available.

While the revenue contribution was non-material to our Q4 fiscal 2017 results, we are focused on driving our FlashBlade business to operate at scale and are optimistic about the long-term expanded market opportunity that this product represents.

Support revenue in Q4 grew 79% year on year and 13% quarter on quarter to $41.1 million, driven by revenue recognition on ongoing support contracts. We continue to drive loyalty among our customers, demonstrated by a strong customer retention rate in the mid-90% range.

Looking at Q4 and full year fiscal 2017 from a geographic perspective, 77% of our revenue came from the U.S. and 23% from international for both periods, compared to an 80/20 split in the prior fiscal year. We continue to observe notable success across all our regions.

Q4 total gross margin of 66.1% increased 0.6 of a point quarter on quarter and remained flat year on year. We continue to be in the range of our target long-term model of between 63% and 68% for total gross margin. Product gross margins of 66.6% improved 0.6 of a percentage point sequentially and declined 1.7% year on year.

We continue to be focused on driving industry-leading product gross margins while successfully managing new product introductions and working within the constraints of the current NAND and other component market. Support gross margins of 63.6% improved 10.2 percentage points year on year and 0.4 of a percentage point sequentially.

This is driven by our expanding customer base and the deferred support associated with increasing product revenue. In addition, we continue to drive operational efficiencies within our support organization as we scale.

Turning to operating margins, we continue to make excellent progress in our drive to profitability and toward our long-term operating margin goal of between 15% and 20%.

For Q4, non-GAAP operating losses were negative $4.4 million, or negative 1.9% of revenue, compared to non-GAAP operating losses of negative $20.9 million, or negative 13.9% of revenue, in the year-ago quarter. This represents a 12 percentage point improvement in operating margin year on year and a 7.9 percentage point improvement sequentially.

As we have said previously, we intended to make fiscal 2017 our turning point in terms of absolute operating losses and we exceeded those goals.

Our operating loss for if fiscal 2017 was negative $96.3 million, or negative 13.2% of revenue, 31% lower than the operating loss for last fiscal year and 32% ahead of our operating loss guidance that we shared with investors the beginning of the year. We did this while growing the business 65% year on year.

Total headcount at the end of Q4 was over 1,700, up from 1,650 at the end of Q3 and up from 1,300 a year ago. We remain dedicated to hiring great talent to drive our sales execution and innovation efforts throughout the year. Moving on to the balance sheet and cash flow, we finished fiscal 2017 with cash and investments of $546.7 million.

Our free cash flow was positive $25.3 million, or 11% of revenue, compared to $32.1 million, or 21% of revenue in the year-ago quarter. Please note that this includes $8.1 million of cash impact related to our employee stock purchase plans.

Excluding this amount, free cash flow would have been $17.2 million, or 8% of revenue, compared to $21 million, or 15% of revenue, for the year-ago quarter. Let’s turn now to our guidance. This fiscal year, we will begin reiterating annual guidance each quarter.

As our revenue’s becoming increasingly predictable through repeat business and our growth rate transitions from hyper growth to high growth, it’s the right time to make this shift.

For the full fiscal year ending on January 31, 2018, we expect revenues of between $975 million and $1.025 billion, implying a $1 billion revenue level at the midpoint of our guidance. We expect gross margins between 63.5% and 66.5% and operating margins between negative 9% and negative 5%.

We are on track to achieve sustained positive free cash flow in the second half of calendar year 2017 and believe we have a clear path to profitability as we drive consistently toward our long-term operating margins of between 15% and 20%. With that in mind, it’s important to emphasize the seasonal trends in our business.

We typically build bookings momentum in the second half of the year, with Q1 our seasonally softest quarter in revenue and operating margin. We typically see lower bookings but continue investing in our sales force and marketing programs.

As our business grows larger, and our growth rates understandably moderate, the impact of seasonality is naturally more pronounced, as we’ve mentioned in the past. With this background in mind, for the first quarter of fiscal 2018 we expect revenues of between $171 million and $179 million. This is based on the seasonality that I just discussed.

In addition, with our focus on adding new customers in Q4, our bookings mix skewed towards smaller first purchases, as is typical to new customers. We are excited about repeat business that these new customers will deliver for Pure in the future and Q4’s bookings mix is factored into our Q1 guidance.

Turning to gross margins, we expect Q1 fiscal 2018 non-GAAP gross margins in the range of between 63.5% and 66.5%. We have completed the manufacturing ramp of FlashBlade.

To fuel the next phase of growth for this product, characterized by rapid market expansion and footholds into new verticals and geographies, we will continue to make strategic deals as we build momentum. We will do this while continuing to operate in the 63% to 68% long-term gross margin guidance we provided earlier.

Our gross margin guidance also accounts for the current component supply environment. We anticipated these natural cycles when modeling the quarter and our full-year gross margin.

We expect Q1 non-GAAP operating margins of between negative 27% and negative 23% as we focus on making strategic investments in our sales force and continue to drive velocity in our business.

As I mentioned earlier, this is seasonally normal and deliberate, given our continued strategy of investing early in the year and reaping the rewards in the traditionally strong second half. To wrap up, as Scott and David said, fiscal 2018 is shaping up to be another strong year for Pure, driven by several key factors.

First, we have very strong repeat purchase rates. In fact, we anticipate that repeat purchases from current customers will account for a full 70% of the bookings required to reach our $1 billion goal this year. Second, we have significantly increased our sales capacity and our latest sales cohorts are the strongest yet.

Third, we are delivering strong innovation across all of our products and are at the beginning of several key product cycles. With this growth, it’s also important to reflect on the fundamental health of our business as seen through improvement in operating leverage. In fact, our Q4 results brought us very close to profitability.

As we continue to grow our business, we will continue our predictable march to our long-term operating targets and believe sustained profitability is well within reach. With that, we’ll now open the call for questions.

Operator?.

[Operator Instructions] Your first question is from Steven Milunovich from UBS..

Thank you. Good afternoon. I understand your comments about seasonality regarding the first quarter but it still appears the year-over-year revenue growth rate might be something under 30% and actually accelerates year over year as you go through the year to get to the $1 billion.

Is my math roughly correct? What confidence do you have that, that’s going to happen?.

Hey, Steve.

In order to hit $1 billion in revenue this year, all you have to believe is that we can drive FlashArray growth in the 25% to 30% range, and that’s off of a 65% growth that we drove in FlashArray last year, and that FlashBlade is going to do roughly 2X in its first full year of selling versus what FlashArray did and that’s easy to believe, given we’re already operating at scale.

We think that combination of factors, adding in the sales cohort productivity and the strong bookings from repeat purchases, is how we get to the $1 billion. With respect to seasonality, as we’ve said in the past, seasonality does become a bigger factor at scale. As we scale and the rate of growth slows, then seasonality will get more pronounced.

I do want to add, though, that we did see a shift in Q4.

We had our strongest new customer adoption in that quarter that we’ve ever experienced, but along with that comes an inevitable mix shift toward the starter products as opposed to the – it’s more entry level systems sold as opposed to the repeat purchase system sold and that mix it ultimately ended up impacting our Q1 guide as well..

And to be a little more specific, on FlashBlade you said your assumption is that it’s roughly two times first-year FlashArray sales.

I’m just wondering how conservative do you feel you’re being in terms of the FlashBlade contribution to that $1 billion?.

Yes, Steve, maybe I’ll take that. This is Dave Hatfield. I’ll tell you that when I – I’ve been here just over four years. When I first saw FlashArray, I knew it was special and it would transform things, but FlashBlade is lightning in a bottle.

The unstructured market there is exploding around Internet of Things, machine learning and big data, as you know. We kind of held the sales force back last year with directed availability to make sure we got the quality and the product that we wanted in stability and also the use cases.

When we launched this to our sales teams a couple of weeks ago at our kickoff, there is huge enthusiasm to drive it. There’s a couple things that you need to think about as you model it. One, it takes one to two FlashBlades per selling team for the year to beat our internal numbers. 50% of our business so far has come from our install base.

So if you look at it a different way, less than 10% of our install base needs to convert over the FlashBlade. We’re super enthusiastic and very confident in the FlashBlade launch..

Great, thank you..

The next question is from Simona Jankowski from Goldman Sachs..

Hi, thank you very much.

Can you comment a little bit on the impact of the NAND supply constraints and the price increases? It seems like it’s not really affecting your margins, but use curious if you can comment on what steps you’ve taken to ensure supply and if you are passing on some of those increases to the of customers or how you expect them to impact you..

Hey, Simona. Thanks for the question. We think we’re in a uniquely strong position. There is no question that there is some tightening in NAND supply, but keep in mind, Pure software gives us unique advantages.

We are between two and five times more efficient in our use of NAND because of those software innovations versus the competition and our software also allows us to mix and match different kinds of flash, consumer grade MLC, consumer grade TLC.

So we have the opportunity to pull from different suppliers in order to meet our customer obligations and it’s a key part of the reason we’re so confident we can continue to grow and maintain industry-best margins. Maybe I’ll ask Kix to chime in..

Yes. The only thing I would add to that is that I think this is really showing the product differentiation shine through in our product line and in particular on the software side compared to some of our competitors.

As we know, some of our competitors basically just have to leverage large SSDs at an overall low cost to the customer to try to drive their way into the all-flash markets. They’re basically kind of buying their way in and underwriting product deficiencies with a bunch of raw flash.

That’s a hard strategy to kind of keep up as we go into a supply constraint situation. We thought they would hit a wall a bit this quarter and indeed we saw HP post a negative 13% and claim that was really tied to the flash shortage. We saw NetApp lose five points of gross margin, now operating their business 20 points under us.

I think we’re really starting to see that strategy hit a wall..

Thank you. And then just as a follow-up, I think you said that to reach your target for this year you’re going to need to see repeat customers drive about 70% of the bookings, if I heard that correctly.

Can you just put that in context for us of what that number was for last year?.

So, Simona, this is Tim. We haven’t disclosed those numbers in the past. What I can tell you is those are in the same zip code. Over time we’ve seen that rate continue to climb up. Now that we’ve got the history in front of us and repeat business, we’ve got a lot of confidence and how those are going to curve out over the course of the next year..

Thank you..

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

Yes. Thanks, guys. Just a couple of questions here.

Back on that 70% comment, Tim, what percentage of that 70% is your sales force has some visibility into right now or is that kind of you projecting out capacity in our install base and certainly knowing where your customers are and kind of getting to that number or is there a large chunk of that, that’s sort of in the pipeline already?.

I would say two things on that, Alex. The first point is that we build pipeline throughout the year and we watch that, so we watch that very religiously out multiple quarters. So that gives us confidence point number one.

And then in terms of the estimation techniques, we’ve also done a number of statistical analyses to triangulate on that looking at how cohorts have seasoned over the last two or three years and then project that on top of the new cohorts that are coming in.

So a lot of analytical rigor as well and the combination of those two things really is what’s driving that confidence for the year..

Okay. And can you maybe give us an update on rep productivity and how that plays into the second-half outlook? I mean, clearly that’s going to be a discussion going forward as you guys have put a lot of revenue in the second half here and what the confidence and the catalysts are for you guys to exceed those numbers..

Yes. Maybe I’ll comment on that first. This is Dave. A, we added our largest cohort of salespeople last year, north of 30% over the year, and that class is growing faster than any other cohort we’ve had in history, so we’re very thrilled with not only the additional capacity, but the incremental productivity of that cohort.

Two other reasons I think that lend me the confidence. Second, we really fine tuned our incentive structure to be more balanced toward top line versus net new logos. And our sales teams are trained up on the FlashBlade and the software innovations that we’re having but they’re shifting from product-oriented selling to portfolio-oriented selling.

And to be able to deliver the data platform for the cloud era and be able to offer a solution for any data requirement that a customer has, we think not only will differentiate us over the long-term but drive that productivity even further..

Thank you..

The next question is from Rod Hall from JPMorgan..

Yes, hi, guys, thanks for taking my question. I had two. I guess I wanted to start off and see if you could give us some idea of what your average order lead time is. And then I have a follow-up after that..

So average order lead time, Rod, you mean in terms of fulfilling a customer order once it comes in?.

Right..

Yes. So one of the things we prided ourselves on is very rapid turnaround time. It’s a hallmark of what customers tell us when they need new deployments. We can turn those orders pretty quickly. We don’t advise on a specific number, but I will tell you we’re ahead of the industry in our ability to fulfill..

Can you give us some kind of ballpark? Are we talking – do you tend to fulfill within a couple of months of an order? Do you tend to fulfill in four months? What’s the ballpark?.

Yes. The ballpark, again, we don’t offer that because it can vary based on different system configurations. But what I will say is that we are ahead of the industry in our ability to serve customers quickly..

Wouldn’t that then suggest that you guys, from a visibility point of view, you can only guess at the second half of the year?.

Not at all. I think for the earlier comment in terms of the pipeline that we’re building, we watch deals and opportunities mature. As we know, particularly in enterprise market, those sales cycles can take some time and so we’ve got good visibility in that pipeline, one, two, three quarters out as we build the business..

I think the one thing I’d also add to that [indiscernible] – sorry. One thing I’d add to that I think on the repeat purchase metrics, we look at that religiously as well and have over the last four years and so we know by cohort, by segment, what the propensity to buy is on a monthly basis as they come in.

And so the high-level metric that we provided is that over 24-month period of time every $1 spent on the front end they spent another $2, but that varies by segment. And so we’re quite granular in our visibility around repeat purchase metrics as well..

Okay. And I guess then if that’s the case, why is the guidance so much weaker than I guess what we were expecting? I assume it’s weaker than what most people on the call were expecting, given you have that kind of visibility..

So I would reiterate again, seasonality is certainly the primary factor. As the business scales and our relative rate of growth slows, we are going to see greater effects of seasonality. There was a secondary factor in having so many new customer adds in the fourth quarter and those being starter systems.

But first and foremost, this is inherent seasonality that is reflected in the Q1 guide..

Great. Okay, I’ll cede the floor. Thanks a lot, guys..

Appreciate it, Rod..

[Operator Instruction] The next question is from James Kisner from Jefferies..

Thank you. Hi, there, guys. Thanks for taking my question.

So I guess one thought was – I guess just clarify, just to beat a dead horse, on FlashArray’s first year of shipping, what was the number for that you’re saying that you can double that this year for FlashBlade? Can you clarify what that number was?.

Yes. So James, this is – if you look back to our couple years ago now, it would have been about a $43 million, I think, from a revenue perspective. That would have been calendar 2013, I think it is. It’s the first full year we reported our S-1..

Okay. $300 million in product revenue. You think you can do $80 million in FlashBlade, basically, this year, just to be explicit..

To be explicit, based on the commentary, we’d like to do 2X or where we were with FlashArray, yes..

And we are confident of that..

Okay, thanks. Great. So I have a question regarding your supply chain. There’s been a lot of talk about an import tax. I know there’s nothing is certain yet. I know you guys in your K you revealed some portion of your products are produced overseas.

I’m just wondering could you give us a general idea of how much of that [indiscernible] in Asia and whether or not you would see any kind of impact if there was an import tax? Thanks..

So product assembly for the U.S. market is actually done onshore. So we manufacture through our contract partners in the United States. The silicon that we use does come from all over the world, but we’re assembling in the U.S. market for the U.S. I would also mention we do have manufacturing facilities in Europe and we’re ramping them in Asia as well..

Great. And just one last thing, just housekeeping on FlashBlade. Is it fair to say the margin impact for FlashBlade is no longer a drag? Is that kind of behind us at this point? Thanks..

Yes. James, this is Tim. In terms of gross margin, we got through, as I said in my prepared remarks, the manufacturing ramp. What we’re doing now is the next phase of growth. There’s a lot of opportunities in various verticals and geos.

We’re not quite there where the FlashArray business is, but we’re in a comfortable spot, particularly within our overall gross margin range that we feel excited about taking this next step in terms of growth. So we’ll always manage it to an overall mix.

As we said, we’re driving industry-leading margins while, A, we’re continuing to ramp FlashBlade and B, dealing with the supply and NAND component topics that we talked about earlier..

Okay. Thank you very much..

The next question is from Jayson Noland from Baird..

Okay. Great. Thank you. I had a couple of competitive questions.

I guess first with FlashBlade, who do you compete with, if anyone, and are these net new workloads or are these kind of older rip and replace situations?.

Yes. This is Kix. The majority of the FlashBlade business sells into customers that are using either primarily today NetApp or Isilon. And I think the good news is that there’s been a real dearth of innovation from both those vendors. And so we’re finding the reception for FlashBlade to be extremely positive.

Unlike where FlashArray deal might go you up against two or three people in a POC, typically a customer that buys FlashBlade’s already got one of these incumbents, already has found problems within it and is really looking for a better answer.

I’d say anything that’s been heartening is that we’ve seen both vendors ship small updates to try to address FlashBlade, most notably Isilon with their All-Flash Nitro system, but it appears to be just a retrofit where they’ve taken the same big SSDs and put it in the old architecture without making fundamental improvement.

So I think we feel really good about where we are in a competitive positioning and it’s just a market that has less natural competition and has had less innovation over the last few years..

Jayson….

Go ahead, Hat..

This is Hat. Just two points to add onto your second question, which is half of the use cases are from our install base so far, so from the customers that we brought in they’re from our very happy install base of FlashArray customers. And 50% of the other ones were introducing us into new market segments that technical computing is the lead.

That then drags or does a pull-through for FlashArray and FlashStack. So we have a really nice mix of being able to go after our install base and expand into use cases there while also opening up new markets..

Okay. And then a follow-up with Dell and EMC. We’ve heard about a lot of EMC departures with the start of Dell’s new fiscal year, but at the same time, it sounds like Dell is offering better-than-expected economics to the channel, so maybe if you could update on the situation with your leading competitor. Thanks..

So we’ve once again managed to hold very strong win rates against Dell EMC, who does remain the competitor we see most often in the marketplace. We’re incredibly excited about the innovative pipeline that we have and how it’s going to actually help us continue to accelerate our business.

I would say there’s another really key dynamic that I’ll ask Hat to chime in on, but our close partnership with Cisco and our work on FlashStack. We have got a very strong alignment between our channel partners and those of Cisco and Dell EMC is seen as a strong Cisco competitor who the Cisco channel is not favorable toward.

And so I would say the FlashStack work in particular has been very helpful in differentiating ourselves from Dell EMC..

Yes. The only add that I’d have on that is Dell, much like all the other legacies, are declining businesses and they’re forced into cost cutting. And so they’re cutting people, they’re cutting product lines, they’re cutting partner programs and this is starting to have a real material effect in the field.

I think we’re just beginning to see the level of disruption that the Dell EMC thing will have. And as you go, as you naturally think about the partner programs that they go out with, they’re going after the EMC storage partners and asking them and providing additional incentives if they replace the UCS servers with Dell servers.

So that strategically aligns our interest very closely with Cisco. I think they recognize that and they’re starting to see that, both through their partners and through our joint customers. Partners have been very committed to Cisco over the last 20 years. Their partner programs are predictable.

They’re very focused on it, whereas with Dell and EMC there’s more of a direct DNA that creates a direct conflict with their channel partners. So if we were to choose and believe what would happen, we think more people are going to be more loyal to Cisco and that lines us up very naturally with them.

So our partnership with Cisco is improving and is deep at both the product level and a go-to-market level and I think that will continue..

Appreciate the color..

[Operator Instructions] The next question is from Mehdi Hosseini from Susquehanna Financial..

Thanks so much. This is David Ryzhik for Mehdi Hosseini. So, Tim, when I look at the operating loss, operating margin leverage year-over-year at least for the second half of 2017 compared to the second half of 2016, I see about an 11 percentage point improvement.

As we look for 2018, is it pretty safe to say that the second half of 2018 we could hit profitability, particularly since you hit 2% into Jan Q.

What would prevent us from getting there?.

Yes. I think maybe you’re thinking about it right. With us being at nearly – only 1.9% in Q4, if you just play forward that leverage and you look at how the math works relative to our full-year guide, I think you’re thinking about it exactly right..

Great. And just a quick follow-up on the innovation front. Something that you guys have done since your inception data reduction, it’s at around four or five to one times. Is that the limit or could that be the next leg of innovation where you can actually innovate to 7 to 10, average of 7 to 1 or 10 to 1, just curious on that. Thank you..

Yes, so this is Kix. Look, one of the great things about being a software-driven array is we constantly make the software better. And so if you look at our history, we always work on better performance, always work on better data reduction, et cetera.

We’ve seen our data reduction improve over time even as our move towards higher end workloads that tend to be more databases flips. And so we’ve maintain data reduction in that 5X range.

I’ll also say that this is probably one of the best examples of a quote, unquote check box that many of our competitors say they have but when you get into the reality of driving the car, it’s a very different experience.

And so we continue to see that our data reduction quality ends up being around 2X better than most of our competitors in head to head POCs and deployments.

And again, that becomes really, really critical in this area of a little bit of supply constraint on the flash side where I think it’s going to really challenge our competitors’ strategies of trying to just compete on price with a lot of raw flash..

Great, thank you..

The next question is from Ittai Kidron from Oppenheimer..

Thanks. When I think about your guidance, it sounds like a lot of your expectations for the second half of the year, that big ramp is really built on what your past experience is with FlashArray, statistical analysis, repeat purchase, booking patterns, so it’s kind of very statistical and looking at patterns.

And I guess I’m trying to kind of challenge your FlashBlade assumption of 2X the performance of FlashArray in its first year. When FlashArray came around there was really no competition. There was a lot of – I guess there was pent-up demand, need for All-Flash arrays and that nobody’s really served well.

It’s a category you defined and so all the demand naturally went to you right up front. When you talk about Isilon and NetApp as competition, I mean, Isilon already has All-Flash arrays. Isilon already comes in All-Flash array format from the second half of last year.

By itself, of course, it was a very successful platform for a long time for an established brand.

So I guess I’m trying to kind of gauge what is it that gives you that confidence again that, that FlashBlade can do so well so fast out of the gate? And I’m also asking in the context of the future set, because I think you mentioned in the past the future set of FlashBlade at least initially is going to be very limited, of course, in 18-, 24-month time frame that will get beefed up and the use cases will expand.

And so with a narrow use case up front, with competition that’s already established in the area as opposed to the framework that FlashArray had four or five years ago when it launched, how do I get comfortable with that?.

Hey, Ittai. So it’s a combination of two things. It’s innovation inside of the FlashBlade software and its unique architecture. It allows us to drive much greater data bandwidth than you’re capable of driving in these legacy designs, even when you fill them with flash.

I would cite the points that Hat made during his comments about us replacing 20-rack configurations with a single FlashBlade and being able to offer improved performance.

This comes out of a design that’s built around silicon and fast networking and it doesn’t have the legacy hold backs that are inherent in these 20 plus-year-old designs that we compete against. Keep in mind, we’re also going up against public cloud workloads.

Hat also cited a spark configuration where we were depending on the query two to six times faster than leading public cloud deployments on our ability to process analytics. And so this is a product that is unlike anything fells the market.

So it’s innovation that’s half of our confidence, and the other half of our confidence comes from our scaled go-to-market engine, right. When we got started with FlashArray, I mean, we had a dozen teams that were working in that first year to grow the business. We are approaching $1 billion revenue run rate.

This gives us so much more exposure to touch many, many more customers. As we mentioned, half of the FlashBlade ramp to-date has come from existing FlashArray customers loving FlashArray and wanting to bring more of that innovation into their shops to have impact on their unstructured data workloads..

You don’t find the fact that the architecture is this innovative that it would lead to long qualification cycles for this product?.

I’ll jump in with an answer to that and one additional comment. I don’t think we see it to be any different than our FlashArray product line. And if anything else, the customers in this space have such a burning need, it’s so tied to their core business, that we find them diving in, testing it and driving faster.

We’ve even had people buy FlashBlade literally off the spec sheet without even trying it and installed it and liked it.

One other thing, just back to the confidence versus Isilon question, one thing that gives us confidence is that we’ve gone head to head now multiple times with not only kind of existing Isilon retrofit with flash, but now with the new Nitro product.

We’ve beaten it and we understand the performance advantages we’ve got, and the real benefit comes down to architecture. If you look at the Isilon architecture, it was designed in the era of media which was all about big streaming rights and big streaming IO.

The problem is, if you look at the current world of large scale IoT analytics and real-time analytics, you need that combo. You need to land tons of data and analyze it in real time and that’s just something the Isilon architecture was not meant for..

Okay, that’s helpful. And a couple more. Dave, on the sales force, you made some good points there.

I guess my question would be are salespeople specifically incentivized to push FlashBlade or is it still just an overall revenue figure as a driver?.

Yes. So as we move from product to portfolio selling, we want people to be understanding the customer requirements and selling a solution that maps to those.

What we’ve done is, the early folks that helped us build very successfully FlashArray, I’d just got to reflect back on four and a half years ago, we had a dozen-plus competitors, no brand, and a half a dozen or a dozen teams that were out there going against the big guys. These initial sales teams are extraordinary and they’re great builders.

So many of those folks that have the DNA who were great start-up builders, we put into our FlashBlade selling team and so they’re a specialist organization that have discrete accountability for the FlashBlade product line, but they’re leveraging the brand and distribution and all the sales teams and partners that we have out there.

So to answer your direct question, everybody has – a dollar’s a dollar, but we’ve got discrete focus and accountability with a specialist sales force on top of it..

Very good. Good luck..

Thank you..

The next question is from Aaron Rakers from Stifel..

Yes. Thanks for letting me ask some questions as well. A couple questions. A lot of things have been answered around FlashBlade, but there were two things that you had commented on, synchronous replication and I’d also like to re-ask the question around NVMe and you how you’re thinking about that through the course of this year.

Does that – I think first of all in synchronous replication, that clearly opens you up into some of the higher end workloads that maybe in the past you’ve not been able to attain.

How much of that is factored into your guidance for this year? And then also how should we think about a fully native NVMe architecture and what that means for Pure through the progression of fiscal 2018. And then I have one follow-up..

Yes. This is Kix here. In general, if you look at our business, we continue to march higher and higher in terms of serving the highest end enterprise workloads. And synchronous replication really remained probably the last big feature that was preventing us from going after pieces of that TAM. And so this isn’t a product announcement.

We’re not announcing the timeline but we are committed to shipping that this year. And we’re also very confident that like everything we do, we’ve really looked at how we can kind of rethink this whole problem and deliver something that is going to really change how people think about that high-end DR scenario.

With regard to NVMe, you probably noticed over the past quarter or two we’ve gone on the bandwagon to really go and educate customers that this transition to NVMe was coming.

And we kind of hung out that we believed that this transition is likely even more important and even more difficult than the move to flash for some of the retrofit architectures. And our reasoning behind that is we really see this is a huge opportunity to showcase the value of our software.

We think that there’s going to be literally a next generation of All-Flash arrays that is emerging that are really designed for the next generation of new stack applications, where they’re meant to be built from scratch to take the best advantage of NAND, fast networking NVMe as the protocol on top of fast Ethernet and really making that kind of all-silicon connection from host servers all the way down to flash to drive new levels of performance and efficiency.

We’ve already got one array in that category, and that of course is FlashBlade, but we’re committed this year to really progressing our FlashArray product line with the inclusion and upgrade to NVMe to really help them make the jump to that next category as well.

Unlike, we believe, any of our competitors, we’re going to do it in a couple of unique ways. It’s going to be a totally non-disruptive evergreen transition, like everything we do, and we’re absolutely going to target this at the main stream. And this again, comes back to our software advantage, right.

We’re not going to sacrifice our software to go and ship something that’s really, really fast. We’re going to ship something that’s really, really fast that leverages our full software advantage..

Okay. And then as a quick follow-up, I want to go back to your guidance and I can understand where you’re coming from, FlashArray versus FlashBlade. But I want to be very succinct and clear. As far as the NAND flash dynamics are concerned, we’ve seen obviously material increases in pricing. We’ve seen constraints out there on enterprise SSDs.

As we look at the guidance going into this current quarter and even beyond, are you – what are you assuming as far as flash pricing, number one, and your ability to pass that through, getting down to the gross margin line, and have you or do you anticipate any impacts from your ability to fulfill demand based on constraints in SSDs?.

So Aaron, this is Tim. We’ve remarked in previous calls that we’ve got some really good relationships. Our supply chain folks do a phenomenal job here. And so in the next couple of quarters, I feel very confident in terms of not only the supply that we have but also what we’re going to be procuring it at over time.

We’ve been very smart about how we’ve leveraged different suppliers. So that’s factored into a guidance. That’s not something that overly concerns me..

And you’re able to pass along any pricing?.

We don’t talk a lot about pricing one way or another. Obviously, we have a variety of different products that we offer. I think more importantly I would take a look at how we crafted the guide. It is down a little bit Q-on-Q, but still industry-leading by a wide margin and well within our long-term targets, and so we’ll use that to our advantage.

As I think Matt was saying earlier in the call, there’s absolutely an opportunity for us to go out and be even more competitive right now and do it at smarts margins given that candidly our competitors who have been relying on price are a little bit on their heels..

Okay. Thank you..

The next question is from Maynard Um from Wells Fargo..

Hi. This is on Munjal on behalf of Maynard Um. I had a quick question, one on new customer adds. What pace do you expect customer additions to continue this year? You added 450 last quarter. In the prior quarters, you’ve been in the 300 to 350 range.

Should we expect that you could add at the 450 customer level? And if you do, you should have – I mean do you expect an impact of small purchases from new customers to continue beyond Q1? And then I have one more question..

Yes. Munjal, this is Dave. I’ll hit that first and maybe Tim will follow-up on it. What we’re more focused on this year obviously is top line and customer acquisition in the core segments of enterprise, cloud, commercial, healthcare and government.

So it’s less about volume and more about continuing on our march to segmenting and getting the most important customers that have the highest repeat purchase rates. So we’re not guiding on a specific number of new customer adds, but we’re more focused on quality and top line than we are on breadth..

Yes. I would really concur with what Dave is saying there. We talked about the 70% repeat being part of – driving the majority of our business next year. So you don’t need to believe a lot of new customer additions, but we believe that there’s a lot more customers out there still to touch, too. So it’s a nice upside for us, too..

Okay.

And then in terms of first-half versus second-half seasonality, your core business versus FlashBlade, should we expect a similar seasonality or the ramp will be different for FlashBlade and so it could be more second half?.

Yes. I think FlashBlade, just because it’s still a developing product, will probably be more back-half loaded than the FlashArray business. But as we know from the past, FlashArray has a bit of a backload to it as well just given the seasonal dynamics in enterprise storage..

Okay. All right. Thanks a lot..

The next question is from Rich Kugele from Needham..

Thank you. Good afternoon. I just want to revisit Q4 again.

In terms of the incremental customers that you added that were buying some of the more entry-level systems, was that something that was intentionally driven by some type of marketing push on your part or was that just the nature of the market? And then as you’re heading into Q1, do they – do those customers just have a different purchasing cycle that extends it out and your core larger customers, why are they not coming in like down 9% to 10%.

Thanks..

Hi, Rich. This is Dave. Yes. So we definitely focused and optimized for net new logo acquisition in Q4 and we over achieved on that. So that was incentive that we put in place to make sure people were out getting share of wallet.

We’ve addressed that and fine-tuned it for 2017 going forward to be still focused on acquiring the right customers, but with more emphasis on top line bookings as a result. So we’re pleased with the growth that we had in the enterprise business. We grew our enterprise Fortune 500 business last year north of 50% in terms of adds.

Our cloud business, which is the modern stack of where storage is really running, continues to be 25% of our business and growing faster than the rest in terms of repeats. So we’re just going to be focused on the right customers and the right customer adds, but with the fine tuning toward top line..

Understood. Thank you..

The next question is from Simon Leopold from Raymond James..

Hi, guys, this is Victor Chiu in for Simon Leopold.

I appreciate the color you gave around competition earlier, but I guess outside dynamics with Dell EMC, are you seeing any traction in general from other incumbent legacy storage vendors who have refocused their efforts towards flash over the last few quarters, last few years?.

This is Kix. I would say that the same trends we’ve seen the large incumbent vendors just starting to really try to push with a lot of raw flash to buy their way into the All-Flash market continues.

From a technical point of view, I think the interesting thing is that we’ve seen them really start to deprioritize their kind of purpose built All-Flash arrays in favor of their retrofits and so although they’re using their kind of checkbook to show All-Flash gains, we see them in many ways falling behind technically as they kind of favor their old platforms versus really making the technical investments to move forward.

And so an example, just on a comparative basis, we’ve seen less extreme IO. We’ve seen less solid fire, once it’s been part of NetApp. You would have expected the opposite.

And so we’re pretty excited about how we’re continuing to push forward and define this next generation of All-Flash array, as evidenced by FlashBlade, as evidenced by where we’re taking FlashArray and we intend to keep widening that technical gap..

I just want to add, these retrofits can’t compete with the rate of data growth. They can’t deliver on the rich predictive analytics that organizations want to run. They don’t support the cloud computing model, which dramatically reduces cost and easy elastic scaling.

And so we’re in a position where we think all of the technology that was designed for the mainframe and client server era is going to get replaced over the next refresh cycle or two and that we are uniquely well positioned to win that market..

Okay. When you speak about scaling and that impacting the seasonality for Q1 now, that doesn’t reflect any impact, I guess, from amplifying the competitive environment at all..

No, no. Win rates have held very nicely. It really is just a seasonal function..

Yes, holding the strong win rates, I think you see it in our customer satisfaction, you see it in our industry-leading margins, repeat purchase trends, salesforce productivity and we had a great fourth quarter, right.

We’re very satisfied with the 65% year-over-year growth and we think we’re poised to drive $1 billion in revenue in the coming year and continue to accumulate share from the legacy players..

Victor, I think I’ll add one thing to that, which is we kind of find our self in this unique position of being both the disrupters and innovators of – as everybody knows us to be, but also had $1 billion of scale and together with the software enhancements that we have with SyncRep and other products, with FlashBlade moving to the portfolio we’re also the safe choice.

There’s a lot more fear, uncertainty and doubt about the legacy incumbents about what they’re doing with their product lines, what they’re doing with their programs, what they’re doing with their partner offerings, what they’re doing with their sales teams and we’re seeing that fear uncertainty kind of fly throughout the marketplace.

And so we have a lot of respect for those folks. They got big because they did something well, but we have a window of time we think over the next couple of years to go acquire customers and then delight them with our cloud-based model and our superior technology and we just got to get them in the boat.

Once they’re in the boat, we know that they’re going to repeat and be excited to be with us. So we have this window of time that we really are focused on seizing..

Great. Thank you..

Next question is from Jason Ader from William Blair..

Yes, thanks. I wanted to go back to the FlashBlade guidance.

Are you expecting the bulk of FlashBlade revenue this year to come from the dedicated sales team that you mentioned? Because I would think that it’s a tougher sale for the average sales guy at Pure, especially if there’s no incentives, why would they burn a bunch of cycles selling something that may be harder to sell? I’m just trying to understand how you think that distribution will come between the dedicated selling teams and the – let’s call it, traditional salesforce..

Hi, Jason, thank you. I actually think that what we’ve seen in the initial sales that we’ve had is that it’s easier to sell this because there’s less competition and this more demand around these really large workloads that are looking for performance.

If it’s hospitals trying to do genomic sequences or its autonomous driving cars with machine learning applications or other big data applications like the spark that we referenced. I mean the customers have a real pain point and there is not an alternative solution that’s as big, fast, or as simple or as economical as what FlashBlade provides.

And so we’ve actually had our sales teams kind of chomping at the bit to want to go sell this. They’re out qualifying opportunities and have proven they can sell all the way through.

Our specialist sales teams will work with them and so we don’t see this as a separate dedicated salesforce to go focus on FlashBlade discreetly on their own sales campaigns but rather how to leverage the existing sales teams that we have in place, those relationships that exist and our partners.

And so I think it’s going to be much more of a sell with than a discrete breakout..

All right. That’s helpful. Thank you. And then one quick one for Tim.

Tim, what is the fully diluted share count if you were to be profitable in Q4?.

270 million..

270 million. Okay, thank you..

Yes..

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

Yes. I wanted to talk about the channel efforts for FY2018 versus FY2017. I’m sure you’re probably going to go into a lot more detail at Accelerate come June, but you’ve got FlashBlade so there’s something new for them to show their installed base or show new logos.

Just curious to know what you’re – anything different about how you approach the channel in 2018 versus 2017..

Yes. Thank you, Erik. This is Hat. So we’re continuing to double down on the channel.

We knew and recognized when we started the Company that we’re going to be 100% channel model because it was the fastest way for us to get our technology and our innovation out into our customers’ hands and we didn’t want to be gated on solely on the rate in which we hired salespeople. So we’re going to continue on that philosophy.

Our approach has always been more of a scarcity versus an abundance model. It’s far more efficient. So we’re looking for the top national partners, those partners that have services practices that solve problems for our customers that get the benefit of driving disruptive technology and the economics and the business outcomes that we can provide.

So continuing to double down on it. We talked about our C led net new logo contributions at north of 70% coming in. We want to make sure we’re doing everything we can to incent them with the portfolio of offerings that are differentiated and incentives to represent Pure to their customers, so lots of exciting momentum.

And I think the last point that I would add is this dynamic between the large legacy providers, particularly Dell and Cisco, I think does play well at the national partner level for Pure.

And so we’re going to be very, very focused on innovating with FlashStack and working together with Cisco and their true north partners to drive velocity in the marketplace..

And Erik, just one quick add. That 70% repeat purchase behavior is profoundly good for our partners, right. It means that their franchises built on Pure, they’re going to redo roughly 70% of what they already did in the prior year and then everything else is new growth on top of that.

That best-in-class repeat purchase trend bodes really well for the channel..

Got you. Thank you..

The next question is from Nehal Chokshi from Maxim Group..

Thanks for taking my question. I want to talk about hyper converge and with respect to FlashBlade. In terms of the ability to transform that product to address that potential, because in ways I would argue that FlashBlade’s elasticity of moving workloads from node to node is very similar to the attractiveness of hyper convergence.

So why not move in that direction?.

Nehal, we’re convinced that FlashArray and FlashBlade are the best possible platforms for data-driven application. What we see across our customer base is the desire to connect many different applications to shared data sets.

And that ability to scale compute elastically and have lots of different applications share the same data is what is so common in the cloud. As you look at all of the top-tier cloud architectures, they’re multi-tier.

And the hyper converge sweet spot has been for single-tier architectures that play well down market of where our sweet spot has been, or where our sweet spot is. I mean we do see this across our customer base. We have customers that use hyper-converged infrastructure.

They tend to use it in smaller, less data-driven workloads, often remote and branch office. That’s why we have 500-plus software as a service, infrastructure as a service and consumer cloud customers, way more than we see typical for hyper-converged designs which, again, play more toward traditional IT and smaller footprint workloads..

All right, thanks. I’d like to do a follow-up, a little bit beating the dead horse. But the full year guidance does imply an acceleration of year-over-year growth.

From what I understand, please correct me if I’m wrong, but the confidence in that acceleration of year-over-year growth throughout the remainder of the year is that FlashBlade selling motion will kick in, plus that you have increased seasonality for the April quarter that depresses that year-over-year growth rate for the April quarter as well.

Is that a correct characterization there?.

No, I’d change that slightly Nehal. So what we’re looking at $1 billion in revenue is that FlashArray just needs to consistently grow in the 25%, 30% range. As I mentioned, it grew well faster than that in the prior year.

And that FlashBlade will deliver 2X what FlashArray did in its first full year of selling, a metric we’re already tracking ahead of in our growth. So that’s what gives us such confidence in the guidance for the year..

Okay. Thanks..

The next question is from John Lucia from JMP Securities..

Hey, guys, thanks for taking my question. It seems like there’s still a pretty big opportunity in your core FlashArray market. I think you said 90% of Tier 1 applications are still available to you.

So with that as a backdrop, can you just give us some color as to why you’re expecting that FlashArray growth to decelerate to 25% to 30% in FY2018 from over 60% in FY2017? Is it competition related? Is it just a conscious decision to drive better profitability? Any kind of color there would be great..

John, we’re convinced there is a phenomenal opportunity for FlashArray. We are specifically guiding at the $1 billion rate, given that’s the ability we see to continue to grow the business, right, based on our repeat purchase behavior, our salesforce productivity.

But we are so far away from tapping the full potential in this market as so many of the legacy systems need to come offline because they just can’t compete with modern data growth, they can’t compete for the predictive analytics and for the cloud computing model the customers want.

So I think there is a phenomenal opportunity for both of our products and you see that reflected in best-in-class growth that we continue to accumulate share in a competitive market..

Okay. And then on the FlashBlade side, I think you’d just mentioned that you’re already tracking ahead of kind of that expectation to double the first year of FlashArray growth.

What did you mean by that? Are you seeing some pretty strong momentum here in the first quarter or what was – can you characterize that for us?.

We’re seeing strong momentum both now and toward the end of last year, through directed availability and now into GA..

Okay. Thank you..

The next question is from Dariush Ruch-Kamgar from Bank of America-Merrill Lynch..

Hey guys, quick question for me. You highlighted the market transition from app-by-app deployments to broader primary storage deployments. Just wanted to know what you’re seeing in terms of average deal size.

And then to sort of beat a dead horse, when you talk about 70% customer repurchases, is this in terms of revenue or deals and does increasing deal sizes provide some upside here? Thank you..

Dariush, this is Tim. On your first question, we don’t disclose ASPs. They do tend to jump around quarter-on-quarter, depending on mix, so we don’t really comment on those. As it relates to the repeat data, what we’re looking at there is we’re looking at, as Dave noted earlier in the call, we’re looking at how these folks have performed overtime.

And so when you look back two, three years from now or two, three years back you see how those folks have climbed from a repeat perspective and what we see is similar trends. And so it’s just really a compounding effect that we see which gives us that nice strong confidence. We’ve cut that data a number of different ways to give us that confidence..

All right. Thanks and congrats on the quarter..

Thank you..

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

Hey guys, thanks for the follow-up. Synchronous replication, SRDF, VPLEX, my favorite topics here. We know that in some large DR site-to-site deals you guys can’t necessarily compete for those very, very large extreme IO VMAX environments. If I was a Pure rep getting synchronous replication, maybe would be a quicker way to my quota than FlashBlade.

Can you just talk about what you’ve seen in the pipeline, Scott, over the last year and what synchronous replication could do for the revenue outlook? I mean imagine that’s more of an out-year fiscal discussion, but it just seems like that’s an area that you guys haven’t been necessarily been able to really penetrate at this point..

Alex, I don’t think there’s any question that there’s additional opportunity. I would say in North America the predominant replication model has been asynchronous, but internationally there is a lot more use of synchronous replication. And so this will be great in this coming year.

It should be an additional accelerator on our international business specifically and then also business-critical workloads domestically that we haven’t had an opportunity to play in. That’s definitely part of the calculus that goes into that our confidence in our $1 billion guide..

And you guys are willing to say this is more of a second-half launch, is that fair, for that product?.

I think we should stay away from product announcements, but it’s definitely not shipping yet..

Okay. Thank you..

Alex, the one thing I would add to that is that there’s no doubt, there’s a discrete market opportunity in EMEA and APJ where it is a specific requirement. But there is also an enterprise halo that comes with having that feature that we believe will allow us to compete in more mixed workloads, even where it’s not a requirement.

So we’re excited about that. We are working and having on a road map allows us to be able to sell into those opportunities for the second half.

And to answer your second question on FlashBlade, look, I think our sales teams are incredibly enthusiastic about the combination of the software enhancements we have in our FlashArray and FlashStack product lines together with the FlashBlade innovation.

So they’re kind of more enthusiastic than I’ve ever seen them in four years here to be able to go deliver this data platform message and meet the needs of what their customers have, based upon their geography and their segment and their account territory.

So I think that sort of breadth of product offerings, together with the focused specialist teams on FlashBlade, gives me a great deal of confidence that we’ll be able to hit the $1 billion..

Thanks, guys..

That’s a great set-up, Hat. So I want to thank everyone for spending time with us again at the end of our quarter and year. The team and I were thrilled with the performance we were able to deliver in the fourth quarter and the results, the growth results for the overall year. We’re even more excited about the opportunity ahead.

This year we’re focused on three pillars. First, innovation and you’re seeing that in the software that’s coming for FlashBlade, the software innovation that’s coming for FlashArray that we’ve talked about.

You’ll also see it in Pure 1, which is our cloud automation suite and in software innovation that’s coming in FlashStack, our collaboration with Cisco. This combination – continues to allow us to move from point application sales to platform sales and to grow our footprint in our largest enterprise and cloud customers.

The second pillar would be growth, the opportunity to deliver $1 billion in revenue in just our sixth year of selling and grow the business 2.7X already since IPO. We’re obviously looking to continue that trend. And last but by no means least profitability. You saw in Q4 material progress, our getting to minus 2 points of operating margin.

Obviously, we intend to continue to improve our operating efficiency as we scale the business going forward. That leaves Pure uniquely well-positioned, playing for one of the biggest available markets in tech.

We are uniquely able to deliver the data growth, the performance for rich, predictive analytics that our customers need and the cloud computing operational model and business model that our customers depend on. And the storage we’re going up against is being rendered obsolete by all those four factors.

So it’s going to be a fantastic year for Pure going forward and we’ll speak to you in a quarter. Thanks again..

This concludes today’s conference call. You may now disconnect..