Pure Storage, Inc. (NYSE:PSTG) Q4 2024 Earnings Call Transcript
Pure Storage, Inc. (NYSE:PSTG) Q4 2024 Earnings Call Transcript February 28, 2024
Pure Storage, Inc. beats earnings expectations. Reported EPS is $0.5, expectations were $0.45. Pure Storage, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Pure Storage Fiscal Fourth Quarter and Full Year 2024 Earnings Call. Today's conference is being recorded. [Operator Instructions]. At this time, I'd now like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead.
Paul Ziots: Thank you. Good afternoon, everyone, and welcome to Pure's Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. On the call, we have Charlie Giancarlo, Chief Executive Officer; Kevan Krysler, Chief Financial Officer; and Rob Lee, Chief Technology Officer. Following Charlie's and Kevan's prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website with us 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 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 today are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted, and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties relating to our business is contained in our filings with the SEC and we refer you to these public filings. 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 [indiscernible] 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 first quarter fiscal 2025 quiet period begins at the close of business, Friday, April 19, 2024. With that, I'll turn it over to Charlie.
Charles Giancarlo: Thank you, Paul. Good afternoon, everyone, and welcome to our Q4 and fiscal 2024 earnings call. We had a solid Q4 performance and ended the year with increasing sales momentum and balanced performance across our theaters and product portfolio. This momentum and growing customer interest in our platform strategy provides us with increased confidence for the coming year. This year, we expanded our Evergreen portfolio and increased subscription services revenue now to over 40% of total revenue. FY '24 total contract value sales for Evergreen/One and Evergreen/Flex grew to over $400 million, more than doubling over the prior year. product and platform innovation was strong as evidenced by FlashBlade now exceeding $2 billion in total sales since launch.
FlashBlade continues to serve as the leading platform for customers' modern file and object data requirements for both high performance and low-cost applications. Launched just 9 months ago, our new E-family of products achieved the fastest sales growth of any pure product, presaging that flash will soon replace all disk. Our data storage platform strategy and vision is working and continues to succeed with large enterprises and managed service providers, Pure's strategy to consolidate data storage using a single operating and management environment for the majority of storage requirements just makes more sense than managing multiple different and disparate system environments. Pure's direct reliability and economics continue to be unmatched and customers appreciate our Evergreen guarantee of no application downtime with system upgrades.
Pure's platform strategy incorporating Pure Fusion, which enables Pure systems to operate as a distributed storage cloud combines the best features of enterprise storage with cloud agility and programmability. It enables customers to manage their data environment as unified storage pools, seamlessly spanning across data centers and public cloud platforms, all within a single operating and management framework. Pure allows customers to organize their data infrastructure efficiently and optimize their data environment. Our platform vision was a major factor in several strategic enterprise deals in Q4. In one example, a major Fortune 500 financial services firm selected Pure based on our platform strategy, our proven reliability, and our ability to satisfy the majority of their diverse storage needs with a consistent environment and cloud-like operation and efficiency.
This high 8-figure deal comprised almost all of Pure's products and services and represents our growing success in large enterprise. A second notable 8-figure deal this past quarter with an Evergreen/One deal with one of the largest specialized GPU cloud providers for artificial intelligence, offering highly differentiated AI infrastructure solutions to their customers. Pure is excited to partner with this company to deliver one of the most powerful and fastest AI training environments in the world. However, what truly excites me about AI confirmed through conversations with customers and partners is the focus that it is bringing to customers fragmented data environments. Customers are beginning to realize that their current fragmented data storage environment will significantly hinder their ability to leverage AI to unlock the full potential of their data.
Current data storage environments inhibit AI deployments in 2 ways. First, existing data storage arrays were selected to provide just enough performance for their primary function, leaving little performance left for AI access. Second, existing storage arrays are not networked, limiting access to AI apps not provisioned directly on their primary compute stack. The Pure Storage platform solves both of these issues. Pure's E-family delivers flash reliability and efficiency at prices now comparable to traditional hard disk systems and with plenty of performance there for AI access. And the single operating and management environment of the pure platform across protocols and price performance ranges makes accessing data easier. We are also seeing increased numbers of Portworx deployments in AI environments for data management preparation.
Portworx had a record year and accelerated growth based on customers increasingly graduating their container-based development projects to production scale. Portworx saw strong sales in the financial sector this past quarter. A leading global financial institution significantly improved the efficiency and lower the cost of critical Tier 0 applications by automating its internal cloud infrastructure with Portworx. Portworx industry leadership was recognized by IDC, which positioned Portworx as an industry leader in their new and latest Kuganetes container data management category. As we reported all year, Evergreen/One consistently experienced breakout growth. Customers appreciate the simplicity of Evergreen's/One SaaS model. The Evergreen One service offers always improving data services, always modern infrastructure and a world-class customer experience with contractually guaranteed service level agreements.
Now with Evergreen/One, Pure pays customers for power and rack space when hosting the service in their data centers. Adding to our SLA industry leadership, Pure introduced 3 new SLA guarantees this past year. One, no data migration; two, 0 data loss; and three, power and space efficiency across our Evergreen family, Evergreen/Forever, Evergreen/One and Evergreen/Flex offerings. Our commitment to offering the most sustainable storage solutions in the industry continues to drive competitive advantage for customers focused on their environmental reporting. Furthermore, the energy demands of AI is outstripping the availability of power in many data center environments. Pure Flash Solutions can reduce data center power usage, space and e-waste by approximately 20%, and this is proving critical in an environment driven by artificial intelligence and the world's growing demand for data.
We are increasingly confident in our platform strategy and our opportunity to lead this market. Our evergreen technology and programs are changing the industry of allowing customers to eliminate the need to continually rebuy and disruptively replace outdated hardware. Most importantly, to enterprises, sure reduces risk. Eliminating application downtime due to infrastructure updates and upgrades while dramatically improving system reliability. Our confidence is bolstered by our 4 sustainable competitive advantages. This includes our ability to deliver a single operating and management environment for the majority of enterprise data storage needs. Our Evergreen technology, which guarantees an always modern environment without application disruption, our management, which enables both performance and cost leadership.
And finally, our cloud operating model, which allows customers to manage all of their data across data centers and clouds as unified pools of data. While we remain cautious about the economy, we are beginning to see some encouraging signs of improvement in the macro environment. As the industry's most performant consistent and sustainable storage solution we are well positioned to serve both the energy and data-intensive demands of artificial intelligence. Additionally, after 18 months of steep declines, NAND market pricing has stabilized, which should improve storage market growth. Looking forward to FY '25, a I have high confidence of returning to double-digit revenue growth, given our platform strategy, our growing product portfolio, our cloud operating model, and strong customer demand for our Evergreen and Fort Works subscription offerings.
With that, I'd like to turn it over to Kevan now.
Kevan Krysler: Thank you, Charlie. We are pleased with our Q4 financial performance, exceeding guidance for both revenue and operating profit. As we were expecting, customer demand for our consumption and subscription-based offerings was very strong, especially for Evergreen/One, our Storage as a Service offering and Portworx. Annual sales for both offerings grew over 100% in FY '24 and total contract value or TCV sales for Evergreen/One and Evergreen/Flex exceeded $400 million. Remaining performance obligations, or RPO, associated solely with our subscription service offerings at the end of Q4 was very strong, growing 29%. Our subscription services net dollar retention, or MDR at the end of the year was 120%. For the year, revenue grew 2.8%.
As a reminder, our annual revenue growth expectations at the beginning of FY '24, assumed that Evergreen/One and Evergreen/Flex TCV sales would grow approximately 50%. When adjusting for the substantial growth above our expectations at the beginning of the year for Evergreen/One and Evergreen/Flex TCV sales and a noncancelable product sale with a telco customer we mentioned last quarter that is expected to be shipped in FY '25, revenue growth for the year would have been over 7%. As a reminder, revenue from our Evergreen/One and Evergreen/Flex consumption and subscription service offerings are recognized over time. Whereas product revenue related to sales of our products across our data storage platform is recognized upon shipment. Operating margin for FY '24 was approximately 16% above our original guide of 15% at the beginning of the year.
Key contributors of our operating margin strength were strong gross margins across our data storage platform reflecting the value of our solutions and disciplined investing. Total RPO, which also includes product orders grew 31% year-over-year in Q4, exceeding $2.3 billion. Product orders included in total RPO at the end of Q4, including a noncancelable telco order that we mentioned last quarter, and orders relating to a significant win in Q4 with a major Fortune 500 financial services company. In Q4, subscription services annual recurring revenue or ARR grew 25% to approximately $1.4 billion, highlighting the strong traction for our consumption and subscription-based service offerings. As we mentioned previously, subscription services ARR excludes noncancelable Evergreen subscription contracts where the effective service date has not started.
Including noncancelable subscription contracts where the effective service date has not started, Subscription Services ARR at the end of Q4 grew 27%. Subscription services revenue during Q4 was $329 million, growing 24% and comprising 42% of total revenue. U.S. revenue for Q4 was $522 million, and international revenue was $268 million. Our new customer acquisition grew by 349 customers during Q4, including 6 new Fortune 500 customers. We now serve slightly over 60% of the Fortune 500. Product and subscription services gross margin both contributed to total gross margin strength of 73.7% in Q4 and 73.2% for the year. In Q4, product gross margin was 73.4% and subscription services gross margin was 74.1%. Our headcount increased slightly to nearly 5,600 employees at the end of the quarter.
Pure's balance sheet and liquidity remains very strong, including approximately $1.5 billion in cash and investments at the end of Q4. Cash flow from operations during the quarter was approximately $244 million and approximately $678 million for FY '24. Capital expenditures during the year were nearly $200 million. Representing approximately 6.9% of revenue for FY '24. Factors driving our higher capital expenditures during the year included sales growth of our Evergreen/One Storage as a Service offering, our new headquarters and test equipment supporting our engineering team for new product innovations. In Q4, we repurchased 585,000 shares of stock returning approximately $21.4 million to our shareholders. For the year, we repurchased nearly 4.7 million shares, returning nearly $136 million in capital to our shareholders.
Consistent with our remarks last quarter, our share repurchases represent a lower level of repurchase activity as a result of the fixed trading parameters that were in place throughout the quarter. We have approximately $145 million remaining on our existing $250 million repurchase authorization, and we are announcing today a new share repurchase authorization of $250 million. Now turning to our guidance for FY '25. We expect to return to double-digit revenue growth in FY '25, growing 10.5% to $3.1 billion. We expect demand across our entire data storage platform will strengthen while also remaining cautious of the macro spending environment. Our annual revenue guide of 10.5% growth also contemplates approximately 50% growth in TCV sales for our collective Evergreen/One and Evergreen/Flex service offerings, which are expected to be $600 million.
To help better understand the short-term impact that growth of our consumption and subscription offerings have on our annual revenue growth rate we estimate that our forecasted FY '25 revenue growth would be in the mid-teens when adjusting for the expected growth of both our Evergreen/One and Evergreen/Flex service offerings. Slightly offset by expected additional revenue arising from past TCV sales in FY '24. Consistent with our philosophy in driving profitable growth, we expect FY '25 operating profit to be $532 million, and operating margin to be 17%. Margin for FY '25 is in line with our longer-term goal of expanding operating margin by a percentage point or 2 each year and represents a 2-point increase from our FY '24 guide that we communicated at the beginning of the year.
We are pleased with our expectations of getting back to double-digit revenue growth and continuing strong growth from our nev Storage as a Service, and Evergreen/Flex offerings. Pure's data storage platform and Evergreen architecture delivers substantial business value to our customers by reducing complexity, while increasing reliability, flexibility and unparalleled power and cost efficiencies. With that, I'll turn it back to Paul for Q&A.
A - Paul Ziots: Thanks, Kevan. [Operator Instructions]. 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.
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