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Pure Storage (PSTG) Up 10.2% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Pure Storage (PSTG). Shares have added about 10.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Pure Storage due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Pure Storage Q2 Earnings & Revenues Tops Estimates

Pure Storage reported non-GAAP earnings of 1 cent per share in the second quarter of fiscal 2020 against the Zacks Consensus Estimate of a loss of 4 cents. However, earnings were flat on a year-over-year basis.

Total revenues rose 28% from the year-ago quarter to $396.3 million and marginally surpassed the Zacks Consensus Estimate of $395 million. The top line was within the management’s guidance of $389-$401 million.

The year-over-year increase in revenues can be attributed to robust business fundamentals, strong FlashBlade implementation, higher adoption of new products and strong go-to-market strategies.

Segmental Details

In the second quarter, Product revenues (representing 76% of total revenues) of $300.1 million increased 24% on a year-over-year basis, primarily on the back of existing customers and continued expansion of the customer base.

The company’s strong product portfolio, including the likes of FlashArray, FlashStack and FlashBlade business segments, drove the year-over-year growth.

Pure Storage recently unveiled flash and cloud-based ObjectEngine solution. The latest backup and restore storage solution is designed to enable customers to modernize data protection strategy. Additionally, ObjectEngine users can access required data in real time through a faster, secure and cost-effective medium.

Further, the company announced the expansion of Evergreen Storage Service (ES2), offering customers a unified subscription model across hybrid environments.

Support subscription revenues (24%) of $96.2 million surged 42% on a year-over-year basis, driven by the company’s ongoing support contracts.

During the reported quarter, Pure Storage added more than 450 customers, bringing the total count to more than 6,600 organizations.

Geographically, the United States comprised 74% of total revenues, while the remaining 26% came from international markets.

Operating Details

Non-GAAP gross margin was 69.4%, up 140 bps from the year-ago quarter. Strength in gross margin was primarily driven by better-than-expected growth in products, technological innovation, and benefits of product rollouts.

Non-GAAP Product gross margin was 70%, up 210 bps on a year-over-year basis due to benefits from component costs.

Non-GAAP Support subscription gross margin was 67.4%, which contracted 100 bps on a year-over-year basis.

Pure Storage reported a non-GAAP operating loss of $3.2 million compared with the year-ago quarter’s operating income of $0.9 million.

Balance Sheet & Cash Flow

Pure Storage exited the quarter ended Jul 31 with cash, cash equivalents and marketable securities of $1.2 billion, almost flat sequentially.

Cash flow from operations during the reported quarter was $48.8 million compared with $6.6 million in the previous quarter.

Non-GAAP free cash flow, excluding the impact of employee stock purchase plan (ESPP), was $14.2 million.

During the quarter, the company authorized a share repurchase program worth $150 million.

Guidance

Pure Storage expects revenues of $434-$446 million (mid-point $440 million) in third-quarter fiscal 2020.

Non-GAAP gross margin is anticipated to be 66-69%. Non-GAAP operating margin is expected to be 3-7%.

Management is updating its fiscal 2020 outlook. The company now expects revenues of $1.645-$1.715 billion (previous guidance $1.70-$1.77 billion).

on-GAAP gross margin is now projected to be 67-69% (previous guidance 65.5-68%). Non-GAAP operating margin is now anticipated to be 2.25-4.75% (previous guidance 1.5-5.5%).

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -9.13% due to these changes.

VGM Scores

Currently, Pure Storage has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Pure Storage has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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