Pure Storage (PSTG) Down 14.9% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Pure Storage (PSTG). Shares have lost about 14.9% in that time frame, underperforming the S&P 500.

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

Pure Storage Q3 Earnings Beat, Revenues Miss Estimates

Pure Storage reported non-GAAP earnings of 13 cents per share in the third quarter of fiscal 2020, beating the Zacks Consensus Estimate by 44.4%. However, earnings were flat on a year-over-year basis.

Total revenues rose 15% from the year-ago quarter’s level to $428.4 million. However, the reported figure lagged the Zacks Consensus Estimate by 2.8%. Further, the top line missed management’s guidance of $434-$446 million due to higher-than-expected pricing declines and weakness in U.S.-based large enterprise business.

Nonetheless, year-over-year increase in revenues can be attributed to strong FlashBlade implementation and new deal wins from Government segment on improving go-to-market strategies.

Segmental Details

In the fiscal third quarter, Product revenues (contributed 75.5% to total revenues) of $323.3 million increased 8.2% on a year-over-year basis, primarily on the back of existing customers and continued expansion of the customer base.

During the reported quarter, Pure Storage added more than 400 customers, bringing the total count to more than 7,000 organizations.

Robust adoption of strong product portfolio, including the likes of FlashArray, FlashStack and FlashBlade business segments, is a key catalyst.

Support subscription revenues (24.5%) of $105.1 million surged 42.5% on a year-over-year basis, driven by the company’s ongoing support contracts.

Operating Details

Non-GAAP gross margin expanded 360 basis points (bps) from the year-ago quarter’s level to 71.7%. Management had anticipated non-GAAP gross margin in the range of 66-69%. Better-than-expected gross margin was primarily driven by lower costs.

Non-GAAP Product gross margin expanded 490 bps from the year-ago quarter’s level to 73% on benefits from component costs.

Non-GAAP Support subscription gross margin was 67.5%, which contracted 60 bps on a year-over-year basis.

Total operating expenses surged 19% year over year to $328.9 million. As a percentage of total revenues, the figure came in at 76.8%, which expanded 270 bps on a year-over-year basis.

Pure Storage reported a non-GAAP operating margin of 6.8%, which contracted 230 bps on a year-over-year basis.

Balance Sheet & Cash Flow

Pure Storage exited the quarter ended Oct 31, 2019 with cash, cash equivalents and marketable securities of $1.24 billion, up from $1.18 billion in the prior quarter.

Cash flow from operations during the reported quarter was $64.3 million compared with $48.8 million in the fiscal second quarter.

Free cash flow, excluding the impact of employee stock purchase plan (ESPP), was $45.6 million compared with $14.2 million in the prior quarter.

Guidance

Pure Storage expects revenues in the range of $484-$496 million (mid-point $490 million) in fourth-quarter fiscal 2020.

For fourth-quarter fiscal 2020, Pure Storage anticipates non-GAAP gross margin in the range of 67.5-70.5%. Non-GAAP operating margin is expected in the band of 10-14%.

Moreover, management updated its fiscal 2020 outlook. The company now expects revenues in the band of $1.635-$1.647 billion (previous guidance $1.645-$1.715 billion).

For fiscal 2020, the company now expects non-GAAP gross margin in the band of 69.2-70.1% (previous guidance 67-69%). Non-GAAP operating margin is now anticipated in the range of 2.6-3.9% (previous guidance 2.25-4.75%).

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -100% due to these changes.

VGM Scores

At this time, Pure Storage has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

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

Outlook

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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