Pure Storage Inc. PSTG 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.
Shares Down on Bleak Revenue Outlook
Following mixed fiscal third-quarter results as well as bleak outlook for fiscal fourth quarter and fiscal 2020, shares of Pure Storage are down 23% in the pre-market.
Pure Storage expects revenues in the range of $484-$496 million (mid-point $490 million) in fourth-quarter fiscal 2020. The Zacks Consensus Estimate for revenues is pegged at $512.65 million.
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). The current projection indicates a decline of 2.3% considering the mid-point. The Zacks Consensus Estimate for revenues is pegged at $1.68 billion.
Notably, the stock has gained 23.4% year to date compared with the industry’s rally of 18.1%.
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.
Portfolio Expansion Noteworthy
During the reported quarter, the company enhanced Pure1 solution with a feature bundle, VM Analytics Pro, to enable customers to plan infrastructure effectively.
With new Cloud Block Store on AWS, Pure Storage aims to aid enterprises to transfer workloads to and from the cloud platform without major changes in infrastructure.
Management is optimistic about robust adoption of the company’s latest capacity-optimized AFA, FlashArray//C, from notable companies including Europe-based Idealista and ServiceNow.
Moreover, FlashArray//X customers can accelerate high-performance applications with new DirectMemory Cache software-based accelerant that utilizes storage capabilities of Pure Storage and Intel’s Optane Memory storage solutions.
The company also enhanced FlashBlade storage capacity and launched AIRI as-a-Service and AI Data Hub, to offer high performance and security while maintaining cost efficiency.
Pure Storage, Inc. Price, Consensus and EPS Surprise
Pure Storage, Inc. price-consensus-eps-surprise-chart | Pure Storage, Inc. Quote
The company also unveiled Pure as-a-Service that provides comprehensive portfolio of integrated solutions.
We believe the latest solutions will enable the company to enhance its market reach in cloud, server as well as shared storage and software storage markets.
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.
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%.
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%).
Pure Storage provided mixed fiscal third-quarter results. Pricing declines and tough business environment limited top-line growth. The company provided bleak guidance on current macroeconomic headwinds.
Further, growing expenses on product development amid stiff competition NetApp and Dell is a headwind.
Nonetheless, the company is banking on robust adoption of cloud storage solutions, including Cloud Block Store, ObjectEngine Cloud, CloudSnap, to mention a few.
Moreover, Pure Storage continues to enhance its all-flash portfolio including AIRI, FlashArray, FlashBlade and FlahStack offerings with new low-latency and high-bandwidth support capabilities to aid customers accelerate high-performance applications efficiently.
Furthermore, the company is well poised to benefit from incremental adoption of latest subscription-based Modern Data Experience and Pure as-a-Service solutions.
Zacks Rank & Other Key Picks
Pure Storage currently carries a Zacks Rank #2 (Buy).
Alteryx AYX, Cirrus Logic CRUS and Marchex MCHX are other top-ranked stocks in the broader computer and technology sector. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
While long-term earnings growth rate for Alteryx is pegged at 39.85%, earnings of Cirrus Logic and Marchex’s are expected to grow 15%.
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