Q3 2024 Pure Storage Inc Earnings Call
Participants
Charles H. Giancarlo; Chairman & CEO; Pure Storage, Inc.
Kevan Krysler; CFO; Pure Storage, Inc.
Paul Ziots
Robert Lee; VP & CTO; Pure Storage, Inc.
Aaron Christopher Rakers; MD of IT Hardware & Networking Equipment and Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division
Amit Jawaharlaz Daryanani; Senior MD & Fundamental Research Analyst; Evercore ISI Institutional Equities, Research Division
Eric Martinuzzi; Senior Research Analyst; Lake Street Capital Markets, LLC, Research Division
Krish Sankar; MD & Senior Research Analyst; TD Cowen, Research Division
Matthew John Sheerin; MD & Senior Equity Research Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division
Mehdi Hosseini; Senior Analyst; Susquehanna Financial Group, LLLP, Research Division
Meta A. Marshall; VP; Morgan Stanley, Research Division
Nehal Sushil Chokshi; MD & Senior Research Analyst; Northland Capital Markets, Research Division
Shek Ming Ho; Director & Senior Analyst; Deutsche Bank AG, Research Division
Simon Matthew Leopold; Research Analyst; Raymond James & Associates, Inc., Research Division
Timothy Patrick Long; MD and Senior Technology Hardware & Networking Analyst; Barclays Bank PLC, Research Division
Unidentified Analyst
Wamsi Mohan; MD in Americas Equity Research; BofA Securities, Research Division
Presentation
Operator
Good day, and welcome to the Pure Storage Third Quarter Fiscal Year 2024 Earnings Conference Call. Today's conference is being recorded.
(Operator Instructions)
At this time, I'd 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 Third Quarter Fiscal 2024 Earnings Conference Call. On the call, we have Charles Giancarlo, Chief Executive Officer; Kevan Krysler, Chief Financial Officer; and Rob Lee, Chief Technology Officer. Following Charlie's and Kevin's prepared remarks, we will take questions.
Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at investor.purestorage.com. On this call today, we will be making forward-looking statements, which are subject to various 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 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 related to our business is contained in our filings with the SEC, and we refer you to these public filings. During this call, 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 press release 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 fourth quarter fiscal '24 (inaudible) period begins at the close of business, Friday, January 19, 2024.
With that, I'll turn it over to Charlie.
Charles H. Giancarlo
Good afternoon, everyone, and welcome to our Q3 earnings call. We are pleased with Pure's Q3 financial results. We saw healthy demand for our portfolio throughout the quarter, proving that Pure's platform strategy and vision is resonating with our customers. The Pure Storage platform provides customers the ability to deploy a consistent software and management environment across the full price performance range or block, file and object workloads, for both traditional and cloud-native applications. The Pure platform guarantees customers never experience change management downtime.
It guarantees the lowest space power and e-waste in the industry and provides infrastructure and services that always get better with age without disruption. The Pure Storage platform also promises a cloud operating model for our customers, enabling them to manage their data storage like the cloud providers to reduce their storage costs in the cloud to provide tailored storage services to their developers like the cloud and to consume storage like the cloud as a service. This model is gaining traction with leading customers. Evergreen//One, our Storage as a Service consumption offering saw continued extraordinary growth, more than doubling year-over-year.
Evergreen//One and Evergreen//Flex are our preferred services for providing customers data storage on a consumption basis. Although we continue to offer customers the choice of consuming storage as CapEx, we believe the continued high demand for Evergreen//One is being driven by our sales activities, new customer buying behavior, and the current macro environment. Customers are attracted to the ability to manage and consume Evergreen storage as a cloud service as they need it. But with the low cost advanced capabilities and data security of on-prem storage.
The outperformance of Evergreen//One this year has been significantly above our prior expectations and we now expect this strong level of demand to continue through Q4. While this success is a long anticipated and welcome expansion of our business model, its overperformance will have an effect on near-term revenue, which Kevin will cover in detail.
In Q3, Pure set a new industry standard with 8 service level agreement or SLA guarantees across our Evergreen services. With the innovative new paid power and rack program, we pay our Evergreen customers power and rack space costs. This first-of-a-kind program is enabled by our ability to deliver the cloud attributes that customers desire with the most energy efficient and reliable storage technology. Paid power and rack directly addresses the increasing cost of electricity and data center space. Additional SLAs introduced in Q3 guarantee no change related downtime, no future data migrations for hardware replacements, upgrades or expansions and 0 data loss. Portworx, our Kubernetes and container storage software for cloud native applications also had a record quarter. Portworx was recently named a leader in the inaugural IDC Marketscape for container data management.
We saw increased multiyear renewals from existing customers and new customers deploying the Portworx suite of products for multi-cloud databases, messaging and logging systems. Portworx was also selected by a leading global retailer to provide a single integrated platform for their machine learning researchers and analysts ensuring consistent models across multiple clouds. A large international government authority is supporting their artificial intelligence and machine learning environments with Portworx deployed in mission-critical cloud-based applications. Customer momentum in the field of artificial intelligence also continues for Pure with a double-digit number of AI wins in the quarter across our portfolio.
This included era technology and AI-based decision intelligence and automation platform that chose our Portworx solution for seamless cloud integration, outperforming competitive solutions by 200%. and Olympus adopted Pure's AI-ready infrastructure based on a FlashBlade and NVIDIA solution for a new AI development environment, ensuring performance and capacity for large-scale models to accelerate their success with transformative AI solutions. We remain our customer's preferred partner for AI deployments and have strengthened our innovation and leadership by earning NVIDIA-based pod certification.
Airi, our complete AI-ready infrastructure built on the NVIDIA DGX base pod reference architecture and the latest FlashBlade//S storage platform makes AI scaling and deployments faster and easier for our customers.
We continue to see strong demand for FlashBlade//E. And this month, we announced the general availability of FlashArray//E and shipped our first orders. This past quarter, we announced our latest Gartner accolade, a leader in the Magic Quadrant for distributed file systems and object storage, and it's now 3 years running.
This marks the tenth successive year overall that our leadership has been acknowledged by Gartner in transforming the storage industry. The early success of our E family reinforces our belief that flash is replacing this enlarging Pure's opportunity in enterprise and eventually cloud storage.
In Q3, Pure scored another major win for new 5G infrastructure to be deployed in our fiscal 2025. Pure's continuing success in the 5G space is based on our superior performance, reliability, density, longevity and advanced remote management capabilities. We are seeing strong early customer interest in our expanded partnership with Microsoft and the Pure Cloud Block store integration with Azure VMware Solution, also known as AVS. Pure and Microsoft announced the public preview of this service this quarter. CBS and AVS are providing customers the opportunity to reduce their cloud storage spend by half or more while providing them the advanced services that they experience with Pure's enterprise systems.
Customers are also enthusiastic about managing their storage and data across data centers and clouds in a consistent hybrid environment. Despite the uncertainties of the current business environment, Pure's superior low total cost of ownership and Evergreen offerings are making a difference in this challenging IT economy. We are seeing a strong positive response to our position of having a consistent, unified flash platform for all storage needs from the data center to the cloud. This position is enabling us to compete for ever larger footprints in large enterprise accounts. This, coupled with the strong overall demand for our platform gives me the confidence in our continued ability to take share and outpace the market.
With that, I'll turn it over to Kevan for further commentary.
Kevan Krysler
Thank you, Charlie. We are pleased with our financial results this quarter. We delivered strong revenue and operating profit, both above our prior guidance for the quarter. Revenue was $763 million, up 13% year-over-year, and operating profit was $169 million. The macro spending environment remains relatively consistent to what we have seen throughout this year. However, demand for our solutions was robust throughout Q3. Our business strategy continues to focus on transitioning our offerings for our customers to consumption and subscription services.
These types of offerings provide more value to our customers, which is resonating as customer demand for our consumption and subscription-based offerings across our Evergreen portfolio, especially Evergreen//One and Portworx is very strong. We achieved another quarter of record sales of our FlashBlade portfolio, including FlashBlade//E, which has quickly grown to become a meaningful portion of our FlashBlade business since becoming generally available in late April.
We are also seeing customers consuming our FlashBlade technology, including FlashBlade//E as a service, leveraging our Evergreen//One Storage as a Service offering. Our operating profit of $169 million in Q3 exceeded expectations. Our differentiated flash management technology powered by purity software operating natively with raw flash continues to be a key driver of our strong product and subscription gross margins.
As we mentioned last quarter, the majority of our capacity shipped is based on QLC [raw-flash]. Remaining performance obligations or RPO was very strong and exceeds $2 billion, growing 30%. During Q3 we closed a large noncancelable product order with a large telco customer totaling $41 million that is included in the RPO balance at the end of Q3. Based on the timing of the shipment schedule for this order, product revenue is not expected until next year, which impacts our revenue outlook this year, which I'll discuss further in my remarks when updating annual guidance.
When excluding both the noncancelable product order from RPO in the current quarter and the outstanding commitment in Q3 of last year with one of our global system integrators, RPO growth for our subscription services was also very strong at 29%. As we mentioned last quarter, the outstanding commitment with our global system integrator was fully satisfied during Q1 of this year. In Q3, subscription services annual recurring revenue grew 26% year-over-year to nearly $1.3 billion, highlighting the strong traction for our consumption and subscription-based service offerings. As we have mentioned previously, closed Evergreen//One contracts where the effective service date has not started are excluded from the subscription services ARR calculation including closed Evergreen//One contracts where the service date has not yet started, subscription services ARR was also strong, growing 27%.
Subscription services revenue of $310 million comprised 41% of total revenue. U.S. revenue for Q3 was $536 million and international revenue was $227 million. Our new customer acquisition grew sequentially as we acquired 353 new customers during the quarter. As previously mentioned, we were pleased with our strong gross margin performance of 74%. Product gross margin was 73.1%, and subscription services gross margin was 75.4%. Our head count increased slightly to approximately 5,500 employees at the end of the quarter.
Pure's balance sheet and liquidity remains very strong, including $1.35 billion in cash and investments at the end of Q3. Cash flow from operations during the quarter was $158 million and capital expenditures totaled $45 million. In Q2, we repurchased over 630,000 shares of stock, returning over $22 million 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 $167 million remaining on our existing $250 million repurchase authorization.
Now turning to our updated annual guidance for FY '24. A key assumption used to derive our FY '24 annual revenue guide at the beginning of the year was that the macro environment would not meaningfully improve or deteriorate throughout the year. This assumption is holding as the spending environment continues to be challenging. Though despite these challenges, we are seeing increasing demand in the second half of the year across our data storage platform especially for consumption and subscription service offerings. Although we expect the demand to increase for the second half of the year, there are 2 important factors that are impacting our annual revenue expectation this year, which we now expect to be $2.82 billion, growing 2.5% and Q4 revenue is expected to be $782 million, declining 3.5%.
First is the impact of our Evergreen//One Storage as a Service momentum, which will be discussed in more detail. And second is the impact of a $41 million non-canceled product order with a telco customer that is not expected to be fulfilled until next year. Both factors on a combined basis represent approximately 4.5 points of incremental headwind when compared to the annual revenue guide we provided at the beginning of the year.
We are very pleased with the momentum and growth of our Evergreen//One service offering, while appreciating that this momentum creates a short-term impact on revenue growth. Last quarter, we stated that sales of our Evergreen//One service offering was expected to create 1 to 2 points of headwind to the annual revenue guide we provided at the beginning of the year.
Based on our Evergreen//One sales in Q3 and the opportunities in our seasonally largest quarter Q4, we now expect that annual sales of our Evergreen//One and Evergreen//Flex offerings will more than double this year, reaching nearly $400 million and expect the impact will now create 3 points of headwind to the annual guide we provided at the beginning of the year.
When excluding the impacts of the increased shift to our Evergreen//One offering and a $41 million order with a telco customer, our annual revenue growth would have been 7% when compared against the annual revenue guide we provided at the beginning of the year. We expect that our consumption and subscription business models will drive improved long-term growth for Pure as our subscription and consumption business continues to grow, we will provide additional business metrics that will help measure the health of our business.
This includes translating growth rates of our subscription and consumption service offerings to a growth rate under our traditional model of a CapEx sale.
Finally, we are increasing our annual operating margin guidance from 15.5% to 16% driven by our continued operational discipline and gross margin strength. Q4 operating margin is expected to be approximately 19%.
In closing, we are pleased with the strength and demand across our entire Pure Storage platform, including our expectation of more than doubling sales this year of our combined Evergreen//One Storage as a Service and Evergreen//Flex offerings. We cannot be more excited with how our solutions resonate with our customers, delivering a consistent, nondisruptive operating and management environment, leveraging the most advanced flash technology. Our innovation across our storage platform also extends to our Evergreen business models, providing customers with increasing flexibility and business value.
With that, I will turn it back to Paul for Q&A.
Paul Ziots
Thanks, Kevin. Before we begin the Q&A session, I'll ask you to limit yourselves to 1 question consisting of 1 part so we can get to as many people as possible. If you have additional questions, we kindly ask that you please rejoin the queue, and we'll be happy to take those additional questions as time allows. Operator, let's get started.
Question and Answer Session
Operator
(Operator Instructions)
The first question comes from the line of Amit Daryanani of Evercore.
Amit Jawaharlaz Daryanani
Yes. I guess maybe to start the discussion, there's obviously a lot of focus on the Jan quarter guide and the delta that's there versus seasonality versus what you expected 90 days ago. I realize there are a fair number of cross currents out there. But to the extent you can maybe talk about how much of the shortfall versus your expectations 90 days ago, let's say, is micro versus macro. I'd love to get a sense if you think anything has shifted from Pure's competitive advantage of your positioning that's impacting it. And I realize Evergreen//One is a big part of it. I'd love to kind of understand why do you think customers are massively increasing their shift towards Evergreen//One versus buying storage in a traditional manner.
Charles H. Giancarlo
Yes. Well, you nailed it, Amit, the shift to the consumption model has just continued to be very, very strong. And as you know, this is a model that we've been investing in for well over 5 years. It's one that we had stated a lot of our anticipation in and moving forward with, but this year has just been very strong. And one could say that it's the macro that has driven greater interest in a consumption model, I think, for obvious reasons, for the customer. But even more than that, we've invested in it heavily to make it not just a subscription and therefore, an easier bite, if you will, for economically difficult times. But to make it a true cloud service where they manage it like the cloud, it is hands-off. And now we're even paying for their power and rack space so that it's -- other than the fact that it sits on their premise, it's a true cloud service.
So the uptake in this, especially in these more difficult challenging times has been tremendous. So the 2 are tightly aligned. The macro overall certainly hasn't helped. Better macro would have lifted all boats. But really, the change as you put it, it was driven primarily by the shift to subscription and consumption model.
Kevan Krysler
Yes. Thanks, Charlie. This is Kevan. Amit, If you take a step back and really look at the change in our annual guide as well as the impact to Q4, it really does come down to 2 key factors that we've described. One is what Charlie has highlighted, which is the strength and momentum of Evergreen//One. And then the second, obviously, is the telco order. That was all product that's having an impact on Q4 as well.
Operator
Your next question comes from the line of Aaron Rakers of Wells Fargo.
Aaron Christopher Rakers
Yes. Just to kind of build on Amit's question there. I guess if I'm the doing the math right, it looks like you're talking about an impact of about $80 million, $85 million from this higher Evergreen//One contribution. So I guess the question is like what would that number look like just actually 3 months ago embedded in your expectation? And how do I think about -- you threw out a number, $400 million. Is that $400 million of ARR contribution. Just help me understand what $400 million is and how fast this necessarily could grow into the next year? Just thinking about incremental headwinds from this transition to this consumption model here as we move forward.
Kevan Krysler
Yes. Aaron, this is Kevan. The $400 million is really our sales of Evergreen//One and Evergreen//Flex for the year. So Think about that as a TCV of sales during the year. And then if you -- if we take a step back into exiting Q2 and going into Q3, we had talked about the fact that our annual guide range had contemplated strong growth. We were adding about another 1 to 2 points of headwind to that growth exiting Q2. And -- and then with the strength that we've seen in Q3 on Evergreen//One as well as what we're seeing in terms of volume and opportunities in Q4, that headwind now has been increased to 3 points. So again, and your math is about right in terms of the effects in absolute dollars when in context to our annual revenue guide. And then tacking on to that, the telco order, which is having an impact as well.
Operator
Next question comes from the line of Meta Marshall of Morgan Stanley.
Meta A. Marshall
Maybe a couple of questions. One, just on any update on how you're seeing kind of your -- or probability of kind of Meta's order coming back at least sometime in the next fiscal year? And then just a second question on -- I mean, I would assume you would have said that the conditions are largely staying the same for most of this year. And so has this Evergreen transition been a headwind for kind of more than this quarter and it just culminated into something you couldn't kind of make up for given not seeing a better environment? Or just how have you seen this evergreen transition kind of progress throughout the year?
Charles H. Giancarlo
Let me start with the Meta question. So we continued -- Meta continues to be a good customer. We have not -- generally, when -- on these calls, we talk about contribution by RSE. No meaningful contribution to RSE this past quarter, but we've had sales to Meta in other segments. And that relationship continues to blossom as far as we're concerned. It continues to get better, and we expect to continue to see good opportunities in Meta as we go forward. And then the second one was the...
Kevan Krysler
You want to clarify your second question as well.
Meta A. Marshall
The second question is just it's clearly a headwind as we go into fiscal Q4, this kind of Evergreen transition. But given probably much of the macro environment has stayed stable during the year, how much of a headwind has it been in previous quarters that you were just kind of able to accommodate for -- Like I guess I'm just trying to say or get a sense of how much of that is new this quarter versus this has been a headwind for the entire year?
Charles H. Giancarlo
Well, almost -- if I might start. One, because we've had such strong growth in Evergreen//One. It has been a bit of a headwind the whole year, but it had never been sustained the way it is this year. We had good quarters, like every other new program you have strong quarters and then it's balanced off by other quarters where these specific opportunity in this case, Evergreen//One was a bit weaker. And when we saw the growth in Evergreen//One early in the year, as we -- as you may remember, the economy turned weak around Q4 last year, and so we were expecting Evergreen//One to pick up. What's really different this time around is just the continued strength quarter-over-quarter and visibility into Q4 now as well, the strength there. So yes, but it's becoming a more meaningful number now.
Kevan Krysler
Yes. And if I would just to add on to that, to what Charlie was saying, it really is an accumulation of effect. So starting with our annual revenue guide that we provided, obviously, there were 2 components that were key in that guide of mid- to high single digits. One was contemplation of the macro environment. And second was, we were considering momentum of Evergreen//One when we came into the year.
Now exiting Q2, we added on 1 to 2 points of additional headwind as a result of what we were seeing, both for Q1 and Q2 and our visibility to Q3. Now Q3 outperformed even our raised expectations and Q4 looks very strong as well. And so you do have the accumulation effect going on, but lastly, when we think about Q3, there was definitely more pressure on product revenue as a result of the momentum we were seeing with Evergreen//One.
And the sales team did a really nice job executing throughout the quarter. And part of this strong execution included accelerating fulfillment and probably of a subset of product orders that would have been expected to close in Q4. So there is an impact there as well. And hopefully, that adds some additional color for you there.
Operator
The next question is from the line of Tim Long of Barclays.
Timothy Patrick Long
Could we just talk a little bit more about the double-digit AI wins in the quarter. Maybe just give us a little more color there on kind of how big these deals are coming out. Any product portfolio that you have that's differentiated, that's winning there kind of timing to see some revenue recognition from these deals? That would be helpful.
Robert Lee
Yes, absolutely, Tim. This is Rob. I'll take that one. Certainly, AI, inclusive of traditional AI and generative AI is and continues to be a strong segment for us. But more importantly, what we've seen this quarter is a variety of AI wins really across all of the areas of the AI-driven opportunity for us here at Pure. And that's number one, certainly, the training infrastructure environments. Number two, the inference and AI application environments, as well as number three, some of the broader data environments that are being connected to these AI workflows. And so if we look at the AI training infrastructure, look, this -- we've been in the space for years, continues to be a strong area for us.
As an example, this quarter, we had a large automaker, expand their FlashBlade footprint, really driving their autonomous driving efforts as well as number two, we saw our customers really deploying both our Portworx as well as our flash array solutions as part of their inference AI application environments. And then thirdly, as we look at the opportunity around the broader data management and data preparation environments, these are equally important parts of AI deployments. And we saw some good wins in both of these -- in these areas as well, serving both customers' database and data preparation applications as well as some other bulk data repositories connected to these environments.
And so if I net it out continues to be a strong segment for us and look, if we look at the opportunity in terms of both the GPU connected environments as well, the larger data environments being driven by AI technology, we're well positioned across the entire portfolio to benefit from these deployments.
Operator
The next question comes from the line of Pinjalim Bora of JPMorgan.
Unidentified Analyst
This is Noah on for Pinjalim. I guess how should we really think about fiscal year 2025? And what are really some of the puts and takes you can highlight there especially when we think about the seasonality of the business given all the moving parts going forward?
Kevan Krysler
Yes. Thanks for the question. And really, we won't go into a lot of detail specific to next year. We want to navigate through our seasonally largest quarter, which is Q4. But I think 2 important things to take away that we're seeing. One is that demand has strengthened and is expected to strengthen through the first half, and that's a good sign for us. And second is the momentum on Evergreen//One and strength we're seeing for a variety of reasons that Charlie walked through. And so both those factors will be in play in terms of how we think about next year, but we want to get through Q4 before providing anything more specific for next year.
Operator
The next question is from the line of Krish Sankar of TD Cowen.
Krish Sankar
I had a question on the $30 million or $40 million telco order. It seems like a pretty big number on a quarterly basis. I was under the impression you have such a high customer concentration. So can you talk a little bit about that? And also, is this being used for 5G applications what kind of application is it being used for.
Charles H. Giancarlo
Yes. No, we highlighted that it is, in fact, a 5G application environment that this is going into. And I would say in order of this type in 1 quarter is not terribly unusual for us. It does happen from time to time. And 5G has been a very strong market for us. The advantages that we have in space, power and cooling, reliability and longevity of the product in its remote management capability really aligns well with telco and especially 5G, which is a very distributed environment. And I will say, although it's unusual for us in general, it's not unusual in the telco space to have scheduled shipments aligning with their upgrades to their distributed 5G environment.
So our typical business in IT and other areas is book and ship within weeks. This is a scheduled shipment based on build outs -- their build-out schedule of their 5G environment.
Operator
The next question comes from the line of Sidney Ho of Deutsche Bank.
Shek Ming Ho
I want to look at the product growth -- actually, gross margin is very, very good at 74%, curious about the sustainability of that, particularly if you look at the product gross margin being 73.1%, looking forward, how would you characterize the pricing environment, especially given many of your competitors have access to lower price and components now? And why specifically do you have to be more aggressive in pricing in order to keep or win businesses, especially in areas that are starting to see more competition?
Charles H. Giancarlo
Thank you, Sidney. We intend to be very aggressive in pricing and especially as we penetrate the lower price performance tiers of the disk market. That's -- it's a new market for flash and the opportunity there is huge, more than half of the overall enterprise storage market, and we believe we have a special opportunity that ahead of every other player in the market. So our intention is the E family grows is to be very aggressive in that segment. Frankly, as you point out, the 73 is above our intended range for product gross margins. And we're going to use that a natural cost advantage we have to continue to gain market share.
Robert Lee
And just to add on to that, I think it's important to just highlight and remember that because of our flash management technology and direct flash, we've got a sustained and significant structural advantage over the competitive set who are trapped in SSD-based technology. Because of the direct flash, we can deliver products that are less complex, more reliable, more efficient, more performance. And at the end of the day, that translates to better products delivered in a more cost-effective way. And behind that, our Purity software really is that differentiation. And so just to -- again, just to add on to Charlie's points, the advantages that we have really are structural and sustainable, driven by our significant software and hardware IP.
Kevan Krysler
So I'm just going to add to this a little bit more, taking a step back, agreeing that the gross margins across the board were very strong, and so we're quite pleased with that and validating and agreeing with obviously Charlie and Rob and really wanting to reiterate as well that the majority of our bits shipped now continue to be QLC, which ties into the continued innovation that we're driving. And look, we really do benefit from flash pricing, both improving and weakening and we are currently seeing some improvement in the NAND pricing. And then reiterating Charlie's point, from a financial lens with our strong product gross margins, we will be aggressive in our disk takeout strategy with our E family price performance solutions.
As we think about our subscription growth margins, that's going to be a combination of our scale on our Evergreen offerings, including the consumption and subscription portfolio as a key contributor, also similar to the strength we're seeing in product margins, our Evergreen subscription gross margins are also benefiting from the structural advantages that Rob alluded to. So yes, definitely pleased with what we're seeing in terms of our margin performance overall.
Operator
The next question is from the line of Mehdi Hosseini of SIG (sic) [SFC].
Mehdi Hosseini
Yes. It's actually Mehdi Hosseini. Just want to better understand Evergreen//One. To follow-up here, would this impact your working capital requirement? And is there anywhere in the balance sheet that we could look and better track the traction with Evergreen//One model?
Kevan Krysler
Yes. I think the key metric, obviously, we added a new metric this quarter, which was the total sales this year expected for the combined Evergreen//One and Evergreen//Flex model and that being $400 million over doubling year-over-year. So that would be a new metric that we've added that hopefully is helpful.
The other metric that I think is helpful is the RPO metric and obviously, our strength and growth in RPO is really being driven by our Evergreen//One momentum that we've seen throughout the year, including Q3. And then layering on to that would be our subscription services ARR growth, which is also quite strong. So those are the metrics I'd probably point you to in assessing the health around our consumption and subscription services business.
Operator
The next question is from the line of Simon Leopold of Raymond James.
Simon Matthew Leopold
I just -- first, a quick clarification. I appreciate you're not ready to guide for fiscal '25, but I think it would be helpful to get a little bit of handholding given that your April quarter, your first quarter is typically down teens double digits, but you've got kind of this tough situation in the January quarter. So just some clarification on that.
And then the question I wanted to ask, and I love Charlie's description of the competitive environment as a [indiscernible] in the phone booth. I'd love to get some updates there. in that what you're seeing and hearing in terms of competitive actions and your ability to displace both hybrid flash competitors as well as hard disk drive competitors.
Kevan Krysler
Yes. I'll hit the discussion for next year, again without providing a lot of details. But as you think about the setup for next year, it is critical for us to navigate through Q4 and our expectations through Q4. But this is really not, in my mind, a seasonal question. It's really about Evergreen//One and the performance of Evergreen//One. And if we take a step back, and look at the Evergreen//One momentum and the telco order, we should be for this year at 7% growth. And so what we've seen on top of that and what we're seeing in the second half is strengthening demand.
And I would hope to see that as we continue through Q4 and as we move into next year. So that would be a data point for consideration. We talked about 3 points on the annual guide against the annual guide of headwind for Evergreen//One.
Look, we're expecting momentum to continue on Evergreen//One. We're actually thrilled that we're seeing an inflection point with our customers with that model. And so we'll have to provide more color for you as we move through Q4, specific to the Evergreen//One momentum next year. Charlie?
Charles H. Giancarlo
Yes. In terms of selling and what the competitive situation looks like out in the field. I'd say it's as competitive as ever, perhaps, a little less gross margins generally have been improving. So perhaps the pricing environment has been a little bit better, but I would say, overall, the competition is as tough as ever, both in the channel and directly with customers overall. What I will say is, having perusing as we always do, our overall win rates and at (inaudible). Our overall win rates hold very steady against our competitors. So -- but it is a tough environment without doubt.
Operator
The next question comes from the line of Nehal Chokshi of Northland Capital Market.
Nehal Sushil Chokshi
Yes. I want to double click here on Slide 17. Your unbilled RPO, I've always sort of reviewed that as a good proxy for your Evergreen//One and Evergreen//Flex sales. A, is that true? And then I'll go from there, (inaudible).
Kevan Krysler
Nehal, that is true. And then I would add on to that specific for this quarter would be the telco order that we've been highlighting and discussing as well.
Nehal Sushil Chokshi
Right. Okay. So the Q-o-Q change in unbilled RPO $100 million, take out that $40 million for the Telco order, then you're talking about $60 million. That's still a significant increase. And if I just simply do it on a cumulative 2-year basis, for this year relative to a year ago, that's more than a doubling on a year-over-year basis. So can you talk about the linearity that you're seeing in this acceleration in Evergreen//Flex, was there relatively sold in the first 2 quarters and now an explosion in the third quarter and then you expect sort of some sort of normalization in the fourth quarter here?
Kevan Krysler
Yes. And it's primarily Evergreen//One. And we've talked about what we've seen this year is a cumulative build and momentum of Evergreen//One. So again, coming out of the year and developing our guide for the year, we had contemplated a really significant growth in Evergreen//One. And again, as we navigated through Q1 and Q2, we saw that growth rate was impacted a little bit more 1 to 2 points against our annual guide.
Now that we've been through Q3 and our visibility to Q4, now that's about 3 points incremental to what we had provided in our annual guide. So this has been a cumulative effect. And as Charlie has pointed out, really seeing an inflection point in part, I think, due to the macro, but I also think customers are really embracing the value of this business model as well.
Operator
The next question comes from the line of Wamsi Mohan of Bank of America.
Wamsi Mohan
I was wondering if you could maybe give us some update on how we should think about CapEx given the increased momentum of Storage as a Service. And where are you in terms of the build-out when you think about maybe this continued momentum of Evergreen//One, what sort of revenue level can the infrastructure that you currently have support?
Kevan Krysler
Yes. I don't think we'll see a lot of change in terms of how we're thinking about our CapEx. Obviously, we had higher CapEx as well this year due to the build-out of our headquarters. Obviously, we've got a significant amount of innovation from an R&D perspective. So we've got some CapEx requirements there. And really, the only other big CapEx requirement is supporting the momentum of Evergreen//One. And so that's how we would be thinking about it from a CapEx perspective. And then obviously, you've got a layering on in terms of the subscription services revenue effect coming on as a result of the ramping Evergreen//One sales that we're seeing.
Operator
Your next question comes from the line of Matt Sheerin of Stifel.
Matthew John Sheerin
There was commentary from one of your competitors last night pointed to a broader QLC-based adoption across the industry. So first, are you seeing any changes in the competitive landscape or market share pressure given some new product introduction. It sounds like from your previous comments that you're not seeing that. And second, can you add more color on the success you've seen so far with FlashBlade//E and expectations for the new array E? And any surprises in terms of use cases or types of customers?
Charles H. Giancarlo
You bet. Well, I'll now refer to the E family given that we've now introduced FlashArray//E, which lowers the incoming price point, if you will, for customers from what was 4 petabytes on FlashBlade//E now down to 1 petabyte on FlashArray//E and even less if they take it as a service. So we really feel that it's a very, very strong product line. We have seen that entry by one of our competitors. E comes in substantially below that. We really feel the E -- the competitors see offering is much closer to our C offering. So we're several years ahead of that. The competitive environment for our E offering is still largely with disk. And disk. We say disk, but of course, disk comes in many flavors. And as we develop E further and further, we have to address all the different use cases that it's involved in, which is what drives its growth. That growth is still the fastest growth of any new product that we've had here at the company.
So we're very pleased with the growth, but it's still at the -- we're only 2 full quarters in. So it's -- we anticipate that will be a much more meaningful part of our revenue next year.
Operator
The next question is from the line of Eric Martinuzzi of Lake Street.
Eric Martinuzzi
Yes. Curious to know how you feel about your sales capacity is typically when you're evaluating your coverage for the coming year? Are you planning on adding sales?
Charles H. Giancarlo
The answer is yes. We believe our capacity is at the level that we had planned for. And we're planning, obviously, to grow. So we are adding to our sales force have been throughout the year, but Q4 is a key time to bring in new players. And so we will be adding to our sales force.
Operator
The next question is a follow-up question from the line of Krish Sankar of TD Cowen.
Krish Sankar
I just wanted to follow up on the Evergreen//One. What sort of time frame are the -- are these contracts, for example, just to like make it simple. You said it's a 3 percentage point headwind for your FY '24 outlook. It is very simply that the next 2 years are flat and because of this one, is it like a 1% uptake every over the next 3 years, if it's a 3-year subscription model. I'm just kind of curious how to think about these Evergreen//One subscription.
Kevan Krysler
Yes, it's a great question. Look, if we look at the Evergreen//One orders that we've closed to date this year, we're probably averaging a little bit over 3.5 years in duration associated with that of those orders, which really is similar to our traditional CapEx commitments as well. So that's the answer in terms of duration that we're seeing.
Charles H. Giancarlo
I do want to point out that these are consumption contracts. And so these are, in effect, minimums. The consumption goes higher, then, of course, we'd expect more. And of course, we expect the contracts to continue even after the contract is done.
Kevan Krysler
That's right, Charlie. And then when we calculate what the headwind is, and against -- the headwind again is against our annual guide that we provided at the beginning of the year, we just basically translate the incremental growth we're seeing beyond the growth we had assumed in the annual -- in the annual revenue guide that we provided, using about 70% going to product if it was a traditional CapEx sale. So that's how we're calculating the points of headwind against our annual revenue guide.
Operator
There are no additional questions waiting at this time. So I'll pass the conference over to the management team for closing remarks.
Charles H. Giancarlo
Thank you, operator. Our strategy to provide customers a consistent, unified and modern storage platform for all their storage needs based on a cloud operating model continues to distinguish us in our industry and propel our success. And we believe the strength of our consumption offerings continues to outperform, benefiting both our customers and Pure. As we enter the holiday season, I want to extend our heartfelt thanks to all of our customers, our investors, partners, our suppliers and our employees. Your effort enables Pure to lead the industry in defining the next generation of data storage. Thank you.
Operator
That concludes the Pure Storage Third Quarter Fiscal Year 2024 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.
