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It has been about a month since the last earnings report for Pure Storage (PSTG). Shares have added about 33.5% 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 drivers.
Pure Storage Q3 Earnings Beat Estimates
Pure Storage Inc. reported non-GAAP earnings of 1 cent per share in third-quarter fiscal 2021, comparing favorably with the Zacks Consensus Estimate of a loss of 1 cent. The company had reported earnings of 13 cents per share in the year-ago quarter.
Total revenues declined 4% from the year-ago quarter’s level to $410.6 million. However, the top line surpassed the Zacks Consensus Estimate by 0.82%.
Year-over-year decline in revenues can be attributed to decline in Product revenues, which offset momentum in subscription services, including Pure as-a-Service, Cloud Block Store, and Evergreen.
In the fiscal third quarter, Product revenues (contributed 67% to total revenues) of $274.5 million declined 15.1% on a year-over-year basis.
Subscription revenues (33%) of $136.1 million surged 29.5% on a year-over-year basis, driven by the company’s ongoing support contracts and robust adoption of Pure as-a-Service, Cloud Block Store, and Evergreen subscription services.
Total revenues in the United States during the reported quarter amounted to $302.1 million, down 4% year over year. Meanwhile, total International revenues totaled $108.5 million, which reflects a decline of 3% on a year-over-year basis.
Pure Storage is gaining from growing clout of its latest second generation FlashArray//C, cost effective storage array solution to provide customers with higher performance capabilities and enable them to run complex cloud workloads onto a single platform.
The company is also poised to gain from uptick in its latest offering, Pure FlashRecover, which provides all-flash data backup and recovery in case of a ransomware attack for the enterprises.
During the fiscal third quarter, Pure as-a-Service customer base, which includes CDK Global and Options IT, witnessed expansion. The service has been adopted by ME Bank in Australia and The University of Texas Health Science Center, to cite a few notable names.
Also, during the reported quarter, Pure as-a-Service solutions were selected by Cadence to accelerate transition to modern IT infrastructure and drive automation of data service, and boost business value.
Further, FlashBlade implementation continued with First National Bankers Bank, the Louisiana Office of Technology Services and Sinai Health Systemaccelerate selecting the offering to accelerate IT environment transformation and automate data services.
Management noted strength in FlashBlade business segments primarily courtesy of existing customers and continued expansion of customer base. During the reported quarter, Pure Storage added more than 316 customers, bringing the total count to more than 8,400 organizations.
Robust adoption of FlashArray//C was also noteworthy.
Non-GAAP gross margin contracted 260 basis points (bps) from the year-ago quarter’s level to 69.1%. The contraction in gross margin can be attributed to decline in revenues and margin contraction of Product revenues.
Non-GAAP Product gross margin shrunk 330 bps from the year-ago quarter’s level to 69.7%.
Non-GAAP Subscription gross margin came in at 68.1%, which expanded 60 bps on a year-over-year basis.
Total operating expenses increased 3.9% year over year to $341.7 million. As a percentage of total revenues, the figure came in at 83.2%, which expanded 640 bps on a year-over-year basis.
Pure Storage reported a non-GAAP operating income of $3.4 million in the fiscal third quarter, down 88.2% from the prior-year quarter.
Consequently, non-GAAP operating margin contracted 600 bps year over year to 0.8%.
Balance Sheet & Cash Flow
Pure Storage exited the quarter ended Nov 1, 2020, with cash, cash equivalents and marketable securities of $1.201 billion, compared with $1.293 billion as of Aug 2, 2020.
Cash flow from operations during the reported quarter was $32.8 million compared with $50.7 million in the fiscal second quarter. Free cash flow was $7.9 million compared with $25.7 million in the prior quarter.
During the fiscal third quarter, the company returned $21.4 million to shareholders via share repurchases of 1.36 million shares with approximately $23.6 million remaining in share repurchase authorization.
Total deferred revenues in the fiscal third quarter were $763 million, compared with $725 million at the end of the prior quarter.
Remaining performance obligations (RPO) at the end of fiscal third quarter were $1.01 billion, up 25% on a year-over-year basis. The metric represents total committed non-cancelable future revenues.
Pure Storage refrained from providing formal fiscal fourth-quarter guidance citing uncertainty in demand due to COVID-19-related business impact.
Nevertheless, management anticipates that total revenues to decline 2% on a year-over-year basis to approximately $480 million. Moreover, the company estimates fiscal 2021 revenues to be $1.66 billion, indicating growth of 1% year over year.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
Currently, Pure Storage has a nice Growth Score of B, though it is lagging a bit 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 fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Pure Storage has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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