Why Is Pure Storage (PSTG) Down 15.7% Since Last Earnings Report?

It has been about a month since the last earnings report for Pure Storage (PSTG). Shares have lost about 15.7% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Pure Storage Q4 Earnings & Revenues Top Estimates

Pure Storage Inc. reported non-GAAP earnings of 23 cents per share in fourth-quarter fiscal 2020, beating the Zacks Consensus Estimate by 4.6%. Moreover, the bottom line improved 64.3% on a year-over-year basis.

Total revenues rose 17% from the year-ago quarter’s level to $492 million. Moreover, the top line surpassed the Zacks Consensus Estimate of $489.2 million. Notably, the figure came within management’s guidance of $484-$496 million.

Year-over-year increase in revenues can be attributed to strong FlashBlade implementation and new deal wins from three major international banks. Moreover, growth was driven by robust adoption of subscription offerings, including Pure as-a-Service, Cloud Block Store, and Evergreen.

Segmental Details

In the fiscal fourth quarter, Product revenues (contributed 76.5% to total revenues) of $376.5 million increased 10.7% 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 500 customers, bringing the total count to more than 7,500 organizations.

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

Subscription revenues (23.5%) of $115.5 million surged 40.7% 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.

Margin Highlights

Non-GAAP gross margin expanded 350 basis points (bps) from the year-ago quarter’s level to 72.1%. Management had anticipated non-GAAP gross margin in the range of 67.5-70.5%. Better-than-expected gross margin was primarily driven by product differentiation, and margin expansion of Product and Subscription services.

Non-GAAP Product gross margin expanded 550 bps from the year-ago quarter’s level to 73.3%.

Non-GAAP Subscription gross margin was 68.1%, which expanded 130 bps on a year-over-year basis.

Total operating expenses climbed 14.1% year over year to $348.9 million. As a percentage of total revenues, the figure came in at 70.9%, which contracted 150 bps on a year-over-year basis.

Pure Storage reported a non-GAAP operating margin of 12.4%, which expanded 500 bps on a year-over-year basis.

Balance Sheet & Cash Flow

Pure Storage exited the quarter ended Feb 2, 2020 with cash, cash equivalents and marketable securities of $1.299 billion, up from $1.24 billion as of Oct 31, 2019.

Cash flow from operations during the reported quarter was $69.9 million compared with $64.3 million in the fiscal third quarter.

Free cash flow came in at $56.2 million compared with $45.6 million in the prior quarter.

Guidance

Pure Storage expects revenues of approximately $365 million in first-quarter fiscal 2021. Pure Storage anticipates non-GAAP gross margin of approximately 69.5%. Non-GAAP operating profit is anticipated at approximately $60 million.

Moreover, for fiscal 2021, the company expects revenues of approximately $1.9 billion. The company expects non-GAAP gross margin of approximately 69.5%. Non-GAAP operating loss is anticipated at $40 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -26.49% 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 an F. Following the exact same course, 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 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 #3 (Hold). We expect an in-line return from the stock in the next few months.