Pure Storage Inc . (NYSE:PSTG) reported a solid third quarter with revenue growth and strategic advancements, despite a challenging IT spending environment. The company's revenue rose by 9% year-over-year to $831 million, and it raised its fiscal year 2025 revenue guidance. However, the stock saw a slight decline in aftermarket trading, reflecting a cautious market sentiment amid broader economic concerns.
Key Takeaways
- Revenue increased by 9% year-over-year to $831 million.
- Gross margin remained strong at 71.9%.
- Fiscal year 2025 revenue guidance was raised to $3.15 billion.
- Stock price fell by 0.26% in aftermarket trading.
- Strategic initiatives include a new hyperscaler design win.
Company Performance
Pure Storage demonstrated resilience with a 9% increase in revenue for Q3, driven by robust demand for its innovative storage solutions. The company continues to expand its customer base, now serving 62% of Fortune 500 companies. Despite a muted IT spending environment, Pure Storage's strategic investments in hyperscale opportunities and new product launches have positioned it well against competitors.
Financial Highlights
- Revenue: $831 million, up 9% year-over-year.
- Total (EPA:TTEF) gross margin: 71.9%.
- Subscription services gross margin: 77.4%.
- Product gross margin: 67.4%.
- Operating profit: $167 million with a 20.1% operating margin.
- Cash and investments: $1.6 billion.
Company Outlook
Looking ahead, Pure Storage has raised its fiscal year 2025 revenue guidance to $3.15 billion, reflecting an 11.5% year-over-year increase. The company is focusing on hyperscale opportunities and expects significant revenue contributions from these initiatives by fiscal year 2027. Additionally, Pure Storage anticipates maintaining a 17% operating margin in fiscal year 2026.
Executive Commentary
CEO Charlie Giancarlo emphasized the company's unique position in the hyperscale market, stating, "Pure Storage is the only company that can simultaneously enable hyperscalers to cost effectively upgrade their data storage while simultaneously freeing vast amounts of electrical power." Giancarlo also highlighted the growing importance of energy efficiency: "Energy availability is a global concern and has become a critical risk to hyperscalers operations."
Q&A
During the earnings call, analysts inquired about the recent hyperscaler win, which was primarily software and licensing-based, with no hardware sales included. The company noted a temporary shift from its Evergreen One model to traditional sales, and ongoing discussions with multiple hyperscalers were highlighted as a potential growth area.
Risks and Challenges
- Muted IT spending could impact future revenue growth.
- Increased software and SaaS costs may strain operational budgets.
- Power constraints are becoming a critical issue for data centers.
- Competition remains intense, with pressure to maintain technological leadership.
- Macroeconomic uncertainties could affect customer investment decisions.
Pure Storage's strategic focus on innovation and hyperscale opportunities positions it well for future growth, but the company must navigate ongoing industry challenges and economic headwinds.
Full transcript - Pure Storage Inc (PSTG) Q3 2025:
Conference Operator: At this time, I'd like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you. Good afternoon, everyone, and welcome to Pure's Q3 fiscal year 2025 earnings conference call. On the call, we have Charlie Giancarlo, Chief Executive Officer Kevin Kreisler, 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 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 make 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 today 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 relating 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 Q4 fiscal 2025 quiet period begins at the close of business Friday, January 17, 2025. With that, I'll turn it over to Charlie.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: Good afternoon and welcome to our Q3 FY 'twenty five earnings call. Pure Storage delivered solid third quarter results with both revenues and operating income exceeding our guidance. As I have discussed in previous calls, we have been engaged on achieving a significant hyperscaler design win by year end. And I am pleased to announce that we signed a design win with a top 4 hyperscaler in the last few weeks. This is the first ever design win to provide flash for standard hyperscaler storage and it is the vanguard for flash storage providing all online storage in major hyperscale environments in the future.
For reference, the hyperscale market is responsible today for 60% to 70% of all hard disk drives purchased globally. In addition to providing cost effective data storage, this top 4 hyperscalers use of pure technology is expected to free up significant amounts of power and space in their data centers. It is also expected to significantly reduce the failure rates and maintenance costs associated with legacy disk storage, while doubling the expected lifetime of their storage infrastructure. Pure Storage, Purity Software (ETR:SOWGn) and DirectFlash Technology will provide this hyperscale customer the necessary price, performance, density and power to deliver the cloud based services with unparalleled performance and energy efficiency. The close engineering engagement between the companies and extended testing by this major hyperscaler has proven Pure's DirectFlash technology is now capable of providing cost effective data storage at hyperscale capacity even at low cost bulk data price ranges.
To fully outline the opportunity here, we are working with hyperscalers to utilize our technology with a single consistent architecture for all of their online storage, inclusive of low price bulk storage, nearline higher performance storage as well as high speed storage for their most demanding use cases, including AI. To support the expected increase in flash demand for the hyperscale industry, we also announced today a deepening collaboration with Kioxia, a global leader in NAND flash technology. Kioxia has been a steadfast partner in our engagement with the hyperscale community. Our design win signals that Pure's DirectFlash technology is now ready to replace hard disks everywhere and NAND vendors are taking notice and planning their opportunity to address this 700 exabyte per year market. As data volumes continue to increase, our combined technologies enable hyperscalers to meet the challenge of increasing data volumes while reducing power consumption, labor and the physical footprint of hyperscale data centers.
The work for the design win we announced today started over 1 year ago. While we have had sales of standard product into hyperscale customers, hyperscalers have developed their own software for their storage services, which operates on commodity hard disk drives and SSDs. Our early outreach to hyperscalers was first met with skepticism that we could achieve the price and performance necessary to replace cheap hard drive storage. However, this hyperscaler was open to investigating us further and working together, Pure optimized the design of Purity and our direct flash technology to fit smoothly into their compute and storage architectures and optimize the economics to fit their financial targets. With this win, Pure is entering an exciting new hyperscale market.
The design win itself signals that this top 4 hyperscalers future data centers are approved to use Pure's technology as their data storage standard. We expect early field trial build outs next year with large full production deployments on the order of double digit exabytes expected in calendar 2026, which corresponds to our fiscal 2027. We continue in our dialogues with other major hyperscalers as well. Given the significant opportunity that exists for this and other hyperscalers, we anticipate increased investment in our hyperscale line of business over the next year, for which Kevin will provide additional details. I would like to turn now to another significant area of opportunity for Pure, namely artificial intelligence.
AI creates several key opportunities for Pure. First, we continue to provide leading edge high performance storage for public and private GPU farms in machine learning and training environments. This past quarter, we were officially certified for the NVIDIA (NASDAQ:NVDA) DGX SuperPOD architecture designed to provide turnkey infrastructure for the world's largest training environments. We recently announced a strategic investment with CorWeave, a specialized GPU cloud provider to better serve our AI customers. Building on our successful existing supercomputing scale deployment serving thousands of GPUs, we partnered with CoreWeave to make Pure Storage available as a standard option within the CoreWeave dedicated cloud environment.
2nd, many enterprises are considering inference engines and retrieval augmented generation or RAG environments as they look to apply commercial large language models to analyze their proprietary data. This quarter, we introduced the Pure Storage Gen AI Pod, a set of full stack solutions, which reduce the time, cost and expertise required to deploy generative AI projects. In the quarter, we signed a deal with a medical device manufacturer who faced multimillion dollar interruptions because their legacy storage technology couldn't support a real time AI imaging system to catch defective products. With Pure, they can now run AI analytics, capture metadata and train their machines to identify and prevent defects, significantly improving their operations and their quality assurance. 3rd, AI continues to drive customers to modernize and break down infrastructure and data silos to enable easier access to data.
Unlike with other vendors, Pure customers will not need to manage different storage operating environments to meet their varied AI needs. This quarter, one of the world's leading suppliers to the defense and aerospace industry chose Pure for their AI data storage infrastructure. This Fortune 200 customer chose Pure's platform to support a wide range of training, inference and fine tuning, sharing many data sets and storage environments seamlessly across multiple groups in AI activities. The Pure Storage platform will be used to develop multiple AI technologies to enhance human capabilities, improve aviation safety, reduce pilot workload and develop human centric autonomous solutions. Expanding on the Pure platform and turning to the enterprise, Pure is driving the biggest shift in enterprise storage since Flash.
With Pure Fusion, we are transforming enterprise data by virtualizing data management and storage and enabling enterprises to create their own data cloud environment across their global enterprise. Pure Fusion will be available this quarter as a non disruptive free upgrade to all existing PureBlock storage arrays and will be standard in all new PureBlock products and storage service offerings. Fusion will be extended to our file and object platforms early next year. Our advances in data storage innovation for enterprises and now hyperscalers are transforming the industry. Our experience and technology in optimizing flash storage for enterprises has now enabled us to begin to penetrate the largest hyperscalers with our purity based direct flash technology at the largest scale.
Because of their scale, hyperscalers manage their storage far differently than traditional enterprises. Traditional enterprises manage individual storage arrays, which are dedicated to specific workloads. Storage dedicated to a specific workload cannot be shared with other workloads. Therefore, data stored for a particular workload is generally inaccessible for other workloads. Traditional enterprise storage architectures and products create data silos.
By contrast, hyperscalers only have a small handful of storage environments segmented only by price performance levels, low, medium and high for instance. All data from all workloads and customers utilize the same storage environments. This makes data access far easier. Different storage capabilities are enabled by software, not dedicated hardware. Our experience in working with hyperscalers has allowed us to bring the best attributes of data cloud architectures to enterprise data centers with Pure Fusion version 2.0, which will be released this quarter.
Pure now makes it possible for businesses to build their own enterprise data cloud, seamlessly combining on prem and cloud environments to stay agile and competitive in the age of AI. Pure Fusion automates data management, simplifies operations and enhances the DevOps developer experience. Fusion empowers enterprises to build their own enterprise data clouds that federate storage across both cloud and on prem environments, enabling effortless scalability, global accessibility, automated job placement, load balancing and importantly, AI ready data access. Fusion allows organizations to define and standardize their own customized global data management classes, inclusive of performance, cost, resiliency, recovery and location, and to automate delivery of data services to users via API and according to enterprise policy. Fusion fully unifies, automates and delivers the cloud operating model across the Pure platform on premise and in the cloud.
We have also deepened our partnership with major public cloud vendors for enterprise services. With the official preview of the Pure Fusion powered, Pure Storage Cloud for Microsoft (NASDAQ:MSFT) Azure VMware (NYSE:VMW) Service or AVS for short, We simplify enterprise migrations from on premise VMware environments to AVS, enabling independent scaling of storage from Azure Compute Nodes. This first of its kind solution ensures a smooth, efficient cloud transition with minimal IT disruption, boosting cost efficiency, data resilience and storage simplicity. Turning now to the market and broader macro environment. We have not seen any meaningful change in the overall landscape, which remains relatively consistent with the muted IT spending and heightened competitive environments we have seen all year.
Customers continue to contend with higher software, SaaS and cloud costs as well as AI spending uncertainty, placing unanticipated pressure on operating budgets. While I would have liked to have seen more strength from Evergreen 1 in the quarter, we are confident that we are strongly positioned across all of our segments. The cloud is not a location. It is an operating model enabling self-service, speed, consistent operations and faster scaling with greater efficiency at lower costs. With Fusion and our data storage platform, we're turning the vision of an enterprise data cloud into a reality for enterprises.
Our consistent innovation in our industry has been recognized annually by industry analysts such as our recent 11th time leader position in the 2024 Gartner (NYSE:IT) Magic Quadrant for primary storage platforms and our 4th time leader position in the 2024 Magic Quadrant for file and object storage platforms. Energy availability is a global concern and has become a critical risk to hyperscalers operations. Some are even contracting with nuclear power plants to secure a reliable supply of electrical power. Hyperscalers no longer seek low cost power. They're looking for power at any cost.
Expanding electricity production cannot add significant capacity for many years. Alternatively, replacing inefficient hard disk drive storage with pure direct flash technology represents one of the largest power sources presently available to hyperscalers. As power limitations increasingly hinder data center growth, Pure Storage is the only company that can simultaneously enable hyperscalers to cost effectively upgrade their data storage while simultaneously freeing vast amounts of electrical power and data center space for other applications such as AI. Overall, we are very pleased with our progress on our hyperscale opportunity and with the expansion of our enterprise capabilities. I am personally more excited than ever about Pure's opportunity ahead as we drive a new era in data storage management.
With that, I'll pass the mic to Kevin.
Kevin Kreisler, Chief Financial Officer, Pure Storage: Thank you, Charlie. We are pleased with our Q3 financial results exceeding both our revenue and operating profit guidance. Revenue of $831,000,000 grew 9% year over year, while also delivering strong operating profits of $167,000,000 Strong demand continues for our e family and flash array C solutions, enabling customers to move their cost sensitive workloads to all flash. Additionally, renewals of our evergreen subscriptions across our installed base remained robust, demonstrating strong year over year growth. Total contract value or TCV sales for our storage as a service offerings during Q3 was $96,000,000 reaching $253,000,000 for the 9 months of FY 2025.
Conversion of larger Evergreen One opportunities valued greater than $5,000,000 is consistent based on our expectations that we reduced last quarter. Higher velocity EvergreenOne pipeline that we define as less than $5,000,000 is strong. Though in Q3, we experienced a meaningful increase in these opportunities converting to a traditional sale. This contributed to higher than expected product revenues in Q3, while also resulting in lower than expected TCV sales of Evergreen 1. Subscription Services annual recurring revenue or ARR grew 22% to 1,570,000,000 dollars Total RPO exiting Q3, which includes both subscription services and product orders grew 16% year over year to $2,400,000,000 RPO excluding product orders and associated exclusively with our subscription service offerings grew by 17%.
RPO growth is impacted by lower than expected TCV sales of our EvergreenOne offering. U. S. Revenue for Q3 was $562,000,000 and international revenue was $269,000,000 Our new customer acquisition grew by 3.40 customers during Q3 and we continue to serve 62% of the Fortune 500. In Q3, total gross margin remained strong at 71.9%, reflecting strong subscription services gross margin at 77.4% and solid product gross margin at 67.4%.
As anticipated, product gross margin was influenced by our strategic efforts to help customers transition cost sensitive workloads to our e family and flash array C solutions. This approach while resulting in a modest decline in product gross margin underscores our commitment to delivering cost effective, high value solutions for our customers across our data storage platform. Looking ahead to Q4, we expect continued strong growth of our e family and FlashArray C solutions, resulting in a sequential modest decline in product gross margin similar to the trend observed from Q2 to Q3. Operating profit of $167,000,000 and operating margin of 20.1 percent during Q3 were positively impacted by revenue over achievement, strong gross margin performance and continued operating expense discipline. Our headcount increased sequentially by nearly 140 to approximately 5,900 employees.
Pure's balance sheet and liquidity is strong, including $1,600,000,000 in cash and investments at the end of Q3. Cash flow from operations during the quarter was $97,000,000 and reflects a large upfront payment for new software technology that we licensed. Capital expenditures were $62,000,000 and include significant investments to scale operations for our hyperscale opportunities. During Q3, we repurchased 3,600,000 shares, returning approximately $182,000,000 to our shareholders. We also paid $55,000,000 of withholding taxes due on employee equity awards, which also offset dilution by approximately 1,100,000 shares.
We have approximately $213,000,000 remaining on our existing repurchase authorizations. Turning to guidance. We are raising our FY 2025 revenue expectations to $3,150,000,000 representing approximately 11.5% year over year growth. The raise to our FY 2025 revenue expectation is the result of seeing an increase in EvergreenOne opportunities under $5,000,000 converting to a traditional sale. While this dynamic increases product revenue expectations, it also reduces FY 2025 TCV sales growth expectations for our as a service offerings.
With lower TCV sales growth for our as a service offerings, we do not expect the growth of our consumption and subscription offerings will have a significant impact on our FY 2025 revenue growth. As such, we are not updating our FY 2025 TCV sales guidance for our as a service offerings. For Q4, we anticipate revenue of $867,000,000 reflecting 9.7% year over year growth. Now moving to operating profit expectations. Aligned with our increased FY 2025 revenue guidance, we are also raising our FY 2025 operating profit expectations to approximately $540,000,000 reflecting an operating margin of 17%.
For Q4, we are guiding operating profit of $135,000,000 and operating margin of 15.6%. Before closing, I'd like to share some preliminary thoughts on our first transformative design win with a top 4 hyperscaler to help inform your models. The commercial framework for this design win involves licensing our technology and delivering support services. Hardware will not be included as part of our sale to the hyperscaler. We anticipate meaningful revenue contribution and operating margin expansion from this win beginning in FY 'twenty seven, which aligns with our expectations for full scale production deployments reaching double digit exabyte capacities by that time.
To capitalize on this milestone, we will increase operating investments in FY 'twenty six aimed at scaling operations and accelerating our opportunity to deliver Pure's differentiated technology for hyperscale storage. When considering these investments, we expect FY 'twenty six operating margin will be approximately 17%, consistent with our FY 'twenty five operating margin guidance. In closing, as we look ahead, our strategic investments and innovation position Pure as a leader in transforming the data storage landscape. We remain focused on execution while navigating a persistently muted IT spending environment. The growth opportunities ahead are fueled by our advancements across our data storage platform, empowering organizations to unlock greater efficiency, scalability and resilience in their operations.
We are excited about what lies ahead and confident in our ability to drive sustained growth and innovation. With that, I'll turn it back to Paul for Q and A.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thanks, Kevin. Before we begin the Q and A session, I'll ask you to please limit yourselves to one question consisting of one 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.
Conference Operator: Thank Your first question comes from the line of Amit Daryanani of Evercore ISI. Your line is open.
Amit Daryanani, Analyst, Evercore ISI: Thanks a lot. Good afternoon, everyone, and congrats on the hyperscale win. I know you folks have been working on this for a while. Could you perhaps just touch on what drove the decision by this hyperscaler to choose Pure Storage versus building this on their own given most of these hyperscalers do have a fair amount of resources? And then just in terms of financial impact, I heard you folks talk about FDI in terms of sizing it up a bit.
But how big do you think at scale this revenue opportunity or TAM could be for Pure? Thank you.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: Thank you, Amit, and good to hear your voice. As you know, we have been working on this a long time. So there are a number of different factors. At the end of the day, it was our ability to provide a number of different superlatives that got this hyperscaler to believe that our technology was the best fit out of anything they could do. And frankly, given our experience in this area, the fact that we had it ready for them right away and that they wouldn't have to develop it themselves.
1st, in no particular order, really unmatched reliability at scale. First of all, we can scale to these exabyte levels. But secondly, our reliability now, we are pressing to 0.15 percent failure rate per year. That's unbelievably low. That compares to failure rates 5 to 10 times higher for SSDs and for hard disks.
And that reduces overall labor costs and outage costs. Secondly, the massive impact on power savings. If you we have between a 5 and 10 to 1 improvement or that is less power than hard disk environments. At that level, you see data centers saving perhaps 20% of their total power. That's a huge power source if you think about it.
Think of it as a power source rather than power savings. It's power that's then available for them to scale out in other applications such as AI. Accelerated time to value, we can deliver this to them right away. There's no more R and D that really needs to go into that they need to put into place for this to happen. It also fits their architectures very well.
Our software remember is a processor based architecture rather than a SSD based architecture, which means that it fits into their virtualized model of having all of their software operate on a processor. So really it's a much more software defined model. And then finally, unparalleled price and performance. Getting to the same TCO capabilities as hard disks when everything is considered, and to do so with 5 so times the performance of those hard disks, I mean, it's just an equation that's really tough to beat. For the economic side of this, let me pass it over to Kevin.
Kevin Kreisler, Chief Financial Officer, Pure Storage: Yes. Thanks, Charlie, and thanks, Amit, for your question. A couple of things I'd point to, a high level for you on the financial front, including what this opportunity potentially could look like at scale. Charlie mentioned that about 60% to 70% of all this sold today is really driven by the hyperscaler market. And so I think that gives you a good data point in terms of what the opportunity looks like for us long term.
Obviously, that will result for us in terms of significant revenue contributions over time as well as operating margin expansion over the long term as well. In the shorter term, I think there's a couple of considerations I would highlight that I also included in my prepared remarks. In terms of operating margin for FY 'twenty six, we're expecting that to be flat with this year's guidance that we gave at the beginning of the year of 17%. And that's really to enable funding for scaling operations and accelerating the hyperscale opportunity that's in front of us. We don't expect meaningful revenue contribution from this opportunity until FY 'twenty seven and that would also include operating margin expansion.
And it's also important to note that we are not going to include hardware in our sale to the hyperscaler and that's an important consideration for us as well. And then lastly, when we're thinking about revenue contribution from this opportunity and we think about it in relation to data storage capacity purchase, it'd be significantly lower than when compared to say, sale of our FlashBlade e solution. So I think those are some important points for us to be considering. Thank you, Amit. Next (LON:NXT) question, please.
Conference Operator: Your next question comes from the line of Aaron Rakers of Wells Fargo (NYSE:WFC). Your line is open. Aaron, your line is perhaps on mute.
Aaron Rakers, Analyst, Wells Fargo: Yes, sorry about that guys. Hopefully you can hear me now. Thanks for taking the question and congrats on the announcement as well. I guess just unpacking a little bit of what was just said there. I guess, Kevin, my question is, the financial attributes of this, it sounds like it's a licensing engagement where are you licensing Purity on a capacity deployed basis, and also licensing the DFM module and therefore you're not manufacturing those?
Just maybe unpack those mechanics of that. And then as we think about this, do you think that this hyperscale customer as they move into next generational data center footprints that they decide to go 100% flash? Or is it a mix of hard drives and flashes? Any thoughts around that would be helpful. Thank you.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: Yes. Thank you. So let me start with that. So you're thinking about it the right way. We're effectively licensing both the two parts of the technology that is the software as well as the hardware design.
The customer will be buying directly from their integrator. They'll be buying the hardware, if you will, from their integrator. And so you have that correct. So for us, it comes in largely as licensing fees, software fees and support fees. In terms of the way the revenue will roll out is as we've indicated more in our FY 'twenty seven, next year is the ongoing development by this customer of their next generation data center design, which we're intimately involved in.
Now, right now, what we had to prove ourselves in being able to do, being able to prove in that the price performance level of the majority of their storage, which has been true for all the hyperscalers, which is hard disk. But our expectations is that this will be a consistent architecture that they'll use across the vast majority of their storage, including their higher performance storage, which is generally provided by SSDs today.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Aaron. Next question please.
Conference Operator: Your next question comes from the line of Howard Ma of Guggenheim Securities. Your line is open.
Howard Ma, Analyst, Guggenheim Securities: Great. Thanks for taking the question and congratulations guys on the hyperscaler design win. I believe it's a game changer for Pure and a potential speed change in the industry. So, Charlie and Kevin, I want to ask a little bit more about the size and structure of this deal. So, I guess, first is, can you share what the deal length is?
And then on the revenue opportunity, if I just do some back of the envelope math, it's a double digit exabytes in calendar 2026, even if you just assume if you assume $0.10 per gigabyte and maybe half of that is recognized since it's software only, then you get to like $500,000,000 in calendar 26, which means that 2025 is something like it could either be 0 or close to $500,000,000,000 So any color you can share, assuming those ranges are right on 25% would be helpful. And if I could sneak in a follow-up on margins too, could you just comment if the deal will be gross margin accretive and what exactly are the investments that you're making on the OpEx line? Thank you.
Kevin Kreisler, Chief Financial Officer, Pure Storage: Yes. Thanks, Howard. Lots of questions embedded in there. Let me first start with the margin, gross margin impact. Look, I think the way we're and again, we're still pretty high level in terms of what this looks like and we'll provide more details as we go along.
You're thinking about it right in terms of the fact that the majority of the value of the deal will still be hardware. And I think that's important to consider for your models. I think in terms of gross margin, what we've been tracking as company gross margin is a good way to be thinking about it at this point in time. And again, we'll give updates as we go along. And then duration?
Charlie Giancarlo, Chief Executive Officer, Pure Storage: It's a multiyear duration, although the volumes are TBD.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Great. Okay. Thank you, Howard. Next question please.
Conference Operator: Your next question comes from the line of pendulum bohra of JPMorgan. Your line is open.
Pendulum Bohra, Analyst, JPMorgan: Great. Thanks for taking the question. Congrats on the quarter. Charlie, I wanted to ask you, how does this opportunity change or evolve as you kind of go through your motion of density expansion of the DSM modules? Is this currently based on the 75 terabytes or 150 as you move towards the 300 terabyte?
How do you expect the volumes kind of evolve in this particular case?
Charlie Giancarlo, Chief Executive Officer, Pure Storage: Yes. It doesn't specifically depend on any one of these things, although they do know our roadmap and that played a big role in their selection of us. They understand that we tend to lead in the density game. A lot of the I would say the bulk of storage for most of the hyperscalers and certainly this one tends to be on the low cost side in terms of gigabytes and therefore having a solution that stays at the forefront of cost is very important to them. At the same time, they are impressed that they can also utilize exactly the same technology and for higher performance workload environments and that will be based on the lower density, DFMs.
So the real magic here is that it's one technology at almost every level of price performance. And if you're a hyperscaler, having one technology that satisfies all the different levels of what you need to run the operation is a big positive.
Rob Lee, Chief Technology Officer, Pure Storage: And I'll just add one thing, Pendulum. As Charlie mentioned earlier in the prepared remarks, we've been working with hyperscalers to drive this technology into disk replacement for some time. I would say that it was really the introduction of the 75 terabyte modules that really got this particular customer to really pay attention. And as we look forward, right, and as we look at the 150 terabyte generation we're shipping now and our roadmap ahead each step along that path, just makes a solution that much more compelling, from really on the basis of all the superlatives that Charlie outlined earlier, including cost.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Pendulum. Next question, please.
Conference Operator: Your next question comes from the line of Mike Sicos of Needham and Company. Your line is open.
Mike Sicos, Analyst, Needham and Company: Hey team, this is Matt Cletri on for Mike Sicos over at Needham. Thanks for taking our question. I want to clarify, is the commentary around Evergreen subscription TCV and revenue a reiteration of previous expectations? And is there any directional color you can provide on how you're expecting subscription revenue to trend as
Paul Ziots, Vice President of Investor Relations, Pure Storage: a percentage of the overall mix?
Kevin Kreisler, Chief Financial Officer, Pure Storage: Yes. It's a great question, Matt. And yes, that's correct. It's really a shift that we saw this quarter, in particular with our Evergreen One higher velocity opportunities, where we saw those opportunities converting to a traditional sale, meaning CapEx sale. And so what that meant is obviously we saw higher product revenue and that's really what drove our guide increase for the year.
Yes.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: Mac, let me expand on this a little bit. I think what we're seeing in the market is that there's been increased pressure on customer OpEx budgets due to the increase in software costs that unexpected increase that came in software and SaaS costs this year as well as AI uncertainty. And so we're seeing more customers than we had seen in the past, who had been considering a storage as a service offering, which obviously comes out of an OpEx budget, moving then to a standard product purchase, which comes out of a CapEx budget, which has not been under such pressure this year. This market is still evolving. It's still in its early phases.
We think this is a temporary phenomenon. We would expect just because of the superior economics and the superior capabilities that we bring in a storage as a service offering that we'll start to see growth again. But I think this has been a temporary phenomenon due to unexpected high OpEx expenditures by organizations this past year.
Kevin Kreisler, Chief Financial Officer, Pure Storage: Yes. And I think that's actually really important as well, right, that when we think about selling data storage technology as a service, it's still early in its maturity. And with it, there's a tendency to default to what's easier and that's frankly purchasing technology through a CapEx sale or traditional sale.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Matt. Next question please.
Conference Operator: Your next question comes from the line of Simon Leopold of Raymond (NS:RYMD) James. Your line is open.
Kevin Kreisler, Chief Financial Officer, Pure Storage: Thank you. Wanted to check on this, the core we've announcement that you released last month. So obviously, it sounds like that's not the big hyperscale opportunity. So maybe you could help us out in terms of describing the nature of that particular win and some of the color behind the use case and that opportunity? Thank you.
Rob Lee, Chief Technology Officer, Pure Storage: Yes, Simon, this is Rob. I'll take that. Absolutely, we're very excited to expand our partnership with CorWeave, both with the strategic investment we made as well as the commercial partnership, which we announced, which will bring and make available Pure Storage technology to all of their customers in the CoreWeave dedicated cloud. As we mentioned in the release, we've been working with CoreWeave, who is the leading GPU cloud provider for over the last year in standing up one of the largest scale GPU storage deployments for a large joint customer. And building on the success of that environment, this latest partnership really expands that, takes those learnings and makes it that proven design more broadly available for our joint customers.
So really excited to get that announced and already seeing early signs of interest and demand from the customer base.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: And Simon, just so there's no confusion, we had announced a double digit GPU cloud win about 2 quarters ago, I believe. It was Q4, 3 quarters ago. That was CoreWeave. We were not at that point in time able to use their name, but that was the deal that that's the infrastructure that's in place, there now.
Rob Lee, Chief Technology Officer, Pure Storage: And Simon, one last thing. Yes, CoreWeave is not the top 4 hyperscaler that we have been discussing today.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Simon. Next question please.
Conference Operator: Your next question comes from the line of Krish Sankar of TD Cowen. Your line is open.
Paul Ziots, Vice President of Investor Relations, Pure Storage0: Yes. Hi. Thanks for taking the question. And Charlie and Kevin, congrats on the results on this exciting hyperscale event. Charlie, you talked about double digit exabytes in calendar 2026.
Is this based on the agreement in place? Or is that your estimate for how big this opportunity can scale? And also on the license, is it a one time license or is it annually recurring and whether it's tied to exabytes or not? Thank you.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: So that's our expectations for calendar 2026 based on coordination with the customer. But all sale pretty much all sales are TBD. The design win is that we are the plan of record however, just to be clear. They're designing around us where the plan of record for the storage in their next generation design. The licensing Yes.
Kevin Kreisler, Chief Financial Officer, Pure Storage: Go ahead, Kevin. Yes. The licensing for the direct flash technology and purity software will really be tied to the capacity that we'll be shipping.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Krish. Next question please.
Conference Operator: Your next question comes from the line of Mehdi Hosseini of Susquehanna. Your line is open.
Paul Ziots, Vice President of Investor Relations, Pure Storage1: Yes. Charlie, in order to understand your reference to FY 'twenty seven and the hyperscaler win that will help you with double digit exabyte shipment. Can you help us understand what is the estimated exabyte shipment in the current fiscal year, fiscal year 'twenty five?
Charlie Giancarlo, Chief Executive Officer, Pure Storage: No substantial shipments other than test systems this year.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Mehdi. Next question please.
Conference Operator: Your next question comes from the line of Param Singh of Oppenheimer. Your line is open.
Paul Ziots, Vice President of Investor Relations, Pure Storage2: Yes. Thank you for taking my question. So really want to dive into your Evergreen One opportunity. I know you mentioned it's on the more higher velocity sales move back to on prem direct sales. But now that you have more hyperscale opportunities coming in addition to the one you announced today, do you think customers might be more likely to move directly to a hyperscale with your Purity platform and your DTF versus going for an Evergreen One type of sale?
Thank you.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: Yes, I'll take that. It's an interesting question, but I think the answer is mostly no. And the reason is the following. Our the infrastructure that we'll be selling to this hyperscaler and if we were able to win others similar hyperscalers, is the underlying storage technology not the storage services that the customer offers to their customers. Those storage services are based on their own software and therefore are some of the same software services that they offer today.
What does that mean? Largely, enterprises move to the cloud because of considerations around their application deployment, much less around decisions around storage. And so what we think those decisions are largely divorced from where they choose to put their data. So to the extent that they decide to keep their applications on prem, that's where we generally sell our standard product today. And when they decide to keep it on prem, we give them the alternative of using storage as a service that operates both on prem and in the cloud.
So I really see those as 2 very separate things. And I don't think that our offering of storage for hyperscalers using our direct flash technology will dramatically affect enterprise decisions as to where to put their storage. On the flip side, I do think that we can bring some of the best attributes of cloud storage to the enterprise with the other announcement we made today, which is that we've released Pure Fusion for download this quarter. And what that allows companies to do is build their own enterprise data cloud that consists both of their on prem storage as well as storage that they put on our software in the cloud. And this allows them to operate very much in the same way that hyperscalers operate, which is storage as a service, storage as a cloud of data rather than as individual arrays.
So I see them as building upon one another, but I don't necessarily see our sales to hyperscaler for their foundational storage as making a big difference in enterprise decisions as to where they place their applications.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Param. Next question, please.
Conference Operator: Your next question comes from the line of Asiya Merchant of Citi. Your line is open.
Paul Ziots, Vice President of Investor Relations, Pure Storage3: Great. Thank you for taking my question and congrats as well on the hyperscaler announcement. The Evergreen TCV, it appears that most of the customers are transitioning more to a product sale. And you mentioned this was probably a temporary phenomena given pressures and OpEx budgets. As you look at the pipeline of opportunity ahead of you and as you look into calendar 2025, if you can help us understand what your expectations are for this evergreen offering and evergreen services subscription services to ramp up again to double digit growth?
Thank you.
Kevin Kreisler, Chief Financial Officer, Pure Storage: Yes. I appreciate the question. And a couple of thoughts here is, look, when we look at the dynamic of our EvergreenOne conversions over $5,000,000 there's really no change to what we've talked about from last quarter. That was actually quite consistent with our expectations, again, that we spent some time walking through with our investors last quarter. Where the dynamic has shifted a bit for us is on the higher velocity Evergreen One opportunities and this would be $5,000,000 or less.
And that's where we saw a meaningful tick up, if you will, on conversions to a traditional sale. And again, we've talked about that looks to be not sustaining, especially giving our industry leading EvergreenOne service offering. But specific to thinking and guiding or talking about next year, I want to wait to see how Q4 plays out and then have an update for you all next quarter.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Asia. Next question please.
Conference Operator: James Fish of Piper Sandler. Your line is open.
Paul Ziots, Vice President of Investor Relations, Pure Storage4: Hey guys. Just I'll echo my congrats on the cloud win as well. I did want to ask around pipeline first on the hyperscaler cloud opportunity. You guys keep alluding to potential to get other hyperscalers based on your comments. So what are you seeing with this similar licensing potential to other clouds in terms of conversations you have going on with, let's say, the top 10 cloud and AI providers?
And second, maybe on the enterprise side, is calendar 2025 setting up to be a larger refresh year for storage? Or does that evergreen model kind of mute some of the impact? Thanks, guys.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: Yes. Actually, I'm going to turn to Rob, our CTO on the hyperscaler discussion. Rob?
Rob Lee, Chief Technology Officer, Pure Storage: Yes, absolutely. So as we said, our discussions with multiple hyperscalers continue to progress. And I would say they progress because of the attributes, which Charlie highlighted earlier, are the reliability that's unmatched that we can deliver, the significant power savings, certainly the performance envelope we can deliver all driving TCO savings. I think those are the main drivers more so than the specifics of the financial and commercial arrangement. But those discussions continue with multiple additional prospects.
I do think that today's announcement with both our lead customer in this space as well as our strategic collaboration with Kioxia to go and enable broader penetration of our flash technology into the hyperscalers will serve to accelerate that. So we're very excited about the potential ahead of us. At the same time, as we mentioned, the design win is a very, very important milestone that puts us in the plan of record with this hyperscaler. But there's clearly more work to be done, right? And so we'll be working very, very closely with this hyperscaler over the next year as they continue to progress through typical move for production stages as they ramp into ultimately what we're expecting to be double digit exabyte capacities in the fiscal 20 27.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: Thank you. As far as the expectations around enterprise, I believe your question really is, are we do we believe that there's demand being pent up because of a muted IT market. And I do tend to believe that there's some pent up demand being building. But we'll have to see what that looks like as we get into next year.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Fish. Next question please.
Conference Operator: Your next question comes from the line of Wamsi Mohan of of America. Your line is open.
Paul Ziots, Vice President of Investor Relations, Pure Storage5: Yes, thank you. Going back to the hyperscaler opportunity, Kevin, your comments around the revenue contribution in relation to data storage capacity purchases would be significantly lower. Is that just a lack of hardware as part of the mix? Or should we think that the pricing of the software itself is also somewhat lower on a per exabyte basis? And just to clarify, is the double digit exabytes in calendar 20 26, is that from this one hyperscaler?
Or does that bake in additional wins in the future? Thank you.
Kevin Kreisler, Chief Financial Officer, Pure Storage: Yes. Thanks, Wamsi. The double digit exabytes in FY 2027 relates to this hyper scalar design win itself and our expectations associated with that win. And what was your second your first part of that question?
Paul Ziots, Vice President of Investor Relations, Pure Storage5: It's just that your comment on the relatively lower revenue contribution compared to a capacity storage capacity sale. Is that just because of the lack of hardware being sold in the solution? Or is it that the pricing of the software itself is somewhat different from the way that you would traditionally be selling?
Kevin Kreisler, Chief Financial Officer, Pure Storage: Yes. Thanks for the clarification. And then really it's going to be that the primary driver of this will be the fact that hardware is excluded from our sale and that would be really the primary driver. Now when you also think about scale and order of magnitude, pricing will play into it, but it's secondary to the fact that hardware is excluded.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Wamsi. Next question please.
Paul Ziots, Vice President of Investor Relations, Pure Storage6: Next question comes from the line
Conference Operator: of Meta (NASDAQ:META) Marshall of Morgan Stanley (NYSE:MS). Your line is open.
Paul Ziots, Vice President of Investor Relations, Pure Storage7: Great. Thanks. I just wanted to on the volume being TBD, but kind of having a sense of what the architecture will look like. Is the TBD in that you don't know how fast they will roll out this new architecture, but you do know kind of what your percentage of that data center will be or just kind of what are still the moving pieces as you kind of centralize in on kind of what the true volumes will be in fiscal 'twenty seven? Thanks.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: Yes. Thanks. Thank you, Meta. It's largely the exact schedule of the data center build outs that's a little bit of an unknown. I would say exactly what percentage we have of the data center is also a little bit unknown, although we know that we will that we have qualified for a very, very large portion of it.
But we're shooting for even more. So, I would say though that for the most part, it's about schedule, which we're not in control of, more than anything else. They still have a lot of design, if you will, on their part, for other components, including ours, but for many other components of their next generation design.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Meta. Next question please.
Conference Operator: Your next question comes from the line of Eric Martinuzzi of Lake Street Capital. Your line is open.
Paul Ziots, Vice President of Investor Relations, Pure Storage8: Yes. I wanted to follow-up on the change in the Kioxia relationship, given your comments about the hardware being excluded. I would think the hyperscaler would then be working directly with Kioxia. What's changed about that relationship? Because you talk about, hey, more manufacturing capacity and more cutting edge technology, it would seem like you guys are being disintermediated.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: Yes. Thanks for the question. No, we're not being dis intermediated. It is still our relationship with all of the NAND vendors. We're responsible for all the qualification.
We're responsible for the design. We will also be responsible for the design of the direct flash modules themselves. So we're very much in control. The hyperscaler uses an integrator. It'll be the integrator that purchases the hardware modules and provides it to the hyperscaler.
Think of it as a meat in the channel model is probably the best way to think about it.
Rob Lee, Chief Technology Officer, Pure Storage: I would also say that this is it's an expansion of a longstanding relationship that goes well beyond just commercial and capacity. We've had a great collaboration with Kioxia in terms of technology roadmaps and technology design. And that's a key part of this collaboration as well, which is to bring a co designed, if you will, as Charlie mentioned, co designed direct flash technology with their bleeding edge NAND parts to this hyperscaler customer together.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Eric. Next question, please.
Conference Operator: Your next question comes from the line of Tim Long of Barclays (LON:BARC). Your line is open.
Paul Ziots, Vice President of Investor Relations, Pure Storage9: Thank you. Just wanted to ask on the gross margin front. I think the comment was the sequential decline in Q4 should be similar to Q3. Just if you could just clarify that. And then looking out on this line, it seems like the mix might steadily be shifting to E and FlashArray C Series.
Is that something that we would expect on the product and hardware side to continue? And if you can make some comments on competition now that more of the competitive set has QLC based products in their portfolio? Is that piece of the market getting more competitive? Thank you.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Tim, out of respect for some who have gotten back in line with their second question, we're going to maybe try to take 1 or 2 of your questions, not all 3. So
Kevin Kreisler, Chief Financial Officer, Pure Storage: Yes. And maybe I'll Tim, I'll hit the product gross margin and the sequential decline similar to what we saw in Q2 to Q3 and what we're expecting now to Q4. And that really is driven through our strategy of enabling our customers to transition their cost sensitive workloads to our e family and flasher AC solutions. And it's really all about the strong growth we're seeing across these solutions. Now there is less price elasticity for these solutions, given the price sensitivity of the workloads.
So the combination of the increased growth of these solutions and the reduced price elasticity is putting pressure on the product gross margins that you're seeing.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Tim. Next question please.
Conference Operator: Your next question comes from the line of David Vogt of UBS. Your line is open.
Paul Ziots, Vice President of Investor Relations, Pure Storage6: Great. Thanks guys for squeezing me in. So maybe a question Kevin for you on margins next year. You talked about investing in the business to support the rollout in calendar year 'twenty six. And you also mentioned gross margins would be relatively comparable in your fiscal 'twenty six versus fiscal 'twenty five.
Can you kind of help us understand sort of where the investment dollars are going because you've been aggressively investing for the last couple of years? Should we expect the same level of growth in OpEx? Is that kind of the framework? If I think about 2024 into 2025, should it look similarly in 2026? Thank you.
Kevin Kreisler, Chief Financial Officer, Pure Storage: Yes. Great question. And I'll spend some more time next quarter going into more details of our expectations. But what I did communicate is the fact that we believe our operating margin of 17% and that's consistent with what we communicated for this year, will apply for next year as well. And when we think about the main drivers of these investments, I mean, it includes focusing acceleration of our density roadmap with our flat direct flash technology and expanding our supply chain capabilities, qualifying additional NAND suppliers and manufacturing sites and really integration of our technology with the hyperscaler hardware specifications.
And that's where we think the significant incremental investments will come from. And then when we think about it for this year, obviously, we're investing heavily as well from a CapEx perspective. And that's why for the full year of FY 'twenty five, we're thinking our free cash flow margin will be slightly below, 1 to 2 points below our operating margin.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, David. We're going to take our last question from Mehdi, who got back in line for his second question. Thank you very much Mehdi for getting back into the queue. So this will be our last question.
Conference Operator: Your last question comes from the line of Mehdi Hosseini of Susquehanna. Your line is open.
Paul Ziots, Vice President of Investor Relations, Pure Storage1: Yes. Charlie, what is the estimated exabyte share buy in FY 2025?
Charlie Giancarlo, Chief Executive Officer, Pure Storage: It's a little bit hard to predict. It's going to be very low. It's a little bit hard to say because as I said, it's mostly test environments that we're going into preproduction environments. So maybe 1, maybe a couple, something along those lines.
Paul Ziots, Vice President of Investor Relations, Pure Storage: Thank you, Mehdi. Before we conclude, Charlie, I think you had some final comments.
Charlie Giancarlo, Chief Executive Officer, Pure Storage: Yes. I want to thank you all for joining us on today's earnings call. The design win underscores, I think, the critical role that Pure is going to be playing in addressing the high data growth and energy demands of hyperscalers. They're facing very fierce competition for power and even turning to very unique new power sources. But these power sources are going to take a long time to come online.
With power constraints continuing to be a huge issue for them, this is one of the best ways for them to free up dramatic amounts of power on the order of 20% of all the power that they use today and make it available for all of the growth that they have in front of them, while improving the overall performance and capabilities of their existing storage. I want to thank once again our customers, our employees, our partners, our investors and our suppliers. We deeply appreciate all of their continued support and commitment. We look forward to speaking to you again next year. Happy holidays everyone.
Conference Operator: That concludes the Pure Storage 3rd quarter fiscal 2025 financial results conference call. Thank you for your participation. You may now disconnect your line.
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