Pure Storage: Fiscal 2Q17 Financial Results

(in $ million)	2Q16	2Q17	6 mo. 16	6 mo. 17
Revenue	84.7	163.2	158.7	303.2
*Growth*		93%		*91%*
Net income (loss)	(63.8)	(59.6)	(113.0)	(123.3)

Highlights:

Record revenue of $163.2 million, up 92.8% Y/Y
Strong operating margin improvement of 51% Y/Y GAAP and 68% Y/Y non-GAAP
Breaks new ground in unstructured data market with first FlashBlade systems shipped

Pure Storage, Inc. announced financial results for its fiscal second quarter ended July 31, 2016.

Key financial highlights include:
   •   Quarterly revenue: $163.2 million, up 92.8% Y/Y, and ahead of the guidance range of $153 million to $157 million.
   •   Quarterly gross margin: 65.2% GAAP; 66.3% non-GAAP, up 6.7 ppts and 7.1 ppts Y/Y, respectively, and in line with non-GAAP gross margin guidance of 65-68%.
   •   Quarterly operating margin: -36.4% GAAP; -19.3% non-GAAP, up 38.5 ppts and 41.7 ppts Y/Y, respectively, and ahead of non-GAAP operating margin guidance of -30% to -26%.

“We are delighted to report another great quarter with record revenue,” CEO Scott Dietzen said. “We are very pleased with the growth of the business in the July quarter, driven by solid repeat purchase rates, by partnering with the channel to accelerate our go-to-market, by healthy demand from cloud customers – which accounts for more than 25% of our business – and by growing sales to international customers, who made up 25% of revenue.”

In the quarter, the company began shipping FlashBlade, the company’s second major product line.

“While we aren’t planning on FlashBlade materially impacting revenue this year,” Dietzen said. “We’re excited about the expanded range of possibilities that FlashBlade is already offering customers in chip design, genomics and life sciences, big data analytics, software development, IoT, machine learning and film production.”

“We continue to execute well against our operating plan,” CFO Tim Riitters said. “While driving rapid growth, we also improved operating margin year over year. We nearly doubled our business over the last year, while at the same time cutting our operating losses almost 40%.”

In the quarter, the vendor added more than 350 new customers, increasing the total to more than 2,300 organizations, including nearly 20% of the Fortune 500. New customer wins in the quarter include: British Airways, The University of Tokyo, NIFTY Corporation and Sally Beauty Supply. Also in the second quarter, Baylor Miraca Genetics Labs purchased FlashBlade to transform its genetics research pipeline, and the Farm Bureau of Michigan purchased FlashBlade to deliver high performance infrastructure.

Additionally, for the third straight year, the flash player is positioned in the Gartner Magic Quadrant for Solid State Arrays furthest along the ‘Completeness of Vision’ axis.

Third Quarter Fiscal 2017 Guidance:

Revenue in the range of $187 million to $195 million (consensus $190.7 million)
Non-GAAP gross margin in the range of 64% to 67%
Non-GAAP operating margin in the range of -17.5% to -13.5%

Comments

Even if Pure recorded highest historical revenue for the quarter at $163 million, up 93% Y/Y and 17% Q/Q, ahead of the guidance range of $153 million to $157 million - to be compared to -7% Q/Q last quarter -, the company never was profitable with losses approaching $60 million for each of the last three-month period.

More generally, the question is: which companies are profitable in the business of all-flash arrays (AFA) where there is a fierce competition on price? Few of them. Probably start-up Nimbus Data, a relative small actor. Public firm Nimble Storage never was profitable recording a $40 million loss for its most recent quarter. It was $22 million for Violin Memory in its first fiscal quarter ended April 30, 2016. Big storage companies like Dell/EMC, HDS, HPE, IBM and NetApp have to prove it as they do not reveal specifically the profitability of their AFA activity.

There are currently 77 vendors of AFA subsystems in the world. The market is growing fast but there is not a place for all these competitors.

Next quarter, Pure expects sales growing between quarterly from 15% to 19% with weak gross margin suggesting pricing pressure.

Product revenue in 2FQ17 grew 84% Y/Y and 17% Q/Q to $131 million, driven by strong repeat trends and over 350 new customers, a record quarter for new customer acquisitions.

For last quarter, international revenue grew 110% Y/Y, faster than US sales. It now accounts for 25% of its global business against 75% in USA. This compares to a 78/22 split in the prior fiscal year.

Pure maintained strong channel momentum during the quarter with nearly 80% of new logos being brought by its resellers. Top five channel partners are driving triple-digit annual growth in their Pure businesses, according to the company.

25% of business is coming from customers providing Software-as-a-Service, Infrastructure-as-a-Service and consumer cloud services. The vendor now has 150 SaaS customers.

The company continues to spend a lot in R&D, sales and marketing. R&D expenses increased yearly 42%, driven primarily by investments in FlashArray//M and FlashBlade products. Sales and marketing expenses of $78.8 million represented 48% of revenue in 2FQ17 versus $57.0 million or 67% a year ago. They grew 38% as sales and marketing headcount increased.

Pure finished the July quarter with cash and investments of $570.2 million. Free cash flow was negative $33.3 million or negative 20% of revenue compared to negative $45.5 million or negative 54% of revenue in the year ago quarter.

The firm shipped its first new FlashBlade models, though the revenue contribution was immaterial during the quarter.

CEO Scott Dietzen says: "We are tracking well toward our longer-term goal of building a profitable, multibillion-dollar revenue company."

But don't wait for $1 billion revenue and profitability for current fiscal year.

Period

Revenue

Q/Q growth

Loss

2FQ15

24.6

(30.0)

3FQ15

34.8

41%

(65.2)

4FQ15

49.2

41%

(40.4)

FY15

174.5

(183.2)

1FQ16

65.9

34%

(47.6)

2FQ16

74,1

12%

(49.1)

3FQ16

131.4

77%

(56.5)

4FQ16

150.2

14%

(44.3)

FY16

440.3**

152%*

(213.8)**

1FQ17

139.9

-7%

(63.5)

2FQ17

163.2

17%

(59.6)

* Y/Y growth

** For unknown reasons, the total revenue for the year ($440.3 million) published is superior to the addition of the four quarters of the year ($421.6 million) as reported. Yearly loss ($213.8) is also superior to the addition of the four quarters of the year ($197.5 million).