Pure Storage delivers solid Q4, but is cautious over near-term economic headwinds

Pure Storage’s earnings this week were broadly positive, with revenue, annual recurring revenue, and net income all seeing double digit growth. However, the tense macroeconomic environment is putting some short-term strain on sales cycles for the all-flash storage vendor, which tempered its guidance for the coming year. 

CEO Charles Giancarlo said that Pure would be adjusting its sales motion over the coming months in order to help customers justify the spend on the company’s products. 

The key numbers released this week are: 

• Q4 revenue $810.2 million, up 14% year-over-year

• Full-year revenue $2.8 billion, up 26% year-over-year

• Q4 subscription annual recurring revenue (ARR) $1.1 billion, up 30% year-over-year

• Remaining performance obligations (RPO) $1.8 billion, up 24% year-over-year

• Net income for Q4 of $74.471 million, up from $14.943 million during the same period last year. 

• Net income for FY2023 of £73.071 million, up from a loss of $143.259 million for FY2022. 

Commenting on the results, CEO Giancarlo took a forward looking view and urged caution over the coming months. He said: 

While we are excited about the prospects for our products and the competitiveness of our organization, we are also well aware of the challenges of the current economic environment and the strains that it places on our customers. Since our Q2 earnings call, we have discussed seeing instances of longer sales cycles and caution with large purchases, especially in the enterprise segment.

As expected, these conditions continued through Q4 and close rates of our advanced stage deals continue to be consistent with the earlier quarters. While we were able to generate considerable new opportunities and pipeline during Q4, the development and progression of these new opportunities slowed substantially, especially in our enterprise segment. 

This recent slowdown in customers' purchasing expectations in conjunction with heightened concerns around further tightening monetary actions by the Fed and other central banks and governments, has impacted our growth outlook for the coming year.

But Pure isn’t going to stand still, the vendor is planning to adapt and make changes to meet customers where they are. Giancarlo added: 

We believe that our successful sales motion over the last few years will need to adapt to the additional scrutiny that customers are now placing on purchases. We are, therefore, adjusting our sales motion for the additional economic analysis that customers need to justify purchases with tightened budgets. In particular, focusing our efforts on steps our customers can take to reduce their costs, both capital, as well as operational, while improving their human productivity.

We have high confidence in our long-term growth and strategy but have made operational changes for what we believe will be near-term economic headwinds. We have already taken action to reduce spending across the company and have reduced our spending in budgetary growth plans for FY2024 until we see improvements in the environment.

Sustainability is resonating 

Central to Pure Storage’s offering is its focus on sustainability, which Giancarlo said - despite the economic headwinds - is still front of mind for buyers. The CEO was at the World Economic Forum in Davos this year, where a study showed that digital electronics of all types contribute 4% to 5% of all carbon emissions. Commenting on the role of all-flash storage, Giancarlo added: 

Other studies identify that data centers use between 1% and 2% of all electrical power generated in the world. It is further estimated that data storage accounts for 20% to 25% of data center power usage, increasing to as much as 40% by the end of the decade. 

The vast majority of data centers, over 80%, remain trapped on magnetic hard disks. As we have stated for the past year, Pure's flash-optimized systems generally use between 2x and 5x less power than competitive SSD-based systems, and between 5x and 10x less power than the hard disk systems we replace.

Simple math then shows that replacing that 80% of hard disk storage and data centers with Pure's flash-based storage can reduce total data center power utilization by approximately 20%. 

That same math shows that both data center space and e-waste would also be reduced by similar amounts with reduced labor costs and increased reliability as additional benefits. Reducing the world's data center power, space and e-waste by 20% is a very significant reduction in the world of sustainability and needs to be recognized and amplified. 

This opportunity is resonating not only within the highly specialized field of IT data storage teams, but now also with the entire C-suite, including CIOs, CFOs and even CEOs.

Giancarlo said that in Q4, Pure Storage saw more customers citing energy efficiency as a reason they chose Pure than in any previous quarter to date. And beyond the environmental benefits, he added, customers are citing total cost of ownership as a factor, given the increasing energy prices. 

This brings us to Pure’s latest all-flash announcement for unstructured data, FlashBlade//E, which it announced yesterday. Pure is pitching this as the first point in time at which flash is now cheaper than hard disk. Giancarlo said:

This simple step of replacing hard disk with Pure's flash-optimized storage has significant benefits to any organization, but has been out of reach economically for the majority of secondary tier data because of the higher cost of solid-state flash technology, compared to the lowest cost hard disk drives. 

Large, unstructured data repositories continue to be dominated by 7,200 RPM disks, despite their difficulty to manage, relatively low reliability and their substantial power, space and cooling needs, because superior all-flash systems were too expensive.

Well, I'm pleased to announce that our founders' vision of the all-flash data center is finally here. And the days of hard disk dominance of data are coming to a close. Today, Pure announced FlashBlade//E, a scale-out, unstructured data repository built for large capacity data stores, which provides a lower total operating costs compared to secondary tier disk. FlashBlade//E will ship late this quarter.

My take

The macro environment is tough, but Pure’s product still has plenty of opportunity in the market given that so much of data center capacity still runs on hard disk. And the vendor may actually benefit from some of the other economic factors that other companies are struggling with (e.g. rising energy prices. 

Pure is right to adapt to buyers’ needs, doubling down on proving its worth in stricter budget cycles. But as Giancarlo said: 

We expect to continue to be share takers in FY2024. What we provide in terms of energy efficiency, total cost of ownership and best-in-class technology strongly resonates with our customers, especially in the current environment where organizations need to do more with less.

Despite the lower-than-anticipated revenue guide for fiscal year 2024, we are confident that we will continue to grow faster than the overall storage market and continue to take share from our key competitors.