Pure Storage: Innovation, Channel Partners Key To 28 Percent Revenue Growth Year Over Year

‘We are now setting a bold new path for Pure for our second decade, which will deliver the next set of 10X breakthroughs. Our goal is to take the fragmented and antiquated data storage environment and re-create it into a unified, automated and multi-cloud data experience,’ said Chairman and CEO Charles Giancarlo on the company’s second fiscal quarter 2020 earnings call.

Continuous innovation and a solid indirect sales channel are helping fuel Pure Storage's growth, executives told investors during the company's second fiscal quarter 2020 financial analyst conference call.

The Mountain View, Calif.-based company's solid revenue and income growth during the quarter, which ended July 31, came as the company continued to invest heavily in innovation, said Charles Giancarlo, Pure Storage chairman and CEO, during his prepared remarks to analysts.

"In less than 10 years, we've disrupted the storage industry by creating solutions that are intelligent, automated and modern and deliver 10X improvements in the performance, the cost of operation and usability," Giancarlo said. "We are now setting a bold new path for Pure for our second decade, which will deliver the next set of 10X breakthroughs. Our goal is to take the fragmented and antiquated data storage environment and re-create it into a unified, automated and multi-cloud data experience."

[Related: Pure Storage CEO Giancarlo On Cloud Moves, Competition, HCI, And What's Next]

Pure Storage delivers a modern data center environment, Giancarlo said.

"Pure enables customers to utilize more of their data while reducing the complexity and expense of managing the infrastructure behind it," he said. "We provide a data experience that creates a common operating environment across multiple data centers and clouds, easing operations via APIs and intelligent AI-driven automation. We now offer our customers integrated hybrid cloud and on-prem solutions consumable as a flexible subscription to deliver that modern data experience."

Pure Storage is out-executing its traditional competitors, some of which have expressed concerns around the macroeconomic impacts, Giancarlo said. He did not specifically mention any competitors by name.

"We do not believe the macro environment has affected us this past quarter," he said. "What we do see is a significant transitory NAND supply-demand imbalance, which impacted component prices and the storage industry as a whole. We expect this situation to continue to affect us for the balance of the year given the natural lag between component costs and storage market pricing. However, we are already seeing NAND pricing rise in the spot markets, and the suppliers are delaying additional fab capacity. We believe these signals point to an improving market next year."

Pure Storage's competitors have "inexplicably" decreased investments in innovation and instead are relying on commodity hardware and software while attempting to convince customers price is the primary differentiator, Giancarlo said.

"Customers understand that an investment in innovation is an investment in their future," he said. "Our continued investments in successful innovations is one of several reasons we are growing faster than public market competitors. At our Accelerate conference next month, we will announce groundbreaking portfolio additions and future innovations as part of our strategy for the next decade."

During the question-and-answer period of the conference call, Giancarlo responded to a question about the impact on variable costs of working with the channel and whether Pure Storage has plans to rein in this spending.

Pure Storage changed its pricing structure about a year ago to accommodate the channel, with standard discounts across all product lines and more transparent pricing, Giancarlo said.

"It took us a little time to get all the tools out, that is, all the electronic tools and so forth, but that's been largely done now. ..." he said. "We have provided now very standard pricing into the channel. Of course, when prices drop more rapidly, we follow up with list price changes so that they can follow the same swim lanes, if you will, which we've done and do continuously."

David Hatfield, president of Pure Storage, said that philosophically, the channel has been an incredibly productive asset for the company from the beginning and anticipates that will continue.

A majority of Pure Storage's net-new customers are identified by its channel partners who are also key in mapping the right route to market to gain access to customers such as large-scale enterprises that would otherwise be very difficult to access on its own, Hatfield said.

"And we're driving towards independence so we can actually lower our costs by leveraging the channel over time to be able to quote, configure and sell independent of Pure," he said. "So as I look at the partner ecosystem, those are all accelerators and routes to market. But to the extent they don't deliver that value to us, we'll look at it very practically and make sure we're getting the right ROI for every dollar that we're putting into it."

Hatfield also said that Pure Storage had over 6,600 total customers at the end of the quarter. The company added an average of seven net-new customers per business day, or over 450 new customers in the second quarter.

The company also recorded a 50 percent increase in new million-dollar-deals during the second quarter versus the previous quarter, he said.

When asked for more detail on Pure Storage's innovations, particularly in the fast-growing NVMe storage technology, Giancarlo said his company has been an innovator in NVMe for the back end and front end of its storage technology.

"We were the first to incorporate NVMe on the back end, and of course that helped both margin and pricing and made us competitive in the market [and] helped overall performance of the systems versus the competitors," he said. "And then, just a couple of quarters ago we introduced it on the front end with NVMe-over-Fabric. … We're seeing a nice pickup there, but it's in early days."

Matt Kixmoeller, vice president of strategy for Pure Storage, told investors that a majority of Pure Storage's business includes NVMe technology.

"Comments from the analysts lead us to believe we're far, far ahead of every competitor in that regard," Kixmoeller said.

Giancarlo said that Pure Storage's Rapid Restore flash-storage data protection appliances, based on the company's FlashBlade Object Engine, have proven to be strong product offerings.

"A lot of customers didn't realize they could get back up and running in less than an hour," he said. "And it's proven to be a major mover of that overall FlashBlade product line."

Another new product line, the Pure Storage Cloud Block Store for AWS, is still in beta-testing, and there is no revenue yet to report, Giancarlo said. Cloud Block Store for AWS allows block-based storage to be delivered natively on the Amazon Web Services cloud.

"I feel fairly confident we'll see the first revenue in Q3, but ... it's a subscription revenue so it'll be recognized over the life of the contract," he said. "We have many dozens of beta customers, some of whom are talking about standardizing their application development as they go into the cloud on Cloud Block Store. So, very promising, but very early days."

For its second fiscal quarter 2020, Pure Storage reported revenue of $396.3 million, up 28 percent over the $308.9 million the company reported for its second fiscal quarter 2019.

On a GAAP basis, the company reported a loss of $66.0 million, or 26 cents per share, somewhat higher than the $60.1 million, or 26 cents per share, it reported for the same period of last year.

On a non-GAAP basis, Pure Storage reported net income of $2.5 million, or 1 cent per share, essentially flat with last year's $2.4 million, or 1 cent per share.

The results beat revenue expectations by $3.96 million and GAAP earnings by 5 cents per share, according to analysts surveyed by Seeking Alpha.

Pure Storage shares initially suffered a sharp drop in after-hours trading once the company's financials were released after the close of trade, but later recovered to rise well over 1 percent in after-hours trading.