Pure Storage Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 22, 2021

There are 12 speakers on the call.

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Pure Storage Third Quarter Fiscal Year 2022 Earnings Release Call. As a reminder, this call is being recorded. I'd now like to introduce your host for today's conference call, Mr. Sanjay Khurana.

Operator

Mr. Khurana, please go ahead.

Speaker 1

Thank you and good afternoon. Welcome to the Pure Storage Third Quarter Fiscal 2022 Earnings Conference Call. My name is Sanjot Khurana, Vice President of Investor Relations at Pure Storage. Joining me today are our CEO, Charlie Giancarlo our CFO, Kevin Chrysler and our CTO, Rob Lee. Before we begin, I would like to remind you that during the call, management will make some forward looking statements, which are subject to various risks and uncertainties.

Speaker 1

These include statements regarding the COVID-nineteen pandemic and related instructions, our growth in sales prospects, competitive industry and technology trends, our strategy and its advantages, our current and future product offerings and our business and operations. Any forward looking statements that we make 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 During this call, we will discuss non GAAP measures in talking about the company's performance and reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. Additionally, when we This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes.

Speaker 1

An archive of the webcast will be available on the IR website and is the property of Pure Storage. With that, I'll turn

Speaker 2

the call over to our CEO, Charlie Giancarlo. Welcome everyone. As American families and many of you We are very pleased with our Q3 results, which demonstrate what can be achieved when great innovation and enthusiastic customer focus work together. Our Q3 revenue was up 37% year over year with double digit quarter over quarter growth across all product lines and across both U. S.

Speaker 2

And international markets. We are also pleased with our strong profitability trend continuing through this fiscal year. With a sustained and steady growth across all key regions, products and customer segments, Pure continues to take share in this large and growing market. Our strategy to deliver a modern data experience to our customers and partners continues to lead the industry with new firsts almost every quarter as we deliver on all aspects of the modern data experience, modernizing data infrastructure, operations and Pure Fusion, our new software defined multi cloud self-service storage environment is a major advance that will allow customers to better manage their data in a multi cloud environment while enabling developers to deploy sophisticated data storage services on demand. We also announced Portworx data services, which will further allow Together with advances in our Pure One digital experience, Pure is enabling a cloud operating model for enterprises everywhere and engagement has been strong.

Speaker 2

Our next announcement on December 8 will push infrastructure modernization even further and extend the breadth of our FlashArray platform. Today, all of Pure's capabilities are available as a service. We continue to see strong growth across in both of their storage magic quadrants, recognizing our execution and vision in primary storage and in the rapidly growing file and object market for unstructured data. Given our speed and breadth of innovation, it should It will not be a surprise that more and more customers are purchasing the full Pure portfolio. This quarter, the Commonwealth of Massachusetts FlashBlade for unified fast file and object and our Portworx suite to containerize and modernize applications.

Speaker 2

The Commonwealth of Massachusetts said that what put Pure ahead of the competition was our ability to provide them with what they describe as a data plane as a service offering that can work with any data type, provide ransomware protection and rapid recovery and scale seamlessly, all delivered through an SLA for transparency, reliability and cost effectiveness. One of their first use cases will be to modernize an application for Massachusetts law enforcement. Comp. Even under heavy load, increasing the safety of their law enforcement personnel and the public. Pure continues to see strong adoption in the public sector.

Speaker 2

State and local governments and agencies have long been a strong segment for Pure. I am pleased that we are seeing steady progress and traction with U. S. Federal and international governmental agencies. For instance, we now have deployments in all three branches of the U.

Speaker 2

S. Federal government and three branches of the U. S. Department of Defense. Enterprise and commercial markets continue to experience strong growth.

Speaker 2

Pure is proud to deliver our modern data experience to which speaks to the universal appeal of our portfolio. I will now turn briefly to 2 topics very much in the news and on investors' minds. Our global customers and prospects are beginning to appreciate the power and green advantage of Pure. And by power, I am not referring to IOPS or throughput and by green, I am not referring to our evergreen subscriptions. Simply speaking, Pure's products use dramatically less energy and create far less waste and competitive offerings.

Speaker 2

We take this expanded scope and responsibility very seriously and look forward to publishing in helping them achieve their ESG objectives. Supply chain is on everyone's mind and no company is immune to this disruption. As we have reported in the past, Pure has built a very robust supply This past quarter, global semiconductor availability was more challenging than last quarter and we expect this environment to have continued to work well, minimizing impacts to our customers and our business. Knowing that our products are helping people all over the world is incredibly motivating to our team. I am proud of how well Pure employees have innovated, executed and delivered our modern data experience to customers despite the continuing COVID environment and the many other challenges they may individually face.

Speaker 2

I'd like to give a special shout out and congratulations to our new Chief Revenue Officer, Dan Fitzsimmons, who in his 6 years at Pure has risen to every challenge we've thrown at him, most recently leading our Americas business Kevin, over to you.

Speaker 3

Thank you, Charlie, and good afternoon. We are very pleased with the continued robust demand across our entire portfolio as well as our execution, delivering both strong revenue growth and operating profit during the quarter. The high demand we saw this quarter was balanced across our portfolio, key geographies and market segments Our sales growth this quarter also includes sales of Flasher AC to 1 of the top 10 hyperscalers. Our supply chain team and suppliers continue to execute, minimizing disruptions for our customers subscription contracts as of the last day of the quarter plus annualized on demand revenue. Remaining performance obligations or RPO, which includes our committed and non cancelable future revenue, was over $1,200,000,000 growing at 27%.

Speaker 3

We saw an improvement in new customer acquisition with 345 new customers, representing 12% year over year growth. Count has exceeded 9,500 customers, which includes over 50% of Fortune 500 Companies. Now turning to additional specific financial results for the quarter. Total revenue grew 37% to approximately $563,000,000 Revenue in the United States grew 35% Non GAAP total gross margins were 68.5% this quarter. The decline in non GAAP total gross margins, of 66.7 percent in Q3.

Speaker 3

Our sale of Flasher AC to 1 of the top 10 hyperscalers this quarter Non GAAP subscription services margins continued to trend favorably at 72.1% this quarter. We achieved nearly $70,000,000 of non GAAP operating profit and 12.3% of non GAAP operating margin this quarter, Increasing revenue growth, sales efficiency and the effects of the COVID environment contributed to our increasing profitability. We estimate that the effects of the COVID environment are approximately two points of benefit to our operating margin this quarter. These reduced expenses generally relate to significantly reduced travel, physical marketing events and slower than planned hiring. We ended the quarter with over $1,360,000,000 in cash and approximately 4,000 employees.

Speaker 3

Cash flow from operations of $127,000,000 were again very strong this quarter, and Capital expenditures were $25,700,000 during the quarter. We returned approximately $56,000,000 of capital to repurchase slightly over 2,300,000 shares. At the end of the quarter, we have approximately 70,000,000 remaining from our 200,000,000 share repurchase program. Now turning to Q4 guidance. We expect strong demand in Q4 with estimated revenue to be approximately $630,000,000 growing 25%.

Speaker 3

We also expect continued healthy profitability, with non GAAP operating profit estimated to be approximately $90,000,000 in Q4, Given the strong performance of our business in Q3 and outlook for Q4, we are also raising our annual guidance. We now expect that revenue for FY 'twenty two will be $2,100,000,000 growing approximately 25%. Non GAAP operating profit is estimated to be approximately $206,000,000 representing approximately 10% is why our customers are choosing Pure. I want to thank our entire Pure team and channel conference for continuing to deliver terrific results while navigating a dynamic environment. With that, I will turn it over to the operator so we can get to your questions.

Operator

Thank you.

Speaker 4

I don't know if you wanted me to do a dance or something. Okay. So I guess the My main question is, can you rank order the main factors that are driving your outperformance? I mean, Obviously, this is a bit of a weird year given that the comps are pretty easy, but yet you guys seem to be Excuse me really well. So maybe just macro execution, new products and then maybe competitor weakness because we know that some of your competitors are struggling with supply?

Speaker 4

And I don't know if that you think that's factoring in as well to your performance?

Speaker 2

Yes, Jason, thank you for the question. And first of all, I'd say that we had a Hard time describing this quarter, only in the sense that everything went very, very well this past quarter. So calling any one thing out really seemed to only diminish everything else that was going very well. So very as I mentioned, very balanced across new products, The longer standing products like FlashArray also did very well, balanced and strong growth across the world, Great participation from our sales force, so very balanced among the sales force as well. If I were to rank it, I'd have to do so not So much on I'd have to do it on very general terms.

Speaker 2

Obviously, as you point out, the comps are easier, but even if you were to compare us on 2 year comps, the results are very good. I really believe that it is the coming together of the investments The fact that we did invest in enterprise, which has been a stronger market throughout the COVID environment, all of these have really contributed to our strength. And the fact that we've continued to advance the technology to the extent that comp. Even as we pointed out hyperscalers looking to utilize us in their infrastructure. And of course, that will be lumpy business, which we saw this quarter that added to this quarter.

Speaker 2

But again, it's very promising for us In terms of we think all these investments will continue to pay dividends as we go forward. So does that answer that?

Speaker 4

Yes, that's great. And then that's perfect. And then Kevin, is there any early look at fiscal 'twenty three and how we should be thinking about both top line and then the operating margin? Obviously, you've got some Serious outperformance this year, but you just mentioned 2 points coming from kind of COVID related benefits. Any kind of just Broad strokes on fiscal 2023 for us.

Speaker 3

Yes, Jason. And again, when we think about it from a demand lens, continues to be robust as we think about Q4. I wouldn't see a significant change in demand as we look beyond Q4. Now with that being said, it's probably a bit early to get specific views, as you mentioned, for next year. We'd like to see how the remainder of this year plays out with our guide that is reflecting continued strength in Q4.

Speaker 3

A couple of call outs when we do think about next year. Look, these terrific growth rates that Charlie mentioned for all the great reasons, but are also aided as well by the COVID environment. So we do need to take that into account. And then obviously the hyperscaler opportunity that's being reflected in this quarter is a consideration as well

Operator

Your next question comes from the line of Aaron Rakers with Wells Fargo.

Speaker 5

I guess I want to kind of build off that last point. Can you help us appreciate How meaningful that cloud opportunity was this last quarter? I think last quarter you talked about an 8 figure deal. Did that all impact this last quarter? Is there any expectation of follow on for cloud opportunities?

Speaker 5

And maybe in that same vein, can you talk about, I think recently you announced a relationship or a deal with Microsoft Azure for EDA. Was that the cloud relationship or is that something separate from your opportunities? And I have a follow-up.

Speaker 2

Right. Okay, Aaron. So first of all, no, the EDA announcement was separate From the top 10 hyperscaler, obviously, if we felt we could have announced it, we certainly would have, but the customer is Wants to keep this confidential, so we certainly respect that on the hyperscaler. But the EDA one is one that, yes, we work very closely With Microsoft to develop it where customers wanted to have very high speed performance on EDA workloads and It's not necessarily restricted or we don't believe that the architecture is restricted to EDA workloads, but We think that it's something that's going to scale well for us. So we're looking forward to that.

Speaker 2

No, but the hyperscaler was different. I'll let Kevin Respond with how we've given you some insight into how the hyperscale affected the quarter.

Speaker 3

Comp. Yes. And it's not that different than how we were talking about it last quarter as part of our guide. But hey, if you think about with the quarter being completed and if we were to The hyperscaler opportunity that came through this quarter, our year over year growth would more likely be in the high 20s is a good way to be thinking about it.

Speaker 6

Okay. And that's helpful. And just so

Speaker 5

I understand, there's nothing embedded in this quarter comp? From a hyperscale top 10 win?

Speaker 2

We announced the win last quarter, but we booked it Fulfilled it this quarter. So that is in Q3.

Speaker 6

Okay. And then as a quick follow-up,

Speaker 5

I'm just curious on gross margin. I know you talked about the hyperscale deal impacting gross margin, but product gross margin, cost headwinds and stuff, do Do we think that those start to abate? Do you feel comfortable still that 70% plus gross margin that you outlined at the Analyst Day is achievable and how should we think about that next couple of quarters? Thank you.

Speaker 3

Yes, that sounds great. And that gross margin, I think on the 70% was more akin to Our subscription business. But hey, when we think about it from a product gross margin or a total perspective, look, the largest driver Really, this quarter was a hyperscaler opportunity. It did have some headwind, obviously, with the increasing component cost that we saw in the quarter, but that would be a much lower driver, if you will, in terms of what we saw in the sequential and year over year drop that we're contemplating.

Speaker 1

Thank you. Yes.

Operator

Your next question comes from the line of Simon Leopold with Raymond James.

Speaker 7

Thanks. Appreciate you guys taking the question. I wanted to maybe just get a better sense of where you are in terms of the Pure software product revenue or contribution within the mix. So I know Pure Fusion is new, but Portworx has been around a bit. Is this something you could break out for us?

Speaker 2

Well, Simon, as you probably know, my bias is Go through their own cycles. They tend to be lumpy and then you have too much focus on the new products, not enough On the total revenue line. What I would say is that we gave color last quarter On Portworx as well as Pure as a Service, they're growing very well, typically comp? In the 3 digit percentage range on a year over year basis. And we're seeing more of the same.

Speaker 2

But I would say, in terms

Speaker 3

subscription as well as product. We're seeing some nice traction, as Charlie pointed out, on subscription ARR, again growing 30% year over year. Comp. So pleased with what we're seeing there. And then obviously software is a large driver in the value and the economics we're seeing as we look at our growth numbers.

Speaker 7

Thanks. And just as a follow-up, I wanted to see if maybe you could unpack a bit about the use case for this hyperscaler. And what I'm really trying to get at in this question is an understanding of if this is a repeatable opportunity either with this customer for other customers. I'm looking for an understanding of the use case and whether we should think of this as a new leg of growth or more of a one off project. Thank

Speaker 2

you. Right. Thanks, Simon. I think also Aaron might have referred to this early on and we didn't respond to it Specifically. So I did want to start off where with this particular hyperscaler, we do believe it's repeatable.

Speaker 2

No reason for us not to believe that it's Repeatable and conversations continue. But let me let Rob weigh in on the general use case.

Speaker 8

Yes. So as far as the use case, this is part of their production environment. It's an environment that has a very large amount of data and they're using this environment to Essentially do analysis and understanding of how to better deliver the hyperscale service. So it is part of the production environment. I think as far as repeatability and understanding just the broad applicability of the use case, I think what's notable is The overall size and capacities that we're talking about here, the performance requirement and the fact that this is a very sophisticated I pretty quickly came to the conclusion that FlashArray C was really the only option that was going to solve the balance of their needs, performance, price, footprint, so on and so forth.

Speaker 8

Comp. And I think it's also worth noting that the overall footprint savings was a key part of winning the initial deal, But we're now also undergoing work with this same customer to quantify the environmental savings and benefits that we're delivering to them with a FlashArray C solution as part of their ESG analysis. And the nice thing is that these are all benefits that we're able to deliver to each and every one of our customers.

Speaker 9

Thank you for that.

Operator

Your next question comes from the line of Rod Hall with Goldman Sachs.

Speaker 9

Hey, guys. Thanks for taking my question. This is Bhalla on for Roy.

Speaker 2

I just

Speaker 9

have a quick clarification. The 10 ks from earlier this year just to indicate that there could be an extra week in fiscal Q4. I might be wrong, but I just wanted to double check.

Speaker 3

Spot on. Yes. For this for Q4, As we contemplate Q4, we do have an additional week with our fiscal year and that is contemplated both from a revenue side and an OpEx side. Comp? The revenue and OpEx is about equal.

Speaker 3

So I view it as a bit of a headwind for us in terms of profitability. Comp? Probably around $14,000,000 $15,000,000 both on the revenue and the OpEx side is a good way to be thinking about it in terms of the additional week.

Speaker 9

Got you. Very helpful. And then a follow-up. So I just want to double click on this Obviously, but I guess I'm wondering, do you see more potential hyperscale customers tracked going forward? Are you having more conversations with more cloud players?

Speaker 9

Or if anyone is actually might be Evaluating asset efficiency, any color on the road map there would be very helpful.

Speaker 2

Yes. Well, first of all, we believe Very strongly that as flash continues to decline relatively to the declines in magnetic disk There is inevitably going to be a crossover point where every player everywhere, including the hyperscalers, will start switching from disc comp. The issue with these large environments is that they're lumpy, uncertain. When they do come, they're big. When they don't come, you're waiting.

Speaker 2

So I think it's a little bit too early for us to speculate on it, but there are conversations and it is We believe that it's just a matter of time before Flash is used in a more substantial way, let's say in a mainstream way In the hyperscale environment.

Speaker 9

Thank you, Charlie. And again, quick follow-up. So, actually, the Are you assuming any revenues in fiscal Q4 from that hyperscale win?

Speaker 2

We are not expecting revenue From that particular hyperscale in Q4. We shipped it all at that point. Well, I'm sorry. Okay, there's some residual revenue for it in comp. But for the most part, no.

Operator

Your next question comes from the line of Steve Enders with KeyBanc.

Speaker 10

Okay, great. Thanks for taking the question.

Speaker 1

I just want to touch

Speaker 10

a little bit more on the 4Q guide, pretty strong revenue that

Speaker 6

you're expecting to see there. But just kind of wondering

Speaker 10

kind of what's built into the assumptions within that guide? And Yes. How should we be thinking about kind of how the macro environment has played out over the past 90 days that's leading

Speaker 7

to the rate guide here? Well, let me start and then

Speaker 2

I'll let Kevin go into it. It's based on what we see in the market today and the performance that we had in Q3. We're certainly not contemplating any major changes to the current direction of the world economy. So the expectation is generally more of the same in terms of macroeconomic forces. We're expecting COVID to continue probably if you've been watching the news and watching the figures, comp?

Speaker 2

It's having its seasonal effect. So seasonally, it will get a bit worse, but we're not expecting that to have a major change to In our expectations, it's what business will how business will perform this coming quarter. What we see is a strong demand And we believe that that strong demand is based on fundamentals of fundamental demand. Comp? We don't think that at least for our market, there's a lot of phantom demand out there.

Speaker 2

And our lead times have stayed relatively low. Our customers know that, so they can order when they need it, not to game the system.

Speaker 3

Yes. And Steve, I probably wouldn't have Much more to add on that. I think this we've got good visibility in terms of how we're looking at Q4. To Charlie's point, Demand still is robust in terms of what we're looking at. No real change in the trajectory.

Speaker 3

Understanding that there's a little bit more in terms of what we're on a wave of COVID on the European front. But again, I don't think those will be meaningful drivers as we think about comp? Q4.

Speaker 10

Okay, great. That's helpful. And then just on the hiring environment, it sounds like it might have been a little bit behind plan in the quarter. But is there kind of anything to call out there in terms of where the biggest challenges are and When you kind of see that beginning to reverse?

Speaker 2

Yes. I would say that the Being a bit behind in hiring is across the board. There's no one, let's say, function that stands out. To put some context on it, comp? We're seeing somewhat slightly higher attrition than average years, certainly a lot more than last year.

Speaker 2

Last year was very low by comparison to an average year. Comp? This year is a bit higher. I would say that recruiting interestingly is the quality of resumes that one can Bring on for interviews now is high. So the good news is that there are lots of good people available.

Speaker 2

The bad news is there are a lot of comp? Lots of slots that we need to fill, but we're confident we'll be able to catch up.

Speaker 6

Yes. And I would just add on

Speaker 3

to that that we are seeing a nice pickup In terms of our hiring cadence, thanks to our talent acquisition team doing a nice job on that front. And that's been contemplated obviously comp. In the Q4 guidance, you'll see a pickup in OpEx sequentially. And that's not only the additional week, but also contemplates the pickup in pace that we're seeing and hiring talent as well.

Speaker 10

Okay, perfect. Thanks for taking the questions.

Operator

Your next question comes from the line of Wamsi Millan with Bank of America.

Speaker 6

Hi, thanks for taking my question. This is John on behalf conference. My first question, so you've mentioned about the supply chain constraint headwinds faced this quarter. I was just wondering if you could maybe

Speaker 3

Yes. Maybe what I'll do is talk just more tactically in terms of the impact for the quarter And then maybe have Charlie just talk about it more from a holistic standpoint because I think the operations team and our engineering team as well as our comp. And look, when I look at it for the quarter, obviously, you saw a drop in product gross margins increases that we saw during the quarter. That was moderated slightly by the fact that our ASPs are still quite stable and we're quite competitive in the marketplace. But with that, I'll turn it over to Charlie to give some more holistic macro comments.

Speaker 2

Yes. On the macro side, we see all costs associated with the supply So component transformation and logistics costs have all increased on an annual basis, we think on the order comp? Of approximately 10%. So that's a significant cost increase in what is While supply chains will remain tight, we're expecting to not see the same kind of Increases in costs going into next year. Now it is, as Kevin said, a very dynamic market.

Speaker 2

On to predict and that causes swings in pricing. So it's a as Kevin mentioned, it's a very dynamic market and It's hard to get a complete or it's hard to have complete confidence in exactly where it will go.

Speaker 6

Particularly in storage and if you have any trends that you would call out. Thank you.

Speaker 2

Yes. On the enterprise side, it's been quite robust. So we think quite good. A lot of demand, a lot more data processing taking place and upgrading. So we've seen it quite strong.

Speaker 2

Commercial, while it's recovering, is recovering slowly. I would say that in general, that's probably still down from where it might have been Price storage actually has been quite

Speaker 1

good. Got it. Thank you.

Operator

Your next comes from the line of Tim Long with Barclays.

Speaker 1

Thank you.

Speaker 11

Maybe Charlie, if you can talk a little bit or Kevin, if you want to chime in. Just obviously, good margin performance in the quarter. Just curious how I know you don't want to get into Too much of next year, but going to be a lot of moving parts, I guess, with some of the benefits becoming offsets with return to work and things like that. So Kind of how we're thinking about leverage over the next year or 2 in the model. And then second, I wanted to just go back to the hyperscale and FlashArray See if I could.

Speaker 11

It looks like the pricing resulted in a much lower gross margin for that business. Just curious, how was that pricing set? Is it somewhat that you had to get close to disc? Is that kind of what the bogey is going to be for all Hyperscale deals or will that be different and or potentially is it maybe a tougher margin upfront and then on repeat business it's a little bit better. So if you could just talk about kind of the dynamics around pricing and potential movements there?

Speaker 11

Thank you.

Speaker 2

Yes. I don't want to get too far ahead of next year and we will certainly have a better view of this as we when we get into our Q4 earnings call and and projection for next year. What I would say is we're planning that we'll still be under COVID rules through certainly Q1 and probably most of comp. And then as we get into the summer, that's when we think we will start seeing customers being open to visits and therefore open More investment. And so I think what you're going to see is a gradual easing into those Additional expenses.

Speaker 2

At the same time, we expect there to be as you saw during this even the COVID period, our margins didn't really change all that much, but we have Continuous basis as we go forward based on greater productivity in the organization and that's largely based on scale.

Speaker 3

Yes. And then I'll just chime in a little bit more on that and then we can move to the hyperscaler topic. But when we think about the full fiscal year with our guide for Q4, which puts us around 10% non GAAP operating margin. We're thinking about 2 to 3 points of that is tailwind from COVID related aspects, whether that's less whether that's less physical events from a marketing standpoint or from a hiring standpoint. And obviously, we're seeing a nice pace and up Hopefully, we're giving you some nice roadmap in terms of how we're thinking about that.

Operator

Right.

Speaker 9

Good. Thanks.

Speaker 2

On C, I'll go back to that. Improve over time both as flash costs improve, but frankly as they gain more experience with Pure as a provider.

Speaker 1

Okay. Thank you.

Operator

Your last question comes from the line of Karl Ackerman with Cowen.

Speaker 6

Yes. Thank you. Good afternoon, gentlemen. Kevin, I have two questions, please. First one for Kevin.

Speaker 6

Most of the upside this I'm curious whether the upper revised outlook for January is also driven primarily by product revenue, Particularly given your planned expansion of your FlashArray platform that you highlighted in your prepared remarks. If you

Speaker 2

could comment on that, that would be helpful.

Speaker 3

Yes. And I guess my view on this, and I'll let Charlie and Rob add some commentary as well. Yes, absolutely, we've gotten great momentum fueled by high demand across our portfolio, which is that translates to the growth rates you're seeing in product revenue. But obviously, we're also seeing good traction with our subscription business, 30% growth in our subscription ARR. And obviously, that's going to Have a lag before that works its way to the P and L.

Speaker 3

But this comes back to how balanced Whether that's specific to sales of our solution. So that's really the storyline here is the balance strength that we're seeing

Speaker 2

And or subscription base, of course, we always want to allow the customer to buy in the way in which they want to provide want to buy rather. But we're expecting I would say we're expecting this quarter, Q4 to be balanced as well. So we are seeing just to be clear, we're seeing good growth in Pure as a Service and obviously the way that works from Given that it's ratable, that starts off slow, so you don't see it quite as readily. But again, I expect it to be balanced going into this quarter.

Speaker 6

That's helpful. Thank you. I guess as my follow-up, I did want to touch on margins a little bit. It seems that the entire upside in your revenue outlook for January is falling directly to operating income, which is Quite impressive. Now that it's quite impressive and now operating margins are in line with your long term outlook.

Speaker 6

On one hand, it seems you're benefiting from volume leverage. On the other, you're at least offsetting the rising input costs through pricing actions. So in that vein, could you discuss the ability to perhaps further pass On rising input costs as they happen. And secondarily, how you see margins improving comp may improve as subscription revenue becomes a larger piece of your revenue next year? Thank you.

Speaker 2

Yes. Well, as we've said in the past, comp? We don't specific we don't price on a cost plus basis. We price based on competition in the market. One of the unique things about this market is that nearly every new opportunity even in an existing customer is newly negotiated with other with competitors.

Speaker 2

Comp. And as such, we're responding primarily to the pricing of our competitors rather than, let's say, a standardized discount for that customer. Fees and costs, we expect relatively stable margins. It will vary based on mix. Obviously, the hyperscaler deal, But for the most part, we think it will stay relatively stable regardless of costs.

Speaker 2

Now part of the mix as well is, in fact, As you point out, the subscription offerings, we expect long term that those subscription offerings, because they will have higher value, we'll be providing more services

Speaker 3

Our view on subscription margins really hasn't changed since our Analyst Day and our communication and expectations on that. But to Charlie's point, is going to give us some tailwinds as we think about it longer term for subscription gross margins. Shorter To your point, yes, we are very much pleased with what we're seeing in terms of increased profitability, even considering The tailwind from COVID. So we like what we're seeing. We'll definitely still trade and prioritize growth, But we very much have the belief that we can drive growth and increased operating leverage as well.

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