Pure Storage Inc

NYSE:PSTG

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen thank you for standing by and welcome to the Pure Storage Q1 Fiscal 2021 Earnings Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today [indiscernible], Investor Relations for Pure Storage. Thank you. Please go ahead.

[Unidentified Company Speaker]

Thank you and good afternoon. Welcome to the Pure Storage first quarter fiscal 2021 earnings call. My name is [indiscernible] Investor Relations at Puree Storage. Joining me today are our CEO, Charlie Giancarlo; and our CFO; Kevan Krysler; and our VP of Strategy, Matt Kixmoeller.

Before we begin, I would like to remind you that during this call, management will make forward-looking statements which are subject to various risks and uncertainties. These include statements regarding the COVID-19 pandemic and related disruptions, our growth in sales prospects, competitive industry and technology trends; our strategy and its advantages, our current and future product offerings and business and operations including our operating model. 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 filings.

During the call, we will discuss non-GAAP measures in talking about the company's performance and reconciliations of 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 IR Web site and is being recorded for playback purposes. An archive of the webcast will be available on the IR Web site and is the property of Pure Storage.

With that I'll turn the call over to our CEO, Charlie Giancarlo.

[Charlie Giancarlo, Chief Executive Officer]

Good afternoon everyone. Thank you for joining us on today's earnings call.

I hope you, your family, friends, and colleagues are all healthy and staying well. As you will have noted at the beginning of this call, Matt Danziger, our Head of Investor Relations is no longer with us. Matt died unexpectedly last month from a non-COVID-related heart attack, due to an undiagnosed genetic cardiovascular disease. Matt was healthy, vital, and intelligent and always a joy to work with and spend time with. He touched the lives of everyone he met and his passing has saddened us all. Our hearts go out to his family and friends.

I'd also like to take a moment to share my thoughts on the current health crisis that has affected everyone around the world. Some of you may know that I contracted COVID-19 in mid-March, and that experience has provided me with a deep personal appreciation for this virus and its impact.

The changes in people's lives and livelihoods are truly extraordinary, and our expectations of what is or will be normal is forever changed. Every day, each new report on the crisis brings an uneasy mixture of anxiety, uncertainty, and hope about the future. The global Pure team has had the great fortune of being able to work virtually. So, we are inspired by and appreciative of the world's first responders and essential workers. We thank all those who have provided the services that have been critical to meeting our basic needs and tending to the well-being of others during this time.

Within Pure, every group has handled this crisis with courage and responsibility, steadfast in their mission to help our customers and our company. We continue to demonstrate that Pure has best-in-class teams, and that our products and services are simple, reliable, and trusted. It is this potent combination that enables Pure to solve the critical and immediate needs of our current and new customers.

This past quarter especially, we were proud to be relied on to deliver products and services to critical infrastructure on the front lines, including hospitals, labs, governments, schools, banks, communication systems, research institutions, and first responders. Our highly automated systems enabled customers and our partners to remotely install and manage our products and solutions within an hour or two rather than days.

A major state government was hit with a ransomware attack in the early days of the crisis. Pure was able to rapidly deliver our ransomware solution providing protection against future attacks. A major collaboration network increased their pure footprint after a huge increase in traffic and demand from new customers due to COVID-19. The customer chose Pure because they experienced failures in their installed base of legacy solutions under the high load and were unable to obtain new product from those vendors to scale their systems. Pure was able to deliver and install Pure solutions into the customer’s production network within 24 hours of our first call.

A retail customer suddenly needed all of their employees to work from home when previously few did, rapidly increasing the load on their infrastructure. We've made this a smooth transition with robust remote capabilities and Pure as-a-Service, our true multi-cloud, consumption-based contract.

In each case, Pure was able to deliver and install products expeditiously, enabling customers to be in full production within 72 hours and in some cases sooner from the first call. Our technology is also enabling those in search of a cure for this scourge or tracing the spread of the virus or in analyzing the structure and behavior of the disease. We have donated our products to companies involved in the fight against COVID-19 including shipping FlashBlades to Folding@home, an organization focused on simulating the dynamics of COVID-19 proteins to find new therapeutic solutions through crowd computing. I am proud of our supply chain and customer support performance and resiliency, which not only maintained the high level of service and support our customers demand, but went above those expectations to serve customers with critical needs.

Pure’s global supply chain strategy and our now fully tested business continuity plan prepared us well for this crisis. We continue to lead with innovation across all aspects of the business and our performance this past quarter was another validation of our modern data experience strategy, helping customers transform their storage operations to be simple, reliable, fast, and flexible.

I was very pleased with our financial performance for this past very unique quarter as year-over-year revenues grew 12% to $367 million. Our revenue performance was broad based across all products and services, including the continuing strength in our FlashBlade offering and our subscription services.

Sales of our portfolio solutions, including both FlashArray and FlashBlade together continued to grow and existing customers increased their footprint in the quarter. FlashBlade solution sales to both new and existing customers also grew year-over-year and now represent approximately 15% of our total sales. Earlier this month, we announced the release of Purity 3.0 on FlashBlade, which adds significant new features to the world's most performant file and object platform.

In this latest release, we've added simple and efficient file and object replication for disaster recovery in hybrid cloud as well as Kerberos and NFS 4.1 support. These features expand FlashBlade’s broad range of use cases including modern analytics, rapid restore, and ransomware.

Customers have rewarded our leadership and innovation with nearly 100 organizations to date each spending more than $1 million in FlashBlade to consolidate their unstructured data for their growing list of modern, high-performance applications.

Pure's subscription services had an outstanding quarter. Subscription services include our non-disruptive Evergreen services, Pure as-a-Service, and Cloud Block Store for multi-cloud environments. Evergreen reduces the risk and economics for customers by ensuring that Pure's on-premise systems never grow old. After seven years, competitors are still playing catch up to Pure's Evergreen program of continuous non-disruptive upgrades, providing customers a subscription to innovation rather than a contract for obsolescence.

But Pure has leapfrogged yet again with our Pure as-a-Service offering, also reducing the risk and economics of storage in the multi-cloud age. Customers leveraging Pure as-a-Service have the flexibility to determine their cash and capital commitments in the short as well as the long term, the flexibility to own or to subscribe and the flexibility to change where they place their data at any time. They have the freedom of a multi-cloud contract for storage and to only pay for what they use, when they use it, regardless of where they place their data.

Customer flexibility through Pure as-a-Service is the right option in this uncertain COVID environment, particularly in a period where it may be difficult to predict long-term requirements. In Q1, a large U.S. national bank as a net new logo made a multimillion dollar commitment to Pure's entire portfolio and specifically our Pure as-a-Service offering to transform their storage needs and move off of a legacy vendor’s disruptive refresh storage model.

This pandemic has changed the way we work with the speed far beyond any pundit’s predictions for technology alone. There is an increased and likely permanent customer demand for greater hands-free management, automation, consolidation, and flexible consumption models. Pure has a great lead in these capabilities as I shared in the customer examples and demand and interest for Pure as-a-Service has increased dramatically.

Moving on to Q2. It is now right to state that there are uncertainties in the global economy and unpredictability in the IT market as customers focus on the urgent push out the nearly important and reassess ongoing IT initiatives. Customers are reevaluating their spending in all areas as they navigate their own challenging environments. We have taken these dynamics and uncertainties into account with our measured Q2 expectations.

Looking beyond the quarter, I am confident that we can navigate the choppy waters of our market. We remain committed to our long-term priorities while managing expenses prudently. We will continue to take market share with our superior and differentiated technology, services and customer first culture. And I am confident that we will lead the market exiting the recession.

As we go forward and shelter in place orders are lifted around the world, Pure will continue to do its part to protect our people and guard against community spread of this virus. Our dedicated crisis planning team meets daily to manage our global response to the pandemic. We have regional phase plans based on local conditions to carefully reintegrate employees into the workplace, while planning for a large fraction to continue working from home for some time. We will do what's right for Pure, our customers, our teams around the world and each and every employee.

Lastly, I'd like to take a moment to thank our global employees executing as one virtual team for their tenacity, focus and genuine enthusiasm to help our customers, our partners, their teammates and local communities throughout this crisis. If anything, our teams are more connected than ever.

Personally, I have enjoyed our new routine of interacting with the entire company weekly through virtual all hands broadcasts. I look forward to connecting with all of you and the broader Pure community, our customers and partners at our Accelerate Digital and Pure Partner Digital events on June 9 and 10.

And with that, I'll turn it over to Kevan.

[Kevan Krysler, Chief Financial Officer]

Thank you, Charlie.

Financial performance during Q1 was solid, despite significant economic disruption during a difficult and constantly changing environment. Total Revenue during Q1 was $367 million growing 12% year-over-year, product revenue was $247 million growing 3% year-over-year and subscription services revenue was $120 million growing 37% year-over-year, which includes revenues from our Evergreen subscriptions, Pure as-a-Service and Cloud Block Store.

Subscription services revenue represented approximately 33% of total revenue during Q1. Total revenue in the United States during Q1 was $264 million growing at 15% year-over-year and total international revenue in Q1 was $103 million growing 5% year-over-year. Given the current environment that we are navigating, I will provide some additional color around our sales performance during the quarter.

Total bookings or sales during Q1 grew 24% year-over-year and is broadly diversified across industry verticals and customers. Sales during Q1 to our enterprise and government customers in the United States were solid and growing, while we saw overall weakness in our commercial business. We are pleased with our partnership and continued momentum from our channel partners worldwide.

Global channel source sales continues to represent a growing and meaningful percentage of our total sales. New customers acquired during Q1 were approximately 300 customers compared to approximately 350 customers during Q1 of the prior year.

Our business during Q1 benefited from increased demand of mission critical IT needs arising in response to the unprecedented pandemic. We fulfill these orders without significant delays and supply shortages based on the remarkable efforts and resilience of our global supply chain and manufacturing operations. Partially offsetting this tailwind, we saw an increase in opportunities in our pipeline that were expected to close during the quarter but did not close.

Non-GAAP gross margins in the quarter for product and subscription services continue to be solid and are a result of our product solution differentiation in the market. Total non-GAAP gross margin in Q1 was 71.9% increasing 3.8 points year-over-year. Now non-GAAP product gross margin in Q1 was 73.3% increasing 4.6 points year-over-year and non-GAAP subscription services margin in Q1 was 68.9% increasing 2.6 points year-over-year. Total non-GAAP operating loss during Q1 was approximately $5 million compared to a non-GAAP operating loss of approximately $31 million during Q1 of the prior year.

Reduced travel, marketing and depreciation expenses as well as slower than planned hiring contributed to lower non-GAAP operating losses. Non-GAAP net loss during Q1 was $4 million and non-GAAP net loss per share was $0.02. Non-GAAP net loss in Q1 of the prior year was $28 million and non-GAAP net loss per share was $0.11.

Weighted average shares used for the non-GAAP net loss per share calculation was 263 million shares in Q1 and 245 million shares in Q1 of the prior year.

Operating cash flow for Q1 was $35 million and was $7 million in Q1 of the prior year. Operating cash flows during Q1 benefited in part from strong collections of our receivables. Free cash flow for Q1 was $11 million and was a negative $18 million in the prior year.

Total cash and investments at the end of Q1 was $1.27 billion compared to $1.3 billion at the end of fiscal 2020. We have a very strong balance sheet that provides us with flexibility to handle a wide range of scenarios.

Total deferred revenue for Q1 was $706 million, compared to $697 million at the end of fiscal 2020 and $564 million at the end of Q1 of the prior year. We are pleased to see the continued growth in our multiple subscription service offerings.

During Q1 we returned to $70 million to shareholders through share repurchases of 5.96 million shares approximately $65 million remains for a share repurchase authorization.

Total headcount at the end of the quarter was approximately 3,500 employees, compared to approximately 3,400 employees at the end of fiscal 2020 and 3,150 employees at the end of Q1 of the prior year.

Now moving to annual guidance, the core fundamentals of our business remains strong. However, we are withdrawing our annual guidance given significant uncertainty around demand for the remainder of the year due to the global economic contraction caused by COVID-19. As we progress through the year, we expect to continue to see strength in sales and adoption of our subscription services.

Our Pure as-a-Service and Cloud Block Store unified subscription offerings also continue to gain momentum, offering increasing flexibility and how our technology is consumed, providing customers with a cloud like business model. Our pipeline generation for the second half of the year continues to grow, but it is unclear how and when these opportunities will convert given the current economic environment.

Moving to investments, we continue to be disciplined on our spending levels and are focused on operating expense savings initiatives and tight capital spend oversight. Our investments in areas of innovation and quota carrying capacity will continue in a prudent manner with ongoing monitoring of our business plan and conditions.

Now let's move to the second quarter. For similar reasons while we were pulling our annual guidance, we are also not providing guidance for Q2. We expect customers purchasing our solutions for their mission critical IT infrastructure and digital transformation needs will continue to provide a tailwind. However, we expect this benefit to be more than offset during Q2 by customers who decide to pause IT infrastructure projects.

Our diverse customer base and our growing recurring revenue derived from our subscription services will provide a level of mitigation. However, the range of potential outcomes are many and widely distributed. Our current view of Q2 outcomes, which should not be viewed as guidance is that sales will be near flat year-over-year and our operating profit will be near breakeven.

To summarize, our business priorities and long-term growth objectives have not changed as we've delivered solid financial results while navigating in a very challenging environment.

With that, we will now open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from Pinjalim Bora from JPMorgan. Your line is open.

[Pinjalim Bora, JPMorgan]

The booking number seems pretty good and seems like you're tracking above your -- at least the annual goal that you had given us last quarter. Can you talk about maybe the mix of use cases driving that? Is that primarily VDI related and how do you feel that tailwind of VDI and end user computing kind of falls off for the next part of the rest of the year? And secondly, when I look into your DR, deferred revenue sequential add, the sequential add seems pretty low versus historicals. So where can we see this -- have these bookings number, is that mainly going to be in the RPO? Where can we see that overall? Thank you.

[Charlie Giancarlo, Chief Executive Officer]

Pinjalim, thank you for the question. And again, for everybody in the audience, I just want to say that I wish you all well, and I hope you're faring well during this crisis. We really saw Pinjalim a very balanced demand for product. Certainly, VDI was one of the major use cases out there, but there were many others as well. We saw positive buying for all sorts of infrastructure needs because of not just work from home, but the higher levels of, of Internet commerce that took place for many, many customers, not to mention a greater service provider needs, et cetera. So, I'll tell you, it was a very balanced quarter overall, all products doing very well.

As we mentioned in our comments, we did see a good strong strength in U.S. enterprise, whereas we did see weakness in the commercial segment, which I don't think should surprise anybody on the call.

And for the second question, I think I'll pass it over to Kevan.

[Kevan Krysler, Chief Financial Officer]

Thanks, Charlie. Yes. In specific to deferred revenue, we're pleased with really both our sequential and year-over-year deferred revenue growth. As a reminder, sequentially, we're coming off the seasonally highest quarter, which would be Q4. So that's going to have some impact when you're looking at deferred revenue sequentially, but you are correct, as well that as we're growing our subscription offerings, there's an off-balance-sheet component that’s also growing that's included in RPO, and that's going to have an impact as well.

[Operator]

Your next question comes from George Iwanyc from Oppenheimer.

[George Iwanyc, Oppenheimer]

Charlie, can you give us a sense of how the monthly trends have proceeded from April into May?

[Charlie Giancarlo, Chief Executive Officer]

Yes. Well, May is very early. As you know, we do have -- quarters themselves build as we go along month by month as we go along the quarter, so it's still relatively early in May, and it's very hard, I would say for us to be able to project the quarter on May alone. We did see, I will say, and we don't generally comment on this, but we did see very good linearity overall in Q1. And again, it's hard to predict what Q2 looks like from what we have so far in May.

[George Iwanyc, Oppenheimer]

All right. And just following up on that, can you give us a sense of how your sales motion is going from the disruption and moving to work from home, have you been able to keep that pretty smooth through the transition?

[Charlie Giancarlo, Chief Executive Officer]

George that is actually a great question. If anything, we've seen higher productivity in sales from the work-in-home environment. I have to tell you that I probably see -- I'm probably communicating with twice the number of customer executives now that I'm working from home, and the same is pretty much true with our sales team. It takes less than a week to get an appointment, people are available, the meetings themselves are very efficient, meetings that in person would take a month or two to set up, and then take hours to have the meeting and to convey everything you want to convey, probably get done in about two thirds of the time. And the meetings themselves are -- as I mentioned, it doesn't take much time to set up, and we're seeing that across our sales base. That is to say it's been easier to get access to higher levels in the customer base. And these have been very potent and very hard hitting meetings. So if anything, I expect that we're going to see sales in a B2B environment, permanently take on more of a virtual digital technique to them.

[Operator]

Your next question comes from Wamsi Mohan from Bank of America.

[Wamsi Mohan, Bank of America]

Charlie, happy to hear of your recovery from COVID-19 and we all will miss Matt as well, thoughts with his family.

Can you give us some more color on your comment about I know it's not explicit guidance but your expectation around the flattish performance year-on-year. What sort of assumptions are backing that expectation, I mean, we're not holding that as guidance. We understand that, but what are the puts and takes that sort of get you there, any color there would be helpful? And I'll follow up.

[Charlie Giancarlo, Chief Executive Officer]

Sure. The puts and takes are that on the positive side, we do still expect some amount of the positive COVID influence that took place in Q1. That is some continued pull in and finishing of the urgent issues that that customers have either for work from home, school from home, higher web traffic, and transactions and so forth. So we're expecting some increase in that. But we're, let's not forget, in Q1, we had about half a quarter of a normal pre-COVID, which we are not going to have here. And then we're expecting on the takes the full impact of a lower global economy start to kick in as well, and it’s -- the difficulty in projecting is the balance between those two things.

[Kevan Krysler, Chief Financial Officer]

I had a couple other points on that. Obviousl, we're staying really close to the field as we always do, and their inputs are really weighted pretty heavily for us as we're thinking about Q2. And when we think about the headwinds for Q2, really it's around the increased risk of how the opportunities in Q2 will convert and the timing of those conversions is really the big question mark for us.

And then, looking at the commercial space in the middle market, obviously there was some softness there that we expect to be a continued headwind for us. But those were factors that we were thinking about on the tailwind side. And really, on the headwind, we're also looking at increased recurring revenue that we would expect over time to be a larger portion of our total revenue, which will be a mitigating factor for us as well.

[Operator]

Your next question comes from Simon Leopold from Raymond James.

[Simon Leopold, Raymond James]

Also extend my condolences on Matt, and Charlie glad you're feeling better as well. So certainly crazy environment for sure. One of the things I wanted to see if you could help us understand is the trending between new and existing customers in that, I would imagine it's harder to land new customers, and I think in the past, you've talked about your revenue split typically around 25% new and 75% existing. If we could get a sense of what your thoughts are on that trend given the current circumstances.

[Charlie Giancarlo, Chief Executive Officer]

Yes. It's a great question Simon for a couple of reasons, and it's a somewhat complex makeup. So, you saw in our accompanying materials, you saw our new customer add this past quarter slightly lower than last year. It’s made up of two things. One is yes, indeed, the commercial market slowing down and new customers a little bit harder to come by, given the risk aversion that's taking place in the market, given COVID again.

But at the same time, we started transitioning as you may know more towards an enterprise orientation. And so the quality of -- we've been focusing our sales teams more and more on the quality of the net new logo, rather than just the number of net new logos, and we feel that's starting to kick in quite a bit, so the lower numbers a mix of those two things.

Thirdly, what I would say is that there is a general risk aversion out there in the market, whether it's new products, new features, new vendors, and that's going to be with us for a quarter or two until I think the customers have started being able to feel comfortable in putting time into testing. It's really the fact that the urgency has been so high to do something that they've not wanted to take risk. Once they have time, once they've settled the urgency and they can then focus on the slightly longer term we think that the ability to convert new customers again will come back.

[Kevan Krysler, Chief Financial Officer]

I will just add a couple of notes to that in terms of the existing customers clearly we're seeing an expanding footprint as Charlie mentioned and what is interesting on the new customer front, is if we pull out the new customers from commercial or mid market, we actually have an increase year-over-year in sales, which was a significant positive, really going back to the strength we're seeing elsewhere, including enterprise, even for new customers.

[Simon Leopold, Raymond James]

And I don't think you mentioned anything about supply chain constraints. And that had been a recurring theme from reports earlier in the quarter. Did you confront any issues in terms of just getting components or factory capacity?

[Charlie Giancarlo, Chief Executive Officer]

Well, you need to look at it from two sides, as I've told my supply chain team, they looked as smooth as a duck on water, but of course, underneath the surface, their feet were paddling like crazy. From a customer standpoint, there was absolutely zero interruption of supply chain. As I mentioned in my prepared remarks, we were able to supply product within 24 hours of first call, and there were very few instances of delay and if there was, it was a delay of a day or two.

So really, no supply chain interruptions and that was true on the subscription service chain as well. So, very, very proud of our supply chain and service, our operations and service people. It does reflect by the way as it wasn't just pure dumb luck. It reflects partially the design of our product which had very little dependence on China, just sub assemblies. But it also reflected the global nature -- distributed nature of our supply chain that didn't have a high concentration of supply in any one area.

[Operator]

Your next question comes from Katy Huberty from Morgan Stanley.

[Katy Huberty, Morgan Stanley]

We were devastated by the news of Matt's passing but I know he'd be really proud of the operational execution this quarter. Had a couple of questions. First, Charlie, do you have a view at this point as to whether July will be the trough in demand, or is it just too early to tell? And then a follow up for Kevan's, what percentage of the subscription services today is Pure as-a-Service and Cloud Block Store versus traditional Evergreen maintenance?

[Charlie Giancarlo, Chief Executive Officer]

Katy, thank you for all the support that you've provided to Matt and/or Matt's family, we really do very much appreciate that. It's very difficult to predict July because one might predict July, if one feels that the effects of COVID or moving beyond us or moving past us at this point. But if we've learned anything from these pandemics from the past is that they can come back and they can come back, as early as late summer.

So I would tend to agree that if we continue to see the slowdown of COVID, that July might be the watermark. But I don't think we can say that, there's a lot of unknown, there are some true unknowns that we want to make sure that we're prepared for. And one of those is we don't really know what this virus will do later in the year.

[Kevan Krysler, Chief Financial Officer]

And then Katie, on your second question around breaking out Pure as-a-Service and Cloud Block Store, we aren't breaking out that specifically, a little bit of color though, especially on Pure as-a-Service. Very happy with the results and the momentum and the interest we're seeing, really around the unified subscription, both of Pure as-a-Service and in Cloud Block Store, such is the fact that we had a customer -- enterprise customer commit to an eight figure deal with us this quarter, which we're really excited to see.

But look, our priority is really around providing customers with flexibility and how and where they're choosing to consume our technology whether that's on-prem, whether that's a multi-cloud environment or [indiscernible], which really all our subscription offerings are enabling. And so we're pretty excited about the momentum overall of all our subscription offerings, including a PaaS and Cloud Block Store.

[Operator]

Your next question comes from Jason Ader from William Blair.

[Jason Ader, William Blair]

Charlie, my question is on the whole potential acceleration of the shift to the cloud from COVID-19. Obviously, many people believe that's going to be happening here or has already happened? How do you think that affects your business? Does that create more headwinds for the on-prem storage part of your business in the near to medium term? Just maybe walk us through that how you're thinking about that?

[Charlie Giancarlo, Chief Executive Officer]

Yes. I think it's very much summed up in the reasoning behind and the construction of our Pure as-a-Service offering. And what I mean by that is our view is that yes, there's going to be and there is increased demand for cloud-based solutions. But customers have to migrate from being on-prem to the cloud. What we saw in Q1 was that the urgency was to beef up what they currently had in and that was largely on-prem. But they wanted the option, they didn't want to sign-on to five years of more on-prem or anything along those lines. They wanted the option of being able to move to the cloud at any point in time. And that's exactly what our Pure as-a-Service is designed to do in several respects.

Not only economically, that is to say it's a single unified contract, a single unified subscription that allows them to place their data wherever they want. But also in the sense that it's the same exact software and same interface to the application environment, in the cloud, as it is on-prem and that makes their ability to migrate their applications even easier.

And so I think the answer is, yes. But with our unified subscription, it's equal to us. And we're very glad to have not just our unified subscription offering, but an account plan for our account reps that's equal to them, regardless of which way -- what they sell. And so, we were optimistic with respect to the offerings that we have out there. We're hopeful that in fact, more of it will move to pass and to cloud data services. And we think that, we're roughly in line with our customers in terms of the timing by which they'll do that.

[Jason Ader, William Blair]

And quick one for you, Kevan. Did you quantify the subscription impact on Q1 in terms of revenue growth?

[Kevan Krysler, Chief Financial Officer]

Yes. We kind of laid out in our prepared remarks the subscription growth as well as what it represents in terms of total revenue, which is increasing. And so we have that in the prepared remarks.

[Charlie Giancarlo, Chief Executive Officer]

But we did not just to be clear, we did not convert that to what it would have been had it been a perpetual, had it been an equipment capital sale.

[Jason Ader, William Blair]

That's correct. That's correct. But you had 12% revenue growth, would that have been 14% or 15%? Did you say that in the performance? I didn't see that.

[Kevan Krysler, Chief Financial Officer]

Did not. And that's what Charlie was…

[Charlie Giancarlo, Chief Executive Officer]

We didn't make that conversion. And we were not -- it turns out, there's a lot of puts and takes and any conversion would be inaccurate. And so we've decided not to do it.

[Operator]

Your next question comes from Tim Long from Barclays.

[Tim Long, Barclays]

Also, condolences to Matt's family and thankfully you're feeling better Charlie. Two questions for me first. Just give us an update on FlashArray C sounds like FlashBlade is moving along well maybe just let us know how that rollout or that take for that has been?

And then second, and the gross margin has been a really strong performance wanted to kind of ask about competition and pricing, but it doesn't seem like that's a problem. So maybe any comments on kind of sustainability of that strength that we're seeing in the gross margin line both product and overall? Thank you.

[Charlie Giancarlo, Chief Executive Officer]

Absolutely. As far as [color on C] [ph], we're very pleased with its continued performance in our revenue base and with the customer acceptance. We've had several very large deployments of C. We've also had a good uptake of C, just individually by new customers. And it's been nine months roughly, since we introduced it. And of course, there's no competitive product out there that even that had been introduced or even comes close to see. So it's an open field for us right now.

And we're seeing the power portfolio as well, because it's really allowing us now to go into customers. And I would say, as of two years ago, we were pretty much still a unique product offering with a great but niche product. And now customers are saying, gee, we can use Pure across a wide variety or even all of our storage needs and that's really been a great benefit to us as we've penetrated further and further into the enterprise.

[Kevan Krysler, Chief Financial Officer]

And then I'll hit gross margin, in terms of how we're thinking about gross margin and really, our long-term view of gross margin remains unchanged. We're very pleased with the performance both on product gross margin and on our subscription services gross margin. And it really is the product of the design of our product solutions, in particular, our software IP and development. And we say that each and every quarter and that continues to be true. And that's where the value is. That's where the customers are seeing the value. And that's really where the competitive differentiation is and while we're competing head to head on cost, the value of the software is really driving the results of what you're seeing on gross margin, but again, our long range view on gross margin hasn't changed.

[Operator]

Your next question comes from Karl Ackerman from Cowen.

[Karl Ackerman, Cowen]

Charlie or Kevin, two questions, if I may. First, while you're not enacting any restructuring actions, like one of your peers, just kind of curious and how much room do you have to rein in on the OpEx side, if demand works remained subdued for next few quarters? And I guess on COGS, I understand that your software stack is the largest driver, but some component costs have risen in the first half a year. It really just kind of both off the shelf SSPs, but also flash controllers with some of these extended lead times. But you expect that to reverse. Where are these component cost can actually be a tailwind in the second half? Have a quick follow up.

[Charlie Giancarlo, Chief Executive Officer]

Yes, terrific. Thank you so much, Karl. Look, it's really my personal goal that we not have any layoffs or furloughs this year. And every Puritan in the company is dedicated to put into the kind of performance that we need to make sure that's the case, to pick up market share to drive the company to support our customers. But, as we look at the both the quarter and the year and as we look going forward, we believe we're going to be able to perform in such a way that we will not have layoffs or furloughs. And as I said, it's my personal mission to make sure that's the case.

We believe that we're going -- there are lots of activities that we can undertake to make the company more, both more productive, but also more efficient. And as you might imagine, we've been very busy identifying those and taking that, of course, we're saving a lot already on T&E and large events, which is very positive, but I feel that as long as we can operate the company at or near breakeven that and that we can do so this year. We will not need to have any restructuring actions associated with it.

Now, I do to preempt perhaps a follow up question. We did have a restructuring early in the year that was planned last year even before any thoughts around COVID but that was really a rebalancing action inside the company. Because as like any company as you go forward, there are times when you deploy people and resources in areas and over time you want them to really to be in other areas that are more productive. And that's what we went through early in the year that resulted in a small number of people being displaced. But that was not an economic consideration. It was a rebalancing.

[Kevan Krysler, Chief Financial Officer]

And then just real quick on your question on -- really in particular probably NAND pricing is what you're getting at. We did see stabilization of pricing, including during Q1. In fact, we saw NAND pricing really rising modestly in Q1. As one might expect, the data is mixed for us when we're looking at the second half across the board. There are some indicators that pricing may decline later in the year. But when we take a step back, we're looking at a much more normalized pricing environment throughout the year compared to what we saw in the second half of last year.

[Karl Ackerman, Cowen]

Yes. Thanks for that. Just, I know you're not providing a full year quantitative outlook, which makes sense given just some limited demand visibility. But can you speak qualitatively of how you see the growth trajectory of your hardware business? I asked, because since you last reported, VMware added support of Rocky and professional network fabrics. Doesn't that eliminate one of the largest impediments to NVMe over fabric implementation? Given that you're more angrier than peers, how does that influence your view on the forward trajectory of your all flash array hardware? Thank you.

[Matt Kixmoeller, Vice President, Strategy]

Just on the point around VMware support from NVMe over fabric, absolutely. So we're very excited to see support for NVMe over fabric from VMware also from Cisco as part of the UCS platform. And so we see, we were obviously out very, very early in that game. And we've seen some of the largest cloud providers we sell to already embraced that wholeheartedly. But we think this really opens it up to more broad enterprise usage. So something we're quite bullish on.

[Charlie Giancarlo, Chief Executive Officer]

Yes. I'll just double down on that. Yes, we've seen a lot of enthusiasm, especially among our cloud customers and just a reminder, our cloud customers are now over a third of sales, but a lot of enthusiasm for the NVMe over fabric as a way to really consolidate to improve their rack structure because it brings the ability to have stateless servers into play and to consolidate all of their state into a single device that has been designed to maintain state. So it actually lowers the cost and increases the density and increases the reliability of large scale infrastructure.

So the more NVMe support over fabric support that we see out there, the better frankly, that it is for us. I believe that being the first we still support probably more use cases than almost any other vendor out there and overall, I think it's good for us.

[Operator]

Your next question comes from Alex Kurtz from KeyBanc Capital Markets.

[Alex Kurtz, KeyBanc Capital Markets]

Charlie, I just want to go back in time to a couple of previous quarters when Tim was still a CFO, and we had all this discussion about, one of the disconnect in pricing -- market pricing and kind of what was in your models. And, we had that kind of revenue reset last year around that. Is NAND pricing kind of stabilizes here and maybe goes up, you know, what actions have been taken to kind of get a better, street view to the model for Kevan that you guys feel more confident and kind of how that's being relayed back and forth between the teams?

[Charlie Giancarlo, Chief Executive Officer]

Yes. Thanks, Alex. What was -- what really knocked us off our ability to project last year in an accurate way was not so much that NAND prices were falling because we're used to NAND, like any commodity NAND memory et cetera, we expect a decline over time. It was the precipitous rate that they declined over a two to three year -- two to three quarter period, which was two to three times normal and how that drops to the market, largely because of some disruptions on the demand side, how it dropped to the market so, so rapidly and it was something that we didn't predict.

One could argue as to how, how one can predict that certainly, we are -- I now get weekly updates on NAND pricing. And what I'm looking for is not so much 3% to 5% quarter-over-quarter drops that one expects and of course, it's not steady, it'll go up and down in any one quarter. But what I'm looking for are the sudden changes, which are usually partially supply and partially demand that are well beyond what we normally see. So we're keeping our eyes out for that, if we will flag it, then we will address it earlier the next time around. So that's the way we're dealing with it now. It just had not been in our model before because it had always stayed within the normal range.

[Alex Kurtz, KeyBanc Capital Markets]

Okay. And just a follow-up on bookings for Kevan, a little bit late to the call here. So I just want to make sure I didn't miss this in the prepared remarks. But just the delta between bookings and revenue growth, like what drove that?

[Kevan Krysler, Chief Financial Officer]

Well, that's really going to be the primary driver really will be around our subscription offerings Alex. It's really what that's coming down to. In terms of either our Evergreen model or what we're doing on Pure as-a-Service or Cloud Block Store. Those would be the main drivers have that difference.

[Operator]

Your next question comes from Rod Hall from Goldman Sachs.

[Raghunathan Kamesh, Goldman Sachs]

Hi. This is RK on behalf of Rod. Thanks for taking my question. Congrats on a nice quarter guys and my deepest condolences to Matt's family.

Could you contrast your Pure as-a-Service offering with other competitor as a service offering? And I have a follow-up.

[Charlie Giancarlo, Chief Executive Officer]

Yes. Let me start that. The first is that we really are as an a service offering because as an a service offering is not just an economic model, it's not just a warmed over lease. First of all, in terms of the way you buy our product, you buy it as a -- it's a cloud-based procurement model, based on an SLA. So it's not based on the hardware that gets put into place. We have a cloud operating and utility model that is true across clouds. That it's a unified subscription that works regardless of where you place your data, whether you place it in the cloud or on-premise of equipment.

It's a common platform, it's the same software operating in both environments managed by the same management system. So that your applications can easily be placed either on-prem or in the cloud with minimal refactoring for that to be done. And we charge the customer basically, on the drip based on what they actually use. So not what they have to reserve, but rather what they actually use. So some of our competitors have -- put try to put together an economic model, which is effectively a lease, but it doesn't contain any of those other components.

[Operator]

Your next question comes from Amit Daryanani from Evercore.

[Michael Fisher, Evercore]

This is Michael Fisher on for Amit. So appreciate the qualitative expectations for the July quarter. Just wondering if you could maybe touch on what's embedded as far as product revenue expectations? Should we be thinking down low single-digit year-over-year in July?

[Kevan Krysler, Chief Financial Officer]

Yes. So we're not giving specific guidance on that. But look, you saw how product revenue came out. And again, product revenue is just a derivation of the product portion of our capital sales. So anything we're selling on our subscription offerings did include our products solutions will be in subscription services. And so when I think about Q2, obviously, we see the growth and the momentum in subscription services. And we see overall, potentially at this point sales in total to be flattish year-over-year. So that'll be a headwind on product revenue.

[Operator]

Your next question comes from Mehdi Hosseini from SIG.

[Mehdi Hosseini, SIG]

I had a couple of follow ups. Want to thank you for providing the mix for the flash play, but I think you would put it in a better context if we could provide some competitive q-on-q or year-over-year, how should we compare this 55 million through prior quarters and I have a follow-up?

[Charlie Giancarlo, Chief Executive Officer]

Yes. Thank you, Mehdi. Well, as you know, we don't want to be in a habit of providing product breakouts on a quarter-by-quarter basis, but we do -- we want to provide you color every now and then. I believe it was in our September accelerate, when we said we believed that we would be passing the 500 million cumulative sales mark for FlashBlade by the end of the year. And we usually don't make those projections without certainty that we will achieve them. And then, we provided you this color which is 15% of total sales. So that should give you another indication, but we don't want to be in the habit of doing it quarter-by-quarter. Appreciate it.

But as you can see, we're so pleased with the growth of FlashBlade and Purity 3.0 in particular, it's just going to open up significant new market opportunity for that product both in existing accounts where they've been waiting for replication, but also in new accounts where they desperately need the Kerberos capability to get into government, for example. So it's going to open up new market opportunities. So we're very excited about the product going forward and expect continued growth.

[Operator]

Your next question comes from Erik Suppiger from JMP Securities.

[Erik Suppiger, JMP Securities]

And I do pass along my condolences to Matt's family as well as to the team there. Most my question were asked but on Flash Array C, can you comment as to whether that's still the fastest growing product in Pure's history?

[Charlie Giancarlo, Chief Executive Officer]

Yes. Quite simply, yes.

[Operator]

Your next question comes from Nehal Chokshi from Northland Capital.

[Nehal Chokshi, Northland Capital]

And my condolences to Matt's family as well. Can you talk about what you see as a potential Achilles heels and power store [indiscernible] and then maybe also talk about when rates -- was that affected at all? Or did you actually see that improved now that's out color that would be great.

[Charlie Giancarlo, Chief Executive Officer]

Thank you. Let me just answer the second part of the question first, which is we really didn't see it very much so far. It's very new out there. Obviously, there's a lot of buzz about and so forth. But frankly, our view very simply is it opens up opportunity to replace four products, whenever there's a disruptive upgrade and God loves them. Power store is another disruptive upgrade. Whenever there's a disruptive upgrade, it opens up the opportunity to all vendors, all new vendors, because the customer is going to go through that trouble. It's basically a brand new product. And in this case, it's a brand new 1.0 product.

So we've just introduced XR3, which is our seventh generation of non-disruptive upgrade on a very mature product with very high reliability. And we've proven that we can do this over and over. And here we are seven years later from our first introduction and our competitors are still trying to catch up on an Evergreen type of program with non-disruptive upgrades. So it actually -- what they done is, they've effectively validated our program of seven years ago and now we're on to Pure as-a-Service, which if Evergreen was about protecting the economics and lowering the risk of on prem storage, Pure as-a-Service is about improving the economics and lowering the risk of a migration to the cloud. And there's no one else and power store does nothing for that.

And lastly, I'll just say that this is a terrible time to come out with a new 1.0 product. Customers are risk adverse. So we really see this as a great opportunity for us.

[Operator]

And your last question comes from Aaron Rakers from Wells Fargo.

[Aaron Rakers, Wells Fargo]

And also my condolences to you guys and Matt's family. He was great to work with. I guess most of my questions have been asked and answered, but I wanted to go back to kind of the channel engagement a little bit. Several quarters ago, you guys announced a partnership with a global systems integrator. Just curious of how you would characterize the current channel motion expansion. And whether or not you've seen additional GSI kind of come to Pure as clear opportunity? Thank you.

[Charlie Giancarlo, Chief Executive Officer]

Yes. We have. What's been very interesting over the last, I would say over the last nine months to a year, but accelerated, frankly, in this last quarter is the degree to which both national and global VARs as well as system integrators have really embraced Pure more and more. Now I think, part of that were the aggressive growth programs that we put in place for these integrators, but frankly, the expansion of our product line, our ability now to address cloud needs and the fact that the product is not long line now really addresses a much wider variety of enterprise storage needs, has really convinced these integrators to throw in more and more of their lot with Pure.

We've seen a significant increase in a partner what we call partner sourced, which is opportunities that are truly sourced by the partner and they may still require us to help them close but these were opportunities that they brought to us, rather than us bringing collectively to them. And we expect this to continue to grow. We're very pleased with --with what we're seeing from partner scale, both in terms of partner source generally, but in particular, the growth in what we're seeing in large enterprise partner activity.

[Charlie Giancarlo, Chief Executive Officer]

Well, I think we're closing, we're at the end of the hour. I really appreciate very much all of the time and attention that you've provided us. While our projections for the near future are highly uncertain, we are extraordinarily optimistic about the opportunities ahead of us. And I have to say we are confident in our ability to continue to increase our market share, quarter-after-quarter a combination of our differentiation with our unmatched simplicity, the reliability, make Pure actually at this time the safe and easy choice for our customers.

And I thank you again for joining us and look -- oh, by the way, please join us virtually for our upcoming Accelerate Digital event that we're going to have on June 9 and 10. We really look forward to seeing you there. There's going to be a lot of information, new things that will be -- new information that we'll be providing.

Please stay well. Shelter in place is serious, it's a serious virus. We want you all safe and healthy next quarter and look forward to speaking to you then. Take care.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.