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Pure Storage Inc
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Good afternoon. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Pure Storage Third Quarter Fiscal 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]
I will now turn the call over to Matt Danziger, VP of Investor Relations. You may begin your conference.
Thank you, and good afternoon. Welcome to the Pure Storage Q3 fiscal 2019 earnings conference call. Joining me today are our CEO, Charlie Giancarlo; our CFO, Tim Riitters; our President, David Hatfield; and our VP of Product, 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 competitive, industry and technology trends, our strategy, positioning and opportunity, our current and future products, business and operations, including our operating model, growth prospects and revenue and margin guidance for future periods.
Any forward-looking statements that we make are based on assumptions as of today and we undertake no obligation to update them. Our actual results may differ materially from the results predicted and reported and reported results should not be considered as an indication of future performance. A discussion of risks and uncertainties relating to our business is contained in our filings with the SEC and we refer you to these public filings.
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. Also, beginning this year we adopted the new revenue accounting standard ASC 606 and all the current quarter financial results as well as our financial outlook are stated in accordance with this new standard. Please see our earnings slides for more information.
This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website for at least 45 days and it's a property of Pure Storage.
With that, I'll turn the call over to our CEO Charlie Giancarlo.
Thank you, Matt and good afternoon, everyone. Thank you very much for joining us on today's earnings call this Thanksgiving week. I'll begin the call with a summary of our Q3 results and the highlights of today's launch of our new Cloud Data Services. Hat will provide a go-to-market update, and finally Tim will give a detailed review of our financials and updated outlook.
First our results, Q3 was another strong quarter of execution for Pure. Revenue for the quarter was $373 million growing 34% year-over-year. Gross margins were 68.1% remaining at our highest level. Operating margins were 9.1%, all of which exceeded the upper end of our guided ranges. These strong results are indicative of the forward traction we're seeing for our data-centric architecture strategy outlined earlier this year.
Customers are increasingly voicing a clear demand for a hybrid cloud, but the reality today is that there is a cloud divide and nowhere is that more evident than at the storage layer. On-prem and Cloud Storage Services vary widely making it difficult to build applications that can be run everywhere, requiring that our customers make a technology choice between on-prem and the cloud.
We believe it shouldn't have to be that way. Customers should be able to make infrastructure choices based on what's best for them, their businesses, and their bottom line not based on what the technology can do or where it lives. In this hybrid cloud world, applications should be developed once and deployed seamlessly across private and public clouds giving customers increased flexibility. This is the insight behind the launch of Pure’s Cloud Data Services.
Today, we announced a new set of products that run natively in the public cloud, delivering a unique hybrid cloud storage solution that gives our customers the flexibility they need to turn their data into value regardless of where it lives. These new products will enable customers to build hybrid applications that run seamlessly across clouds leveraging consistent storage APIs and services everywhere. This will benefit both cloud native and enterprise customers alike. We announced a significant number of important new capabilities with Pure’s Cloud Data Services. I'd like to focus on a few of these now.
First, we announced the beta availability of Cloud Block Store, which is based on Purity software running natively on AWS. Cloud Block Store is an industrial strength block storage offering enabling mission critical enterprise applications to run in the cloud, with all of the capabilities that they expect from high end storage arrays. Cloud Block Store also brings new storage capabilities like snapshots, replication, and de-duplication to born-in-the-cloud web scale apps.
Secondly, we announced the availability of CloudSnap, which delivers cloud based data protection build right into our flagship FlashArray. CloudSnap makes it easy to copy snapshots directly to the public cloud for both data protection and application migration use cases.
Third, we announced the beta availability of StorReduce, a cloud first de-duplication engine for modern backup. This software is designed to enable simple backup, rapid recovery, and cost effective data retention in public cloud object storage. When combined with a FlashBlade on-prem, the solution provides a new architecture we call flash-to-flash to cloud enabling both rapid restore and low-cost, long-term cloud retention.
Lastly, all of our Cloud Data Services will be managed by Pure1, our cloud data management solution. In fact, Pure1 is one of our key assets in our expansion to the cloud, because Pure has always managed our products from the cloud from day one. Already, the one place to manage all Pure products on-prem Pure1 is now being extended to seamlessly manage all Pure products in the cloud enabling end-to-end control of hybrid cloud mobility and protection.
Pure now delivers a comprehensive cloud data solution. With our cloud data infrastructure we have long provided storage for our customers to build and automate their private data clouds. Our new Cloud Data Services enable our customers to build more powerful hybrid cloud solutions and Pure enables comprehensive cloud data management allowing customers to manage data wherever it sits.
We are very excited about the early response to Pure's Cloud Data Services from partners, customers, and analysts. We look forward to working with our customers to better deliver their hybrid clouds.
And now, Hat will provide this quarter's go-to-market update. Hat, take it away.
Thanks, Charlie. Q3 was indeed a strong quarter for Pure. We not only continued to execute well, extended our partner ecosystem and capitalized on our innovation cycle, but as Charlie noted, today we announced Pure's unifying cloud vision and suite of new Cloud Data Services.
First, our execution in the quarter was strong. We exited the quarter with more than 5,450 customers, representing more than 300 new customer additions. Our focus on the enterprise, cloud, and public sector also yielded results. We improved our traction in the Fortune 500 with almost 40% now Pure customers, our Cloud segments significantly outpaced our overall company growth and we saw progress in our U.S. Federal and public sector business.
Our go-to-market teams continued to perform well. We were pleased with the contribution from new customers. Repeat purchases and win rates held nicely, and the overall productivity of the sales teams continue to trend positively. This showcases how we have reached scale across our technology portfolio, shifting from a best-of-breed single product company to a multi-dimensional portfolio of on-prem infrastructure, cloud management, and now Cloud Data Services.
Second, our overall partner ecosystem continues to expand and deliver positive results. During the quarter, we had excellent momentum across our technology alliances, national channel partners, and Global and Federal Systems Integrators, known as GSIs and FSIs.
Our alliances with Cisco and NVIDIA continued to thrive with leading converged infrastructure solutions. And we announced deeper integrations with both Splunk and Veritas. Our progress with the largest national resellers was strong, with two notable partner CEOs, specifically highlighting All Flash and NVMe as key growth drivers for their storage businesses. As part of our focus on the large enterprise and federal markets, we made solid progress with several GSIs including Accenture and FSIs this quarter.
Finally, we entered into a strategic partnership with IBM to deliver as a service solutions with the Pure portfolio. We will continue to invest in the partner ecosystem and fundamentally believe that these additional routes to market will contribute meaningfully to our growth in the years to come.
Third, our product portfolio continues to delight our customers is highly differentiated when compared to our competition and is now operating at significant scale. Specifically, FlashBlade had one of the strongest growth quarters since its debut. In Q3, traction in the electronic design automation EDA, a traditional file market stronghold was particularly notable with Pure now counting three of the top five players in this industry as customers including both Synopsys and Mentor, a Siemens business.
We also saw growing participation across our global sales teams for both our rapid restore and artificial intelligence used cases, including key wins in top 25 cloud companies this quarter. FlashArray continues to lead the market transition to NVMe. NVMe represented more than two-thirds of all shipments this quarter. And we added a significant number of multi-million dollar deals across several industries. We're also seeing nice early momentum in key market segments for our subscription based pricing model, the evergreen storage service. Just like the cloud, ES2 enables customers to consume on-prem solutions on a flexible usage basis.
Finally, and perhaps most importantly, today marks a key milestone at Pure with the launch of our Cloud Data Services. Today's customers demand a unified cloud architecture that brings agility to the modern enterprise. But up until now, organizations have been forced to make trade-offs between on-premises and the public cloud. We are bridging that gap by enabling hybrid cloud environments, with the same simple and automated experience our customers love about Pure, while delivering our leading data services and open API's, in the public cloud.
Essentially we are bringing all the innovation we delivered on-prem to the public cloud and making it easy for our customers to use both at the same time. Causeway Capital and IDT are two Pure customers that agreed. They are both at the leading edge of their industries, building hybrid applications and revolutionizing data protection in the cloud.
We're thankful to work with leading customers like these and for the industry leading net promoter score of 86.6 that they have given us. And now we're very excited to expand our relationship to help them with their data protection and hybrid cloud strategies as well.
In summary, this is an exciting time at Pure. We are unifying enterprise and cloud architectures, we are in a great innovation cycle with our portfolio and our global partner ecosystem and sales momentum have never been stronger.
With that, I'll turn the call over to Tim. Tim?
Thanks, Matt. Q3 was another strong quarter for Pure. As we surpassed the upper end of all of our guided measures revenue, gross margin and operating margin. Before I dive into specifics, I'll make my usual note that the gross margin, operating margins, OpEx, net income, EPS and free cash flow numbers, I will use are non-GAAP unless otherwise noted. A reconciliation of these non-GAAP metrics to their GAAP comparables, as well as our full Q3 results and presentation are available on our Investor Relations website at investor.purestorage.com.
Total revenue for the quarter was $372.8 million or 34% growth year-over-year, exceeding the upper end of our guided range. Product revenue was $298.9 million or growth of 31% year-over-year. Support subscription revenue was $73.9 million or growth of 48% year-over-year. Revenue performance was driven by strong FlashBlade execution in the quarter as well as continued adoption of our X series products.
Geographically, 71% of our revenues came from the United States and 29% came from international markets. Total gross margin in Q3 was 68.1%, up one-tenth of a point from the previous quarter. Our ability to deliver consistent industry leading gross margins highlights the value we deliver to our customer base and validates our technological differentiation.
Product gross margins increased two-tenth of a point sequentially to 68.1%, driven largely by strong performance across both of our FlashBlade and FlashArray product lines. Support subscription gross margin decreased slightly three-tenth of a point quarter-on-quarter to 68.1%. We continue to invest in our support team as they drive industry leading customer satisfaction.
Turning to operating margin, we delivered another quarter of profitability, with Q3 operating margin at 9.1%, representing a five-tenth and four-tenth of a point improvement over the same period a year ago, and a three-tenth and one-tenth of a point improvement over the midpoint of our guidance. Revenue and gross margin outperformance were key contributors to our operating margin beat. And we plan to continue to invest aggressively to capture the opportunity in front of us, given the momentum we are seeing in our business.
Net income in the quarter was positive $35.4 million or positive $0.13 per share based on a weighted average share count of 267 million shares. This compares to a net income of $10.4 million or positive $0.04 per share based on a weighted average share count of 243 million shares in Q3 of last year. Total headcount at the end of the period was over 2,650 employees, which represents an increase of approximately 200 employees during the quarter.
Turning to the balance sheet and our cash flows, we ended Q3 with cash and investments of $1.1 billion, which was up slightly from the previous quarter. Free cash flow was positive $28.5 million in the quarter, including a negative $2.1 million impact from our employee stock purchase plan. This compares to free cash flow of positive $14 million during a year ago quarter, which included a negative $2.5 million impact from our employee stock purchase plan.
With that, we'll now turn to our guidance. As we enter Q4, we are excited about the opportunities ahead of us and as such, we are raising all three of our guided measures for the full year. For the full year, we expect revenues in the range of between $1.376 billion and $1.384 billion, a midpoint of $1.380 billion, which represents an increase of $15 million from our previously guided midpoint.
Gross margin in the range of between 66.6% and 67.6% or 67.1% at the midpoint, a 0.6 point increase from our previous guidance. And operating margins in the range of between 3.9% and 5.3% or 4.6% at the midpoint, a 1 and 1/10th point increase from our previous guidance.
Based on our yearly guidance the implied fourth quarter guidance levels we expect are: revenues in the range of between $438 million and $446 million or $442 million at the midpoint; gross margin in the range of between 64.5% and 67.5% or 66% at the midpoint; and finally operating margins in the range of between positive 8% and positive 12% or positive 10% at the midpoint.
In summary, Q3 was a strong quarter and we are excited about the momentum we are seeing, the innovation we are driving and the launch of our new hybrid cloud offerings.
With that, we'll now open the call to questions. Operator?
[Operator instructions] Your first question comes from Mark Murphy from JP Morgan.
Yes, thank you and congrats on the strong results. Tim, the deferred revenue growth on the balance sheet looks quite robust in Q3, and I'm just curious if there's anything unusual in that performance? In other words, is it more of a correlation with your mainstream new bookings or is there timing of renewals in there or is it possibly something else like the early traction of some of your subscription offerings like the Evergreen Storage Service?
Yes, Mark, thanks for the question. On deferred revenue a couple of things happening there, so more of a longer-term trend. We’re seeing really a renewals base starting to build. And so, obviously we've been at this for several years now and when these folks are on their three year renewal cycles, we're starting to see nice, healthy, robust renewal business for us. So that's obviously building the deferred revenue number faster than overall revenue growth.
And then this quarter, which was a unique quarter for us, we saw a little bit more of an elongation in support contracts. So what that means is people are buying a little bit more longer support contracts, which is great for us as well. They’re making a longer-term bet for Pure. So both of those built the deferred revenue balance nicely, over 40% year-on-year. So it's a really healthy indicator of the long-term potential in the business.
Thank you. And as a followup Charlie, the acquisition of StorReduce looks like it has the potential to kind of evolve your cloud strategy. Wondering if you could maybe walk us through how StorReduce might accelerate or change any of your relationships with Amazon, Microsoft, Google, et cetera and just how it's going to fit overall into your product roadmap?
Yes, as we had mentioned last quarter StorReduce had already built separate from us a really great relationship with AWS, because of their ability to upload effectively highly de-duplicated data into an Amazon environment. So Amazon was very excited about that, as we were not just for that use case, but also for the ability to dedupe backup data directly on to a FlashBlade platform.
So we think as we go forward with AWS as well as with some of the other hyperscalers that this gives our customers real flexibility in terms of where they place their backup data. And we have innovated a very new model here, which we call flash-to-flash to cloud, which allows both rapid recovery from an event as well as low-cost, long-term storage.
Thank you very much.
Your next question comes from Alex Kurtz from KeyBanc Capital Markets.
Thanks guys, lots to unbundle here. First congrats on a great quarter and this big product launch today. Hat, our channel work indicated also strong momentum in U.S. Fed and in Cloud AI, so I was hoping you could provide any additional color on the order flow in these two verticals during the quarter and what it meant for the business? And for Tim, how should we think about operating leverage as we go into 2020? Your operating margin profile, obviously some strong contribution margin in the quarter just as we start to look out into next year?
Hey, Alex, it’s Hat. We were pleased with the progress in our Fed and public sector business. We've been working on that, and we've been talking about that for several quarters and we saw a nice uptick and some strategic wins in both the intelligence community and civilian. So we're going to continue to focus there, it's one quarter doesn't make a trend, so we're going to keep focusing and building that, but we feel confident that nice traction there.
And then as we mentioned, FlashBlade had a terrific quarter for us and it was really driven by the rapid restore and AI use cases, and we did have some significant wins in large cloud providers, so that's a combination of AI and backup.
And Alex, this is Tim. On your second part of the question, obviously pleased with Q3 in terms of the overperformance on the bottom line, but as thinking going into next year, obviously we're not guiding today on the call, but I think your question is a good one. Really the last couple of quarters have seen a lot of overperformance on the bottom line. And I think about that as almost a multiplier of both revenue overperformance as well as very, very strong gross margin performance. Industry leading and certainly at a high point even for us here at Pure.
And so those two numbers multiply and typically drop right to the bottom line in any given quarter. And so, I wouldn't read that overperformance that you saw here in Q2 or Q3 as something that continues to go on until into the next year. Really, as we said in our prepared remarks, we are investing aggressively, looking at what we launched today and the innovation pipeline. We’re really excited about the lead we have in the business and we will invest aggressively against that. So that's how I think about next year.
Thank you.
Your next question comes from Katy Huberty from Morgan Stanley.
Thank you. Good afternoon. Congrats on the great quarter. A couple questions from me, the conversation around hybrid multi cloud offerings is picking up momentum, particularly with the traditional data center infrastructure players, so it would be helpful if you can summarize how Pure’s offering announced today is really differentiated versus what others are talking about? And then I have a follow up.
Right. What, we think we're differentiated in a number of ways. One is, we really focused on tier 1 used cases, really some of the most challenging and most performance demanding of enterprise used cases. And we've created an environment where they can do that now, both on-prem and in the cloud. Second is we bring all of the Pure advantages, everything from resiliency, availability to high de-duplication and data reduction ratios as well as, tier 1 cloud analytics and management to the entire spectrum of our product.
And then third is, this was purpose built for the cloud from day one. I mean, this was, in terms of the cloud block storage, that's our software running natively on AWS infrastructure. And this was something we're able to bring the market quite quickly.
And then finally, flash-to-flash to cloud, as I mentioned in an earlier comment, I mean, that's a unique offering, first of its kind, where customers can get the best of what they're looking for, which is low cost long-term storage plus very high and rapid recovery from events that occur on-site for them. And we think it's a -- that's a first example of anything like that. So we think we're highly differentiated.
Thank you, that's helpful. What's the penetration of evergreen flexibility in smartphones [ph] today? Where do you think that might go over a three year time period?
Katy, I'm sorry. But you were garbled as you came in. Could you repeat the question?
I was just asking about the evergreen flexible usage model. Where is penetration today and where might that go in three years.
Perfect. I'm going to give that to Hat.
Yes, Katy. So really nice early success there, we were focusing on markets where they really had a propensity to buy in that fashion that were incremental to the markets that we've been serving. So we saw a nice uptick in GSI. We saw some nice multi-million dollar wins within healthcare as well. So we see it as being incremental to the overall mix and saw some nice traction. It’s still early days, and so we build that in, we'll provide -- it's embedded into our guidance for Q4 and as we talk about next year we’ll embed it then as well.
Great, thank you so much.
Your next question comes from Jason Ader from William Blair.
Yes, thanks. Just a housekeeping one for, Tim, on the accounts receivable, looks like it's been trending up -- on the DSL, sorry. And I guess why is that happening and what's the right level to think about going forward?
Yes, Jason a couple of things. So on DSL this quarter, I mentioned in the earlier question from Mark on deferred revenue our support contract did elongate a little bit this quarter and that's a very good thing for the company. It basically gets money in quicker and it has people locked in longer, but that's going to boost your AR balance all else being equal versus product revenue or overall revenue. So that's one of the dynamics you're seeing there.
And then, we'll be selective with some of our enterprise customers they tend to be a little bit more hard negotiators in terms of a little bit more extended terms in some of our more commercial business. And so, that's why you saw some of the terms rise a little bit as well. But that's -- given our balance sheet that's an easy trade off as we continue to grow the business.
Wasn’t any particular backend loading or linearity skewed to the end of the quarter that drove that up?
No, really extended terms and some of the enterprise business as well as that elongation of overall support contracts, which again I said is a really nice thing that we are happy to see.
Okay, great. And then I'm just I guess for, Charlie, I know lot of skittishness in the market today obviously. What are you seeing from a demand perspective have you seen any noticeable changes in terms of customer behavior at this point?
Yes, no, I think to some extent the results, Jason, speak for themselves, it was a good quarter for us. Overall that you know the tenor of the quarter was pretty similar to every other quarter. If I had to really push and look at certainly a very small minority of our deals we did sense maybe an extra look on the finance side of the house.
And of course, I keep my eyes open and are very attune to this -- to the jitteriness of the market and so was possibly expecting something. But we really didn't see it. So, I think, as I said I think the results speak for themselves. We executed well and didn't see a lot of macro yet.
Okay, great. Thank you.
Your next question comes from Aaron Rakers from Wells Fargo.
Yes, thanks for taking the questions. I've got two, if I can, and then also congratulations on the quarter. When we think about the cloud services opportunity for you guys I'm just curious if you can at a high level help us appreciate how we expect to see the monetization of this start to play out across your existing customer base? And then I believe in that you've launched today with AWS, I'm just curious how should we think about the relationships with Microsoft Azure, as well as Google Cloud Platform? And I have a follow up.
Hey, Aaron, this is Hat. I’ll take the first part I’ll hand it over to Kix. I think a lot of our customers are looking for our view on a multi-cloud and hybrid cloud strategy. And so, I think, what mostly what it does to start is just increases relevancy. It expands our strategic conversation with senior executives in their organization. So we think that's positive for our overall portfolio, number one.
Number two, as we move forward to be able to monetize the cloud box storage as a software subscription independent of AWS they'll have maintained their own contracts. That's positive for us in terms of incremental opportunities in the future.
And I think just generally speaking, our opportunity with ES2 is starting to show real signs. So we can meet the customer in the way they want to buy and if they want to buy it on-prem, they want buy in the cloud we're really agnostic we want to provide a complete solution for them for multi-cloud. Kix anything to add to that?
Yes, I would just add the fact that I think we're really seeing great signs of feedback from both traditional enterprise customers as well as cloud native type customers. Now for traditional enterprise customers, we can help them move their mission critical apps to the cloud seamlessly and for web scale customers that can develop much more simply and have the resiliency being built in the storage layers they don't have to build it into every application they create.
And then, the finally I’d say this from an opportunity point of view is that this flash-to-flash to cloud opportunity and modernizing backup is a real opportunity. That's largely we haven't gone after in the past and it's a huge opportunity to go in and modernize that entire workflow.
Perfect. And as a quick follow up question, I'm just curious, as we look at your solid execution particularly on the product gross margin line. Just curious how you're seeing current flash pricing trends and how you're managing that as far as passing through some of the pricing that you've seen coming through?
Yes, so Aaron, this is Tim. As we expected, we're starting to see some flash declines. I think we talked a little bit about that in last quarter as well and it continues to play out the way we anticipated here several quarters back. So obviously we see those declines. But we've always thought of ourselves as a differentiated company and selling on value as opposed to sort of if you will cost plus.
And so, we've been able to maintain ASPs nicely, because as you saw in the gross margin, as you've heard us talk about in the prepared remarks, customers are looking for value and the overall ROI that we can deliver to them regardless of what cost and the bill of materials might be.
Perfect, thank you.
The only thing I'd add to that is, we kind of benefit both ways, which we've said in the past and when it comes down to get aggressive especially for a G2K or a new customer, we’ll go aggressive to make sure we win the business and demonstrate our value from that point forward. So it gives us a lot of flexibility to win in the future.
Thank you very much.
Your next question comes from Wamsi Mohan from Bank of America Merrill Lynch.
Yes, thank you. Charlie, you elaborate on the unification with the cloud and clearly you articulated it like yours Pure’s proposition here. Wondering if you guys are willing to sort of size the opportunity longer term. I know when all of your competitors spoken about sort of $0.5 billion a few years out from a revenue perspective, just wondering if; A, you can give us some goal posts that you're thinking about this opportunity, and do you see AWS is a net additive opportunity or partly cannibalistic? And I have a follow up.
I’ll start with the second part of your of your question first, which is we see AWS as a great partner here. And, the way that we've envisioned this, both of our products that are associated with the AWS components of it, it's an opportunity for both companies to make money, while saving our customers money, which is pretty amazing. It's a win, win, win situation. So we're very excited about that. And AWS has been a good partner with us this early in the development of these products.
In terms of the first part of your question, it's a bit early, we're excited about the products, we're excited about the roadmap. Where we like the fact that this gives our customers comfort to know that they can get the best of Pure, regardless of where they put their workloads. But I think it's -- and I think you can hear this from the entire industry; it's a bit too early to call exactly how customers will deploy their resources and how quickly it will go there.
Obviously, we're not doing this just for a press release, we're doing it because we think there's real money to be made here, but -- at least I'm not ready to project yet as to what it might be.
Okay, thanks for that. And as a follow-up, it looks like CapEx ticked up somewhat quarter-on-quarter, how much has this got to do with the investments in the cloud or is it pertaining to something else? And how should we think about the trajectory of CapEx here going into next year? Thank you.
Yes, Wamsi, this is Tim. A couple of things on CapEx, certainly on the engineering R&D CapEx there is -- there were dollars that uptick both for what we're doing with cloud, as well as our ongoing innovation efforts. And that I expect to continue. We're going to continue to make those investments.
There were some one-time CapEx that we're seeing; we're just rolling out one new facility here in Mountain View. And so, we're putting the finishing touches on that. So that tended to be more of a one-time shot than anything else, you’d see that on the G&A part of overall CapEx.
Okay, thanks a lot.
[Operator Instructions] The next question comes from Simon Leopold from Raymond James.
Great, thank you for taking my question. I wanted to get a quick clarification then more of a trending question. In terms of the January quarter forecast you are suggesting gross margin will be down from the levels, you enjoyed in July and October. And just wanted to understand whether there were some particular factors that we should understand leading to that sequential decline, if there's anything related to tariffs or other issues.
In terms of the broader trending question, I wanted to see, if you could offer some thoughts regarding the Cloud Data Services milestones. I understand you're not prepared to give us a dollar forecast. But are there certain metrics or milestones that we should look forward to help us validate your progress? Thank you.
So, Simon, I'll take the first question on gross margin. On gross margin, you're absolutely right, the gross margin guide for Q4 66% at the mid. And this is the same thing that we talked about last quarter as well. It just gives us the flexibility, you heard us talk about it even in a few earlier questions in terms of, we like the flexibility when we have a differentiated product to be able to take that gross margin and put it to work if we want to.
And so that's why we guided what we did and it was the same thing that we did back here in Q3 as well. So obviously, we're enjoying really high gross margin for us right now, but we want to retain the flexibility as we continue to grow the business.
Yes. And on the second part of the question about keeping tabs on the products as we put them out and obviously we'll be doing that. As callers on this call know, I think, we're not a fan of identifying individual especially new products as they go out for consistent management because we do manage to the top line overall. That being said, one of these as we announced in the launch CloudSnap is available today Cloud Block, StorReduce we announce to be available in the first half and Cloud Block Store towards mid next year.
Two of the three are subscription based services. So, as you know with subscription based service we'll get contracts, but we paid out on a month by month basis. So, we'll provide color quarter-to-quarter on these things. And hopefully we'll all see good take up of them.
Thank you.
Your next question comes from Rod Hall from Goldman Sachs.
Hi, guys, thanks for the question. I guess, I wanted to come back to FlashBlade, you commented that the growth there was very strong. And I wonder if you could give us any kind of an update that would help us quantify kind of where you stand there. It sounds like it's going well, but just hard to get a feeling for how to model that or how to think about it. So is there any other color that you could give us in terms of relative size or anything like that that might help? And then I have a follow up.
Well, again as you know that we're not giving out specific guidance on individual products, but I would say that at this point you can assume that FlashBlade is a substantial proportion now of our of our total sales.
Yes, the only thing, Rod, that I'd add there is we're seeing a terrific uptick in the repeatability of the used cases across rapid restore, AI next generation analytics and Oracle. We commented on EDA that that's been a longtime stronghold for the file market for our competitors.
And so to have three of the top five in the EDA segment, we're very pleased with kind of just getting going in that segment. And then just the overall momentum if you look at number of deals and the size of deals and the attach for our global sales teams all of those are trending in the right direction. So very encouraging.
Okay. And may be on FlashArray you guys had originally I know you got away from commenting on this, but you had said that you expected it to track with or at 2 times the pace of FlashArray. Is it catching up to that, I know it kind of fell below that at one point and I'm just curious whether it caught back up to it sounds like it's re accelerating.
Yes, Rod, I think the last time we commented on that was five quarters ago the quarter when I had just come in. So, no, we're not going to go down that path. As I said, I think, that what we can tell you is that it is a substantial portion of our overall sales and the overall sales are growing at 34% year-over-year just this quarter alone. So we’re on the very good growth rate FlashBlade is a substantial portion of that.
The other thing, I'd -- maybe I’d add one more thing as well, Rod, this is Tim. On FlashBlade, I think what's exciting to us this rapid restore case is allowing us to have conversations with a lot more of our existing customers and I think that's one of the reasons you saw the sort of momentum we did in this quarter is it's not just about specific niche used cases it's a lot more than that. And you're seeing that played itself out in the numbers here in Q3.
And then just -- okay one last, I guess, question since you guys can't say much about that one. NVMe over fabric, I think you'd said that you were planning or launching by the end of the year. I just wanted to make sure is that on track or could just give us kind of an update on the plan there?
Yes, absolutely on track, this is, Kix by the way. Overall I’d just say the NVMe strategy is working. Over two-thirds of our shipments are now NVMe and we're on track to ship the final piece of the puzzle with NVMe over fabric this year. So feeling very good about our leadership there and continuing to see that to be just extraordinarily differentiated in the field when we go out versus the competition.
Great, thank, Kix. Thanks guys, appreciate it.
Your next question comes from Andrew Nowinski from Piper Jaffray.
Great, thank you and congrats on the Cloud Data Services launch today. I just want to ask the new customer adds that you've had been fairly flat each quarter at around 300, I'm just wondering if you view the Cloud Data Services as a way to accelerate your new customer growth. Getting it getting you into new accounts as you view these as being deployed more by your existing customers.
Yes, hey, Andy, Dave Hatfield. We actually feel great about the adds, it's right in line with our expectations. We're adding five net new customers per day, compared to the competition who stopped talking about their customer adds. So we feel great about the overall contribution and the mix there.
Obviously, expanding our product portfolio gives us opportunities to enter into different buying centers and different usage based contracts may accelerate things as well. It's still early days, but we are really pleased with what we saw in the GSI segment and in the healthcare segment with the S2 [ph] in the quarter.
And Andy, I'll just add one additional thing to that. The quality of the adds is just as important and as you may remember from the beginning of this year, we were, if you will, putting more emphasis on larger Fortune 500, Global 2,000 customers and the thousand largest cloud companies and we're seeing that start to occur for us, But, of course, that takes a bit more effort than let's say a commercial customer. And so, we're very -- as Hat, mentioned we're very happy with the new adds we have and with the quality of them.
Okay, very good. And then with regard to the product growth at 31% year-over-year this quarter, I think, it seem fairly modestly above what NetApps just reported for their all flash revenue. Can you just give us an update on the competitive landscape and where you're taking share considering your rate is well above the market growth rate? Thanks.
Yes, so the competitive landscape I think our win rates still stayed heavy, we're stable for the quarter. And so, we feel great about our differentiation across all of the major competitors. So, no material change their. Kix, I don't know anything else you want add?
No, we've continue to see great product differentiation out there. And, when we continue to find when we get in and we showcase our product, we win, our biggest challenge is about that since we keep working on making sure we can knock out as many doors we can.
Great, thank you.
Your next question comes from Stephen Fox from Cross Research.
Hi, good afternoon. Just one question for me, it sounds like you're very satisfied with the sales force productivity in the quarter and year-to-date. As the product portfolio is expanding as you described on this call what are the implications for productivity near-term and longer term? And then as we think about next year with sales force investments would we think about a similar investments first quarter of this year -- of next year as you had this year? Thanks.
Hey, Steve, this is Hat. Productivity is continue to improve, the way that we set out in line with expectations our latest cohorts our biggest classes continue to outpace our most productive cohorts from earlier on. Moving to a platform and portfolio pull-through sale motion versus a best of breed point product takes work and takes time. Very pleased with the attach of the new products, obviously FlashBlade in the quarter was significant and that's largely driven by the attached of our sales teams bringing it into their portfolio.
So that pull-through motion that we wanted to see is absolutely starting to kick-in and is repeatable. So as you look at that, as we add more products to their portfolio, we're confident that the productivity trends we're seeing will continue.
And in terms of investments in sales next year?
Yes. So Steve, this is Tim on next year. Obviously not guiding the year, but I think if you look at our seasonal pattern from the past several years, Q1 is the investment quarter for us where we do hire a lot in sales and marketing. We get them in, they're coming off good years at competitors. We have them have great years here up here. We get them in early. We get them trained up to hit the seasonally strong second half. And I think you're going to see that dynamic continue to play out. We've done it for three, four years now.
And just what Kix said and Tim said together, that we consider our limitation to be add best, we're going to be investing significantly in the sales and marketing line.
Great, thanks so much.
Your next question comes from Mehdi Hosseini from Susquehanna.
Hi, thanks. This is David Rzyhik for Mehdi. Thanks for taking the question. Just wanted to touch the macro and then I had a follow-up. So, Charlie, just going back to your Jan quarter outlook, does it include any kind of softening in the macro outlook? And is it safe to assume that you're factoring in some continued share gains to compensate for that? And I had a follow up.
Yeah, I would say that we're not including -- we're only -- in terms of defining the guidance for the quarter, we're only looking at what we see in the market, and what we're hearing from our customers’ pipeline, et cetera. And so, if the macro were to take a sudden change from what we saw last quarter, of course, that's beyond our control. But basically we incorporated everything that's within our control.
Sure. Thanks. And regarding FlashBlade you've talked in the past about adding some feature sets to FlashBlade to better compete in the traditional file storage space. Would love to get an update there? And in that context with regards to Cloud Data Services you announce Block, would you consider announcing file services as well? Thanks so much.
Yes, this is Kix, I'll take the first question away. Look we continue to make progress on FlashBlade features nicely and I think the thing that's been really encouraging to us is just to see repeatability around the number of pretty diverse used cases. So everything from the highest in AI and analytics on through backup covers a pretty wide swap of the data center. And so, I think, we're feeling good about where we are and as we add more features, of course, we'll just address more and more of the market.
And then on the file question, we don't like to announce things before we're ready to bring them to market, but you can assume that files on our radar.
Great, thanks so much.
Your next question comes from Eric Martinuzzi from Lake Street.
Yes, I want to discuss the Cloud Data Services offering and kind of the sweet spot for your customer base. My assumption would be we're kind of talking about the larger customers the top of the pyramid, as I like to frame it. What about the value added resellers your partners. Is there any training and education because typically down the midsize and smaller end they like to sell a box and now we're talking about software in the cloud?
Yes, so this is Kix, I'll start there. First off, as you said, we really wanted to start by going after the most important tier 1 critical workloads and we think that's actually a really different tack in our competition started with. And so bringing in the greatest part of the Pure on-prem experience to the cloud and making it seamless was our key goal. Secondly, I'd say though as we approached this really with the channel first philosophy we're 100% a channel company. And so, we really wanted to take this to market in a way that allowed our channel partners to add value.
And so, they'll be able to transact the software component of this, they will also be able to resell the Amazon component. And, of course, most customers are also buying on-prem. So the channel is really in a unique position to stitch together all of that into one cohesive solution.
Got it, thanks.
Your next question comes from Erik Suppiger from JMP Securities.
Yes, thanks for taking the question. First off, can you discuss the competitive landscape you see for the cloud services? NetApps made a lot of noise there, VMware has its own solution in the cloud. Who do you envision going up against? And then, secondly, can you give us any updates on the proportion of shares -- B class shares with your dual class listing. Is that starting to approach 10% of your total shares at this point?
So this is Kix, I'll start with a competitive landscape. I think, the first thing you say is that it's still really early. I mean, we're really excited about kind of when we're entering this market, because the customer demand is really opening up now. And if you look at our competitors out there who have announced kind of dollar traction in the space we're not starting very far behind. So that's the first thing I'd say.
When we look at the ecosystem we see a lot of natural partners. And you mentioned VMware, that’s a great one. VMware is actually part of our launch event and we're underscoring our commitment to any greater cloud offerings nicely between the two companies.
And so, ultimately, I think, the key is to make sure that the on-prem ecosystem partners that we have can transfer to the cloud and so that customers can take advantage of both on-prem and cloud seamlessly. That's our whole vision.
And then Erick to your question on Class B and 10% threshold, yes, we continue to watch that, that has naturally come down over time as our VCs have rolled through and moved on to great quality public market investors. And so, we'll continue to track that closely and obviously give updates as we get to that sort of 10% point.
Very good, thank you.
The last question comes from Nehal Chokshi from Maxim Group.
Yes, thanks. Your sales and marketing expenses up only 9% year-over-year for the October quarter and given your tendency to invest in the first half, I would anticipate that it's not going to be a up significantly Q over Q for a January quarter. So I'm concerned that your sales and marketing line is not going to ramp more than say 20% year-over-year for fiscal year 2019 and that would imply that you will get a significant improvement in sales and marketing productivity going into fiscal year 2020.
So; A, is that the right way to think about that; and B, if so why should we get the confidence that you will get a big ramp in sales and marketing productivity for your mature sales teams?
Yes. So we have a couple thoughts on that question. So first of all, I would say that we are going to continue to invest in sales and marketing. And, I wouldn't read any particular quarter. In fact, we continue to increase the pace of hiring here in the middle part of the year, given the momentum that we were seeing in the business.
So we were over performing on the revenue side, we were over performing on the gross margin side. And that really enabled us to go even faster than, I think, we would have thought to begin with.
So, I think, you're seeing some of those investments come to light now, but it does take some time. But we remain very focused on Q4, late Q4 and certainly early Q1 hiring in the business. And so that's obviously one of the key jobs and key focus areas that we're working on here at the company. And on overall seasoning of our existing folks that are on the ground, we continue to like those trends. We've got a lot of sort of room to continue to sort of see those folks grow as they mature into their full tenure here.
Yes, Nehal, this is Hat, I mean, the only thing I would say is we're hyper focused on continuing to identify the very best sales people out there and bring them on board. There is a seasonal impact to that. But we're very focused on addition to adding capacity. The reason why I'm confident, on the productivity continuing to scale is, we are in a great innovation cycle, I mean, our products are just completely differentiated from the rest and with the Cloud Data Services that was the key remaining piece of the puzzle that we're adding in.
The repeat purchases are remaining strong, the competitive win rates are steady and our teams have proven they can sell multiple products. So, as I look at the productivity going into next year, I think, the trends that we've seen were just going to continue.
Do you expect your win rates to go up as these Cloud Data Services mature?
I would actually wouldn't mind seeing our cloud or our win rates actually go down a little bit if we saw more bets. It's more about getting into more fights. So, we're really pleased with the additional routes to market with the GSI and the FSIs. We're excited about the relationship with IBM and continuing to get into more fights. If we can get into more fights, I really like our chances.
Okay. And then if I may, you said that he had his strongest quarter for FlashBlade, was that on a year-over-year or Q-over-Q basis? That is my last question. Thank you.
I think it's whichever way you want to measure it. And when we said, we saw the strongest growth quarter, but it was a very strong quarter.
Very nice year-on-year growth. Very, very nice year-on-year growth.
Okay, thank you.
I will now turn the call over to Charlie Giancarlo for closing remarks.
Thank you all. We're proud of our progress this quarter. And especially around our cloud announcement with the new data centric solutions we've introduced, customers can work in their private cloud, the edge, on SaaS, or the public cloud and manage it all seamlessly with Pure1. I want to thank the entire Pure team and our global partners for their tireless efforts and dedication this last quarter.
And I also want to thank our customers for their business and their trust in us. And I want to wish all of you on the call and in the U.S. a very happy and merry Thanksgiving. Thank you.
This concludes today's conference call. You may now disconnect.