Shares of the data center hardware company Pure Storage Inc. flew into orbit today after it posted third-quarter financial results that breezed past analyst expectations and offered strong guidance for the current quarter.

The company reported third-quarter earnings before certain costs such as stock compensation of 50 cents per share, easily beating Wall Street’s target of 41 cents per share. Revenue increased 9% from a year earlier to $831.1 million, surpassing the analyst target of $815 million by a wide margin.

Pure Storage also reported strength in terms of its subscription services revenue, which increased 22% year-over-year to $376.4 million, while its subscription-based annual recurring revenue jumped 22% to $1.6 billion.

In addition, the company reported remaining performance obligations of $2.4 billion, up 16% from a year ago.

NAND Research Inc. analyst Steve McDowell told SiliconANGLE that Pure Storage’s subscription and as-a-service businesses were the real winners in the quarter, showing solid growth. “They account for about 45% of revenue now and are growing at more than 20% per quarter,” he said. “This is a long-term recurring business that’s good for the bottom line. And it’s a business where its competitors aren’t seeing as significant a bump.”

Hyperscaler win

During the quarter, the company achieved a significant design win with a “top-four hyperscaler” regarding its DirectFlash technology. According to Pure Storage Chief Executive Charles Giancarlo (pictured), the win represents a “vanguard for Pure Flash technology to become the standard for all hyperscaler online storage.”

Hyperscalers are technology giants that require computing and storage resources on a massive scale, such as Amazon Web Services Inc., Google LLC and Microsoft Corp. Meta Platforms Inc., another hyperscaler, is already a big customer of Pure Storage.

The win is a major result for Pure Storage and the all-flash storage technology it offers, and paves the way for a significant expansion. Traditionally, hyperscalers have always relied on traditional hard disk storage, and they very rarely buy brand-name storage systems, McDowell said.

In a conference call with analysts, Giancarlo talked up the role of another company in the deal, namely Kioxia Inc., which supplies it with raw NAND flash. McDowell said this is important because Pure Storage is one of the only mainstream storage system providers to make its own solid-state drives. This is a key differentiator for the company as it gives it more control over the supply chain.

“It means Pure Storage has cost-control levers that its competitors don’t enjoy,” McDowell said. “The relationship with Kioxia plays into this, giving it a strong partner for the raw NAND.”

The analyst said Pure Storage’s DirectFlash technology will likely make its impact felt in nearline storage, where hard disk drives still dominate the industry. He added that although the company didn’t name the hyperscaler involved, it’s almost certainly Meta. That’s because, not only is Meta an existing customer, but Pure Storage was also careful to say the deal was with a “top four” hyperscaler, rather than a top three player, which would exclude Meta from the equation as it ranks fourth by almost every measure.

“The hyperscale win speaks well to Pure Storage’s overall value proposition, and it’s something that likely translates to the growth it is now seeing in the enterprise, where it outperformed most of its competitors this quarter,” McDowell continued. “But the deal didn’t have any immediate impact, and it won’t be a significant revenue driver for about a year.”

AI still an Opportunity

In the conference call, Giancarlo once again talked up Pure Storage’s prospects in the fast-growing artificial intelligence industry, which could become another major revenue driver for the company in future.

Much of what the CEO said mirrored what he spoke about in August, when he told theCUBE Research’s John Furrier and Dave Vellante during an interview that the rise of AI is forcing an evolution in data center storage. Back then, he said that traditional storage solutions, based on physical arrays and complex, fixed environments, are starting to give way to more flexible, virtualized, flash-based storage systems.

“We’re creating an environment where on our arrays, all of that data appears as a pool of data,” he said. “It’s accessible by AI — what AI wants is access to data. Now you have to have the proper security mechanisms in there, role-based access controls, but then you want to allow it to have access to the data where it sits instead of having to be able to replicate it.”

McDowell said however that it’s still very early days for storage suppliers in the AI industry, and that like most of its competitors, Pure Storage has not yet seen any significant tailwinds.

“I think that will change over time as enterprises figure out what’s needed,” the analyst said. “Pure Storage is doing all of the right things to be ready for that market as and when it materializes.”

In any case, Pure Storage seems confident it will continue to enjoy strong momentum in the short term. Looking to the next quarter, it forecast revenue of $867 million, well ahead of Wall Street’s target of $856.9 million. For the full year, it’s eyeing sales of $3.15 billion, topping the analyst forecast of $3.13 billion.

Investors liked what they saw, and Pure Storage’s stock jumped more than 20% in extended trading, adding to a small gain it made during the regular session.

“Our third-quarter results exceeded our expectations on revenue and operating income, demonstrating the sustaining strength of our business models,” said Pure Storage Chief Financial Officer Kevan Krysler.

Photo: SiliconANGLE