UPDATED 19:23 EDT / MAY 21 2018

INFRA

Pure Storage bests expectations, but stock tanks on weaker forecast

Pure Storage Inc. today beat the high end of its revenue forecast for its fiscal first quarter but issued guidance that appeared to disappoint growth-hungry investors.

The flash storage maker’s revenue rose 40 percent, to $255.9 million, over the same quarter a year ago and slightly exceeded the high end of the guidance executives set last quarter. The loss of 7 cents per share was also better than analyst consensus estimates by a nickle.

What appeared to underwhelm investors was the company’s second-quarter forecast of revenue in the range of $296 million to $304 million. The $300 million midpoint between those numbers only slightly exceeded analyst consensus estimates of $299 million and pointed to growth of 34 percent compared with historical averages of 40 percent-plus. It didn’t help that MarketWatch, a prominent Wall Street news service, initially reported that Pure Storage had missed earnings expectations by a wide margin. The service later corrected the mistake.

Still, in after-hours trading, the shares fell more than 8 percent. They had fallen 0.38 percent, to $23.58 a share, in regular trading.

“Buy on the rumor, sell on the news,” shrugged Chief Executive Charles Giancarlo, when asked about the selloff in an interview with SiliconANGLE.

Futures aside, Pure Storage had a pretty good quarter. Gross margins held steady in a an increasingly competitive market, and operating margins improved from minus 14 percent in the same quarter last year to minus 6 percent. The net loss of $16.2 million was also a third less than the loss in last year’s first quarter. This year, said President David Hatfield, “is shaping up to be our best year yet and we’ve only just started.”

Loyalty counts

Pure has set itself apart from the pack with a focus on performance and a subscription pricing model it calls Evergreen that enables customers to move to new technology without heavy migration efforts. The company said it added 300 new customers during the quarter, bringing the total to more than 4,800.

However, the strength of Pure Storage’s business continues to be repeat customers, which contribute 70 percent of its revenue. “I have never been with a company whose customers were so enthusiastic,” Giancarlo said, citing consistent Net Promoter Score ratings of more than 70 percent.

On the earnings call, executives stressed the primacy of growth over profitability. “We can be profitable if we want to be, but for a company of our scale, growth is the most important thing,” Hatfield said. “We aren’t going to be buffeted by short-term swings in mood.”

The flip side of a growth-focused strategy is that any slowdown tends to provoke investor wrath, as happened today. Executive stressed that the fiscal second quarter is seasonally the slowest and so the slightly lower growth forecast shouldn’t be taken as a sign of weakness.

On the contrary, they insisted, Pure Storage is swimming in an ocean of opportunity and is beating all comers. “Our biggest challenge is being able to make the investment in infrastructure to be able to deliver,” Giancarlo told SiliconANGLE. The company added 200 employees in the quarter, bringing its total employee base to 2,300.

The company is particularly bullish about the prospects for Non-Volatile Memory Express or NVMe, a high-speed protocol for moving data between solid-state memory and the other components of a storage environment. Pure Storage has bet heavily on the technology with FlashArray//X, which sports twice the bandwidth of previous arrays with half the latency.

Competitors have been more reluctant to push customers toward NVMe, but “they’re making the same mistake as they did with flash,” Hatfield said. “They view it as exotic high-end technology. To us it’s just a faster wire.”

Analysts’ and investors’ main concern may be how fast companies shift operations to the cloud, which could cut into the flash drive market, especially branded providers such as Pure that the so-called “hyperscaler” cloud companies such as Google Inc. and Facebook Inc. don’t buy as much as generic drives.

“While we believe Pure can gain significant share in the declining storage market with the transition to all-flash, we see increased competition pressuring growth rates,” Morgan Stanley analyst Katy Huberty wrote in a note to clients. “We wait for signs of better traction of new products, including FlashBlade and the AIRI solution with NVIDIA, to become more confident that the company can successfully compete in new addressable markets.”

Executives implied that more is on the way this week as an estimated 3,000 people gather for the company’s Accelerate user conference in San Francisco. Expect “a host of new products and services,” Giancarlo said. Pure Storage will also outline “a new data center architecture that make organizations more resilient and better able to use containerized and virtualized applications.”

With reporting from Robert Hof

Image: Pure Storage

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