Key Pure Earnings Call Points (X post)

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I posted this on NPI but plenty here are interested in Pure Storage.
http://discussion.fool.com/key-pure-storage-earnings-call-points…

I refrained from using ALL CAPS in my summation but only just!
Ant
(Long and positive)

28 Likes
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Key Pure Earnings Call Points

Ant, again, what a great post! Thanks so much for taking the time to do that for us all. We all appreciate it. I may just have to increase my number of positions.:grinning:
Saul

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Here are my notes from the quarter (Copied from Evernote, so I apologize if the formating is little messy.) 
Ant, I'm interested in your thoughts on my negatives, particularly #4.  
I'm struggling with how this company gets profitable in the future, ANET or NVDA profitable, or maybe they never will.

Jim
______________

Revenue growth by quarter (percent)

2017  89  93  50  52
2018  31  38  41  49
2019  40  37

2Q19 $309 M (+37%), FCF -$12M (vs -$18M)

3Q19G  $369 (+33%)
2019G  $1380 (+35%)

Positives

1) Revenue growth: came in above expectations, average of last 2 years is 37.5%. 
  Guidance of 33%, which they will most likely slightly beat gives an average of 37% for Q3.  

2) gross margin of 68% an all time high

3) operating margin of 0.3% vs -10.3% last year (10.6% improvement)

4) lead dog: have the leading technology in AFA.  
             CEO addressed the issue of NTAP having higher sales, because of installed base.

5) Management:  Charlie Giancarlo  had his pick of jobs, went to PSTG for a reason

6) Backers: Investors I respect like the company and its quarter, ANT, Etc.

7)  Momentum:  PSTG was weak coming into this quarterly earnings.  
               Market liked the report and the Stock is popping. 

8) Long term trend is toward AFA, TAM should continue to grow.

Negatives

1) negaitve FCF.  FCF is loaded to 2nd half of year and is improving this year over last. 
    But, how does a $1.4 Billion sales company have negative free cash flow thru 6 months?  
    Had FCF of 1% of sales last year.  Would like to see PSTG get to 5-7% FCF/sales this year ($70 M - $100 M)

2) share compensation of about $100 M thru 1st 6 months, just over 17% of revenue.

3) share count.  non gaap count of 262 M, up from 209 M last year, 25% increase in one year.  On a revenue per share basis, company isn't growing much.

4)  How is PSTG going to make money in the future?  
 PSTG is forgoing current profitability to grow. 
 However, in the future they claim a target operating profit of 15-20%. (so 12-16% after tax). 
 In 2 years they will have sales of $2 B, which is $240M -$320M is earnings at the target rate (which probably won't happen for 3-5 years). 
260 M shares and growing, maybe a $1 /share in EPS at the long term target profitability in 2 years.
  Already have a 2 year forward PE of 25 at the target rate which they most likely won't achieve yet.
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One more positive is the net promoter score of 86.

“We are also pleased to share that the fourth year in a row, Pure has an increase to certified net promoter score 86.6, up from 83.7 last year retaining our spot in the top 1% of all B2B companies. Critics have noted that as companies scale it’s common to see net promoter scores decline over time. However, it’s rewarding to us with our relentless customer-first focus to defy this conventional wisdom.”

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Let me fix this for you, putting < pre > and < /pre > around the tabular data.

Here are my notes from the quarter (Copied from Evernote, so I apologize if the formating is little messy.)
Ant, I’m interested in your thoughts on my negatives, particularly #4.
I’m struggling with how this company gets profitable in the future, ANET or NVDA profitable, or maybe they never will.

Jim

Revenue growth by quarter (percent)


2017  89  93  50  52
2018  31  38  41  49
2019  40  37

2Q19 $309 M (+37%), FCF -$12M (vs -$18M)

3Q19G  $369 (+33%)
2019G  $1380 (+35%)

Positives

  1. Revenue growth: came in above expectations, average of last 2 years is 37.5%.
    Guidance of 33%, which they will most likely slightly beat gives an average of 37% for Q3.

  2. gross margin of 68% an all time high

  3. operating margin of 0.3% vs -10.3% last year (10.6% improvement)

  4. lead dog: have the leading technology in AFA.
    CEO addressed the issue of NTAP having higher sales, because of installed base.

  5. Management: Charlie Giancarlo had his pick of jobs, went to PSTG for a reason

  6. Backers: Investors I respect like the company and its quarter, ANT, Etc.

  7. Momentum: PSTG was weak coming into this quarterly earnings.
    Market liked the report and the Stock is popping.

  8. Long term trend is toward AFA, TAM should continue to grow.

Negatives

  1. negaitve FCF. FCF is loaded to 2nd half of year and is improving this year over last.
    But, how does a $1.4 Billion sales company have negative free cash flow thru 6 months?
    Had FCF of 1% of sales last year. Would like to see PSTG get to 5-7% FCF/sales this year ($70 M - $100 M)

  2. share compensation of about $100 M thru 1st 6 months, just over 17% of revenue.

  3. share count. non gaap count of 262 M, up from 209 M last year, 25% increase in one year. On a revenue per share basis, company isn’t growing much.

  4. How is PSTG going to make money in the future?
    PSTG is forgoing current profitability to grow.
    However, in the future they claim a target operating profit of 15-20%. (so 12-16% after tax).
    In 2 years they will have sales of $2 B, which is $240M -$320M is earnings at the target rate (which probably won’t happen for 3-5 years).
    260 M shares and growing, maybe a $1 /share in EPS at the long term target profitability in 2 years.
    Already have a 2 year forward PE of 25 at the target rate which they most likely won’t achieve yet.

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PSTG’s account receivables is huge and so is their purchases of property and equipment. If they could bring down account receivables that would be nice. But since they are selling to large corporations I doubt that is going to happen. The companies they are selling to are using them for a piggy bank.

Andy

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Hi Jim

Of all your negatives the 2 I don’t worry about are 1 and 4. PSTG has shown tracer bullet improvements year on year in all respects. They are now profitable and will be going forwards. They aren’t sacrificing profits for growth in my mind - they win with the highest margin. They are also banking forward revenues and high margin deferred subscription revenues going forwards so profitability should be good and assured. Cash flow - these guys are continuing to improve all the time on that measure.

This is not an industry that has had profitability issues. I’m not worried. It’s practically an oligopoly and they are the new growth leaders and profitable. It just doesn’t concern me at all.

SBC is high but has been and should continue to come down.

Ant

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Hi Ant -

not to hijack the thread but I am curious to see what you think about PSTG execs discussing softening of memory prices. The conference call mentioned that at least once. How do you see that impacting PSTG as well as memory fabricators (Micron, Samsung, SK, etc)?

Micron is a core holding for my portfolio but my conviction for this company going forward is slipping…

–cliff

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Cliff,

This fantastic post is part of what convinced me to sell Micron: http://discussion.fool.com/micron-valuation-33136322.aspx

Hope it is of interest to you.

Bear

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thank you for the link. Lot of good information in that post.

-cliff

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Hi Cliff

Yeh I thought about my Micron too. It’s good for Pure no question - costs down and sales up.

Micron has DRAM and NAND - Dram prices are holding up better. But in any case what Pure is saying is that as prices decline the demand volume growth more than compensates. This will be what I’m watching for at Micron together with 3D X point.

Ant

3 Likes