PSTG getting hammered for a revenue miss.
I just went through the numbers though…interestingly, they hit their target units shipped and deals – the revenue drop was due to a double digit decrease in RAM costs…so pass through revenue that doesn’t actually affect their margin.
I just went through the numbers though…interestingly, they hit their target units shipped and deals – the revenue drop was due to a double digit decrease in RAM costs…so pass through revenue that doesn’t actually affect their margin.
The reaction, especially after hours, was overdone. The stock clawed back some of those losses today. Irrespective of the price, there wasn’t much new in the call except NAND prices continued to fall more than expected. This is actually a good thing for PSTG not only short term as they have higher margins in a lower priced environment, but long term more companies will use flash as they upgrade storage which is inevitable in the current paradigm. Pure is trying to change that paradigm, but that isn’t terribly relevant today.
They did claim that global slowdowns had a very minor impact on the business. That part is new, but it sounded like they attributed no more than a couple of percent to that.
Revenues increased roughly 15% and gross profits increased 20%. Their business is humming along just fine and the recent drop takes a bunch of risk out of the name. I have a small position in order to follow the company closely. Their margins show they are not a commodity business nor a pure hardware company.
It is not a hyper growth company and doesn’t fit this board incredibly well, but I definitely won’t be selling. They will do about $1.6B in revenues next year and grow about 20% as NAND prices stabilize and rise. While I do understand the opportunity cost, I keep some “value” positions to a small degree in my portfolio. I’ll likely employ an options strategy to bring in income for the next three month prior to the next report, but that isn’t pertinent to the board either.
Just wanted to provide a few more nuggets of info on the company.
A.J.
My issue, “risk out of the stock”. This was said at $21, at $19, at $16, and now we are at $15.
NAND prices fell, and Pure has better tech that gives them better economics in regard. Fine. Still revenues only grew 15%, and that lead to 20% gross margin improvement, and bottom line improvement? If I recall they beat by a bit but hardly a company snowing such superior ability to make returns that it is going to be a run away investment.
They have a credible business, in a nice niche, that is not going anywhere, and that appears to have long term middling growth that will be lumpy and cyclical.
I just don’t get the hurrah about PSTG. Same thing every quarter. Slowed down to 30% growth, then 25%, now 15%, but hey, gross margins increased 20%…
Unlike EMC and NTAP before them, who created new storage product categories and were able to runaway with the markets and become cash printing machines, now trading at very low multiples with low growth, PSTG has not demonstrated the same ability because (1) their innovation is not disruptive enough to not allow the competition to create a good enough product, and (2) the competition has not been inept nor stuck within an innovator’s dilemma. It just has not happened.
When is it going to happen? It has been years. The talked about reduction in NAND prices that was going to be so great for Pure has hit, and it was not all that great.
Whatever, just saying. I don’t get it.
Tinker
Hi Tinker,
The stock price without looking was under $14 just a few months ago after their last report which was the first report where tremendous drops in NAND pricing were announced as an impact. NAND was expected to stabilize but ended up declining double digits this quarter.
Flash continues to become more affordable though it likely isn’t going to stay this cheap for long. It has not consistently gone down every year, but has fits and spurts. When it goes up, revenue growth will rise similarly to how it has fallen. Either way, gross margins will remain high in a relatively tight range trending lower when NAND pricing increases and higher when it decreases.
None of the above talks about their innovation nor their Evergreen model.
They are stealing market share as we can see in IDC reports and are likely to continue to do so at a profitable level.
A.J.
Zeke,
I appreciate your heads up on PSTG. I am familiar with the stock and so bought and made a quick 7% (if the price holds on Monday). Having so many eyes on the market is a hidden value of these boards, particularly so when stocks trade on headlines as they tend to do these days.
I won’t argue for the stock, not here. It is a cut or two below the targets/metrics for this board. Bert liked it in September, but then he has a much more prominently used EV/S ruler than most here, and it shows wear down to 2 which is certainly in the “cheap for a reason” category. But will likely keep almost half of what I bought on the drop–which isn’t a great percentage, and we will see what it looks like come May.
KC
The Q3 15% headline revenue growth and miss due to price erosion masked:
Zero miss in terms of volume growth
A beat in billings
A beat in net inc & net inc per share
Highest GM ever at 71.7%
Record levels of cash flow
The fastest selling new product introduction they have ever had (FlashArray//C)
Equal highest level of new customer additions in over 2 years - up 29% YoY
Subscription revenue growth of 42%
Deferred revenue growth of 39%
Stronger traction than anticipated in their Pure as a Service business model conversion
Additional $5bn added to their TAM (now $50bn)
Increased market share
and
within 2 quarters the potential for accelerated growth from demand elasticity to the lower unit pricing.
Nand prices stabilised at the end of the quarter so the short term pain should be limited but the long term gain from elasticity in demand will kick in shortly - which should be significant given that flash is only 20% of the market volume whilst 30% of the market value.
Lots to like about the growth story very much intact and at EV/S at 1.8 it’s a growth play at unreal value.
Ant
Hi AJ
They will do about $1.6B in revenues next year
Not meaning to quibble but actually they are forecasting $1.641bn for fiscal 2020 which is THIS year for them - they are in Q3 of their fiscal 2020. For next year at ~20% growth they will be landing at close to $2bn run rate.
Ant
Tinker said:
“…PSTG has not demonstrated the same ability because (1) their innovation is not disruptive enough to not allow the competition to create a good enough product, and (2) the competition has not been inept nor stuck within an innovator’s dilemma. It just has not happened.”
I think that’s the key to Pure’s lack of momentum. They may have very fast flash storage (but so does NetApp and EMC, and depending on which benchmark you want to look at, Pure’s may not even be fastest), but the storage itself is mostly a commodity. The package or solution around that storage is more important for enterprise-level customers.
Pure’s solutions architecture is still very storage-centric compared to Dell/EMC or NetApp. You can get very fast storage for whatever… but the solutions package is still inferior in many respects to what NetApp and others provide. Backups, mirroring, storage efficiency, instant roll-back/recovery/DR/failover, uptime, non-disruptive upgrades (NetApp’s “eternal cluster”, for example, is hard to argue if not compete against)… the list of needs and features is almost endless. And I won’t even scratch the surface of what’s happening with folks moving to the cloud or running hybrid on-prem/in-the-cloud storage models where they need to move large amounts of data into and out of a cloud – or between a public and private cloud.
Being able to manage all that data, not just the storage behind it, is actually more important than the storage itself (but yes, you need the storage to be solid, reliable, fast, cost-effective for the application, etc.), especially when you get to the point where you have dozens or hundreds of terrabytes of data, and PSTG still has some work to do in that realm, as a relative newcomer.
Disclosure: I’ve been working in this industry for more than 15 years, so I freely admit my probable bias as well as the strength of my insider knowledge across many of these storage vendors – but I invest in more than just the employer who signs my paycheck, including PSTG. I tried to buy some more yesterday on the overreaction, in fact, but my limit order didn’t trigger. I suspect I will have another opportunity in the next few market days.
Hlygrail,
Thanks for the input and I’d love to hear more about your thoughts being in the industry.
And I won’t even scratch the surface of what’s happening with folks moving to the cloud or running hybrid on-prem/in-the-cloud storage models where they need to move large amounts of data into and out of a cloud – or between a public and private cloud.
It seems Pure is addressing this with the following, but feel free to comment further.
Second, we believe in cloud everywhere. Organizations want to both transform their on-prem operations to the cloud model, and seamlessly link to the public cloud for IT agility. Customers also want a single, consistent, data storage architecture for all clouds, public and private. Cloud Block Store provides multi-cloud consistent operations, including migration, test/dev, disaster recovery, and protection for all applications. Our offering on AWS was made generally available this past quarter, and we recently previewed Pure Cloud Block Store on Microsoft Azure at the Microsoft Ignite conference.
Can you provide any further information on this part of your post?
especially when you get to the point where you have dozens or hundreds of terrabytes of data, and PSTG still has some work to do in that realm, as a relative newcomer.
It sounds like you are still bullish on Pure, but with a good deal of skepticism. It is a small position for me. According to IDC reports, they are taking market share at a pretty good clip. IDC reported the AFA market declined 1% in Q2 on a revenue basis. Pure grew 28% that quarter.
Interested to hear if you have anything more you’d like to add.
Thanks,
A.J.
Tinker said:
“…PSTG has not demonstrated the same ability because (1) their innovation is not disruptive enough to not allow the competition to create a good enough product, and (2) the competition has not been inept nor stuck within an innovator’s dilemma. It just has not happened.”
That pretty much sums up Pure’s story. Two years ago I was enthusiastic about Pure’s story and I started buying in March 2018 at $19 to $20 but the market was not buying the story. A year later I sold my position for a small loss. Excuses are nothing but excuses. I agree with Tinker that Pure is simply not disruptive enough to be worth investing in, it’s not going to be a second EMC or NetApp.
One has to remember that Pure Storage might be competing with EMC and NetApp but PSTG, the stock, is competing with every other stock on the market.
Denny Schlesinger
It sounds like you are still bullish on Pure, but with a good deal of skepticism.
I wouldn’t say I’m bullish on PSTG. I’m probably more bullish on NTAP, but that would make my PSTG position more of a hedge… which maybe it is (although much smaller). When I first opened my PSTG position, they had reasonable momentum and were winning bake-offs with other storage vendors far more often; that win ratio has changed in the last ~12 months, depending on who you want to listen to. (I was also bullish on NTNX until they imploded, but couldn’t trust them enough to get back behind the latest rally, c’est la vie.)
I’ll let others do the comparison between cloud/on-prem cloud/hybrid cloud offerings between Pure and others – mine would be invariably biased and hole-punched the moment I shared it. But if you beg, I might carve out (see what I did there??) some time over the Thanksgiving break to line up some data.
But if someone is going to do it, I think it has to include at least:
But if you beg, I might carve out (see what I did there??
I don’t know if I’ll beg for it, but I’d certainly be interesting in hearing what you have to say on the topic. Unfortunately, the tech is not my area of expertise.
I’m sure your follow up would say why you are more bullish on NTAP than PSTG and I’ll be interested to hear about the tech and how it pertains to that if you have the time.
Take care,
A.J.