Title

Presentation

Pure Storage, Inc. reports earnings inline with expectations. Reported EPS is $0.58 EPS, expectations were $0.58.

Operator: Good day, and welcome to the Pure Storage Third Quarter Fiscal 2026 Financial Results Conference Call. Today’s conference is being recorded. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press 1 on your telephone keypad. At this time, I’d like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead.

Paul Ziots: Thank you. Good afternoon, everyone, and welcome to Pure’s Third Quarter Fiscal Year 2026 Earnings Conference Call. On the call, we have Charlie Giancarlo, Chief Executive Officer, Tarek Robbiati, Chief Financial Officer, and Rob Lee, Chief Technology Officer. Following Charlie’s and Tarek’s prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at investor.purestorage.com. On this call today, we will make forward-looking statements, which are subject to various risks and uncertainties. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings, and competitive industry and economic trends.

Any forward-looking statements that we make are based on facts and assumptions as of today, we undertake no obligation to update them. Our actual results may differ materially from the results forecasted and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties related to our business is contained in our filings with the SEC and we refer you to these public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenue, remaining performance obligations or RPO, and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. 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 and is the property of Pure Storage. Our fourth quarter fiscal 2026 quiet period begins at the close of business Friday, January 16, 2026. With that, I’ll turn it over to Charlie.

Charlie Giancarlo: Thank you, Paul. Good afternoon, everyone, and welcome to our Q3 FY ’26 earnings call. Thank you for joining us. Pure Storage delivered a strong Q3, continuing to expand revenue growth as customers increasingly look to Pure to solve their most pressing data management requirements. Our results were underpinned by continued strength in enterprise and sustained momentum in our Evergreen One and modern virtualization solutions, which includes CBS and Portworx. During the quarter, we also exceeded our full annual forecast of two exabytes of hyperscale shipments and expect to ship more in Q4. Our strong Q3 performance translates to an increased outlook for Q4 and improved guidance for FY 2026, which Tarek will discuss in his prepared remarks.

Our enterprise momentum continues to be driven by the power of the Pure Storage platform, built on our purity operating system, now enhanced with Fusion. Purity delivers the reliability, simplicity, and long-term value that customers depend on to manage their data with confidence. It also powers our evergreen subscription model, the industry’s only continuously modern nondisruptive storage experience. With Evergreen One Infusion, customers can build their own modern enterprise data cloud, automating storage, simplifying management, and achieving faster, more efficient, lower-cost operations with zero downtime. Since the beginning of the year, the number of customers deploying Fusion has more than tripled to the mid-hundreds, proof of the platform’s momentum and market demand.

Data is now increasingly vital because of the promise of AI and requires that customers elevate its role in their technology architectures. While software may have been eating the world in the last decade, it appears that data will be eating the world and potentially even eat software in the next. Since the beginning of modern computing, data has been structured below the applications that create it. It’s been locked beneath databases, file systems, and backup systems, each designed for a specific purpose, but ultimately isolating their in silos confined to those services. This application-centric model limits data visibility and mobility. It slows efficiency and innovation and prevents companies from realizing the full potential of their information.

Consequently, data is repeatedly copied and to be useful for other applications, such as analytics and AI. Each copy is created and maintained by different individuals by manual processes. With the massive proliferation of data and copies of data, in enterprises managed by manual processes, data is poorly governed. Often overproduced, and highly fragmented. We believe the era of data being subservient to application in data center architecture is ending. Data, the lifeblood of modern organizations, must now take center stage in data center architecture. In a world where artificial intelligence, automation, and analytics are redefining competitive advantage, enterprises can no longer afford to treat data as captive to specific applications. Data must be architected to stand on its own.

Self-describing, stateless, and managed globally by policy set in software. The Enterprise Data Cloud makes this possible. It gives organizations the ability to access and leverage all their data. Securely, seamlessly, and in real-time. Regardless of where it originates. With the right authorizations, any application will be able to access integrated pools of data enabling faster insight, more intelligent decision-making, and greater operational velocity in business. By freeing data from legacy silos, the enterprise data cloud lets companies operate with the same flexibility scalability, and efficiency as the cloud itself. Customers who use our PureFusion capability embedded in Purity can now manage their datasets globally with policies embedded in software.

Rather than by fingers on keyboards. Enabling storage and data management that is truly defined by software. At our Accelerate Roadshow in New York, and around the world, we extended the enterprise data cloud into Azure with our Pure Storage Cloud. Which enables customers to unify their data landscape across public and private environments. This Azure native service for AVS, enables seamless migration from on-prem VMware environments with enterprise-grade resiliency and efficiency. In New York, we continued rolling out powerful innovations across all three pillars of the enterprise data cloud. First, we expanded our unified data platform with new systems like the XL190. And we improve data reduction efficiency on all our platforms giving customers more capacity and performance on their existing systems.

Second, we enhanced our intelligent control plane with an AI Copilot, which simplifies management and automates complex tasks. Making storage operations faster, smarter, and more reliable. Third, we expanded our partner ecosystem to deliver greater value through integrated cybersecurity and data protection. As the pace of our technology advancement accelerates with scale, we expect to continue to gain market share in more and more segments of the data storage and management space. In the quarter, we were recognized in the two most important Gartner Magic Quadrant for our industry. In the enterprise storage platforms Magic Quadrant, Pure was positioned highest for execution and furthest provision. We were also recognized as a leader in the first-ever infrastructure platform consumption services magic quadrant.

Additionally, Pure was recognized as a leader in the IDC marketscape on support services globally. Reflecting our strengths in reliability proactive connective support, and our customer-first mindset. Portworx continues to lead the industry in defining storage in the cloud-native Kubernetes and container world. Customers want more flexibility, lower cost, and modern architectures that support cloud flexibility. It’s why companies like NVIDIA, SiriusXM, and a major global bank have chosen Portworx. In Q3, one of the world’s largest enterprise software companies selected Portworx to overcome multi-cloud fragmentation. They accelerated the deployment of their cloud services across AWS, Azure, Google Cloud, and Alibaba Cloud, ensuring a consistent operational experience enterprise-grade data protection, and high availability.

Modern virtualization is a subject in great demand with our customers. Across the industry, three trends are driving this shift. The search for alternatives to expensive legacy virtualization models, the rise of containers in KubeVirt, and the significant increase of AI and machine learning built on Kubernetes. Portworx and our solutions in partnership with Nutanix, Microsoft, Red Hat, and others are leading this transition away from traditional virtualization solutions. Portworx is now becoming practically mandatory for any scaled Kubernetes virtualization deployment. As Kubernetes extends beyond virtualization, to power modern applications and AI workloads, Portworx’s role continues to grow. Portworx lets customers run any application anywhere.

Securely, efficiently, and up to two or three times lower cost. So they can modernize faster, and operate with greater speed and flexibility. Neo clouds represent another fast-growing market for specialized storage technology. This new generation of specialized high-performance cloud platforms built for AI, machine learning, and other compute-intensive workloads represent a new segment of cloud infrastructure driving new benchmarks for performance and scale. Recently, we published our latest benchmarks for FlashBlade X at supercompute. A leading conference on high-performance computing and AI. FlashBlade Exa delivered data to thousands of GPUs twice as fast as competing systems in less than half a rack. FlashBlade Exa extends the power of our purity architecture to these next-generation clouds, pushing the limits of performance for AI and high-performance computing superior, sustainable throughput and scalability.

As we have discussed over the past year, Pure provides a compelling alternative to hyperscalers. Who face mounting hard disk and SSD cost and power constraints. As I stated earlier, we have already exceeded our annual plan for shipments by the ‘3. But consistent with our statements at our September financial analyst conference, we will not be providing specific information on shipments to hyperscale customers going forward. We will share more information next quarter about the outlook for FY 2027 and the economics of our hyperscale business as it impacts our financials. Turning to the macro environment, we foresee increased commodity pricing and excess demand putting pressure on global supply chains. As in the supply chain crisis of 2021 and 2022, we anticipate both extended component lead times and higher component pricing across the technology industry in the quarters ahead.

Pure is well prepared for this challenge with a resilient supply chain a broad global supplier base, manufacturing sites on three continents, and strong business continuity plans. As we’ve noted a number of times before, given our industry’s dynamic pricing environment, the effect of commodity pricing tends to affect our top line more than gross margin. Thus, we would expect higher commodity pricing to positively affect revenue growth. Finally, I am pleased to welcome Pat Finn to Pure as our next chief revenue officer. Pat brings extensive experience in scaling sales and go-to-market organizations within high-tech infrastructure companies along with a proven record of building lasting customer relationships with leading global enterprises. I also want to extend my gratitude to Dan Fitzsimmons for his dedication and contributions to Pure over the last decade, and for his continuing engagement with Pure to maximize our opportunity.

His leadership was and is instrumental in expanding our operations advancing our enterprise and commercial strategies, and helping advance Pure from its early days to the global enterprise it is today. With that, I will hand it over to Tarek.

Tarek Robbiati: Thank you, Charlie. In Q3, we delivered strong revenue and operating profit results, both exceeding the high end of our guidance range. Revenue of $964 million grew 16% year over year, operating profit grew 17% year over year to $196 million, which is a record for the company and resulted in an operating margin of 20.3%. Our Q3 results demonstrate sustained demand for our differentiated data storage management offerings. Sales across our portfolio remained robust, led by ongoing strength in the enterprise and our hyperscaler business. We also continue to see strong traction of our Evergreen One and modern virtualization solutions which include Cloud Block Store. Our success this quarter continued to be driven by the strength of the Pure platform value proposition across multiple customer segments.

Our single operating system, Purity, delivers simplicity and reliability across just two hardware offerings, blades and arrays. We provide the industry’s only truly nondisruptive upgrades and the only genuine storage as a service offering to Evergreen One. In terms of data management, no competitor can match the capabilities we are delivering with Fusion and the enterprise data cloud. And with our differentiated direct flash technology, we are able to expand into a large newly addressable hyperscale market where traditional storage system vendors cannot compete. Underscoring this competitive advantage, hyperscaler shipments as of Q3 year to date exceeded our original forecast for fiscal year 2026 of one to two exabytes. We expect momentum in our hyperscaler business to continue in Q4 and obviously for fiscal year 2027.

We will not be providing any additional quantitative guidance on our hyperscaler business fiscal year, but we do expect to provide additional color for our next fiscal year at the end of Q4. Product revenue of $534 million grew 18% year over year. As a reminder, our product revenue category now includes royalties that we receive from hyperscale shipments as well as a portion of Portworx software revenue when sold as term licenses. Q3 TCV sales for our storage as a service offerings grew 25% year over year to $120 million. This consistent growth reflects Evergreen One and subscription-based offerings, strong resonance with our customers, by delivering a consistent, nondisruptive operating and management environment. Subscription services revenue in Q3 reached $430 million, up 14% year over year accounting for 45% of total revenue.

ARR grew 17% to $1.8 billion while total remaining performance obligations, or RPO, grew 24% to $2.9 billion. RPO encompassing our storage as a service offerings and evergreen subscriptions across our installed base grew 22% exiting Q3. With respect to our geographic mix of revenues, US revenue was $683 million growing 22%, and international revenue was $281 million, growing 4% year over year. Overall, we added 258 new customers our penetration of the Fortune 500 is now 63%. Turning to margins and profitability, total gross margin increased to 74.1%. Subscription services gross margin was 75.5% and product gross margin increased to 72.9%. Growth in product gross margins reflects a stronger mix of higher performance flash arrays a slightly larger proportion of Portworx software sold as term licenses as well as hyperscaler shipments.

On a full-year basis, we expect that product gross margins will sit closer to 70% with some variability in magnitude quarter to quarter. Operating profit of $196 million and operating margins of 20.3% in Q3 were both positively impacted by revenue strength and robust gross margins. Our headcount increased sequentially by 104 employees to approximately 6,200 employees. Our balance sheet remains strong with $1.5 billion in cash and investments. Q3 operating cash flow was $116 million our capital investments of $63 million included tests and infrastructure equipment to support data center expansion and funding of Evergreen One subscription growth. In Q3, our free cash flow performance was strong as we generated $53 million of free cash flow a free cash flow margin on revenue of 5.5%.

We returned $53 million to shareholders through the repurchase of 600,000 shares and offset roughly 1,000,000 shares in employees award withholding taxes and we currently have $56 million of our buyback authorization remaining. Intend to update you on a new share repurchase authorization at the end of our fiscal year 2026. Now turning to our guidance for fiscal year 2026. Strong Q3 results and higher expectation for Q4 contribute to an increase in full-year revenue and operating profit guidance for fiscal year 2026. For Q4, we anticipate revenue to be in the range of $1.02 to $1.04 billion representing approximately 171% year over year increase at the midpoint. We also expect operating profit to be in the range of $220 million to $230 million representing approximately a 47% year over year increase at the midpoint.

As a result of our Q4 guidance, for fiscal year 2026, we anticipate revenue to be in the range of $3.63 to $3.64 billion representing 14.7% year over year growth at the midpoint. This is a 70 basis points increase from our previously provided revenue guidance of 14% year over year growth. We expect operating profit to be in the range of $629 million to $639 million representing approximately a 13.3% year over year increase at the midpoint. This is over a 330 basis points increase from our previously provided operating profit guidance. The projected increase in operating income fiscal year 2026 reflects the strength of our business and the impact of hyperscaler revenues on gross and operating margins. Most importantly, I would like to emphasize and reiterate that beyond fiscal year 2026, we are planning to capitalize on the financial benefits from hyperscaler revenues to continue making significant incremental investments in R&D and sales and marketing in order to sustain our momentum and capture additional profitable growth opportunities in the enterprise aligned with our long-term strategy.

As we close fiscal year 2026, will provide guidance for fiscal year 2027 that will factor in these increased investments. In addition, and as foreshadowed by Charlie, we plan to grow our hyperscaler business. In doing so, we will be evaluating additional business model options that may result in changes in gross margin economic for the hyperscaler business in fiscal year 2027 relative to fiscal year 2026. We will also provide an update to the market as we finish fiscal year 2026 and provide guidance for fiscal year 2027. With that, I’ll now turn the call back to Paul for Q&A.

Paul Ziots: Thanks, Tarek. Before we begin the Q&A session, I’ll ask you to please limit yourselves to one question consisting of one part so we can get to as many people as possible. If you have additional questions, we kindly ask that you please rejoin the queue. And we’ll be happy to take those additional questions as time allows. Operator, let’s get started.

Receive real-time insider trading and news alerts

Operator: Thank you. If you would like to ask a question, please press Again, to ask a question, press 1. Our first question comes from Amit Daryanani from Evercore ISI. Please go ahead. Your line is open.

Amit Daryanani: Yes. Good afternoon. Thanks for taking my question. You know, I guess there’s been a lot of focus on memory price inflation across both NAND and DRAM and, you know, some of your product gross margins near 73% don’t suggest this is an issue in October. But can you just talk about how should we think broadly both on the direct impact on your P&L from a margin and revenue perspective from this commodity inflation? And then also maybe just touch on the indirect impact you could see from competitors’ pricing changes as you go forward. Thank you.

Charlie Giancarlo: You bet. Thanks, Amit. Well, you know, as I think many of the analysts who have followed us for many years have come to understand. Is that, you know, in in our market, which has a very dynamic pricing environment, your prices are are set at the time of purchase, and we we compete with other vendors many of whom are cost plus vendors. And as such, the pricing of our systems tends to float more with commodity pricing. What that means is that it doesn’t it tends the commodity pricing tends to be a lesser effect on our gross margins and, frankly, a greater effect on the overall market. That is when prices are higher, to the extent that customers require the same amount of of capacity they’ll be paying, you know, higher prices on average.

So, you know, this is something that customers understand. The sometimes the customers will will buy ahead. But what we expect is that higher prices would generally translate to a rising tide, if you will, in the storage market overall. Of which we’d be a beneficiary. So, yes, 73 is a is a bit high as you’re pointing out. You know, our our generally, long term trend, we believe, is in the 65 to 70% range. And, you know, that’s the way we’ll continue to guide for for the foreseeable future.

Paul Ziots: Thank you, Amit. Next question, please.

Operator: Our next question comes from Aaron Rakers from Wells Fargo. Please go ahead. Your line is open.

Aaron Rakers: I guess maybe building on Amit’s question a little bit. I think that the one number stands out to me in this print is like you had a 76% sequential increase in inventory. I’m curious if that is reflective of any kind of strategic purchases. Appreciating, you know, any color you can give us of how much maybe, you know, purchase obligation stands coming out of this quarter? Or does that not necessarily relate to the component pricing environment? Is it more of a reflection of your procurement for your hyperscale customer? Any color there would be helpful. Thank you.

Charlie Giancarlo: Well, let me start, and then I’ll pass it over to Tarek. We as you may know, Aaron, we don’t crow about making about our purchase decisions being ahead or or on the spot market on a quarter by quarter basis. We do believe we’ve got one of the best supply chain and purchasing organizations, frankly, in our industry. But we’re always taking advantage of what of our own internal forecast of what the market will will be like. I’ll have Tarek comment on the specific numbers.

Tarek Robbiati: Yes, Aaron. Hi. Thank you for the question. Look. We we track and manage levels closely, and there are a couple of drivers in the increase you referred to. First, we had tariff mitigation purchases at the beginning of the year, and, also, the hardware components market is tightening all over world, and we’ve taken a couple of positions in some key parts to avoid disruption in our supply chain. Which is why you could see that increase. But overall, I would say that our inventory levels at about $46 million in Q3 are low. Compared to the overall size of our business. And, we think that they could stay about the same level moving forward.

Paul Ziots: Thank you, Aaron. Next question, please.

Operator: Our next question comes from Howard Ma from Guggenheim Securities. Please go ahead. Your line is open.

Howard Ma: Great. Thank you for taking the question. If we make an estimate for hyperscaler shipments in the quarter, the implied product gross margin, I believe, was still quite strong and perhaps a a notable sequential uptick. So my question is, was there a continued mix shift to higher end products in the quarter? And what is your ability to maintain this level of product gross margin in coming quarters especially when considering potential sales to to Neo Cloud, Sovereign Cloud that I believe probably will carry lower gross margin.

Tarek Robbiati: Yes, Howard. Thank you for the question. It’s Tarek here. There are three vectors that drive the overall product revenue gross margin. Number one, the product mix in itself. And we did see higher and greater configs being bought by customers in Q3, and this is usually good news for product revenue gross margins. The second element that drives the product gross margins is, to a large degree, purchases of Portworx licenses that are purchased on a terms basis. Sometimes customer choose term licenses instead of subscriptions, and we did recognize some ports revenue in, product revenue this quarter in Q3. Thirdly, obviously, there is a contribution from hyperscalers revenue, which we recognized in Q3, as, we mentioned earlier on we exceeded the prior goal of one to two exabyte, shipments for fiscal year 2026. Q3 year to date, we already attained that goal and we can see some additional growth in Q4 and beyond that point.

Paul Ziots: Thank you, Howard. Next question, please.

Operator: Our next question comes from Mike Cikos from Needham and Company. Please go ahead. Your line is open.

Matt Galitri: Hey, guys. This is Matt Galitri on for Mike Cikos over at Needham. Thank you for taking our questions. I’m wondering how early feedback has been on the enterprise data cloud with Pure Storage Cloud and and how this expanded offering is impacting the way that customers are approaching their storage architectures?

Charlie Giancarlo: Yep. It’s still early days. We’re in the first year and in but the response has been extraordinarily positive. We are seeing a lot of demand for placement or for the feature to be placed on the systems that already exist. That they have to go through a software upgrade to do that. And since the release of what we call our long-lived or enterprise release, which, of course, some of the larger companies will wait for. Since that time, it’s been expanding very rapidly. So and now that we’ve released the Pure Storage cloud, which is effectively if you remember our cloud block store, it’s effectively Cloud Block Store, but but, complete cloud native in Azure and managed by us. So it is, in fact, a cloud service.

And it’s part of the enterprise data cloud. So now customers can very easily manage their global estate, including what’s in Azure now on on on Pure Storage Cloud under the EDC umbrella. So, you know, this is we believe this is part of what’s driving customers in our direction. You you saw our growth this quarter. Well above the industry as a whole. We think that the the vision and the capabilities that we’re bringing with enterprise data cloud is a significant portion of that.

Rob Lee: Yeah. And, Matt, this is Rob. Just to add on to what Charlie said. Know, I think one of the things that’s been quite notable in terms early customer feedback with Fusion PureFusion and Enterprise Data Cloud is both not only how positively it’s being received, but how it’s being by multiple persona sets within our customer base. As we’ve discussed, you know, in prior calls, we have historically, you know, interacted with subject matter experts storage administrators, and and the like, within our customer, states. You know, that group of customers, you know, really know, is gravitating towards storage automation, the ease of you know, performing operational tasks that used to be quite manual, nature. But as we further articulate the enterprise data cloud vision, we’re now having very meaningful conversations you know, chief information security officers, CIOs, folks that are really recognizing the benefits of governance, you know, data security, data provenance, that we can go and deliver.

So, you know, as Charlie’s mentioned before, one of the things that enterprise data cloud is allowing us to do is now have much more strategic interactions with our largest and and most valuable customer.

Paul Ziots: Thank you, Matt. Next question, please.

Operator: Our next question comes from Samik Chatterjee from JPMorgan Chase. Please go ahead. Your line is open.

Samik Chatterjee: I know you’re not guiding quantitatively to the hyperscale or sort of outlook here for, next year. But, wanted to see if you can give us a sort of update on what the engagements with the hyperscalers beyond the first customer that you have are progressing. And when you talk about in further investments to capitalize on those revenue opportunities, if you could flesh that out a bit in terms of these investments in sort of more product SKUs? Or what are the nature of these investments that you’re looking to ramp into next year? Thank you.

Rob Lee: Yeah. Samika, this is Rob. I’ll take that one. Look, you know, as we continue to progress with our existing hyperscaler customer and and you know, work with additional ones. Those activities are are progressing well. You know, we continue to be engaged with majority of, let’s say, the top 10 hyperscalers in one way or another. With multiple proofs of concept that, you know, being undertaken you know, and and and are underway. You know, as we look at, you know and I think the second part of your question, correct me if I’m wrong, was areas of investment that we’d be looking at across the board. You know? So, certainly, you know, we have continued investments we’ve discussed around our direct flash road map, driving greater densities that continue to allow us to penetrate you know, wider swath of price performance tiers.

But then as we look at the enterprise portfolio as well, when we look at you know, delivering on the enterprise data cloud vision, if we look at you know, AI, what we’re doing with FlashBlade Exa, there’s a number of areas where, you know, we’ll be directing that continued investment to drive growth in not just the hyperscaler, of the market, our enterprise market, but also, AI and and NeoClouds.

Paul Ziots: Thank you, Samek. Next question, please.

Operator: Our next question comes from James Fish from Piper Sandler. Please go ahead. Your line is open.

James Fish: Hey, guys. Could the increase in memory cost actually lead to a change on on the demand dynamics between essentially your your OpEx and your CapEx model? In your view? And can you just remind us or walk us through every you know, percent or two or 10% increase in in commodity costs, especially on the flash side? What that, you know, leads to in terms of that revenue versus gross margin delta that you guys are saying, like, hey. It doesn’t impact as much. I get why. Just just trying to understand the magnitude here. Thanks, guys.

Charlie Giancarlo: Yeah. So let me take a stab at part of the the question. Generally, we do when economics in the market change, whether that’s, interest rates or, you know, changes in expectations, on the, pricing side, you’re going to see shifts between Evergreen One and the and our cap you know, the the traditional product purchase. So I would expect it. Now we’ve been fooled before, to be honest. But but I would expect it to that increasing prices to drive more relatively more customers towards the Evergreen one model. The other part, though, I I would say is that because we have longer depreciation cycles on the Evergreen one model, it really isolates or insulates us quite a bit from spot pricing in the in in the commodity market.

So, you know, I think it again, that’s another place where we’re also able, as you may recall, to use existing and returned equipment that has been renovated in the ever green One model. So there’s always a mix of new and and existing and and and renovated product that goes into the Evergreen One environment. Again, that isolates us, if you will, from from spot pricing.

Paul Ziots: Thank you, Fish. Next question, please.

Operator: Our next question comes from Simon Leopold from Raymond James. Hi. This is Victor Chew in for Simon Leopold. You noted in your prepared remarks that scaling the hyperscale business, you know, you could could change the gross margin dynamics. Can you expand on this a bit? I’m presuming that you’re expecting a, you know, a structural expansion. A shift in gross margin, you know, as you scale that business up. Can you help us understand kind of the leverage around that and and what your expectations would be, based on what you know, you’re expecting for next year.

Tarek Robbiati: Alright. So first of all, I would say you have to look at product gross margins excluding hyperscalers We guided in the past that our typical product gross margin range is between 65-70%. If you think about the nature of what we sell to hyperscalers, right now, we recognize only software licensing revenue, which is very high gross margins. As we said on prior occasions, this is a 90 plus percent gross margin revenue stream, and therefore, as you combine the two traditional products revenue and software licensing revenue, this has a very positive impact on gross margins moving forward. Having said that, I also said in my prepared remarks that we are exploring new and different revenue models with hyperscalers.

In addition to recognizing the net revenue, we may think, in thinking right now that in the future, we will be recognizing a different type of revenue streams and licenses, and this would have a impact on the gross margin economics of their revenue stream moving forward in fiscal year 2027. I will update you about this in our Q4 call. So for the moment, no change. Thank you, Victor.

Paul Ziots: Next question, please.

Operator: Our next question comes from Wamsi Mohan from Bank of America. Please go ahead. Your line is open.

Wamsi Mohan: Yes. Thank you so much. I was wondering, when you look at sort of your overall results, you obviously exceeded your forecast of one to two exabytes at at hyperscalers, which should be coming in at at very high margin. But you have the lowest magnitude of of earnings beat in in a while. And so we think about that, probably, it’s coming from the higher investments that Tarek alluded to. And and so as we think about this, you know, sustaining into fiscal 2027, does it really mean that we’re going to see a year where potentially operating margins could be down year on year, want to understand, Tarek, you really seem to emphasize that point and and just wanna make sure that we walk away with the right conclusion around trajectory of of margins. You so much.

Charlie Giancarlo: Well, Wamsi, let me start, and then I’ll hand it over to Tarek. You may recall that as we entered this year, we actually guided to a flat operating margin business for for the year. At you know, in anticipation of higher investment in the hyperscale business that was yeah. Without a full understanding of what the revenue would look like in that you know, from from the hyper business. As we are here sitting today, it is a substantial increase over our original guide. So we’re coming in we’ll be coming in. Our expectation is higher than than our original guide which is a positive which which is very positive. And we stay committed to continuing to increase operating on a year over year basis. So that that shouldn’t that shouldn’t be in it under there shouldn’t be any question of that at all.

Tarek Robbiati: Derek, do want Yeah. No. Thank you, Charlie. Wamsi, I’d say, the following to you. First of all, with respect to fiscal year ’26, the new guide implies a pretty substantial growth in in operating profit. I mean, if you really look at it on a year over year basis in Q4, at the midpoint, the operating profit growth implied is 47%. When I joined Pure, almost six months ago, we observed that there were several opportunities in the enterprise space that we wanted to capture, and we can see substantial growth there. We intend to continue to deliver the levels of growth that you’re seeing in in in Q3, in Q4 with the guidance that we implied, but also that into fiscal year 2027. But to go after that growth, we have to make some investments in ‘2 earnings call, we changed our guidance philosophy to guide on operating profit growth with a range as opposed to a single operating profit margin figure.

However, you know, as Charlie mentioned, we continue to expect operating profit to grow beyond fiscal year 2026 And, yes, you can expect a degree of, operating profit margin expansion in fiscal years beyond fiscal year 2026.

Paul Ziots: Thank you, Wamsi. Next question, please.

Operator: Our next question comes from Eric Woodring from Morgan Stanley. Please go ahead. Your line is open.

Eric Woodring: Great. Thank you so much for taking my questions, guys. I’m going to go back to the kind of memory questions that a lot of us are asking. And Charlie, I would just love to get your opinion on why demand why or if demand elasticity in your markets could be different this time versus 2017 or ’21? I’m just trying to think of looking back at memory cycles, it’s clear that you were able to kind of pass this pricing through. Could that be an inhibitor to market demand this time around? And if so, why or why not? Thank you so much.

Charlie Giancarlo: Yeah. It’s actually a great question, Eric, because obviously, the two factors go together, right, which is to say that just because prices go up doesn’t mean that customers have an unlimited ability to pay. And so demand may go down. What we’ve seen overall, though, you know, in the years and you’re you’re right. 2037, ’20 roughly 2021 was that that commodity pricing tended to to have a much greater effect on the top line, or you might think of it as the overall market size or growth in the in the flash storage industry than it did at least on our gross margin. Overall. We’re we’re able to manage the gross margins actually quite well. And part of that is because we do compete with the event with competitors that that largely sell on a cost plus basis, and that tends to then float pricing along with with commodity prices.

There’s not much more than that. You’re right. It could constrain demand a little bit from a overall terabyte standpoint. But the dollar generally, dollars you know, continue to scale along with commodity pricing. I think the the main thing, of course, is with AI, yeah, we are seeing more demand for data just in general, and data has become and data architectures you know, have become more top of mind. For our customers. So I don’t see I I think that will continue. Even though, as you point out, you know, budgets are not necessarily unlimited.

Paul Ziots: Thank you, Eric. Next question, please.

Operator: Our next question comes from Krish Sankar from TD Cowen.

Krish Sankar: Yes. Hi. Thanks for taking the question. And Derek, I understand you’re going give us more color on the next earnings call regarding the hyperscaler business model shift. I’m just curious from the economics of this opportunity standpoint, is the rising NAND prices one of them catalyst solutions where the hyperscalers don’t wanna deal with the volatility? Or in other words, if two years from now, if NAND prices do crash, will the business model again shift?

Charlie Giancarlo: I I would say prob let me jump in. I would say that’s at the moment, that doesn’t seem to be a a big factor in this. I would say that we’re just seeing different different hyperscalers have different points of view as to how they’d like to purchase. And given that, there’s gonna be a a different a different mix of options that carry different cogs associated with it. And that’s that’s going to be a a large part of us having a somewhat more mixed and nuanced model in the hyper hyperscale business. It it is certainly true that the the hyperscalers, in some ways, would rather be more insulated from commodity prices. But there’s only so much that we could do some of that, but but we can only do so much of that.

Paul Ziots: Thank you, Krish. Next question, please.

Operator: Next question comes from Asiya Merchant from Citi. Please go ahead. Your line is open.

Asiya Merchant: Great. Thank you for taking my question. Charlie, at the Accelerate event in New York, I think I asked about the Neo Cloud opportunity, and I think the response there was a it’s a little bit more you know, nuanced and relative to the size of the hyper opportunity, of course. And and can you just double click a little bit about how you’re thinking? Has that thinking changed about how you’re looking at the Neo Cloud opportunity ahead? And it doesn’t relate to any of your product offerings? Lately. Thank you.

Charlie Giancarlo: Thank you, Asiya. We try to be very structured in terms of how we qualify hyperscale opportunity and how we qualify, for example, Neo Cloud and and AI opportunity. And and let me just repeat that. And then I’ll go directly to your answer. So when we sell into the hyperscale into their traditional structured storage environment. Much of which is used for AI, but it’s not specialized for AI. We discussed that as being the hyperscale opportunity. When we sell specialized product that’s designed specifically for AI, which comes under our FlashBlade product traditionally and typically the FlashBlade S, but now the FlashBlade Exa. And that that is what’s typically sold into the Neo Clouds. Sovereign clouds, and other AI environments.

We discussed that as being the AI our AI market. So just to put those two in a make that clear because a lot of the product that we will be selling into hyperscale, despite the fact that it’s going into their standard storage environment, will be used for their AI systems. In fact, they tend not to buy specialized product for in the storage space for AI. So so in that sense, it’s not nuanced. You know, obviously, we’re a little bit further along if you will, on, you know, on having you know, really scaled, sales into the the the AI environment. We’ve been selling FlashBlade S now for for five years. You know, we we have hundreds of of directly tied to GPUs for AI. With FlashBlade Exa now, they can scale to even larger sizes. And we’re seeing good good interest right now in FlashBlade Exa.

In the Neo Cloud environment. So does that does that answer your question, Asiya?

Paul Ziots: We’ll take that as a yes. And Okay. Next question, please.

Operator: Our next question comes from Eric Martinuzzi from Lake Street Capital. Please go ahead. Your line is open.

Eric Martinuzzi: Yes. I wanted to based on the investment comments that you had, Derek, around the R and D and sales and marketing, Just for those of us modeling at home, that mix the skewing of the investment, just curious to know if there’s an expectation that next year would be significantly different than this year. In other words, based on my math, I’ve got about 34% of your non-GAAP operating profits in the ’26. And 66% in the ‘6. Is the expectation that, that would skew abnormally in FY 2027 such that it would be more back half loaded?

Tarek Robbiati: Look. And it’s we’re still in the middle of our planning cycle, and we have yet to give guidance for fiscal year ’27, and we’ll do so in Q4. But I think the the the point to take away here is that we would like to continue to grow to the levels that we’re witnessing right now in fiscal year 2026 into fiscal year 2027, and beyond. And, therefore, this growth comes at a cost and this is in R&D, in sales and marketing, and in back office system operations. But if you are looking at the various OpEx lines as percentage of revenues, they won’t be. Material disruption to the levels you’re you’re seeing today in R&D, sales and marketing, as percentage of revenues. But the dollars overall will increase. Thank you, Eric. We have one This will be the last question coming up next.

Operator: Our last question comes from Mehdi Hosseini from Susquehanna. Please go ahead. Your line is open.

Mehdi Hosseini: Yes. Thanks for squeezing me in. Charlie, wanna go back to that two exabyte shipment. When I look at the overall size of the enterprise SSD market, tracking close to about 400 exabyte. And my question to you is, what would be need to happen for you to scale and actually account for one or 2% of the exabyte shipment, especially given the fact that hyperscalers are driving the growth for enterprise SSD demand? And let me know if my question is not clear.

Charlie Giancarlo: Well, I think I I understand what you’re asking. Would is what it what would it take for us to continue to grow in the hyper business and become a much more substantial portion of their overall, storage per purchases, which today is hard disk and and SSD. You know, our our our view is that we provide a superior solution in both environments. That is hard disk and SSD. And now, of course, the design cycle within the the within the hyperscalers is quite long. You have to, first of all, meet the beginning of their design cycle, and then their design cycle is about two years. And so and we are a different to be clear, we don’t opt in the same way as an SSD or a hard disk. And therefore, it requires a change in their in their technology and operating process.

That being said, as Rob mentioned earlier, we’re in a lot of POCs. We’re in a lot of engineering meetings with the majority of the top 10 hyperscalers. The the value that we provide in the in the area of power and space reduction, in the area of performance increase, and inconsistency, consistency because whether it is the lower performance, low price, range, or the high performance, and therefore, higher price range, we we provide them a single solution from a software perspective that doesn’t require them to modify their operating systems. These are all very powerful incentives for them to make that investment and make that change. So know, our belief is that over time, obviously, we’re going through right now a supply chain crunch that is that the the hyper scalers are seeing that supply chain crunch in every form of memory.

And every form of storage now is basically on back order. And when we see that, it it does give us an opportunity to get in, but we think that when that when supply chains come back to normal, which always occurs, there’s always a reversion to the mean, it will have us be in place with superior economics and performance. So you know, we we do believe that we can, continue to take share. And become a significant portion of hyperscaler storage environments.

Rob Lee: Yeah, buddy. I I would just set it out to three things. Right? One is making our existing customer successful in the environment and tier that we’ve been designed into. Two is expanding our offering and value to multiple tiers of price performance. And three is expanding the reach of our technology into other firms. So Charlie, talked about a lot of the process and and steps along that path where pursuing it afoot and but that’s how I think about, you know, what are the unlocks and what are the drivers to get there.

Paul Ziots: Thank you, Mehdi. Charlie has some concluding remarks.

Charlie Giancarlo: Yeah. I wanna thank you and thank everyone for joining us today. Data is now becoming, we believe, the primary engine that gonna drive economic growth in the decades ahead. It needs to be elevated to be useful and available to for a wide range of uses. And the Enterprise Data Cloud makes that possible. It gives customers a unified and virtualized way to control their global data state with the reliability and the simplicity that we, Pure, are known for. So once again, as always, I wish to thank our customers, partners, our suppliers, our employees, and our investors. Your consistent support drives our success.

Operator: Thank you. That concludes the Pure Storage third quarter fiscal 2026 financial results conference call. Thank you for your participation. You may now disconnect your line.

Receive real-time insider trading and news alerts