Earnings Call Transcript - PSTG Q2 2025

Operator, Operator

Good day and welcome to the Pure Storage Second Quarter Fiscal 2025 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. At this time, I'd like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead.

Paul Ziots, Vice President of Investor Relations

Thank you. Good afternoon everyone and welcome to Pure’s second quarter fiscal year 2025 earnings conference call. On the call we have Charlie Giancarlo, Chief Executive Officer; Kevan Krysler, Chief Financial Officer; and Rob Lee, Chief Technology Officer. Following Charlie’s and Kevan’s prepared remarks, we will take questions. Our press release was issued after the 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, and 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 third quarter fiscal 2025 quiet period begins at the close of business Friday, October 18, 2024. With that, I'll turn it over to Charlie.

Charlie Giancarlo, CEO

Thank you, Paul. Good afternoon everyone and welcome to our Q2 FY ‘25 earnings call. We were pleased with our Q2 revenue growth of 11% year-over-year. Pure continues to pick up market share, and outpace the industry, both in innovation and in growth. During the quarter, we hosted customers and partners at our annual Accelerate conference. Our Las Vegas Accelerate held in June kicked off a series of local events across the Americas, Europe, and Asia-Pacific, where thousands of customers and partners learn about our platform strategy and Fusion vision, as well as Pure’s offerings in AI, virtualization, and application modernization. Specifically, we introduced the next generation of Fusion, a first-of-its-kind storage cloud architecture soon to be available as a non-disruptive upgrade to all of our global customers. Fusion allows businesses to transform their Pure Storage systems into an automated, data storage cloud that eliminates the data silos of existing enterprise data storage systems. We also unveiled the industry’s first AI storage-as-a-service for GPU clouds. Growing GPU and AI clouds need flexibility in their infrastructure as they are uncertain of their future growth, and the type of workloads that they will need to address. Pure’s Evergreen//One for AI provides them flexibility in both their consumption and price-performance needs, and matches cost to their revenue growth. Our Evergreen//One service offering remains strong. Evergreen//One removes the hard work, expense and risk of operating a storage environment from enterprise IT organizations. It provides flexibility. It avoids over-provisioning and rigid planning. And, it simplifies customers’ operations with solid and guaranteed SLAs. It also significantly boosts efficiency in terms of capital costs, energy, and labor. Options Technology, a financial technology company, started with one small Evergreen//One subscription back in 2019 and has grown over the last five years to 18 petabytes of storage across multiple sites globally. Through EG//1, Pure regularly enhances the delivery of their SaaS services, improving resiliency, efficiency, and overall performance. While the lengthening of large enterprise deal times impacted Evergreen//One growth in the first half, we continue to see strong deal activity. Artificial Intelligence continues to be of great interest to our customers. Specifically, customers continue to study both potential areas for AI use, as well as how to accommodate AI in their infrastructure. We were pleased to have had NVIDIA join us at //Accelerate to announce our expected NVIDIA DGX SuperPOD certification by the end of this year. The AI market for data storage has progressed as we have consistently predicted. Pure sees three separate AI opportunities for our solutions. First, storage for machine learning and training environments where Pure provides high-performance storage for public and private GPU farms. This quarter we signed a deal with SoftBank corporation, one of the big four telecommunications services in Japan. Pure is providing the storage layer behind many of SoftBank’s cutting-edge services including their new Generative AI platform, created specifically to develop the market-leading Large Language Model for the Japanese language. The second AI opportunity we foresee focuses on tailored storage for enterprise inference or RAG environments. Many, if not most, enterprises will use commercial LLMs or other models to operate on their own proprietary data in-house. These systems will use relatively small GPU environments to provide AI insight from their data. Pure is working closely with NVIDIA on a number of vertical market offerings to satisfy this market. We continue to believe that our largest opportunity opened by AI is to address the siloed nature of enterprises’ existing data storage architectures. Current data stores sit behind application stacks and generally have neither the performance nor the connectivity to serve data directly for AI engines and analytics. Customers that are the most advanced in their AI investigations all acknowledge that data access and preparation are major barriers to AI deployment. Pure Fusion will allow customers to upgrade their enterprise storage to function as a storage cloud, simplifying data access and management, and eliminating data silos to enable easier access for AI. The focus and uncertainty around AI has caused customers to begin to re-evaluate their planning on how they will invest their IT dollars. We are also seeing large organizations increase their focus on managing escalating costs from software, cloud and SaaS services. Our Pure Cloud Block Store for Microsoft Azure VMware Solution is helping enterprises contain cloud storage costs, generally by more than 50%. Put simply, Cloud Block Store provides a more resilient and performant public cloud storage infrastructure for large enterprise cloud application deployments that is dramatically less expensive than cloud native services. Furthermore, Cloud Block Store is fully compatible with enterprise storage interfaces and services including disaster recovery and data protection. One case in point is a Fortune Global 500 Food and Beverage customer that faced a growing hyperscaler data footprint and accelerating costs with limited visibility into its overall workload performance. By leveraging Cloud Block Store, reducing thousands of cloud managed disks to just dozens of Cloud Block Store volumes, equipped with data protection, ransomware remediation features, and advanced workload performance reporting, the company is looking to save 50% of its total storage bill. Our discussions with hyperscalers to replace their core storage with Pure technology continue to progress positively. Our lead prospect has advanced from extensive evaluation of our core technology, to testing an integrated solution, and we have been engaged in detailed contractual negotiations for many months. We remain confident that we will secure our first hyperscaler design win by year-end. The longer-term opportunity for Pure with hyperscalers is significant. To provide a sense of scale, the top ten hyperscalers are projected to buy almost 70% of all disk drives, over 600 exabytes this year alone. Because of Pure’s unique Direct to Flash technology, we can offer hyperscalers better performance, reliability, and power and space savings than hard disks, at a similar or better total cost of ownership. With nearly 15 years of experience with software and hardware flash management, we continue to far outdistance the industry in energy-efficiency, density and performance. Pure holds key intellectual property and unmatched multi-vendor, multi-process flash expertise that no other vendor can match, and cannot be replicated with standard SSDs. Our latest 150-terabyte Direct Flash Module shipping later this year is but the next stop on our robust industry-leading flash roadmap. Energy and space savings generated by our Direct-to-Flash advantage are significant. We reduce space, power and cooling requirements by a factor of 5 to 10 compared to hard disks. In a world of greater power demands and limited electrical supply, the savings on electricity alone provides a compelling incentive to switch from hard disks in both hyperscalers as well as enterprise data centers. Our //E family of products, focused on replacing enterprise hard disk systems with more efficient and higher performance Pure technology, continues to grow strongly. Enterprises increasingly recognize that Pure DirectFlash technology has reached the price level where they can eliminate the last mechanical component from their data centers. As highlighted in our latest ESG report, power reduction on storage from Pure’s DirectFlash technology can reduce total power usage in existing data centers by approximately 20%. Businesses are facing higher energy costs and greater power constraints while committing to higher sustainability goals. BT, the British multinational service provider, has set a target to achieve net-zero carbon emissions in its operations by the end of March 2031. As a foundational storage provider to BT, we directly support their data center energy reduction program. We have enabled BT to grow its data storage while reducing its energy usage. BT has measured Pure Storage to be about 18 times more efficient than their legacy storage benchmarks. Looking back over this past quarter, we have not seen a significant change in the overall macro environment or our customers’ intentions to buy. We have, however, seen customers look to manage increasing costs in cloud, software and SaaS. We believe that the storage market will be resilient in this IT economy, but we have yet to see a positive inflection. Overall, we are well positioned in all of the segments in which we compete, and believe we will continue to gain share in our market. We know we are gaining ground as our growing strength has forced competitors to intensify their efforts and mimic our messaging. It is clear now that legacy competitors in our market see Pure as the alpha competitor and have focused their messaging and strategies on us. We appreciate the attention and look forward to the competition. We remain confident in our ability to expand our market share and maintain our strong leadership in storage.

Kevan Krysler, CFO

Thank you Charlie. We are pleased to have delivered double-digit revenue growth during the first half of our fiscal year and we continue to see strong sales performance for both our FlashArray//E and Flashblade //E offerings. Revenue of $764 million in Q2 grew 11% year-over-year, and both revenue and operating profit of $139 million exceeded our guidance. Subscription Services annual recurring revenue, or ARR grew 24% to over $1.5 billion, which continues to be driven by our Evergreen//One service offering, in particular, for our higher velocity business. As a reminder, subscription services ARR excludes non-cancelable Evergreen subscription contracts where the effective service date has not started. Including non-cancelable subscription contracts where the effective service date has not started, subscription services ARR grew 25%. Total RPO exiting Q2, which includes both subscription services and product orders, grew 24% year-over-year to $2.3 billion. As we have shared in previous quarters, product orders within RPO include a non-cancelable telco order from Q3 FY ‘24, and orders relating to a Fortune 500 financial services company from Q4 FY ‘24. At the end of Q2, RPO associated exclusively with our subscription service offerings grew by 21%. Additionally, total contract value sales for our storage-as-a-service offerings during Q2 reached $101 million, bringing TCV sales in the first half of FY ‘25 to $157 million. Our Evergreen//One as-a-service business is strong, demonstrating robust pipeline growth and consistent success in converting opportunities valued at $5 million or less. This continues to underpin our confidence in the growth potential of our storage-as-a-service offerings. Consistent with last quarter, we continue to experience extended closing timelines for larger Evergreen//One opportunities. Last year, we closed several large Evergreen//One deals in the first half, compared to three in the first half of this year. This impacts both year-over-year RPO growth and forecasted FY ‘25 TCV sales for our storage-as-a-service offerings which we now expect to be $500 million, reflecting a growth rate of approximately 25%. US revenue for Q2 was $538 million and International revenue was $226 million. Our new customer acquisition grew by 261 customers during Q2, and we now serve 62% of the Fortune 500. Total gross margins of 72.8% in Q2 continues to be very healthy and comparable year-over-year. Subscription services gross margin strengthened to 76.4%, as we leverage increased automation of our service logistics workflows supporting delivery of our Evergreen subscription services. Our product gross margin of 69.5% in Q2 underscores the strong sales growth of our FlashBlade//E, FlashArray//E, and FlashArray//C solutions, driven by customers increasingly shifting their cost-sensitive workloads to all-flash. As we aggressively pursue our efforts to help customers transition their workloads to our all-flash solutions, we anticipate a modest, strategic decline in product gross margins during the second half of the fiscal year. Operating profit and margin strength of approximately 18% were both positively impacted by revenue overachievement, strong gross margin performance and operating expense discipline. Our headcount increased sequentially by nearly 250, to approximately 5,700 employees at the end of the quarter. Pure’s balance sheet and liquidity remains very strong, including $1.8 billion in cash and investments at the end of Q2. Cash flow from operations during the quarter was $227 million, and capital expenditures were $60 million. Our most significant capital expenditures during the quarter were concentrated in engineering for new test equipment supporting key strategic growth initiatives, including our pursuit of hyperscaler infrastructure opportunities. As part of our objective of partially offsetting dilution, we began paying withholding taxes due on employee equity awards. In Q2, withholding taxes on equity awards was $76 million, which offset dilution by approximately 1.1 million shares. We have approximately $395 million remaining on our existing repurchase authorizations. Now turning to guidance. For Q3, we anticipate revenue of $815 million, with an expected operating profit of $140 million, resulting in an operating margin of 17.2%. Projected operating profit takes into account a modest sequential decline in product gross margins that we expect during the second half of the fiscal year, driven by our expectations of continued sales growth of our //E family solutions, which are successfully targeting cost-sensitive workloads. Turning to our annual guidance for FY ‘25, we are reaffirming our FY ‘25 revenue target of $3.1 billion, representing growth of 10.5%, and our operating profit guidance of $532 million with an operating margin of 17%. The anticipated modest decline in product gross margins during the second half of the fiscal year validates our successful strategy of expanding into cost-sensitive workloads with our all-flash solutions, and has been contemplated in our annual guidance. In closing, we are pleased to deliver strong financial performance, which reaffirms the effectiveness of our strategic initiatives. Our focus on innovation and customer-centric solutions underscores our commitment to be a leader in the data storage industry. While we remain mindful of the broader macroeconomic environment, we are confident in our ability to capitalize on the growing demand for high-performance, sustainable data storage solutions.

Paul Ziots, Vice President of Investor Relations

Thanks, Kevan. 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.

Operator, Operator

Our first question will come from Amit Daryanani from Evercore ISI. Please go ahead. Your line is open.

Amit Daryanani, Analyst

Good afternoon, everyone. I guess my question really is, and I think one of the things folks are trying to square away is the Evergreen//One TCV target is getting lower from $600 million to $500 million. I would have thought that a downtick here would have meant perhaps better CapEx spend for your customers such that it would actually help your fiscal year revenue growth profile. Clearly, not seeing that happen based on the fiscal year guide. So hoping you just unpack what's driving the downtick on the TCV expectations and how do you see that flowing into your revenue guide really. Thank you.

Charlie Giancarlo, CEO

Yes, Amit. Your assumption would be correct if the same customer were transitioning from an Evergreen One deal to a CapEx deal. However, what we've observed is that large opportunities in the Evergreen One category are remaining opportunities for longer than we anticipated, which is causing delays. This could be due to customer caution or other factors. We have noted that customers are scrutinizing their subscription costs more closely now, considering the increases in software and SaaS expenses over the year. We haven't fully analyzed this yet, but we are witnessing a trend of larger Evergreen One opportunities taking longer to close.

Kevan Krysler, CFO

And I'll just add on to that, we did see three opportunities closed this quarter that were larger and we're defining larger as greater than $5 million. And then just to reiterate, the question was really focused on why aren't we seeing an increase to our annual revenue guide, and I will point out to Charlie's point. These larger deals that are Evergreen//One are still being actively worked and they're just taking longer to close. If we saw those opportunities flip to a traditional product sale or CapEx, that's when we would be looking at an upward view of our annual guidance for revenue.

Paul Ziots, Vice President of Investor Relations

Thank you, Amit. Next question, please.

Operator, Operator

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

Undentified Analyst, Analyst

Hi, everyone. Thank you. This is Michael Smirnoff speaking on behalf of Aaron. I wanted to get more details regarding the hyperscale opportunity you mentioned. It seems like discussions with customers are ongoing, and you anticipate progress by the end of the year. Has anything changed? Alternatively, what do you see as the main obstacle to finalizing these deals? Additionally, could you share any updates on other opportunities you are exploring?

Charlie Giancarlo, CEO

Absolutely. There are several minor challenges to address rather than one major obstacle. A significant part of this involves aligning our business models and ensuring economic improvements are reflected in our pricing and overall economics. Additionally, various logistical factors come into play, especially when dealing with large hyperscalers, their substantial orders, and complex data centers and supply chains. Therefore, we are currently managing numerous small challenges. Testing and discussions are progressing well, but we still need to work through a lot of details.

Rob Lee, CTO

Yeah. And this is Rob. Just to add to that. I would say, overall, our engagements with our lead prospects are progressing very well as Charlie mentioned in his prepared remarks. What we've done over the last many months is really move forward on our testing in phases from initial proof of concept to testing of that core IP to now extensive testing of really an integrated, think of it as a co-engineered solution. And as you'd imagine, this involves detailed performance, operational testing, so on and so forth, and with that, as Charlie mentioned as well, accompanied with detailed contractual discussions around the commercial package. And so overall, engagement goes well and to the original question, I would say it's lots of little things as opposed to one big hurdle.

Paul Ziots, Vice President of Investor Relations

Thank you, Michael. Next question, please.

Operator, Operator

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

Howard Ma, Analyst

Great. Thank you and good afternoon, everyone. My question is about your lead horse, but I'm just joking. My real question is similar to what Amit asked. By lowering your as-a-service total contract value sales estimate while keeping the total revenue outlook the same, it indicates you're receiving less contribution from product sales. However, Charlie, you mentioned that the drop in as-a-service sales is not due to more customers choosing CapEx instead. Does this imply that there’s an increased risk in the product line? Or can you identify specific demand drivers that give you confidence that your guidance is set appropriately? Thanks, guys.

Charlie Giancarlo, CEO

We are observing that our capital expenditure sales are continuing as anticipated. The ongoing sales momentum for Evergreen One is developing as expected. However, we have noticed that some larger deals for Evergreen One, which we've been monitoring, are taking longer to close than we had anticipated. The nature of these deals hasn't changed; the same accounts and opportunities still intend to pursue Evergreen One, but they haven't been finalized yet. Overall, we are experiencing strong growth in the velocity business, and there is significant interest in Evergreen One with good activity, but the larger deals are just taking more time to close.

Kevan Krysler, CFO

Yeah. I think it's really important to separate what we're observing with our larger Evergreen deals over a longer period from the overall demand we are experiencing. We aren't seeing any significant changes in demand that would impact our annual guidance, which I believe is part of what you're asking, Howard.

Paul Ziots, Vice President of Investor Relations

Thank you, Howard. Next question, please.

Operator, Operator

Our next question comes from Pinjalim Bora from J.P. Morgan. Please go ahead, your line is open.

Undentified Analyst, Analyst

Great. This is Jaden on for Pinjalim. Thanks for taking the question. How has the customer interest been on the new Fusion offering? And do you see customers looking at it to unify their storage as they prepare for AI inferencing?

Rob Lee, CTO

Yeah, this is Rob. I'll take that one. Early interest has been excellent. As you know, we have been engaging with customers and partners about the Fusion vision for the past year. We are looking forward to the demand that we anticipate, especially following our Accelerate user conference, where we've seen a strong interest from our existing customers to utilize the Fusion technology later this year. With the upcoming release of Fusion, we will be able to provide all the capabilities it was designed for, such as fully automating the management of multiple environments. This will enable customers to manage their Pure Storage assets through policy declaration rather than through individual operational tasks, effectively creating a unified resource pool or storage cloud. By later this year, customers will have the opportunity to leverage these capabilities on all of their existing arrays and data storage environments. The early interest has been promising, and as we approach the release later this year, it will facilitate an easier experience for customers to benefit from these capabilities.

Kevan Krysler, CFO

The beta users involved have been very satisfied, and we are also pleased with the strong interest and utility in Fusion among both large and small customers. Even smaller customers are experiencing significant benefits from being able to manage their relatively smaller fleets through policy, which further reduces the labor required to operate at nearly every level.

Paul Ziots, Vice President of Investor Relations

Thank you, Jaden. Next question, please.

Operator, Operator

Our next question comes from Mike Cikos from Needham. Please go ahead, your line is open.

Mike Cikos, Analyst

Hey, thanks for taking the question, guys. I just wanted to circle up because it seems like customers are continuing to choose maybe more of a CapEx-type purchase, which is a little bit counterintuitive in this environment given the macro. And I'm just trying to get a better understanding on the customer preference. Does it tie in any way to potentially customers thinking about data repatriation to their on-prem environments to help handle some of the ballooning costs behind these GenAI workloads as they move into production environments?

Kevan Krysler, CFO

I'll start this and then have Charlie come on. This is Kevan. What we're seeing with our Evergreen One demand is quite strong, especially in our velocity opportunities. These are opportunities that are less than $5 million, and they are tracking well and aligning with our expectations set at the beginning of the year. The focus shifts back to the larger Evergreen One arrangements. There are several factors at play, but it's not primarily about preference for an as-a-service offering versus traditional options or CapEx. Customers are still considering how to manage their costs in cloud, software, and SaaS. When evaluating larger as-a-service offerings, this could influence the time taken during the decision-making process. Charlie, do you have any other thoughts on that?

Charlie Giancarlo, CEO

Yeah. No, Kevan, I think you answered it well.

Kevan Krysler, CFO

Okay. Thanks.

Paul Ziots, Vice President of Investor Relations

Thank you, Mike. Next question, please.

Operator, Operator

Our next question comes from Jason Ader from William Blair. Please go ahead. Your line is open.

Jason Ader, Analyst

Yeah, thank you. Hey guys. Just wanted to ask about the competitive environment. I know we've seen an increase in the QLC-based arrays from some of your competitors. Can you just comment on how that has impacted or not some of the deals and some of the opportunities? And then also, can you comment on the NAND pricing environment right now, which I know has been rising?

Kevan Krysler, CFO

Our lead in QLC remains as strong as ever. I wouldn't say that QLC has significantly changed the competitive landscape. Our E-family of products, which targets the low-end market, has been very successful. Competition remains tough, and we recognize that all players in this market are strong competitors. The focus is firmly on us, and we are competing effectively. However, I don't believe QLC is the primary factor; it's more about our size, scale, and effectiveness. Currently, we are the second-largest vendor of all-flash systems in the enterprise market, just a few points behind the leader. Everyone is feeling the pressure of competition, but our position in QLC is still solid.

Rob Lee, CTO

And then I'll just touch on the NAND pricing, which is really consistent with our previous commentary. And flash pricing from our lens really is affecting top line. And the volatility again is highlighting the differentiated advantages we're seeing with our Purity software and our DirectFlash technology, and that becomes more evident when we see the volatility in NAND pricing such as the current environment. And look, we're having a lot of success in winning workloads across price-sensitive workloads for our customers and that would be our E//Family as well as C, and that will have an impact on gross margins as well.

Paul Ziots, Vice President of Investor Relations

Thank you, Jason. Next question, please.

Operator, Operator

Our next question comes from Asiya Merchant from Citigroup. Please go ahead. Your line is open.

Asiya Merchant, Analyst

Great. Thank you for the question. The Evergreen ramp expected in the second half, maybe you can just again, delve back into some confidence that you have recognizing that these deals are taking longer to close given macro and other dynamics that you talked about. So what gives you the confidence that we ramp from $157 million here in the first half to $500 million for the full year? Thank you.

Kevan Krysler, CFO

Yeah, I appreciate the question. This is Kevan. Look, we certainly believe that the adjusted forecast for TCV sales of our as-a-service offerings at $500 million growing 25% is achievable and considers the dynamic that we're seeing with larger deals. Our current forecast of TCV sales does assume less contribution throughout the year from larger deals but also assumes the continued higher velocity business continuing to track strongly similar to what we've seen in the first half. And so the implied second-half ramp of TCV sales is only slightly higher than what we typically see from our traditional seasonality with our CapEx sales or traditional sales. So look, there's obviously, work to do and we need to execute in the back half, but we absolutely expect to achieve this forecast.

Paul Ziots, Vice President of Investor Relations

Thank you, Asiya. Next question, please.

Operator, Operator

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

Quinton Gabrielli, Analyst

Hey, guys. This is Quinton on for Jim Fish. Thanks for taking our question. I understand it's still pretty early, but as you think about the backlog or your order book for the 150 terabyte flash module, how is that compared to kind of what you were seeing from the last upgrade cycle at this point in time? And I know it's a little bit apples and oranges here, but it seems like we're facing scrutiny in transformational budgets you're seeing in EG//1. Is there any concern that would impact customers' willingness or ability to kind of transform and move to this new module or are people so focused on performance that's not really in your kind of concern list here? Thanks.

Charlie Giancarlo, CEO

Thank you for the question. It's a good one. I don't think it's a significant concern for us for the following reason. The 150 terabyte module creates new opportunities at lower price points and helps reduce our costs for existing E series transactions. In other words, if we can achieve a certain performance level with 75s that we can also achieve with 150s, our costs will be lower even if the prices remain the same. This is a margin enhancement for us and enables entry into more affordable hard disk markets. Therefore, we see this as a positive development, and it won't discourage customers from transitioning. I believe it won't impact our revenue opportunities.

Rob Lee, CTO

This is Rob. I want to emphasize that the introduction of the 150 terabyte drive is an important advancement in our flash portfolio, as highlighted by Charlie in his comments. Each enhancement in storage density enables us to compete more effectively with lower-cost systems based on acquisition costs. Additionally, it decreases power and space requirements, which in turn lowers operating expenses for our customers. The reasoning behind this is straightforward: denser modules need less supporting equipment, which cuts down on costs and reduces space and power needs. Our commitment to improving density and efficiency has allowed us to pursue the most cost-sensitive disk-based systems aggressively within the enterprise sector. Furthermore, this strategy significantly expands our opportunities in hyperscaler infrastructure environments.

Paul Ziots, Vice President of Investor Relations

Thank you, Quinton. Next question, please.

Operator, Operator

Our next question comes from Meta Marshall from Morgan Stanley. Please go ahead, your line is open.

Meta Marshall, Analyst

Great. Thanks. Maybe just diving into these Evergreen//One deals, I just wanted to get a sense, are some of those kind of with Tier 2 customers or are these really kind of enterprise customers that we're talking about? Is the quantum a handful or is this really kind of just a couple of deals that are hung up? Thanks.

Charlie Giancarlo, CEO

Yeah, Meta, it is enterprise customers because we're talking about large deals and it does tend to be just a handful per quarter. So, because it's a handful per quarter and they're not always easily predictable in terms of exactly when they'll transact, it does make it more challenging to forecast.

Paul Ziots, Vice President of Investor Relations

Thank you, Meta. Next question, please.

Operator, Operator

Our next question comes from Mehdi Hosseini from Susquehanna. Please go ahead. Your line is open.

Mehdi Hosseini, Analyst

Thank you for your question, Charlie. In previous earnings calls, you mentioned engaging with up to 10 data centers, including hyperscalers. Could your focus on selling products to both large and small data centers be reflected in your product revenue? Until Enterprise and Evergreen One reach that $500 million run rate, it seems that scaling the subscription model may be limited. However, you are making inroads with various data centers, and that progress is evident in your product revenue. Is this an accurate understanding of the current situation? Thank you.

Charlie Giancarlo, CEO

Thank you, Mehdi. If we discuss Evergreen One, it's being sold in both large and small environments. As Kevan mentioned, we are seeing both large and small deals. The run rate in the commercial market for smaller deals of Evergreen One is quite strong. It's also performing well in larger environments and cloud settings. We are successfully selling to managed service providers and various cloud platforms. Overall, we are seeing positive results. When we reference the $500 million, it includes all sales categorized as Evergreen One, regardless of the buyer. I hope that clarifies your question.

Paul Ziots, Vice President of Investor Relations

Thank you, Mehdi. Next question, please.

Operator, Operator

Our next question comes from Jeff Koche from Raymond James. Please go ahead. Your line is open.

Jeff Koche, Analyst

Thank you. This is Jeff Koche stepping in for Simon Leopold. Can you provide an update on what percentage of revenue is currently generated from AI? More importantly, how much of the order book is becoming related to AI given the ongoing AI trends? Thank you.

Charlie Giancarlo, CEO

We haven't separated out AI specifically, but I can provide some insight. As mentioned in my prepared remarks, we see three main segments within AI, with the first segment already generating real revenue not only for us but for others in the market as well. This first segment is the training environment, which we have been serving for nearly six years. The training environment gained significant attention with the rise of large language models, but it has also been crucial for self-driving cars, drug discovery, various medical technologies, and high-speed trading. These applications typically rely on parameter-based models. Recently, generative AI models have become very prominent. Currently, we estimate that the total market for storage related to training large language models is under $1 billion annually, and we are capturing a fair share of that. The other two segments include the inference or retrieval-augmented generation model within enterprises, which is just beginning to be explored and hasn't yet produced revenue, but we expect that to change soon. The third segment involves upgrading existing storage systems to make data currently in silos more accessible for inference. We believe this last area will eventually be the largest for enterprises, and we have been focusing our efforts to help organizations leverage it.

Paul Ziots, Vice President of Investor Relations

Thank you, Jeff. Next question, please.

Operator, Operator

Our next question comes from Krish Sankar from TD Securities. Please go ahead. Your line is open.

Robert Mertens, Analyst

Hi, this is Robert Mertens on for Krish. Thanks for taking my question. Just with the reiterated full-year guide, assuming the midpoint of the October quarter outlook, that would imply the January quarter growth decelerates a bit to mid-single-digits year-on-year. Could you just speak towards some of the puts and takes in the guide, expand and industry inflection is mid-to-high single-digit growth the new norm? And is there any sort of seasonality headwinds to expect in the January quarter?

Kevan Krysler, CFO

Yeah, appreciate the question. This is Kevan. And look, glad to see that our total revenue is tracking with our expectations for the year, which again is double-digit and it's tracking as well in terms of what we saw for the first half of the year. But you got it. The primary factor in terms of what you see in terms of growth in first half and second half is largely due to seasonality. That would be the primary driver. And that's been consistent historically for many years with the exception maybe a one year following COVID. But another consideration as well is that we are expecting a sales ramp of our as-a-service offerings, especially with our higher velocity business in the second half of the year. And this would create some headwind as well to our expected total revenue growth and that's been considered as well in our annual guide for total revenue.

Paul Ziots, Vice President of Investor Relations

Thank you, Robert. Next question, please.

Operator, Operator

Our last question will come from David Vogt from UBS. Please go ahead. Your line is open.

David Vogt, Analyst

Great. Thanks guys. Thanks, Charle. Thanks, Kevan, for all the detail. I just had a thematic question about the hyperscaler opportunity. We appreciate all the color, but can you maybe talk to how the hyperscalers are viewing your solution? What I mean by that is what kind of workload, what kind of application, kind of what are the use cases that they're thinking about as you have these extensive discussions, so we can think about sort of how your product would dovetail with their existing architecture? Thank you.

Kevan Krysler, CFO

Let me begin, and Rob will provide additional insights. This represents a significant architectural change for them. We are at various stages in our discussions with different hyperscalers. As we progress with any one of them, they aim to transform their infrastructure in a way that will not only enhance higher performance workloads but also address lower performance tasks, including disk usage. Once implemented, there’s potential for it to even replace their utilization of SSDs. It’s quite extensive. We have not finalized anything yet, but as our conversations with hypotheticals deepen, the more they test our capabilities, and as we negotiate terms, the broader the scope of these discussions becomes.

Rob Lee, CTO

Yeah, David, and this is Rob. Just to add on to that. I really want to emphasize a point that Charlie made, which is really going after this and looking at this as a broad set of workloads targeted at various performance and architectural replacement points. And what I mean by that is these hyperscalers operate so many workloads, so many different environments, they get economies and simplicity of scale and operations by standardizing the infrastructure largely to serve all of those workloads. They generally don't build out special-purpose infrastructure for each workload one by one. And so certainly within and under that umbrella, they've got higher performance workloads typically being served by Flash today, all the way to lower performance workloads largely being served by disk. We think in the long term, we've got opportunity to go provide value across the board with our direct-to-flash technology. But certainly, as an initial step, we'd be focusing on the replacement of the disk-based environments in that infrastructure. So hopefully, that's helpful for you, David.

Paul Ziots, Vice President of Investor Relations

Great question to end on. Charlie, if you have some final comments.

Charlie Giancarlo, CEO

I want to thank you all for joining us today on our earnings call. Our platform strategy and innovation are once again transforming the storage industry. We empower enterprises to tackle their fragmented data silos, which is crucial for unlocking the full potential of analytics and artificial intelligence. We believe that by providing a unified, versatile, and energy-efficient platform, we will enable businesses to adapt to the technological changes they face and seamlessly integrate their data centers with their cloud environments. I want to express my gratitude to everyone, especially our customers, employees, partners, suppliers, and investors. Your dedication, collaboration, and trust are the driving forces behind our success. Thank you all for your continued support and commitment. Goodbye.

Operator, Operator

That concludes the Pure Storage second quarter fiscal 2025 financial results conference call. Thank you for your participation. You may now disconnect your line.