Earnings Call Transcript
Everpure, Inc. (P)
Earnings Call Transcript - PSTG Q4 2022
Operator, Operator
Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Pure Storage Fourth Quarter Fiscal Year 2022 Earnings Release Conference Call. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Mr. Sanjot Khurana. Mr. Khurana, please go ahead.
Sanjot Khurana, Vice President of Investor Relations and Treasurer
Thank you, and good afternoon. Welcome to the Pure Storage Fourth Quarter Fiscal 2022 Earnings Conference Call. My name is Sanjot Khurana, Vice President of Investor Relations and Treasurer at Pure Storage. Joining me today are our CEO, Charlie Giancarlo; our CFO, Kevan Krysler; and our CTO, Rob Lee. Before we begin, I would like to remind you that during this call, management will make forward-looking statements, which are subject to various risks and uncertainties. These include statements regarding the COVID-19 pandemic and related disruptions, our growth and sales prospects, competitive industry and technology trends, our strategy and its advantages, our current and future product offerings, and our business and operations. 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 relating to our business is contained in our filings with the SEC, and we refer you to these public filings. During this call, we will discuss non-GAAP measures in talking about the company's performance, and reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. Additionally, when we refer to sales in our prepared remarks, we mean total bookings, excluding cancellable orders. 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. With that, I'll turn the call over to our CEO, Charlie Giancarlo.
Charlie Giancarlo, CEO
Hello, everyone, and welcome to our call. I hope you are healthy and faring well given the many challenges of the current environment. I'm very pleased to report that Pure delivered a fantastic Q4, capping off a great fiscal year. Our quarterly revenue grew 41% over last year's strong Q4. This past quarter, we again enjoyed strong growth, especially in the Americas, our largest theater, and we grew across enterprise, commercial, and public sectors. I'm especially pleased with our growth in both net new logos and subscription annual recurring revenue, indicating great progress against our long-term strategy. Full year revenue growth was 29%, and the annual growth of our subscription revenue was 37%. Revenue growth and operational leverage drove strong profit and cash flow growth in fiscal '22. As we stated in our Financial Analyst Day presentation in September, our total addressable market of more than $60 billion across both storage and storage as a service continues to provide expansion opportunities for Pure. We believe that our strong performance is clear evidence of Pure's increasing strength. Three things are necessary for sustainable growth, which we have steadily developed within Pure: First, sustainable growth requires highly differentiated technology with sustainable competitive advantage. Pure's focus on developing purity software and our direct flash technology to maximize the many advantages of solid-state storage is unique in our industry and has taken many years to develop. Second, sustainable growth requires a broad portfolio that addresses a full range of customer needs, a portfolio that we have steadily developed over the last several years. Third, sustainable growth requires the ability to support customers in all major market segments: commercial, enterprise, public sector, and cloud. Pure now has all three of these elements to drive our growth for many years to come. Pure's highly differentiated technology enjoys a strong sustainable competitive advantage. Many of Pure's advantages stem from core software architecture decisions that are practically impossible to retrofit into pre-existing software. Among our advantages are the simplicity in the design and use of our products, the ability to realize the best price performance from raw flash, and the ability to perform nondisruptive upgrades for both hardware and software, which deliver a cloud-like experience. While some competitors make claims of nondisruptive upgrades in their marketing, they consistently fail to deliver. Furthermore, Pure's proprietary hardware provides higher performance, reliability, and longer lifetime while requiring less space, power, and cooling than competitors' commodity-based systems; competitors would need entirely new designs and years of new software development to replicate Pure's advantages. Pure's growing portfolio of industry-leading storage and data management products has propelled the growth of our enterprise business to greater heights. Customers appreciate the simplicity of our portfolio, which supports the majority of their traditional workloads with just two hardware architectures sharing a common software architecture and their cloud-native workloads with Portworx, all integrated through Pure1 and all available as a service. They appreciate our ability to provide common interfaces and APIs between on-prem and the cloud. They have embraced our ability to support their development of cloud-native applications with Portworx. They're excited by our vision to provide automated data management with Pure Fusion and Portworx data services. And they are overjoyed as we consistently deliver nondisruptive upgrades year after year and soon decade after decade with our Evergreen design, a model that has been claimed competitively but never replicated. The effect of our portfolio is evident not only in our continuing penetration into large enterprise but also in our recently announced collaboration with Meta. Meta chose Pure when it needed a storage partner to deliver powerful and scalable storage capabilities for their AI research supercluster. With FlashArray and FlashBlade, their AI supercomputer has unparalleled performance and benefits from a broad range of our technology’s advantages, underpinned by Pure's foundation of simplicity, reliability, and sustainability. We announced a record number of new products and services this past fiscal year, including purity upgrades for ransomware and disaster recovery, additions to our FlashArray//C Series, FlashStack as a service, Pure Fusion, Portworx data services, and major enhancements to our Pure1 digital experience. This past December, we announced FlashArray//XL, which delivers 5.5 petabytes of capacity in up to 80% less space and power than competitive all-flash solutions, and it's off to a great start. Our product pipeline for FY '23 is no less ambitious, and I am incredibly excited about the year ahead. Our vision and technology to deliver a cloud operating model to our customers' multi-cloud data environment, spanning their private cloud and public cloud providers, continue to resonate and grow. This vision is based on the concepts of first, providing common frameworks and APIs to both on-prem and hyperscaler environments; second, enabling fully automated data management to IT organizations through policy; and third, the abstraction of these IT-created data classes for developers' access through API. We are seeing strong interest in this transformational model built on Pure Fusion, Portworx, and delivered by Pure1. We have enjoyed great success with our strategy of delivering a simple set of Evergreen data platforms that enable customers to focus more on leveraging their data than on managing their storage environment. Customers have rewarded us with market share gains and recognized us with the highest third-party certified Net Promoter Score in almost all industries of 85.2% for the calendar year 2021. From our primary focus on the commercial market just five years ago, we have expanded our skills and infrastructure to support all major markets. Today, our enterprise business model is fully capable of supporting the largest global organizations, both public and private, with a portfolio of products, subscription services, support, and professional services. We do this with the help of a growing set of capable partners. We're now adding the ability to serve large hyperscalers and MSPs. We are proud to partner with the world's largest global system integrators and managed service providers to make Pure a preferred part of their solutions. We recently announced a global partnership with Kyndryl, combining the power of Pure's offerings and Kyndryl expertise to deliver industry-leading solutions to customers' most complex challenges. Our joint customers are already benefiting from this partnership. One of the world's leading shipping and logistics companies chose Pure as-a-Service to build a secure data infrastructure for its new logistics offering for its clients. Being part of a major digital transformation to improve shipping and logistics worldwide has special poignancy as we face supply chain challenges that continue to affect all companies. I feel confident that we have one of the most robust supply chains in the business. Pure has invested in strong relationships with our supply partners and flexible multisource global operations over many years and we benefit from the architectural advantages of our integrated hardware designs. While there have been numerous supply chain challenges over the last year, and we are certainly not invulnerable to disruption in the future, we have navigated and managed them well and continue to meet our customers' demands. Earlier, I had mentioned that Pure solutions are able to provide customers higher performance and reliability with significantly less space, power, and cooling than competitive all-flash products, in many cases, utilizing up to 80% less power in space. Lower energy use by our products will significantly reduce the environmental footprint of our customers' data centers. Third-party reviewed competitive comparisons will be part of our full Environmental, Social, and Governance, or ESG report, which we will publish later this month. In our first ever ESG report, we will identify our environmental achievements and future goals for improvement in our operations and downstream use of our products as well as our current state and future plans on talent recruitment and retention and diversity, equity, and inclusion. And finally, our governance and business practices. I would like to comment on three additional topics of broad current interest. First, the so-called great resignation, then inflation, and then our response to the Russian invasion of Ukraine. As is widely reported, employee attrition is elevated across all industries and especially in technology. However, the flip side of this coin is that there has never been a time in my memory when so much great talent was available all at one time. And we saw strong traction in hiring during Q4. Our continuing success, large market opportunity, and high employee satisfaction scores have made Pure a talent magnet. Inflation is also real, and there is no countervailing benefit. I believe this will be with us for some time, and we have assessed impacts on employee compensation and other operating expenses, which we have considered in our guidance. We are carefully monitoring the situation in Ukraine. And I am dismayed by the wanton disregard for both national sovereignty and human life currently on display. Our hearts go out to the people of Ukraine and all those affected by the conflict. We have ceased all shipments and support services in Russia and Belarus, which represents a small amount of business for the foreseeable future. We are providing support as appropriate to our employees and their families. In closing, I would like to thank our customers, partners, and especially our employees for their trust and support of Pure this past year. Through all of the challenges over the last several years, Pure has thrived. We have innovated, we've grown. We've battled competitors, large and small, and we've taken market share. Most importantly, we have delighted more customers by delivering solutions beyond their expectations. This simple formula will continue to fuel our growth for years to come. Over to you, Kevan.
Kevan Krysler, CFO
Thank you, Charlie, and good afternoon. We saw outstanding execution and performance across our entire company, achieving record revenue, operating income, and cash flows. Demand continued to be very strong across our portfolio of solutions, services, and geographies, especially in the U.S. and Canada. Although supply chain challenges continue to persist, we executed for our customers, delivering our solutions and minimizing delays. Growth of our subscription business is robust as we continue to create value-based outcomes for our customers. Subscription annual recurring revenue, or ARR, grew 31% to nearly $850 million. Also, our subscription net dollar retention or NDR at the end of the year exceeded 120% compared to our long-term target of 115% as a result of expansion growth from existing customers. Remaining performance obligations, or RPO, which includes our committed and non-cancelable future revenue, was over $1.4 billion, growing at 29%. We acquired 470 new customers, reflecting increasing strength. New customer acquisitions were balanced across geographies, market segments, and our solutions portfolio. Our total customer count now exceeds 10,000 customers, which also includes over 50% of the U.S. Fortune 500 companies. Now turning to financial results for the quarter. Total revenue for the quarter grew 41% to approximately $709 million. Revenue in the United States grew 51%, and international revenue grew 20% year-over-year. Subscription services revenue grew approximately 42%. For the full fiscal year, total revenue grew 29% to nearly $2.2 billion. Our fiscal year includes 53 weeks contributing both additional revenue and costs. Excluding the revenue contribution arising from the additional week, total revenue for the quarter grew approximately 37%, and 28% for the year. Total non-GAAP gross margins were nearly 69% this quarter. Non-GAAP product gross margins of 67% were slightly impacted by higher supply chain-related costs. We were very pleased with how we actively managed our supply chain challenges in partnership with our suppliers. Our integrated software and hardware designs continue to be very valuable as we manage these challenges. As we continue to sell the value of our solutions, we expect product gross margins to be in the high 60s, consistent with our long-range expectations. Non-GAAP subscription services gross margins were solid at 73% this quarter. We achieved record non-GAAP operating profits of nearly $119 million and non-GAAP operating margins of 16.8% this quarter while also continuing to make investments to drive growth. Increased operating costs included higher compensation due to our strong performance, increased hiring, and an additional week of operating expenses of approximately $17 million. Non-GAAP operating profit for the year also achieved a record high of $235 million and 10.8% non-GAAP operating margins. As we have highlighted in previous quarters, the COVID environment was a tailwind to our operating profits, contributing approximately 2 to 3 points of benefit to our fiscal 2022 operating margin; slower than planned hiring, significantly reduced travel, and the reduction of physical marketing events were the largest drivers. Now let's turn over to the balance sheet and cash flows. We ended the quarter with over $1.4 billion in cash and approximately 4,200 employees. Our strong overall financial performance was also reflected in our cash flow from operations of $138 million this quarter. Capital expenditures were approximately $21 million. For the year, we more than doubled our cash flow from operations to more than $400 million and generated more than $300 million of free cash flows. With our strong balance sheet and cash flow generation, we paid off our outstanding credit revolver balance of $250 million after the close of our fourth quarter. We continue to return capital to shareholders through share repurchases. We repurchased approximately 2.4 million shares during the quarter and approximately 8.5 million shares during the fiscal year. Our $200 million share repurchase program has been completed, and we have also announced a new share repurchase program of $250 million. Now turning to guidance, which is based on a 52-week fiscal year. Our performance in fiscal 2022 set new records for revenue, operating profit, and cash flows. Our strong revenue growth this year benefited from a substantial sale of FlashArray//C to Meta, includes an extra week in the fiscal year, and reflects an easier compare to fiscal 2021, which was impacted by COVID-related headwinds. We see broad-based demand strength continuing this year for our solutions and subscription offerings and expect our Pure as-a-Service offering to grow at a much faster rate than our overall company growth rate. As we consider these factors, we expect revenue in fiscal 2023 will be approximately $2.6 billion, growing 19% to 20%. Revenue in Q1 will be approximately $520 million, growing 26%. Operating profit substantially expanded this year as a result of strong operating discipline and operating leverage. As we have previously highlighted, operating profits also benefited from slower-than-anticipated hiring, less travel, and fewer physical marketing events due to the COVID environment. While we do not expect the majority of these COVID-related benefits to recur next year as business operations become more normalized, we anticipate operating margins to expand modestly through continued operating discipline and leverage. We remain committed to investing in innovation for growth while also contemplating higher inflation next year. With these considerations, we expect to achieve non-GAAP operating margins of approximately 11.5% and non-GAAP operating profits of $300 million for the year. Non-GAAP operating profit in Q1 is expected to be $16 million. In closing, I am very pleased with our execution and performance. Our consistent commitment to innovation and creating best-in-class experiences for our customers are really the driving forces of our success as we have seen. And I want to thank our entire Pure team and our channel partners for their outstanding execution this year. With that, I will turn it over to the operator so we can get to your questions.
Operator, Operator
Our first question comes from Amit Daryanani from Evercore.
Amit Daryanani, Analyst
Congratulations on a great set of numbers here. My question really is you officially announced Meta as a customer, and they had this white paper that outlines the storage leader on the super AI clusters that they have. Can you talk about sort of the breadth of this engagement? And I think you all know the revenue contribution from back in October, but maybe to talk broadly, what led them to choose Pure Storage versus building their own? And then what does it mean from a revenue perspective if this cluster gets to 1 exabyte that they've talked about in their white paper?
Charlie Giancarlo, CEO
Thank you for the opportunity to speak. Meta is a great example of the effectiveness of our portfolio. We began collaborating with Meta, previously known as Facebook, years ago on some of their AI projects using the FlashBlade platform. As they aimed to expand their AI initiatives, they required a data lake capable of maintaining high performance while being cost-competitive with traditional disk storage. They also had challenges related to space, power, and cooling in their environment. Ultimately, they assessed both their in-house technology and external vendors. Our FlashArray//C product, which underpins the data lake for their AI cluster, was the only solution that met all their needs. This situation highlights the strength of our portfolio and its role in driving our growth globally. We believe this advantage will enable us to broaden our market presence. I'll now hand it over to Rob Lee to share more about the supercluster, followed by Kevan who will discuss revenue.
Rob Lee, CTO
Yes, Amit, just to add on to what Charlie said. Again, I just highlight this is a great example of use case benefiting from the entire portfolio. As Charlie mentioned, we started working with Meta, formerly Facebook, over 5 years ago, first supporting, I would say, their AI research environment, directly supporting data scientists, doing ad hoc kind of AI model training against the FlashBlade. And as that environment grew and continues to grow, they built around at a larger production AI supercluster environment, which Meta has come out and described. And now in that environment, what they look to Pure to provide with FlashArray//C is really what we have described as more of a general data storage, bulk data storage capability, right, something that provides a huge capacity, certainly high performance, and then meeting the balance of needs that Charlie called out in terms of a very efficient power cooling and footprint associated with it. And so I think a couple of things of note here. One is, well: A, great validation of our technology and advantages, but B, I think it's a great sign that look, the transition from disk to flash is absolutely happening. We see it in the enterprise. We're now starting to see it in the hyperscale environment. And we believe to a degree, this is not only happening, but it's inevitable.
Kevan Krysler, CFO
And I'll just close, Amit, by sharing some thoughts on the revenue contributions without getting into specifics. From a revenue outlook, we've included some revenue for Meta, which is consistent with our overall company growth rates for next year.
Amit Daryanani, Analyst
Perfect. That's really helpful. And if I could just follow up quickly on your commodity, I think, has been a big discussion, especially NAND pricing. I'd love to understand what you are seeing from a NAND pricing perspective? And then what are you embedding really in the fiscal year guide relative to commodity prices?
Charlie Giancarlo, CEO
Yes. We expect that the constraints in NAND production over the next few quarters will lead to upward pressure on NAND pricing. We anticipate that this will eventually decrease later in the year. We don't expect significant fluctuations to be direct, but there will likely be slight upward pressure in the early part of the year and then downward pressure later on. That's our current outlook. However, events can quickly change expectations these days, so that's what we're working with for now.
Operator, Operator
Your next question comes from the line of Meta Marshall from Morgan Stanley.
Meta Marshall, Analyst
Great. Wanted to see clearly, you guys stated you were seeing traction across a lot of different customer types. But just any details on kind of the magnitude of the beat, particularly as we look at the guide and we get to more of a seasonal kind of downtick there. Just any context for just where all of the upside came from? And then you noted that you were saying maybe that all of the COVID savings or COVID tailwinds don't come back or on the OpEx side, but just what you're expecting in terms of how much of that 200, 300 basis points would come back in fiscal '23?
Charlie Giancarlo, CEO
Meta, welcome to Pure. Thank you for being with us. We look forward to our time together in the future. In response to your question, we observed broad-based strength in our product line, especially in the U.S. Both commercial and enterprise sectors showed strong performance. While commercial has been slower to recover during the latter part of COVID, we are beginning to see significant improvement in commercial building, particularly in the last quarter. We've also been able to penetrate deeper into the enterprise market, gaining both new customers and deepening relationships with existing ones, which has been robust across the Americas. We also experienced good strength internationally, but this past quarter, the Americas showed the strength of the IT environment in the U.S.
Kevan Krysler, CFO
Yes, I'd agree with that, Charlie. I think the U.S., Meta just had an outstanding quarter for us. In addition to what Charlie was saying, I think what we're seeing in the U.S. is really leveraging our expanded product portfolio and technology and solutions. With FlashBlade, we're really seeing some good traction on that front. So it's a shout-out to our sellers and channel in terms of the performance there. I think your next question was in terms of contribution with the COVID tailwinds. I think it's probably fair to say around two points, Meta, in terms of how we're thinking about that.
Operator, Operator
Your next question comes from the line of Jason Ader from William Blair.
Jason Ader, Analyst
I thought it was a typo when I saw the revenue number for the quarter. That's a significant beat. Relative to the guidance, can you help us understand how much of the upside came from Meta and how much came from other sources?
Charlie Giancarlo, CEO
Jason, I don't think we could have or would have predicted such a strong quarter. It was indeed a very strong quarter, largely because the company is now performing at its best with a solid portfolio. Our brand has become very robust across major markets, and our capacity to sell and support our products is widely recognized. We can effectively address a broader range of use cases with our industry-leading products. We're truly hitting our stride. Kevan, would you like to discuss the guidance?
Kevan Krysler, CFO
Well, yes, and I'll just tack a little bit more on to that, right? So it's really interesting for us, right, because the linearity we saw was actually really strong all the way throughout the quarter. end to end, which was really impressive for us. Again, the U.S. and Canada, frankly, outdelivered for us. And it was across the board, as Charlie said; enterprise, strong; commercial, strong; public sector, strong. The other thing that was interesting is we did stress test a lot in terms of, hey, were we seeing a lot of pull-forward activity due to supply chain? And frankly, we didn't see anything abnormal to that front. So yes, really strong for us.
Jason Ader, Analyst
Was Meta a 10% customer for the year?
Charlie Giancarlo, CEO
No, I believe they were not.
Kevan Krysler, CFO
They were not.
Jason Ader, Analyst
Okay. One quick follow-up. I may have missed this if you discussed it, so I apologize. One of your competitors mentioned constraints on low-level components, not on NAND, but on low-level components in their arrays, which presented challenges in terms of shipments and their overall guidance. Did you experience anything similar? I think they mentioned it occurring around mid-December, and I'm curious whether you were affected by that.
Charlie Giancarlo, CEO
Absolutely. That's a significant challenge throughout the industry. We collaborate with other companies and manufacturers, and issues with low-level components have been a persistent problem. Almost daily, our supply chain team faces new challenges. To give you a broader perspective on the supply chain, I anticipate a question you may have. We indicated last quarter that we believed things would reach a low point in Q4, which seems to have happened, but there hasn't been real improvement. It's still somewhat stagnant, and we remain vigilant for any new challenges that may arise. We've handled the situation well so far, but we're still looking for signs of recovery.
Kevan Krysler, CFO
It's almost becoming a new normal for us because obviously, this is the same, very similar challenges we were working through last quarter that we're very successful in partnership with our suppliers and delivering for our customers. But I'll tell you, I think the real benefits we're seeing is the value of our integrated hardware and software solutions that we over and over again keep talking about, and it just keeps getting validated as we're working through these challenges that Charlie outlined.
Operator, Operator
Your next question comes from the line of Rod Hall from Goldman Sachs.
Rod Hall, Analyst
Yes. I want to ask the first question with regards to OpEx and OpEx leverage. I was just kind of looking at Arista's OpEx, sales and marketing to sales costs about 8%, and you guys are about 30%, and that's fair because you distribute to a bunch of enterprises, and hyperscale is pretty new to you. But that's the sort of sales and marketing ratio that a company that distributes more to hyperscale is capable of. And I just wonder, do you think over time if hyperscale mix increases, the marginal OpEx related to that in either such a small number of customers, Charlie could start to approach that lower number. I'm just wondering how you think about that hyperscale mixing into that sales and marketing costs. And then I've got a follow-up.
Charlie Giancarlo, CEO
Right. Absolutely. No, that is the right example, right? I mean if you look at Arista's numbers, they operate on somewhat lower gross margin and higher operating margin due to lower sales and marketing. And that's the business model for selling into hyperscalers. As we go down that path, the model for us will be mixed. That is to say that there'll be an enterprise business model that will have a higher gross margin but higher sales and marketing expense and a cloud business model likely to have lower gross margin but lower sales and marketing expense. Those are the trade-offs that are made. My view is both of which should improve over time to give us higher operating margin.
Kevan Krysler, CFO
Well, in our subscription businesses as well.
Rod Hall, Analyst
Right. Yes. That's why I thought. Thanks, Charlie. That's helpful. And then my follow-up was the Meta revenue up, down or flat in Q4 on Q3.
Kevan Krysler, CFO
Far down. I mean we just had a little bit of revenue coming in from our hyperscalers. So the majority of that revenue we saw in Q3.
Charlie Giancarlo, CEO
And we should keep in mind that generally, this is typical for large players, whether they are hyperscalers or service providers, as their performance can vary significantly from one individual to another.
Rod Hall, Analyst
That makes sense. And when you guys think about that revenue then, you talked about the growth of it being kind of in line with the company growth. I didn't know what you meant by that. Are you saying sort of prorate the revenue you got in the second half like multiply it by 2 and grow that at the company rate? Or are you saying look at the absolute total of revenue in the year?
Kevan Krysler, CFO
Yes, keep it pretty simple, right? So when you take the outlook for next year and our growth rate, applying that on top of it, it's a general good framework to start out with.
Operator, Operator
And our next question comes from Pinjalim Bora from JPMorgan.
Pinjalim Bora, Analyst
Great. Congrats on an absolutely great quarter, it seems like. Charlie, listing to your vision in the prepared remarks, it sounded like Portworx will play a bigger role in the future. First, is that right? And then what are you seeing or hearing from customers with respect to the need for persistent storage and containers and kind of the maturity of container-based environments? And do you expect Portworx to be an important component of the growth equation in 2022?
Charlie Giancarlo, CEO
We definitely anticipate that Portworx and its data services will be essential for our future development, especially in the realm of cloud-native advancements based on Kubernetes and containers. This represents a significant shift from traditional storage and data environments, necessitating new software solutions to support these changes. We have a top-tier product in Portworx and are experiencing strong traction with a diverse and expanding customer base. However, it's important to note that containers and Kubernetes are still not fully mature. The industry and customers are in the early stages of adopting container-based applications, as most new developments are occurring in these environments, yet few have transitioned into full production. It will naturally take time for these production workloads to scale up. It’s crucial to stay at the forefront of these significant and foundational shifts. Rob, would you like to add anything?
Rob Lee, CTO
Yes, absolutely. Just to add to that, Pinjalim, you asked the question about the growth and realization around state versus stateless containers. I think it's a great example of the maturity curve that Charlie is talking about. I think as the technology around containers matures and the adoption increases in the enterprise, we're seeing a couple of things. One is a realization that state matters and being able to store data, get it back and have all the enterprise resilience around it really does matter. As well as the enterprise data management workflows that go around it, whether that's a backup, disaster recovery, security, or migration needs. And that's where we really see customers across the board recognizing that Portworx is really the only solution out there that's able to solve the entire set of data challenges and needs around the container environment, whether that's the container storage infrastructure, the data management workflows or now with Portworx data services, providing the data service and application tool capabilities with the integrated and curated database deployments. So net-net, definitely earlier in the maturity curve, but we're seeing great adoption and great growth within Portworx, and we think that's going to be an increasingly important part of our strategy going forward.
Pinjalim Bora, Analyst
Got it. And Kevan, just a follow-up on the RPO growth. It's a fantastic number, 29% at $1.4 billion scale is pretty impressive. Are you seeing any kind of an elongation of contract duration that might be positively impacting that growth rate? Or would you say it's more apples-to-apples in terms of contract duration year-over-year?
Kevan Krysler, CFO
Thanks for the question. And I think it's pretty consistent from a duration standpoint. And then again, I do point the analyst base to our subscription ARR because I really do think that's a really good measure of the health of our subscription businesses and obviously, NDR, which we published is greater than 120 exiting the year.
Operator, Operator
Your next question comes from the line of Aaron Rakers from Wells Fargo.
Aaron Rakers, Analyst
Yes. And I'll ask two as well since nobody stuck to the one. So I guess the first question I have is that in terms of the hyperscale cloud opportunity, we've talked a lot about Meta. But as we look out over the next 12 months, do you think we come out of that timeframe, saying, "hey, it's more than just Meta? have you had engagements with other cloud hyperscale customers on their own AI projects?" Do you expect that customer base to expand as you look forward?
Charlie Giancarlo, CEO
We are putting significant work and effort into this, so I definitely expect it to grow as we move forward. However, predicting the exact timing can be challenging, as these are similar to engineering designs. It’s like selling into a new rack design for each hyperscaler, which takes several years for them to implement. While I have ongoing conversations and hope to have an update, I can’t guarantee it will be in the near term. Twelve months is a long time, and this remains strategically important for the company overall. Rob, do you want to add anything? Please, go ahead.
Rob Lee, CTO
No, I think you are correct, Charlie.
Aaron Rakers, Analyst
I understand it's probably too early to revisit the comments made during Analyst Day in September. However, considering the growth you mentioned, specifically the mid-teens CAGR of revenue for fiscal years 2022 through 2025, could you clarify whether that projection included any expectations for hyperscale cloud opportunities? Or was that not factored into your outlook at that time?
Charlie Giancarlo, CEO
I think it did not assume significant hockey stick growth from the hyperscale environment. It anticipated moderate growth, and at that time, we had already mentioned Meta as a hyperscaler, so we expected to gain some from that, but I can't say we anticipated a substantial amount.
Kevan Krysler, CFO
Yes, I think that's fair, Charlie. In addition to that, we are assuming obviously acceleration with our subscription businesses overall as well, which is part of our long-range expectations in the model.
Operator, Operator
Your next question comes from the line of Simon Leopold from Raymond James.
Simon Leopold, Analyst
I don't want to focus too much on the negative given the metrics you've exceeded, but I want to clarify what happened with your gross margin, particularly the product gross margin in your January quarter. I thought the October numbers were low due to the customer mix, and I don't believe you have the same customer mix now with the Meta shift down. I would like to explore this more and understand the factors impacting the April quarter as well as the fiscal '23 outlook for product gross margin.
Kevan Krysler, CFO
Yes, it's a great question, Simon, and I'll take it. This is Kevan. First of all, we're quite pleased with the product gross margins, but I do understand the question. We certainly did see some impact with higher costs at the component level that Charlie talked about as well as indirect costs, including logistics that were impacting us, and we saw a little bit of that coming through this quarter. But look, we're continuing to benefit from selling the value of the integrated hardware and software architecture that I've alluded to and Charlie's alluded to and expect our ASPs to really be healthy, especially as our competitors who really sell in a cost-plus start increasing the pricing, and we've seen that in the marketplace. And so in my prepared remarks, I talked about the fact that we continue to expect product margins to be in the high 60s, and that's again, consistent with our long-term expectations and understanding the challenges we're working through on the supply chain. So thanks for the question.
Operator, Operator
Your next question comes from the line of Wamsi Mohan from Bank of America.
Wamsi Mohan, Analyst
I would like to follow up on the previous question about product gross margins. Looking back two quarters, we experienced a 330 basis point decrease in margin. The supply chain situation remains quite difficult. As you consider the high 60s gross margin for next year, is the assumption that we won't see any supply chain improvements? Or is there an expectation of a full year of hyperscale revenue that might negatively impact the gross margin mix?
Charlie Giancarlo, CEO
Yes, Wamsi, you are asking a complex question. Let me start by saying that we encountered some timing-related issues affecting our gross margin in Q4. This was not related to hyperscale changes but rather our costs. In Q4, adjusting for rapidly changing prices through average selling prices wasn't always immediate. However, we do see strong average selling prices due to the value of our product. Unless we face unforeseen challenges in Q1 and Q2, we anticipate that these temporary product gross margin costs will effectively pass through. We've consistently guided for high 60s in our gross margin for many years, and this does not signify a change from our past.
Kevan Krysler, CFO
Maybe I can add just a little bit more to that in terms of specific questions. So to be clear, we did not build in degrading product gross margins due to hyperscaler transactions. So I want to be clear on that. We do expect supply chain challenges to continue. But to Charlie's point, we sell on value, always have, the value of our software both Purity and Pure1, the integrated architecture of the hardware and software. And that's what we've been doing even before, obviously, the supply chain challenges. And that's really the validation point that Charlie is alluding to on the ASPs and why we believe our ASPs will respond accordingly and why we continue to believe that our product gross margins will be in our long-term expectations in the high 60s.
Operator, Operator
Your next question comes from the line of Wamsi Mohan from Bank of America.
Wamsi Mohan, Analyst
Okay. That's helpful. And if I have a follow-up. When we think about this hyperscale revenue, I think, Charlie, you mentioned that you first engaged with Meta maybe 5 years ago. Obviously, it took a while to sort of get to a healthy revenue level there with that customer in this past fiscal year. So why should, now that the proof of concept is sort of behind you, a lot of the technological heavy lifting is sort of behind you, why should we expect growth rate to be in line with your aggregate growth rate when it's coming off a much smaller base and sort of it seems like a lot of the heavy lifting and proof of concept is sort of behind you? Why shouldn't we expect a much faster growth on that piece of the business?
Charlie Giancarlo, CEO
Well, Wamsi, we certainly hope to see that. However, every new sale relies on a new engineering engagement in a new data center or a rack design with each customer. I should note that while your timeline is accurate, we have sold them FlashBlade for AI uses over the last five years. The reason we received the significant order for FlashArray//C relates to Pure finally achieving an impressive price-performance level with midrange disk, which made it appealing for traditional use cases, specifically data lakes. This is just beginning, and that level of price performance is new for hyperscalers, who are still adjusting to it and need to design around it. Timing is crucial, as hyperscalers are now starting to recognize the opportunities presented by this new technology. Additionally, the advantages of FlashArray//C or QLC in traditional use cases go beyond just price performance. We are capable of delivering outstanding performance with respect to the environmental footprint of the storage involved, including power, cooling, space, and waste. We believe these factors will become increasingly important for both enterprises and hyperscalers in the future.
Rob Lee, CTO
And Wamsi, this is Rob. To address your question about our relationship with Meta and the pace of growth, I want to emphasize that each hyperscaler operates in a distinct environment, and each area within a firm is unique as well. This means that each scenario requires an engineering-driven design win process. Being a partner for Meta in one aspect of their environment certainly benefits us compared to starting in a new account. However, similar to our discussions with other hyperscaler firms, this is a lengthy process that relies heavily on engineering and design, so it will take some time.
Operator, Operator
Your next question comes from the line of Sidney Ho from Deutsche Bank.
Sidney Ho, Analyst
Congratulations on an excellent quarter. My question pertains to demand. While your competitors have mentioned constraints affecting their growth, you managed your supply chain effectively and exceeded expectations. Do you believe some customers are choosing your solutions because they couldn’t access hard drive-based products? What do you see as the long-term sustainability of these wins stemming from supply constraints? Additionally, do you think your as-a-service offering is gaining advantages from these constraints? If so, do you have sufficient capacity to meet this increased demand?
Charlie Giancarlo, CEO
On average, we don’t observe a significant amount of business driven by supply constraints, although there are a few anecdotal instances where we did gain business due to these constraints. However, these cases are rare. The demand we see is fundamentally based on the expansion of our portfolio and the various segments we can target right now. We believe this demand is sustainable for three reasons: we now offer a much broader product line than we did a few years ago, we are reaching more segments, and our technology provides sustainable differentiation that is hard for competitors to replicate. Therefore, we are just beginning to experience sustainable demand growth.
Sidney Ho, Analyst
Okay. And then my follow-up question is I want to ask about this Rule of 40. Clearly, fiscal '22 was a good year; I think it was up 44%. I guess, you benefit from some of the reduced expenses from COVID. How do you think about the Rule of 40 this year? Revenue growth is about 20%. So I guess, indirectly asking about your free cash flow of margins.
Kevan Krysler, CFO
It's a great question. And yes, we kind of outdid ourselves this year, didn't we, in terms of the rule of 40. It was outstanding. And any metric we look at including the Rule of 40 framework. But look, our FY '22 performance in of itself really doesn't change our long-term view that we've shared about sustainable improvement within the rule of 40 framework. And look, when we look at our FY '23 outlook, it's tracking well with the long-term expectations that we set and discussed on Financial Analyst Day with you guys a couple of months back.
Operator, Operator
Your next question comes from the line of Nehal Chokshi from Northland Capital Markets.
Nehal Chokshi, Analyst
Yes. The results are impressive, especially considering you achieved a 41% year-over-year growth in product revenue with minimal support from Meta. The question now is, since you are projecting a 20% year-over-year growth in the April quarter, and mentioned that a revival of IT spending in the Americas is the main driver, why do you expect this trend to continue into the April quarter and beyond?
Kevan Krysler, CFO
Yes, I'll start, and I'll let Charlie kind of hit it from a macro standpoint. But when we chatted about the secure mount, right? We're seeing strong demand across our portfolio, which is obviously have been expanded. We're seeing good success across our entire portfolio, including our subscription businesses, key markets, key geographies, key businesses. No matter what we're looking at, we're seeing strength. So that's a plus for us in terms of the demand signal that we're seeing. And I also think when you think about our FY '23 outlook for revenue growth, just a few reminders for you, right, in terms of the FY '23 compare. Obviously, we had the large opportunity with Meta that was helping us out in FY '22. You have an extra week revenue in '22. And again, without taking anything away from our outstanding performance in FY '22, our growth rate was simply an easier compare because obviously, fiscal '21 had some COVID-related headwinds that we're working through. So and then when I complement later on, the Pure as-a-Service growth with Cloud Block Store that we – we expect that growth to significantly outpace our company revenue growth rate for next year. And as a reminder, with Pure as-a-Service, revenue is recognized over time. So obviously, there's an impact there. But hopefully, that's helpful for you.
Operator, Operator
Your next question comes from the line of Tim Long from Barclays.
Tim Long, Analyst
I have a follow-up and a question. Regarding the hyperscale segment, I wonder about your relationships with other large customers. Since you have a background with Facebook, did that provide you with a significant advantage? Was there an implication that with other large hyperscalers, you may not have that same level of relationship, making it more difficult? Additionally, could you discuss deal sizes and cross-selling across your products? You've mentioned that FlashArray//EX is performing well, and C is doing well too. Could you provide insight into how cross-selling is influencing repeat sales and deal sizes?
Charlie Giancarlo, CEO
Certainly. We appreciate your question, Tim. In terms of hyperscalers, we are familiar with them, although we primarily engage with their IT organizations rather than their production teams, which represents a different type of relationship. We have received positive feedback from their IT departments, but it's important to understand that these are distinct interactions. It's crucial to note that our approach involves engineering design wins, resembling chip sales more than traditional enterprise system sales. This process can be time-consuming as it requires high integration with their teams, and we are still in the early stages of these relationships. However, we are already involved in a production environment with Facebook, which is a significant milestone. Looking at our broader portfolio, it is exciting to see how it can persuade customers to incorporate more of our solutions into their systems and increase their spending with us. While I don’t want to downplay the importance of individual portfolio sales, we are finding that even without a comprehensive portfolio approach, we are uncovering new opportunities. Currently, a notable percentage of our transactions involve selling multiple products simultaneously, and this trend is on the rise. Our goal is to demonstrate to customers that whenever they consider new storage solutions or replacements for their current systems, they should remember to include us in their considerations.
Operator, Operator
Your last question comes from the line of Krish Sankar from Cowen & Company.
Krish Sankar, Analyst
Congratulations on the impressive results. I have two quick questions. First, regarding profitability, what gives you confidence about achieving profitability for the entire year? I understand you mentioned that operating expenses are increasing due to inflation and COVID-related costs, but your inventory is also at an all-time low. I'm trying to determine the level of confidence in profitability. Secondly, I have a broader question for Charlie.
Kevan Krysler, CFO
Welcome, Krish. I know you're new to the community at Pure, so welcome aboard. Let's take a moment to discuss profitability. We've already shared our insights regarding the gross margin for products. However, we haven't focused much on subscription gross margin, which performed quite well for both the quarter and the year. We believe this positive trend will persist. Looking at the operating leverage and discipline we've achieved this year, along with the advantages brought by COVID, particularly in our sales and marketing efforts, we see benefits across all areas this year. We will maintain this momentum and continue to prioritize investments in growth. With a disciplined approach to expanding our global workforce, we are confident we can progress towards greater profitability and are comfortable with our modest expansion in operating margins.
Krish Sankar, Analyst
Thank you for your kind words. I’d like to follow up with Charlie regarding IT spending. There are perspectives suggesting that IT spending saw strong growth last year and is expected to grow this year, but perhaps at a slower rate. I’m curious from your perspective if there was any budget excess last year that is now normalizing, or how we should consider IT spending as a whole in relation to Q4 and into fiscal year '23.
Charlie Giancarlo, CEO
We experienced strong linearity throughout the quarter, with no specific budget flush at the end of December, which is typically when most companies finalize their fiscal years, or at the end of our fiscal year in January and early February. Therefore, I wouldn't say budget flush was a significant factor. The results were really driven by the overall strength of our business and the competitiveness of our portfolio. Looking ahead, we certainly have more clarity on the first half of the year compared to the second. Observing the industry and economic trends, as well as other companies in the IT sector, there's a general belief that there's more confidence in the first half of the year than in the second half. This perspective likely informs our outlook.
Operator, Operator
Thank you. This concludes the question-and-answer session. At this time, I will turn the call over back to Charlie Giancarlo for closing remarks.
Charlie Giancarlo, CEO
I want to thank you all for joining us today and especially Mita and Kriss, who are with us for the first time. Certainly, here at Pure, we're looking forward to not only this quarter but to our sales kickoff, which starts next week, and I'm going to welcome all of our sellers. It's going to be virtual, hopefully for the last time this time around. But we are broadcasting to you for the first time legally maskless from our Mountain View headquarters, and we're hoping that's a sign of things to come. Thank you all very much again for joining us and look forward to talking to you next quarter.
Operator, Operator
This concludes today's conference call. You may now disconnect.