Earnings Call Transcript - PSTG Q2 2022

Operator, Operator

Good day, ladies and gentlemen. Thank you for joining us for the Pure Storage Second Quarter Fiscal Year 2022 Earnings Release Conference Call. All participants are currently in a listen-only mode. After our prepared remarks, we will open the floor for questions. This call is being recorded. I would now like to introduce your host for today's conference call, Mr. Sanjot Khurana. Mr. Khurana, please proceed.

Sanjot Khurana, VP of Investor Relations

Thank you, and good afternoon. Welcome to the Pure Storage second quarter fiscal 2022 earnings conference call. My name is Sanjot Khurana, Vice President of Investor Relations 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 all that during this call management will make some 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 cancelable 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 property of Pure Storage. With that, I'll turn the call over to our CEO, Charlie Giancarlo.

Charlie Giancarlo, CEO

Hello everyone, and thank you for joining us today. Pure had an outstanding Q2! As a growing, share-taking company, we expect every quarter to be record-breaking, but this quarter was extraordinary. Sales, revenue, and profitability were well above expectations. Revenue growth this quarter exceeded 23%, and we had the highest Q2 operating profit in our history. I was especially pleased with the growth of both our new and existing products, the balance of performance geographically, and our continuing penetration of cloud and large enterprises. These are all key parts of our long-term strategy that we’ve shared over the past several years. These results also show that our strategy of investing during the pandemic, specifically investing in our enterprise sales capability and expanding our product line, was the right one. As we discussed in past calls, we predicted that Pure’s growth would accelerate as businesses adjusted to the COVID environment. We believe that our growth will be even stronger as businesses return to an in-office environment. We estimated that this would start this past Q2, and we are obviously very pleased with the results. Looking ahead, we expect that businesses will continue to adjust to the effects of the pandemic while driving digital transformation. We believe that the Delta variant has only temporarily slowed a return to the office environment, and that large-scale global vaccinations will do much to enable a full return to normal by spring of next year. As we indicated last quarter, we believe that the current environment enables us to return to our historical double-digit growth rates, with increasing profitability. Our leadership and innovation in the data storage and management market continues to grow. Our strategy is focused on delivering a unified cloud operating and procurement model across all data storage use cases and environments; enabling modern cloud-native applications built on containers; and driving the modernization of today’s infrastructure with a focus on the all-flash future that modern applications will demand. Let’s take a quick look at the results. This past quarter provided many areas of outstanding performance, highlighted by the highest total sales for any second quarter in the history of the company, growing more than 30% year over year; continued strength and momentum in Subscription Services revenue, up 31% year-over-year with strong growth in Pure as-a-Service, which almost doubled revenues compared to the prior year; and, our success in large enterprises continues to grow, comprising over 50% of our sales, with our top 10 customers spending more than $100 million in total. As I mentioned, both our new and existing products achieved new sales milestones. Frankly, the superlatives from this quarter are too numerous to fully enumerate, but here are a few highlights: Growth of our subscription businesses were very strong this past quarter with sales of both Pure as-a-Service and Portworx approximately tripling year over year. All subscription sales taken together, including Portworx, Pure as-a-Service, and Evergreen, increased almost 50% year over year in Q2 and is approaching one-half of Pure’s total sales. These results show both the continued attractiveness of our Evergreen model and the market’s excitement for our new subscription offerings. It has been nearly a year since we announced the acquisition of Portworx. Every quarter as part of Pure, Portworx has beaten their targets. This past quarter, Portworx sales tripled year-over-year and continued to gain many new customers both large and small. Financial services and service providers are particularly interested in the ability to easily scale container-based workflows with Portworx. FlashArray//C continues to deliver tremendous growth, with sales tripling over last year. It remains the fastest growing new product in Pure’s history and is enabling customers to transition to an all-flash data center. Cloud customers, in particular, are making use of FlashArray//C to improve their reliability, reduce their environmental footprint, and lower their operational costs. For instance, a recent eight-figure win with a top 10 hyperscaler, which will begin to ship this Q3, was won against traditional magnetic disk based on our high performance, small space, and power footprint, and superior total cost of ownership. SafeMode is another compelling reason why even more customers are turning to Pure. This high-performance ransomware protection solution for both FlashArray and FlashBlade takes less than a millisecond to create an immutable copy of data for fast recovery. And customers can send these snapshots to a variety of destinations such as FlashArray//C, FlashBlade, or AWS, Microsoft Azure, and NFS shares. Only six months after introduction, over 500 customers have enabled SafeMode. These examples demonstrate the success of our strategy to provide organizations with the modern data services they need to modernize their data infrastructure, take advantage of modern applications, and manage their data and infrastructure through code in a multi-cloud environment. Our focus on these goals has been rewarded with new and expanding customer relationships. For example, one of our enterprise customers, a Global Fortune 500 financial services firm, recently chose a Pure as-a-Service subscription to fuel the expansion of their core operating applications in a virtual hub. While increasing the performance, flexibility, and scale of this global platform, they were able to reduce their physical footprint by nearly 80%, contributing significantly to their environmental sustainability goals. They estimate that this will reduce their total cost of ownership by nearly 70% while providing significant performance increases. And with growing global concerns about ransomware attacks, a UK-based securities firm with sub-millisecond performance requirements found performance, simplicity, and safety in Pure’s recovery capabilities. Using FlashArray SafeMode with our FlashBlade FlashRecover solution on an Evergreen Gold subscription, they now have the data protection and unified fast file and object platform they need to scale safely. Our strategy since our founding is to focus on doing the right things for our customers and on doing things right. Our environmental goals dovetail with our customer-first values. Part of ensuring that our products and services have the lowest total cost of ownership means designing products that use less energy, require less cooling, need less maintenance, take up less space, and produce less waste. With our customers’ increasing focus on their own environmental footprint, we will be providing more quantitative measures and sustainability programs going forward. Pure Storage is advantaged by the major trends in our industry: we enable companies around the world to shift to a cloud operating model for their private and hybrid cloud infrastructure; we lead in driving the all-flash data center; and we have the most advanced services and tools to automate data management for our modern cloud-native applications. As we entered the year, we stated that our customers would accelerate their investment in digital transformation with renewed confidence in economic recovery this year. This was clearly evident in our performance in the first half and especially this past Q2. In the current environment, we are confident that the momentum of our first half will continue into Q3 as evidenced by our Q3 guide and raised annual outlook. I want to thank our employees and our partners who have worked tirelessly to support our customers with great products and great service throughout the uncertainty of COVID-19, and who have created our sustainable momentum. Everyone at Pure deserves to feel proud of the advancements we have made through this difficult period. One last note that I would like to add before I turn the call over to our CFO, Kevan Krysler. I am very pleased to announce that Rob Lee, whom many of you know, has just been promoted and will serve as Pure’s Chief Technology Officer. Congratulations, Rob. John Colgrove, a.k.a. Coz, who in addition to his title as founder also served as CTO, will now take the title of Chief Visionary Officer. Rob will continue to report to him, and Coz will continue to serve Pure full time. Congratulations, Rob and Coz. Kevan, over to you.

Kevan Krysler, CFO

Thank you Charlie and good afternoon. We could not be more pleased with the strength of our business, our execution, and Q2 financial results. We saw strong sales execution across the globe, which is reflected in our sales growth of 32%, excluding cancelable orders. Similar to what we saw last quarter, our entire portfolio, including our subscription services, contributed to our performance. Our core business of FlashArray//X gained significant strength across our enterprise, commercial, and public sector customers, FlashArray//C sales more than tripled year over year, and FlashBlade sales established a new record high for Q2. Our revenue growth was 23% this quarter, and product revenue had its highest year-over-year growth rate compared to the previous seven quarters. Remaining performance obligations, or RPO, which includes our committed and non-cancelable future revenue, was $1.2 billion, growing 25%. RPO growth reflects the continued strength of our Subscription Services, including record sales this quarter of our unified subscription, Pure as-a-Service. We acquired 380 new customers representing 10% year-over-year growth, and we saw particular strength with new enterprise customers this quarter. Now turning to specific financial results for the quarter. Total revenue grew 23% to approximately $497 million. Revenue in the United States grew 25% and International revenue grew 18% compared to last year. Subscription Services revenue grew approximately 31% year-over-year, representing approximately 35% of total revenue. Product revenue was very strong during the quarter growing 19%. The differentiated value of our software and solutions continues to be reflected in our non-GAAP total gross margins of 70.5% this quarter. Non-GAAP product gross margins continue to be on the high end of our long-term expectations at 70.3%. We expect that product margins will fluctuate depending on product mix as our newer offerings continue to scale. Non-GAAP subscription services margins were 70.7%. Revenue and gross margin outperformance and improving sales efficiency contributed to delivering strong non-GAAP operating profits of $46.6 million. Continued reduced travel due to the ongoing COVID environment and slower-than-planned hiring also contributed to lower operating expenses during the quarter. We ended the quarter with over $1.29 billion in cash and approximately 3,900 employees. Cash flow from operations achieved a record high this quarter of $123 million, resulting from improved linearity and strong collections as well as increasing operating leverage. Capital expenditures were $28 million during the quarter. We returned approximately $44 million of capital to repurchase slightly over 2.3 million shares as part of our $200 million share repurchase program. Now turning to guidance. We are very pleased with our sustained momentum and improving operational efficiencies. We expect Q3 revenue to be approximately $530 million, growing almost 30%. Our revenue guide for Q3 includes revenue we expect to recognize in connection with the sale of FlashArray//C to one of the top 10 hyperscalers. We also expect non-GAAP operating profit will be approximately $40 million. I have mentioned in previous quarters that we would not be updating our annual view. However, given the strong performance of our business over the last several quarters, including our strong financial outlook for Q3, we have also updated our annual view. We now expect that revenue for the year will surpass $2 billion, growing approximately 21% to $2.04 billion. We also expect that operating income will be approximately $150 million. This is an exciting time at Pure. Our strategy, innovation, and service is compelling for our customers and we are executing with a focus on accelerating revenue growth and increasing profitability. Thank you to all of our employees and partners. I am also really looking forward to having you join us at our virtual Analyst Day on September 28. With that, I will turn it over to the operator so we can get to your questions.

Pinjalim Bora, Analyst

Seems like a super solid quarter here. Probably one of the highest beats I think if I was just looking at it going backward. Charlie maybe at a high level, did anything surprise you in the quarter when we were doing checks? A lot of partners can have highlighted that Pure continues to see relatively short lead times, while competitors tend to struggle with the longer lead times. Do you think that is helping you to gain share? Anything that surprised you in the quarter would love to know?

Charlie Giancarlo, CEO

I think the reason why we continue to gain share and why the quarter was so good is that we've been preparing a portfolio of products that are really second to none. While that was being done during the beginning of the COVID crisis, of course, there's a lot of disruption in our customer base. But as the customers have become accustomed to operating within the COVID environment, that portfolio and our focus on developing a set of enterprise capabilities, both in sales support as well as with our products, it's finally all coming together and hitting stride. No, we expect this to be the beginning, if you will, of very evident growth for the company as we go forward.

Pinjalim Bora, Analyst

Strong comments. Thank you for that. One follow-up for Kevan. It seems like you were able to maintain the gross margin sequentially, if I did my math correctly, quickly. Despite the inflationary pressures that have been creeping up, is it fair to say that you saw kind of a better pricing environment maybe as the component price inflation presumably made the competitors do less discounting in the field?

Kevan Krysler, CFO

Well, hey, Pinjalim. I think your math is correct. We definitely maintained our gross margins, which speaks to a few key factors. Our operations team has been doing an exceptional job, and our suppliers are collaborating closely with us. To specifically answer your question, discounting remained steady, and I believe much of that is due to our sales team's discipline and execution, which contributed to the gross margin performance we achieved.

Aaron Rakers, Analyst

Yes. Thanks for taking the question. Also congrats on the solid results and guidance. Throughout today's call, you referenced the fact that you've now got a top 10 hyperscale customer, it sounds like for the FlashArray//C product. I guess the question on that is that, is that tied to their cloud offerings, or is that for internal usage? And do you expect this to kind of be the beginning of more potential hyperscale customer traction for the company going forward? And I have a follow-up.

Charlie Giancarlo, CEO

Yes, it’s a part of their overall operations. So I think the answer is affirmative from the question that you asked. We do feel that this is sustainable both in the sense of continuing with this customer, as well as we think it's the beginning of seeing other similarly situated hyperscale customers starting to look at flash as a real alternative. As you may know, most of the hyperscalers, the vast majority of what they store, they store on disk. They may have a little bit of flash in their servers, but for the most part, all storage is on disk. We think this is the beginning of breaking that structure. We finally have the kind of price performance that can really compete within the disk market.

Aaron Rakers, Analyst

Very helpful. I wanted to ask a follow-up question about the subscription revenue, which you've mentioned is up 31%. You also noted that on a combined basis, Pure as-a-Service, Portworx, and Evergreen were up nearly 50% year-over-year if I understood correctly. I'm curious about what else is included in the other Subscription Services line that may not have grown as quickly as the three you mentioned.

Kevan Krysler, CFO

Hey, Aaron, this is Kevan. And this is just a clarification. I think the 50% reference is really towards sales and bookings, and then obviously the revenue and there's a lag with the revenue. So, two different metrics here that we're referring to.

Aaron Rakers, Analyst

Okay, so just to be clear, Evergreen, Portworx, and Pure as-a-Service basically are the majority, if not all of the services line in the P&L?

Kevan Krysler, CFO

That's correct.

Jeff Rand, Analyst

Hi, this is Jeff Rand on for Sidney. I just wanted to kind of follow up on the FlashArray//C into the hyperscalers, can you give us an idea of how close the pricing has gotten compared to HDDs? Or is this more about the need for better performance by the cloud providers?

Rob Lee, CTO

This is Rob. I will take that one first. When we compare FlashArray//C to the hybrid disk systems it competes against, we generally find that FlashArray//C is very competitively priced, sometimes offering up to a 30% price advantage. However, what we're noticing, particularly with this large hyperscaler deal, is that while price is important, the additional attributes and benefits of flash, such as performance, power savings, cooling savings, and reduced footprint, are all significant. At the hyperscale level, these factors become even more critical. For instance, in this case, FlashArray//C was the only solution that could fulfill the customer's requirements without necessitating the construction of new data centers.

Jeff Rand, Analyst

Great, thank you. And then just as my follow up, you didn't mention anything on supply chain in your prepared remarks, can you give us an update on that, if you're missing out on any revenue due to supply chain constraints?

Charlie Giancarlo, CEO

Yes, no, again, I think we're doing a great job with our operations team, in partnership with our suppliers. Obviously, the environment, from our perspective hasn't changed much from what we saw last quarter. We just continue to be focused on it. And obviously, you see the results in our print. This will be an area that we will continue to focus on through the second half. We'll manage that. But again, a testament to our sales team to continue selling the value, especially the software value associated with our solutions.

Wamsi Mohan, Analyst

Yes, thank you. Your guidance for next quarter calls for close to 30% growth. But all that can be explained from sort of that acceleration from 22 to 30 can be explained really to easier compares. On the one hand, you're seeing, very good traction, Charlie you spoke about share gains. You essentially are reiterating sort of this better outlook for the full-year as well. Just trying to reconcile why wouldn't you see a further organic acceleration on top? I'm not saying 30%, 30% is really good, but why aren’t we seeing a further acceleration, especially when you think about the comments around the backdrop of Delta being maybe somewhat transitory?

Kevan Krysler, CFO

Wamsi, I don't completely agree with your calculation regarding the 30% growth being solely due to easier comparisons from last year. This growth rate is significant not just compared to last year but also shows substantial improvement when looking at a two-year comparison, taking into account the unusual circumstances last year. We believe this growth rate serves as a solid basis for our projections for the upcoming quarter, considering the overall market conditions. Additionally, this increase aligns with our annual expectations and is above what was previously anticipated, so we see it as a justified adjustment.

Charlie Giancarlo, CEO

We are very pleased with what we're seeing in terms of the Q3 outlook and the idea that we're driving almost 30% growth next year, with the opportunity we highlighted on FlashArray//C. So, I think the guide that we've come out with for Q3 is actually quite strong. We're very pleased with that.

Kevan Krysler, CFO

Yes, absolutely. And again, what I really was pleased with, with the quarter was not only the top-line growth that we're driving, but the operating leverage that's coming with it. That's coming really from the sales organization. We are seeing really strong productivity, sales efficiency and discipline, and we're seeing that come through primarily on the operating leverage that we saw for Q2 and frankly the increased outlook for the remainder of the year. So, when I think about the increasing operating leverage, I would look at first what we're doing in terms of outperforming on sales, as well as the gross margin performance, execution of the sales team. Yes, we've got a little bit of tailwind from the COVID environment. As I look at Q2, I would view that between 1 to 2 points of the 9 points that we saw this quarter. So not a significant tailwind, but there is a bit of a tailwind that we saw for Q2. Yes, we're managing that quite well. Obviously on the sales side, even though we're got some more hiring to do on the sales side. They are just doing such a great job in terms of productivity. Participation rates are tremendous. We're seeing a great growth in participation rates, both on individual contributors, as well as the first line managers. So, like what we see there.

George, Analyst

Hi, this is George on for Steven. Thanks for taking the question and reiterate my congrats on the quarter. I just wanted to ask if you could give us an update on your ability to close new logos. And then in the past, you've mentioned COVID as a bit of a constraint from that, but then we've seen things sort of open up and then the Delta variant coming back. So, just an update on where you stand from that perspective. Thank you.

Charlie Giancarlo, CEO

Yes. We do feel that people working at home, and offices not really being open is a bit of a constraint on net new logo growth. Despite that, of course, we were pleased with the 10% growth we saw year-over-year, but in past years, of course, we saw more. We believe that as things opened up more, obviously that's been delayed a bit because of the Delta variant, but as things open up, we expect that to actually just improve our net new logo gains. In the meantime, our continuation to penetrate deeper into existing accounts, particularly in the enterprise, and I might point out as well that our net new logo gains in enterprise was actually quite a bit strong. So as you might imagine, the commercial logo gains swamp because there were so many more commercial accounts. In terms of net new logos, net new logos tend to be dominated by commercial, but actually our gain of enterprise net new logos this past quarter was actually quite healthy.

George, Analyst

Great. Thank you. That's very helpful. A quick follow-up. Obviously, it's a nice bottom line outperformance this quarter. Can you give us an update on how you're thinking about driving growth versus operating leverage over the long term? Thank you.

Charlie Giancarlo, CEO

Yes, we feel like at this point in time, given our product portfolio and given the productivity that we're seeing from the sales force, we're going to be able to deliver both. We're going to be able to deliver both continued double-digit growth as well as continued improvements quarter by quarter in our operating profit margins. So, yes, no, we're quite confident in that.

Simon Leopold, Analyst

Thank you for taking the question. I first wanted to sort of check on how you're thinking about the longer term growth trajectory? Because in the past, Charlie, you've mentioned growth exceeding 20% and now you put up 23% and you're guiding for 29%, which maybe there's some easy comp to it. But if you could just sort of update us on how you feel about the overall trajectory relative to your prior comments about exceeding 20%.

Charlie Giancarlo, CEO

Yes. No, we've made that commentary in the past because we feel quite comfortable that we will be exceeding 20% for the foreseeable future. I think we're going to stick to that point right now, which is exceeding 20%. I do think that we have room to grow beyond that again, as COVID wanes. But predicting that right now is probably not a fool's errand for all of us. But we do feel comfortable that in this type of COVID environment that we can continue to grow at over 20%.

Kevan Krysler, CFO

And Simon, we'll provide some more color on that as well on our virtual Analyst Day. So we look forward to having those conversations as well.

Simon Leopold, Analyst

Great. And then just as a follow-up. You were helpful in terms of talking about bucketing revenue recurring, but maybe another way to segment your contribution. If you could talk a little bit about what portion of revenue and what's the trajectory for revenue that you would consider off-premise? So what you're doing with hybrid cloud and things like the Cloud Block storage with Azure, what you're doing with AWS? Could you help us get a better assessment of how that fits into the model?

Charlie Giancarlo, CEO

Yes, definitely. We have previously indicated that cloud revenues have been around 30% or more. We haven't specifically calculated this for the current quarter, but the trend appears to be similar. Cloud is a key focus area for us, and we aim for it to continue growing, especially as more customers and workloads transition to SaaS and cloud environments, while the consumer cloud keeps expanding. With the FlashArray//C, we are committed to the all-flash data center model. The remaining traditional disk data centers are primarily in the cloud, which presents a significant opportunity for us.

Shannon Cross, Analyst

Just a couple of questions. The first, strength in cash flow, free cash flow. Obviously, you're buying back stock. Curious how you're thinking about acquisitions and other uses, you were about a year off when you announced Portworx. Then I have a follow-up.

Charlie Giancarlo, CEO

Yes, thank you, Shannon. We continue to be investigating opportunities for M&A. We believe that M&A that really enhances our ability to provide a cloud operating model for our customers is the right way for us to be focused. There isn't a quarter or even a week that goes by where we're not investigating potential combinations for the company. So M&A continues to be an active area of investigation for us.

Kevan Krysler, CFO

I want to highlight the strong operating cash flows, which were impressive for the company. There are three key factors I believe contributed to this quarter's performance. First, the sales team achieved excellent linearity, which significantly improved our collection efforts, resulting in record operating cash flows. Additionally, our ongoing focus on operating leverage is yielding positive results as well.

Charlie Giancarlo, CEO

Yes, that's a great question. To address it, I want to break it down into the two points you mentioned. First, we've experienced an increase in component costs, averaging about 10% this year. However, we believe this is a temporary situation linked to supply chain shortages, and we expect component costs to return to the standard long-term downtrend in the next year or so. On the other hand, we are beginning to observe signs of an inflationary trend regarding wages. Our forecasts and guidance reflect this, as it is becoming increasingly apparent.

Kevan Krysler, CFO

One of the things I would just make sure to highlight too, back to the component cost is, look our approach to sourcing raw NAND really continues to be an advantage for us, really when we look at some of the other folks who are leveraging sourced SSDs and leveraging our software capabilities to enable NAND management is really beneficial for us in this time as well. So I think that’s an important comment.

Karl Ackerman, Analyst

Good afternoon, gentlemen. With Portworx tripling revenue year-over-year, is it now adding to operating income? Additionally, you're finishing the fiscal year in the low double-digit EBIT range, which aligns with record quarterly results from 2019. That's certainly impressive. The question is, while some skeptics might argue that this could be the peak, can you discuss the operational improvements since the beginning of 2020 that indicate operating profit growth is sustainable and can continue to increase? Thank you.

Charlie Giancarlo, CEO

Yes. Well, thanks for the question Karl, that's been on people's minds. Focusing on operational improvement, productivity enhancement across the board of the company has been something we've been very focused on over the last several years. COVID has obviously set us back a bit, because we planned to grow into productivity, and with COVID, we decided to continue to invest in areas that were we felt very important to our long-term growth, particularly investing in our ability to penetrate large enterprise, which by the way, is part of productivity improvement; and two, was to invest in a broad-scale portfolio of products, again to help us to be able to penetrate and achieve much greater wallet share in our customer base. It was only a few years ago where we could only address maybe 10% of their storage needs, and today it's much wider than that. So as we look forward over the next several quarters with the anticipation for the top-line change that we've already discussed, we know quite strongly what our productivity gains are going to be in the different parts of our organization. These are productivity gains that we're going to be able to continue to maintain inside the company. Again, last year was the anomaly, as it was for many companies, but in different ways. For us, it meant that our continued investment that we wouldn't see the productivity, or the sales return on that until the economy started to improve. And now we're starting to see that.

Kevan Krysler, CFO

Yes, I'd like to expand on that a bit. This increase in operating leverage is not unexpected for us. We are focusing on this, as Charlie mentioned. We are observing significant improvements in our go-to-market teams regarding their costs and expenses relative to revenue, and I believe this trend will persist. Over time, I think we will also experience benefits from our R&D efforts. Our gross margins remain strong, particularly in product gross margins. I am confident that we can achieve greater scale and improve our subscription gross margins as our unified subscription Pure as-a-Service expands. I truly believe that our operating leverage will trend upward.

Rod Hall, Analyst

Yes. Thanks for the question. I guess I wanted to start Charlie with this FlashArray//C sale to the hyperscaler. I'm really intrigued by that as an opportunity. I wonder if, maybe you can give us any more color on what that use case looks like, and are there other hyperscalers in your pipeline with very similar use cases? Just how big is that opportunity for you, and what does that pipeline look like with those types of customers? And then I've got a follow-up.

Charlie Giancarlo, CEO

Yes. The individual opportunity is substantial and not just a one-time occurrence; it is ongoing as we gain more insights. You can consider it a general-purpose implementation for one of the key application environments within the organization. I can’t provide too many details, but it’s a common scenario in a hyperscale setting. Moreover, it can be easily adapted to other hyperscalers. This is not the first instance of selling FlashArray//C to one of the top 10 hyperscalers; it's just notable for this particular quarter. We believe we can continue to grow our presence with other hyperscalers as well.

Kevan Krysler, CFO

Just to be clear too, in terms of the strength we're seeing in our Q3 guide. Look, when we exclude this great opportunity that we're seeing with FlashArray//C in a top 10 hyperscaler, we're still in our comfortable 20%, plus 20% year-over-year growth rate, excluding that opportunity. I think that's important to note as well in terms of the strength, is across the business and is across the portfolio. We're really excited about the FlashArray//C opportunity, but it's really incremental to the strength we're seeing.

Kathy Huberty, Analyst

Kevan, just to come back to the third quarter contribution from the hyperscaler account, was that — was the revenue contribution from that customer baked into the original for your revenue outlook? And are you expecting any contribution from that customer that would be material in the fourth quarter?

Kevan Krysler, CFO

That's a great question. Look, when we were looking at the annual guide at the beginning, no, it's fair to say that we wouldn't have contemplated. So it's part of our beat, both from an annual perspective and how we're looking at it for Q3. We're not expecting a significant amount to come through in Q4. We'd expect the larger piece in Q3.

Kathy Huberty, Analyst

Okay, thank you. And then just a follow-up, maybe for Charlie, if we step away from the slower hiring in Q2, which I assume is more a function of the tight labor market, how are you thinking about hiring in the coming quarters to support the stronger demand you're seeing, and the intention to sustain growth rates north of 20% for the foreseeable future?

Charlie Giancarlo, CEO

It's a great question, Kathy. We definitely want to maintain the strength and momentum of our sales capability. Therefore, we will focus heavily on our sales teams, both in the U.S. and internationally, while continuing to enhance our infrastructure to support sales. Most of our efforts will concentrate on sustaining sales momentum.

Nehal Chokshi, Analyst

Yes. So just to be clear, this top 10 hyperscaler revenue contribution for Q3, very clear now, what was going to, but how much did it contribute during Q2 though?

Kevan Krysler, CFO

We didn't have an impact for Q2, Nehal.

Nehal Chokshi, Analyst

No impact for Q2. Okay. Great. And then you said that PaaS doubled in revenue year-over-year, but what about PaaS bookings?

Kevan Krysler, CFO

So PaaS bookings almost tripled, almost tripled year-over-year. Yes. That's correct.

Matthew Cabral, Analyst

Yes, thank you very much. I want to dig a little bit more into the Cloud Block Store. I think it's five, six months since you guys went GA on Azure. Just curious what the ramp has been there so far? And there's any way to compare and contrast what the ramp on Azure has looked like compared to what you saw on AWS the first time around?

Charlie Giancarlo, CEO

Yes, absolutely. Well as we've said, in the past Cloud Block Store, fundamental part of our overall Pure as-a-Service subscription. No doubt, it was very critical in driving part of that growth in the Pure as-a-Service, as many customers already determine which of the hyperscalers they want to use. It's been instrumental in several of our Pure as-a-Service deals, some with some very large, certainly Fortune 50 companies that had set their sights on Azure. So from that standpoint, very strong. And then, with respect to actual deployment on Cloud Blocks, actually I'm going to let Rob take that because he's the one that's been most tied into it.

Rob Lee, CTO

Yes, on the deployments, Azure has performed exceptionally well. We are observing customers deploying across both AWS and Azure, with demand for Azure being somewhat stronger. When we take a broader view, we see Cloud Block Store and Portworx as integral to our cloud portfolio, and we are experiencing strong performance in both areas. Customers are deploying in the cloud from day one using both Portworx and Cloud Block Store, which are now available on multiple cloud providers. Additionally, we have customers starting with Pure-as-a-Service through a unified subscription on-premises and later expanding into Azure or AWS. We see both of these approaches, which reinforce our strategy and confirm that customers appreciate the flexibility and consistency we offer across on-premises, hybrid, cloud, and multi-cloud environments.

Charlie Giancarlo, CEO

To conclude our discussion on Cloud Block Store, it is a key component of the unified subscription. While some customers may choose to use Cloud Block Store without having on-premises arrays, a larger number transition from on-prem to the cloud. It typically begins as a unified subscription, and as customers migrate, whether for disaster recovery or testing capabilities, they utilize Cloud Block Store in their cloud environment. This feature is not only appealing within the unified subscription but also complements their engagement with Pure-as-a-Service.

Matthew Cabral, Analyst

Got it. All that's really helpful. And then just a quick follow-up, you called out enterprise momentum several times in the prepared remarks and a couple of times in the Q&A. Just wondering, if you can you spend a little bit more on just biggest contributors or drivers to that strength. I'm curious if there is any way to think about how much of that momentum is just bigger footprint within existing customers versus getting into some net new wins versus the competitive landscape, and maybe those being a little bit bigger than they were in the past?

Charlie Giancarlo, CEO

Yes, it's actually all of the above. First of all, having a broader portfolio earns more respect from enterprise customers, whether they are new or existing. Four years ago, when I joined, I encountered enterprise customers who told me, “You’re great, but we can only use you for this specific area. Why can’t you develop products that meet the rest of our storage needs?” A broad portfolio is essential to being a good partner to these customers and helps us compete for larger deals within them. This was particularly true for many banking customers; they were hesitant to engage with us until we reached a certain scale and could cover a significant portion of their requirements, as they sought strong relationships. So, going back to your initial question, our success in growing our enterprise business has been driven by our investment in enterprise capabilities, both in sales and support, as well as the expansion of our product line and the maturation of our organization in working with enterprise customers. All of these factors have contributed to our success.

Kevan Krysler, CFO

Just to add onto that, I think one of the areas that we haven't talked too much about today, in the portfolio is FlashBlade. I think that's a great example of where we've invested in broadening the portfolio, broadening our enterprise capabilities and feature sets. That’s reflective in the strength we saw, FlashBlade did extremely well in terms of large deals. Getting back to Charlie's point, having the breadth of enterprise capabilities in the portfolio, whether it's FlashArray//C, which we talked quite a bit about, FlashArray//X or FlashBlade. Having all of that together really just helps us go and prosecute these opportunities.

Operator, Operator

And this concludes the question-and-answer session. At this time, I'll turn the call back over to Charlie Giancarlo for closing remarks.

Charlie Giancarlo, CEO

Thank you, operator. Well, Q2 has really been a fantastic quarter for Pure as our strategy and our execution have become evident this quarter. Pure is being chosen because we deliver a leading and highly differentiated technology with also best-in-class customer experience. It's a very exciting time at Pure, and we're in a great innovation cycle with our portfolio and our sales momentum, and our execution has never been stronger. I do want to recognize again the hard work of all of our employees at Pure and the strong collaboration that we've had from our business partners, everyone's singularly focused on delivering strong results for our customers. Thank you all and have a good evening.

Operator, Operator

This concludes today's conference call. You may now disconnect.