Earnings Call Transcript
Everpure, Inc. (P)
Earnings Call Transcript - PSTG Q1 2024
Operator, Operator
Good day, and welcome to the Pure Storage First Quarter Fiscal Year 2024 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Paul Ziots, Vice President of Investor Relations. Please go ahead.
Paul Ziots, Vice President of Investor Relations
Thank you. Good afternoon, everyone, and welcome to Pure's first quarter fiscal 2024 earnings conference call. On the call, we have Charlie Giancarlo, Chief Executive Officer; Kevan Krysler, Chief Financial Officer; and Rob Lee, Chief Technology Officer. Following Charlie's and Kevan's prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website, where this call is being simultaneously webcast. The slides that accompany this webcast can be downloaded at investor.purestorage.com. On this call today, we will make forward-looking statements, which are subject to various risks and uncertainties. These include statements regarding our financial outlook and operations, our strategy, technology and its advantages, our current and new product offerings and competitive industry dynamic trends. Any forward-looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted, and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties relating to our business is contained in our file with the SEC, and we refer you to these public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenue, remaining performance obligations or RPO and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Pure Storage. Our second quarter fiscal '24 quiet period begins at the close of business, Friday, July 21, 2023. With that, I'll turn it over to Charlie.
Charlie Giancarlo, CEO
Good afternoon, everyone, and welcome to our Q1 FY '24 earnings call. Thank you for joining us today. We were pleased with our Q1 performance in what continues overall to be a challenging IT environment. Highlights for the quarter include the highest all-time sales for Evergreen//One, our first sales of FlashBlade//E, which is experiencing the fastest first-quarter pipeline growth for any new Pure product. Our largest single order since inception of almost 8 digits for our Cloud Block Store product and the release of a major upgrade to our FlashArray unified block and file software. We are especially pleased with the customer response to our E product line. The E line is the first and only all-flash storage system that can address the secondary storage market, at competitive prices to 7,200 RPM hard disk systems, but with only 1/10 the power, space, cooling and labor requirements. As I've stated in the past, the days of hard disks are coming to an end. We predict that there will be no new hard disks sold in 5 years. But beyond the benefits of the E product line itself, it enables Pure to now compete for our customers' entire storage environment. It enables Pure for the first time to be our customers' complete storage partner. Something that our customers have been asking for, for years. The operational and economic benefits of Pure's comprehensive storage portfolio are clear and overwhelming and are based on sustainable technology and business model advantages. In March, we gathered our sales team for our annual sales kickoff, an event we had not held in person since 2020. Everyone was energized by both the event and the training we conducted there. This ongoing training focuses on honing sales skills with our expansion into the secondary storage market, advancing our as-a-service offerings and selling in today's environment of constrained IT spending. This valuable training is already bearing fruit and enabling us to reach new customers, better support the needs of current customers, and reduce sales cycles, which have lengthened in this economic environment. It's clear that our continued innovation strongly resonates with our customers, whether it is for AI/machine learning, rapid recovery from ransomware, high-performance databases, electronic design automation and video editing traditional or cloud-native applications, and now also for secondary storage environments such as content and media stores, enterprise imaging, and even traditional backup and archive. We deliver unique outcomes that are highly valuable to our customers in every environment. Compared to our all-flash competitors, we are 10x more reliable. We are 2X to 5X more power and space efficient, and we require 5 to 10x less manual labor to operate, resulting overall in at least 50% lower total cost of ownership. Also, our products never become obsolete and never require forklift upgrades because our Evergreen program provides continual hardware and software upgrades nondisruptively, to the customer's application environment forever. Products we sold 10 years ago are not only still in service but have been continually modernized to our latest models without disruption or additional customer expense, thanks to our Evergreen subscription. These capabilities are based upon 4 unique and sustainable competitive advantages. One, our Purity software uniquely works directly with raw flash, while other competitors use more expensive, less efficient, and shorter-lived SSDs; two, Pure's highly consolidated product line consisting of our common operating system, Purity, and one management system, Pure1, operating on both a scale-up and scale-out platform utilizing common direct flash modules, while competitors require many disparate software and hardware platforms to cover the same breadth of use cases; three, Pure's unique Evergreen technology and services, which guarantee that deployed products never become obsolete, never need to be replaced, and enable nondisruptive upgrades; and four, Pure's cloud operating model, which enables customers to operate their storage the way that cloud customers operate theirs, highly automated, orchestrated, and available as-a-service. As we expected, Evergreen//One is thriving in this economic environment. Sales of Evergreen//One have more than doubled year-over-year. As a reminder, Evergreen//One is Pure's Storage as a Service offering that enables customers to access storage entirely through service level agreements with no capital expenditure, only paying for capacity as they use it. Customers can place their data on-premise, on Pure-owned infrastructure, or on AWS or Azure with Pure's Cloud Block Store. The customer only pays for what they use under a single contract for enterprise-class capabilities for less than what they pay for raw cloud storage. This past quarter, we saw the largest individual sale of Pure Cloud Block Store at almost 8 figures. A Fortune 500 healthcare organization purchased Cloud Block Store because of its ability to securely store data in the cloud with enterprise features, reduced management overhead, and lower total cost of ownership. By using Cloud Block Store, the organization is able to significantly reduce their cloud storage spend while getting the most out of their data. Our extraordinary lead in driving power space, labor, and e-waste reduction both on-prem and in the cloud has also garnered attention amid increased customer focus on the selection criteria. The continued strength of FlashArray//C and interest in FlashBlade//E speaks to our customers' demand for the total cost of ownership benefits of Pure all-flash products over competitive offerings, now including both their flash and hard disk systems. In particular, FlashBlade//E consumes approximately 1/10 as much power and space as similar capacity hard disk systems that it replaces, requiring up to 1/10 the labor and generating less than 1/10 the e-waste. Only Pure's direct flash management and operational simplicity delivers this operational performance. As I mentioned, early interest in FlashBlade//E is off the charts for a new product. FlashBlade//E is the second in a series of products that can compete for the secondary tier and some lower tiers of the storage market, entirely dominated today by hard disks. Prior to FlashArray//C and FlashBlade//E, all-flash products were only price competitive for high-performance systems, and therefore, Pure could only provide products for our customers' Tier 1 storage needs. With the introduction of our E product line, Pure can now compete for customers' entire storage estate, enabling Pure to become their complete storage partner for the first time. For years, customers have asked us for products that could address the remainder of their storage and space. I have now had many customer visits since our introduction of FlashBlade//E with senior IT executives describing our key advantages and our ability to provide flash solutions for their entire storage environment. A common question from these senior executives is, 'Why aren't we doing this already?' In April, we announced a major update to our FlashArray unified block and file software, representing a significant expansion of our broader file strategy and portfolio. I'm proud to share that we're now able to address customers' file needs across high-performance, general-purpose NAS, VMware over NFS, and dozens of other use cases, allowing us to compete for all of a customer's file storage. Best of all, FlashArray customers can simply upgrade to the latest software to get these capabilities without any additional expense. This unified offering was a key component in the largest individual international market win in Pure history last quarter. Touching upon the most recent trends, generative AI and ChatGPT have brought artificial intelligence to the top of mind in all of our major customers and has become a focal part of literally every earnings script this quarter. Pure saw the AI opportunity years ago and started innovating in this area with our introduction of FlashBlade in 2017 and then with our AI-ready infrastructure Aerie product, co-developed with NVIDIA. We've continued to advance FlashBlade's high-performance parallel architecture, and Pure continues to be the go-to partner for storage on AI projects. For instance, we support more than 10 leading autonomous vehicle development companies in managing and processing the massive amounts of data required for their machine learning activities. In addition to our very successful position with Meta in their AI research supercluster or RSC, the largest AI supercomputer in the world. Pure is the chosen vendor for AI environments across a broad range of industries, including media and entertainment, pharma, healthcare, aerospace, transportation, and financial services. We expect our leading role in AI to continue to expand, but we are equally excited that the requirements for Big Data will drive even more use of high-performance flash for traditional bulk data. As we mentioned last quarter, we expect the current macro environment to continue through this fiscal year, and we continue to operate the company with our usual diligence, improving productivity, and focusing investment on meaningful innovation and growth. Our as-a-service offerings, including Evergreen//One and Evergreen//Flex, and our Pure financing vehicles, provide customers with a wide range of economic alternatives to address their business needs. Pure's superior TCO and flexible Evergreen offerings are making a difference in this challenging IT economy. While we saw continuing caution by enterprise and cloud customers in Q1, similar to what we saw in Q4, we also experienced enhanced demand for our most cost-effective hybrids, especially Evergreen//One. Given all of our advantages, we remain confident that we will continue to increase our market share, outgrow our competitors, and gain even greater momentum, especially as our new products and services gain mind share. I am confident that we are gaining recognition with both customers and prospects that Pure is the company to trust for their future data storage architectures. We are years ahead of the competition in our ability to provide for all storage needs with the most consistent, modern, and efficient storage solutions. We enjoy a highly sustainable competitive advantage based on the only direct-to-flash operating system in Purity, a simple, consistent product line with common management, our Evergreen technology to continually upgrade our products nondisruptively to the third state of the art, and our ability to provide our customers with a cloud operating model. Our new capability to compete for the full range of enterprise storage needs gives us even greater relevance to our enterprise accounts and enables us to deliver a full and far more integrated storage solution to our customers. In closing, I am excited to share that in just a couple of weeks, we'll be hosting our Annual Accelerate User conference in Las Vegas. We're looking forward to seeing customers, partners, and analysts from around the world to discuss the future of data storage and management. I'll now turn the call over to Kevan.
Kevan Krysler, CFO
Thank you, Charlie, and good afternoon, everyone. In Q1, we achieved revenue of $589 million and operating profit of nearly $20 million, exceeding our expectations. We also set an all-time record of Evergreen//One subscription sales this quarter as demand was exceptional. We were pleased that our U.S. enterprise business exceeded our expectations this quarter. Macro conditions continue to be challenging, consistent with what we saw in Q4. Against this macro backdrop, our sales force and leadership are actively monitoring deals to get ahead of challenges as well as continuing to focus conversations both on our business value and total cost of ownership advantages, which are unmatched against our competitors. Our subscription services annual recurring revenue grew 29% year-over-year to $1.2 billion, and subscription services revenue of $280 million represented 48% of total revenue. Remaining performance obligations, or RPO, grew 26% year-over-year to $1.8 billion. Similar to the remarks we've made in previous quarters, our RPO included an outstanding commitment with one of our global system integrators. During Q1, this remaining outstanding commitment was fully satisfied with Evergreen//One sales. When excluding the impact of the past outstanding commitment from our global system integrator, RPO grew 31%. Our headcount increased slightly to approximately 5,270 employees in Q1, and we remain disciplined in managing our costs, including hiring. Incremental investments in headcount remain focused on quota-carrying sales capacity and critical business hires. As I previously mentioned, total revenue in Q1 was $589 million and product revenue was $309 million. As we noted in previous earnings calls, Q1 revenue last year included $60 million of product revenue that was contemplated in the second half of last year. Excluding this impact, Q1 total revenue grew approximately 5%. U.S. revenue for Q1 was $427 million, and international revenue was $162 million. We also acquired 276 new customers during the quarter. We were pleased with our continued strong gross margin performance in Q1 of 72.2%, with product gross margins of 70.8% and subscription services gross margin of 73.7%. Q1 operating profit of nearly $20 million exceeded expectations and included higher year-over-year costs for salaries and our first sales kickoff event since 2020. Pure's balance sheet and liquidity remains very strong, including $1.2 billion in cash and investments. In April, we reduced our overall debt, paying off $575 million in convertible notes using $475 million in cash and $100 million from our revolving line of credit. Cash flow from operations during the quarter was $173 million and capital expenditures totaled $51 million. In Q1, we repurchased 2.9 million shares of stock, returning nearly $70 million to our shareholders and have approximately $211 million remaining on our existing $250 million repurchase authorization. Now turning to guidance. We are reiterating our annual guidance for FY '24 with revenue growth in the mid- to high single digits and expect an operating margin of 15%. Our annual revenue guidance assumes that macro conditions will continue to be challenging and will be consistent with what we have seen over the last couple of quarters. We expect continued momentum of our Evergreen subscription services, in particular, Evergreen//One. The strength of our Evergreen//One offering has been contemplated in our annual revenue guide as the recurring revenue for these services is recognized over time. Also, as Charlie mentioned, early customer response to FlashBlade//E, which became generally available in late April, has exceeded our expectations. Our FY '24 annual revenue guidance that we provided last quarter assumes a modest revenue ramp during the second half of the year from sales of FlashBlade//E. While we are very pleased with the early response to FlashBlade//E, our FY '24 revenue guidance continues to assume a modest revenue ramp during the second half of the year. Moving to Q2 guidance. We expect Q2 revenue of $680 million representing an increase of approximately 5% year-over-year. Our Q2 revenue guidance implies continued strong subscription revenue growth and a slight year-over-year decline in product revenue. We also expect Q2 operating profit of $90 million as we remain focused on profitable growth and ensuring we are appropriately aligning our cost structure with demand. In closing, through our innovation, our competitive advantages are clear and aligned to our customers' focus on both performance and cost. We are uniquely positioned to deliver significant business value while reducing our customers' total cost of ownership, including labor, energy, and real estate. It's a pleasure to also invite you to join us for our product and technology-focused Financial Analyst Meeting at Accelerate on June 15, either in person in Las Vegas or virtually through our Investor Relations website. With that, I will turn it back to Paul for Q&A.
Paul Ziots, Vice President of Investor Relations
Thanks, Kevan. Alex, let's get started.
Operator, Operator
Our first question for today comes from Amit Daryanani of Evercore ISI.
Amit Daryanani, Analyst
Congrats on a really strong print here despite the tough macro environment. Charlie, I was hoping you could talk a little bit more about what you are seeing from an AI infrastructure investment perspective from your customers? You folks obviously have good engagement with Meta that's been doing well, I think. But I would love to hear how your customers are really thinking about their storage needs broadly and very specifically around Pure's product portfolio around IRS to help to put any dimensions around it? And how do you distinguish yourself from the requirements?
Charlie Giancarlo, CEO
Yes. Thank you, Amit. It's great to hear from you. We see AI as a significant opportunity that has accounted for a considerable portion of our sales over the years, particularly since we launched our FlashBlade product five years ago. We have continually expanded in this area and believe we are the preferred partner for AI projects, supporting numerous industries in their AI initiatives. The majority of AI work remains focused on traditional applications that we have recognized for many years, such as genomic research, advanced analysis, financial analysis, and self-driving cars. However, many companies are now exploring large language models and tools like ChatGPT, trying to understand their implications. While we've observed some interest in this area, traditional AI projects still dominate our engagement. We are particularly excited about the opportunities for high-performance FlashBlade systems. Additionally, customers increasingly want to transition their data from outdated, hard-to-access hard disk systems to more efficient, higher-performance flash-based solutions. Our FlashArray//C and FlashBlade//E systems are ideally suited for this purpose. We believe this shift is timely. Regarding Meta, we maintain an excellent relationship with them around AI. They have recently activated the first two phases of their research supercluster, which they announced a few weeks ago, and we look forward to collaborating with them on this and other projects in their pipeline.
Rob Lee, CTO
No, yes. I think a couple of things. Number one, Amit, as Charlie mentioned, we're very excited about what we see as two sets of opportunities that AI creates for us and I think are very constructive for Pure supporting the AI training environments themselves as well supporting enterprise customers as they look to connect their datasets to AI-powered applications. One set of demands, which Charlie discussed, is hey, this needs to go in store larger as larger amounts of data. It can't be cold data. And so it's a perfect fit for C and our E products, but then equally so, enterprises are going to need to connect data from all across the organizations and all across different silos of infrastructure into these applications. They can no longer be islands of their own relegated to silos that the infrastructure had held them to. And if you step back from it, those are the hallmarks of a cloud experience for storage and is exactly what we're delivering with the cloud operating model. So net-net, we think this is very constructive for us, both in supporting the high-performance and large-scale training environments certainly with our secondary tier disk takeout product lines, but also in what we're delivering with the cloud operating model.
Operator, Operator
Our next question comes from Meta Marshall of Morgan Stanley.
Meta Marshall, Analyst
Maybe first question, you noted that you had some FlashBlade//E sales have begun. Just wondering if there was any kind of surprise on where that uptake has been. And then maybe as a follow-up question, you noted kind of the 8-figure block store deal. Just wondering kind of how long that deal has been in the works and kind of what were the ultimate decision-making factors for that? Appreciate it.
Charlie Giancarlo, CEO
You bet. Thanks, Meta. Let me start with the Cloud Block Store. As you know, we introduced that product about 2.5 years ago and have continued to work with major customers on their efforts to transition their traditional applications to the cloud. This process of moving traditional applications has likely taken longer than our customers expected, and perhaps a bit longer than we anticipated as well. However, now that they are seeing some of the invoices coming in from cloud providers for storing large amounts of data for these traditional applications, they are becoming increasingly interested in the Cloud Block Store. We initially discussed this particular deal with them about 1.5 years ago before they began their cloud migration. At that time, they were so focused on the transition that they might not have fully understood the costs of deploying a production environment. Once they deployed that environment and began to understand the expenses, they approached us to learn more about the Cloud Block Store. The time from when they reached out to us until the sale was completed was only about 3 months, which is a relatively short timeframe.
Operator, Operator
Our next question for today comes from Tim Long of Barclays.
Timothy Long, Analyst
Charlie, I was hoping you could talk a little bit about visibility. A lot of talk of macro. And obviously, last quarter, there was a little bit more challenging environment, but pretty positive that you guys are keeping the full year here. So can you just touch on kind of how your visibility compared to a few months ago? And what are the factors that can kind of swing the numbers into the second half or end of the next fiscal year, maybe from a product standpoint or where there could be upside?
Charlie Giancarlo, CEO
What we observed in Q4 was a significant decline around the middle of the quarter. In Q1, we experienced a stabilization compared to the end of Q4. The situation didn’t improve, but it also didn’t worsen. The visibility we have is derived from how our sales team evaluates the timeline for closing accounts. Our sales teams have become more adept at recognizing the various approvals needed from each account, which has helped them better gauge and manage the deals. Overall, we view the current environment as stable. We hope for improvements as the year progresses, but we are not counting on them just yet. We expect stabilization through the end of the year, with the possibility of improvement by year’s end or the beginning of next year, excluding any unforeseen federal issues.
Kevan Krysler, CFO
Tim, I probably would add a couple of things. This is Kevan as well. We did indicate that our enterprise business performed better than expectations. And again, I think that's a testament to our field really adjusting to our customers' buying behavior. So that's a plus for us. I think the other two key highlights for us that came across as incremental strengths, if you will, would be Evergreen//One performance, which we alluded to. Again, that strength was much stronger than we were even anticipating and we were already anticipating in this environment. Our Evergreen//One storage as a service sales would be strong coming into this type of environment. And then FlashBlade//E, again, is a highlight for us. Early, but customer response has been fantastic.
Charlie Giancarlo, CEO
As we mentioned, the pipeline build is progressing rapidly. I have spoken to numerous customers, and there is a high level of excitement surrounding this product line, particularly regarding the opportunity to replace their problematic disks with all-flash products. What’s most thrilling is that customers recognize our ability to meet the majority of their storage needs while providing the simplicity, power, ease, and reliability of Pure products. The enthusiasm we experience when we present to customers is genuinely tangible.
Operator, Operator
Our next question comes from Pinjalim Bora of JPMorgan.
Pinjalim Bora, Analyst
Great. And congrats on the strong quarter. One question for Kevan. Subscription, obviously, is very strong, and you kind of highlighted the potential headwind to revenue because of that. Is it possible to quantify that? You've kind of beaten the guidance by $29 million; you're keeping the full year, which I appreciate, but I'm sure there is a little bit of conservatism there, too. I'm trying to understand what for the year, what would you kind of circle as a potential year-over-year growth headwind from that Evergreen//One strength?
Kevan Krysler, CFO
Yes. We won't go into specifics, but as per our usual practice, we discuss the subscription portfolio as a whole, including performance and product perspectives. You are correct in thinking that the strength of Evergreen/One will positively impact our top line over time. We prefer to let you calculate the specifics. Additionally, over one-third of our revenues currently come from subscriptions, so the headwind isn't as significant as it might seem, though we do take it into account, and it has been factored into our annual guidance, which we have reaffirmed.
Operator, Operator
Our next question comes from Wamsi Mohan of Bank of America.
Wamsi Mohan, Analyst
Yes. I was wondering, just to clarify, are you embedding anything from Meta in your guide? And as my main question, I want to ask you. We're hearing a lot of strategic buys that are happening in now for some areas within memory, particularly in NAND. And wondering how you're thinking about it and potential impact to margins for the rest of fiscal '24? Or maybe a different way to think about the same thing is, do you think that closes any of the competitive gap at all or pressure to margins in the second half?
Kevan Krysler, CFO
Yes. Let's start by discussing our competitive advantages in direct-to-flash management, which I believe are strong and sustainable. After that, we can address the situation with Meta.
Charlie Giancarlo, CEO
Absolutely. The interesting thing is that we believe our advantage, based on our Purity operating system and our continuous advancement of our direct flash modules, is going to enable us to enhance our lead over SSDs. So I'm going to ask Rob to provide more details on this.
Rob Lee, CTO
Yes, absolutely. I think we've been clear that disk is essentially a dead technology. However, our view on SSDs isn't much brighter either. We believe SSDs will continue to lag behind due to our direct flash technology. Overall, while SSDs have helped make flash more accessible, they are inherently less efficient, more complex, less performant, less reliable, and have shorter lifetimes compared to the systems we provide with our direct flash software technology. The challenge for SSDs and others relying on this technology is that they will struggle to keep pace with the advances we are making. As NAND flash becomes increasingly difficult to work with, it pressures the SSD technology, and attempts to create larger capacity SSDs only worsen the situation. Additionally, there are economic factors around consumer demand that will follow a similar trajectory to what we are achieving with our direct flash technology. Overall, we're very optimistic about having a significant competitive advantage over the next 3 to 5 years against those stuck with SSD technology, and we intend to pursue this aggressively. Regarding our partnership with Meta, this engagement exemplifies the value we can deliver through this technology. One of the primary reasons we secured this partnership was our capability to balance performance, cost efficiency, and power, space, and cooling savings, all linked directly to our direct flash technology.
Kevan Krysler, CFO
So then, Wamsi, I do think just to answer your question specifically around our product gross margins. Look, I think the pricing environment, clearly, we're seeing heightened competitiveness around the pricing environment probably not a lot different than what we've seen historically. That's always been an area where our competitors compete with us. But even despite that, you saw the favorability in product gross margins, which again, is a testament to what Rob and Charlie were talking about specific to our direct-to-flash management advantages, which, again, I think are sustaining despite what the competition will do from a pricing competitiveness perspective.
Operator, Operator
Our next question comes from Krish Sankar of Cowen.
Eddy Orabi, Analyst
This is Eddy for Krish on Cowen. And congrats on strong results. Going back to the AI question, of course. Just at a high level, what is the predominant storage solution for AI today? Is it hybrid storage or flash storage, right, when you go to our customer already working on AI applications, what kind of systems do you usually replace a competing old flash solution or a hybrid story system?
Charlie Giancarlo, CEO
Yes, I'll take that. Well, AI systems are typically they're greenfield. So we're not generally replacing. What we are competing with are solely all-flash systems. Hard systems just can't provide the kind of performance necessary for a sophisticated AI environment. Of course, you still have hard disk systems in there for some analytics environments, where the performance is not generally as required. But for anything that's machine learning or real-time AI-oriented, it's only all-flash systems, and we compete on the basis largely of our FlashBlade product, which has been in place for 5 years now, and now augmented by the latest generation FlashBlade.
Rob Lee, CTO
Yes, Krish, this is Rob, just to add on to that. As Charlie said, AI earlier in cycle, generally in the training environments are net new and all-flash. I think the broader brownfield opportunity we see is, hey, so what are the large corpuses of data that enterprises have been collecting for sometimes decades? They've been throwing in the corner on hard disk-based systems that have generally been very, very cold and haven't had a need to access that data. Well, now with AI technology, there's now a demand to apply AI or AI applications to those large data sets. Well, now all of a sudden, there's large pools of data that need to be accessible. They need to be to a degree of performance. And I think that's where we see a tremendous opportunity for us, especially in our FlashArray//C line.
Operator, Operator
Our next question comes from Shannon Cross of Credit Suisse.
Unidentified Analyst, Analyst
I wanted to ask about operating income and margin. Given the outperformance this quarter, I know you didn't really change your guidance for the full year. But I'm wondering, assuming there may be some upside, are there areas that you would look to invest further? Or is this something where if revenue upside grew, we should expect perhaps greater than 15% operating margins through the year given the opportunity for leverage?
Kevan Krysler, CFO
Yes, Shannon, I'll take this and let Charlie comment as well. But yes, pleased with, obviously, our Q1 results, including better than expectations, both on the top line as well as operating profits. We are continuing to be disciplined in terms of spending, really focusing on key areas and expanding sales capacity, and that focus remains. It's not changed from how we're thinking about Q1. So when we look at Q2, we're pleased with our guide. You see the expansion sequentially from Q1 to Q2 in terms of our operating profit, and again, reiterating the 15% operating margin for the year, which we feel comfortable with. Charlie, any other commentary you'd have?
Charlie Giancarlo, CEO
Yes, it's a bit early in the year to speculate on this topic. I believe that 15% represents the best balance between ongoing growth and profitability. We are continuing to invest in overall growth as a company. That's where our mindset is right now, but we have another long three quarters ahead of us. We will assess the situation before providing any updates.
Operator, Operator
Our next question comes from Sidney Ho of Deutsche Bank.
Sidney Ho, Analyst
Great. I have a question on subscription revenue. So your subscription ARR and revenue has grown pretty consistently 30% a year. Are there any risks that growth will start to slow down over the next few quarters when product sales are actually going through a correction in the last quarter and maybe the next couple of quarters?
Kevan Krysler, CFO
Yes, it's a great question. And look, we don't specifically guide to subscription ARR, I really do view this metric as important in measuring the overall health of our subscription businesses. And look, we've stated back in fiscal 2022 that our 3-year CAGR expectations for subscription ARR would be around 30%, and we're tracking nicely to that expectation. Like we've noted in Q1, we saw just outstanding strength in our Evergreen//One offering. And obviously, that's really offset any reductions you might have on other Evergreen offerings that might be attached to CapEx sales. So look, I think we're continuing to see strength in terms of our subscription ARR growth. The value of Evergreen is really resonating with our customers due to the flexibility that these offerings provide. Of course, there's incredible value for customers in being able to use critical data storage infrastructure that frankly stays modernized and you don't have to pull out and refresh. So therefore, yes, I think we're continuing to see strong subscription growth and ARR growth.
Charlie Giancarlo, CEO
I view this number as a stabilizing factor in our overall performance as a company. When the economy slows, customers tend to favor these as-a-service offerings to save on cash outlays and capital expenditures. Conversely, when the economy is doing well and customers shift to capital expenditures, we benefit from the Evergreen attached subscription. There is a balance and some variation, but I believe this number will remain fairly stable.
Operator, Operator
Our next question comes from Jason Ader from William Blair.
Jason Ader, Analyst
My question is on Portworx. I haven't talked about that one in a bit. So I'd love to hear thoughts on, I guess, 2 years in, something like that, how that product is doing? And just what are some of the dynamics out there, some of the puts and takes relative to the point in time when you acquired the asset?
Charlie Giancarlo, CEO
Yes. Portworx had a good quarter, so we're very pleased with the progress overall of Portworx. I would say that the enterprise market for cloud-native applications for stateful cloud-native applications has probably progressed a bit slower in the last year than we had expected early on. But our expectation is that 5 to 10 years from now, all applications will be designed in a cloud-native way with containers and Kubernetes. So we're very confident about the future. We remain the best-in-class product in that area, according to numerous analyst reports as well as we track sales of competitive products. We're #1 in that space, and we expect that to continue. So overall fees, maybe the market is a little bit slower this past year than we might have expected, but overall, very bullish on the segment.
Rob Lee, CTO
Yes, this is Rob. I want to add a few thoughts to that. As Charlie mentioned, we had a strong quarter from Portworx, particularly with customers expanding their use with us. This seems natural as platform engineering and the evolution of DevOps start to take hold. We believe this is leading more customers to seek Portworx for complete enterprise and scalable solutions for their cloud-native applications. Additionally, we are beginning to hear from customers that Portworx is saving them a lot of money, whether that's by optimizing their virtualization strategy, reducing their cloud storage and compute costs, or accelerating their overall time to market. As we've discussed regarding other parts of our portfolio, there is definitely a focus on the value customers are seeing in our solutions, which help them save money in this environment.
Operator, Operator
Our next question comes from Nehal Chokshi of Northland Capital Markets.
Nehal Chokshi, Analyst
Yes. Congrats on a strong quarter. I wanted to ask about the media and win that you guys cited last week in a press release and specifically you guys the voice recognition modeling cycle in 6 months to 2 weeks, which is effectively been an order of improvement. So a few questions on this presser. First, is this app degenerative AI study? And then is the voice recognition modeling another way of saying basically the training period? And then finally, is the typical level of benefits to customers are seeing, i.e., in order of magnitude performance improvement and it sounds like the typical structure that's being completed with is indeed all-flash arrays with the AI if you can sell to.
Charlie Giancarlo, CEO
Yes. As Nehal mentioned, we recently had two press releases last quarter related to first-quarter gains in the AI space, specifically with Median and Greater labs. These were releases issued by the organizations themselves, and we're very pleased to see this development. In each case, we observed significant improvements in the overall speed of training across their various environments. I will have Rob provide more detailed information on Median, which was the focus of your question.
Rob Lee, CTO
Nihal, what Media and Labs experienced is common among customers scaling their AI training environments. As they began their AI journey, they initially trained on smaller data sets that were likely stored directly on GPU servers. This approach works well at a small scale, but to achieve high-quality results with AI, large data sets are required. Customers face the challenge of transferring subsets of their vast data pools, which may reside on cold storage systems, to their GPU servers for processing. Consequently, they often spent a lot of time moving data between these different systems. Pure FlashBlade helped them by streamlining these systems, enabling them to train directly from shared storage. This significantly reduced both the manual steps involved and the overall training time. The outcomes they experienced are typical when AI projects scale beyond what small-scale infrastructure can handle.
Operator, Operator
Our next question comes from Tom Blakey of KeyBanc Capital Markets.
Tom Blakey, Analyst
I think I'm going to go back to Portworx as well actually, just the DB announcement that you had in the press release. Just wondering what the driving force there just in terms of market demand was there, where does incrementally bring to Pure and the Portworx data services platform. any update on details you've relayed into the partnership with Mongo serving in the channel? Is this consumption-based, et cetera? And if I could squeeze one more in, I don't know if I heard the answer to the question about Meta in the fiscal '24 guide from even that would be helpful?
Charlie Giancarlo, CEO
I think we're going to need to take the Meta question. We're running out of time, and we have quite a few people left in the queue. So I'm sorry everybody, but we do need to stick to our policy.
Kevan Krysler, CFO
Yes. And then, Tom, on Meta, our annual guide continues to exclude new Meta orders. In particular, future phases, i.e., Phases three and four of the RSC environment. So no changes from our annual guide, which again, we have reiterated this quarter.
Operator, Operator
Our next question comes from Simon Leopold of Raymond James.
Simon Leopold, Analyst
I was interested in Charlie's comment about the demise of hard disks several years out. And just wanted to see what your thinking is or your take on the hard disk technology known as heat-assisted magnetic recording or HAMR, whether that's a competitive threat or how you think about that in the land?
Charlie Giancarlo, CEO
Yes, Simon. The density of hard drives will keep increasing, following a pattern that has been consistent for over 40 years. However, the I/O speed for these disks is not expected to improve significantly, which is becoming increasingly important. Additionally, the overall weight and failure rates of these devices are not likely to change. As systems grow larger and more dense, flash technology is rapidly outpacing hard disks in terms of performance. When we say we can replace existing hard systems using only a tenth of the space, power, and cooling, even with the latest hard disk technologies we're still five times better, and we will continue to improve beyond that. It will be quite challenging for hard disks to keep pace. It's also worth noting that hard disks are now mostly relegated to secondary and tertiary applications, where we are reaching price parity while also offering a lower total cost of ownership, smaller size, and increased reliability. There are no other markets left where hard disks can maintain revenue that flash won't also capture. This implies reduced revenue and, consequently, less investment in ongoing development for hard disks, which poses a significant challenge for the vendors. It's unfortunate; I bear no ill will. But as has happened in the past with other technologies, such as CDs replacing vinyl or DVDs replacing VHS, progress is inevitable.
Paul Ziots, Vice President of Investor Relations
We're going to actually run over by a couple of minutes. We're going to try to get in these three more questions if we could.
Operator, Operator
Our next question comes from Aaron Rakers of Wells Fargo.
Unidentified Analyst, Analyst
This is Jake on for Aaron. I was just hoping you could talk a little bit about your views on component pricing for the rest of the year and maybe its effect on FlashBlade//E's ramp?
Charlie Giancarlo, CEO
Yes. We have observed a significant decline in flash pricing over the past few quarters. We anticipate this will stabilize for the remainder of the year, in line with what you're reading in analyst reports. However, the economics of FlashBlade//E remain strong and appealing. We are currently offering it at the same price as hard disk systems for nearline, and we expect our advancements in density to help us accelerate into next year, enabling us to penetrate deeper into lower cost tiers of disk while maintaining the margins we expect from the company. I hope that answers your question.
Operator, Operator
Our next question comes from David Vogt of UBS.
David Vogt, Analyst
Great. Charlie, I wanted to revisit your product roadmap and how you see it evolving in the future. I know you are currently shipping solutions up to 40 terabytes. Considering the expected increase in data moving forward, can you discuss your strategy for scaling your business as some HDD manufacturers are planning to release 50 terabyte and even 100 terabyte drives in the coming years? I would love to hear your thoughts on your product roadmap.
Charlie Giancarlo, CEO
Thank you for the question. We expect to deliver a 75 terabyte SSD DFM this year, and we plan to provide 75 units. We anticipate that this number will double next year and double again the following year. We view this as a realistic and achievable roadmap. Unlike hard disk vendors, we are confident in our ability to meet these goals while maintaining efficiency in power, weight, size, space, and cooling.
Rob Lee, CTO
Yes, this is Rob, and I want to emphasize that we have a high level of confidence in our roadmap. It relies on existing technology, and no new physics need to be developed for it to succeed. This roadmap differentiates us from hard disk roadmaps and SSD manufacturers. We do not believe that SSDs will be able to match our progress, which is one reason we are very optimistic about our advantage.
Paul Ziots, Vice President of Investor Relations
Let's take one more question, please. So this will be the last question.
Operator, Operator
Our final question for today comes from Eric Martinuzzi of Lake Street.
Eric Martinuzzi, Analyst
I'm interested in the capital expenditures. Comparing Q1 this year to Q1 last year, it appears we have increased by about $18 million. I know you've mentioned that the capitalized software investments are up, but what other factors are contributing to the rise in capital expenditures this Q1 compared to last year? Additionally, what do you anticipate for Q2?
Kevan Krysler, CFO
Great question. And really, there's 2 drivers for that. It's really around our test equipment for new product releases. And obviously, we've come out with FlashBlade//E, and we've got a lot of stuff in the work. So we've got some test equipment investments associated with that and then we're moving into our new headquarters. And so we've got some additional CapEx associated with that as well, but again, when we look at it in terms of our CapEx rate, we'll see a little bump this year against a percentage of revenue, but around 6% to 7% is what we're thinking.
Paul Ziots, Vice President of Investor Relations
Thank you, Eric. Before we conclude, Charlie has a few comments to make.
Charlie Giancarlo, CEO
Thank you, Paul, and thank you all for joining us on today's call. We continue to surpass the industry, as reflected in our innovation and the benefits in total cost of ownership, energy efficiency, and price performance that are establishing us as the leading choice for global organizations. I want to thank our employees for their commitment, our partners and suppliers for their ongoing collaboration, and our customers for trusting Pure Storage with their data storage and management needs. As a reminder, we all look forward to seeing you at Accelerate, whether in person or virtually, to share more about our ongoing momentum and the future of data storage and the data center. Thank you.
Operator, Operator
Thank you. That concludes the Pure Storage First Quarter Fiscal Year 2024 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.