Earnings Call Transcript
Everpure, Inc. (P)
Earnings Call Transcript - PSTG Q4 2021
Operator, Operator
Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Pure Storage Fourth Quarter Fiscal Year 2021 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, there will be a question-and-answer session. As a reminder, this call is being recorded. I would like to introduce your host for today's conference call, Ms. Nicole Noutsios. Ms. Noutsios, please go ahead.
Nicole Noutsios, Investor Relations
Thank you, and good afternoon. Welcome to Pure Storage fourth quarter fiscal 2021 earnings call. My name is Nicole Noutsios, Investor Relations at Pure Storage. Joining me today are CEO, Charlie Giancarlo; our CFO, Kevan Krysler; and our VP of strategy, Matt Kixmoeller. Before we begin, I'd 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 business in operations. Any forward-looking statements that we make are based on facts and assumptions as of today. We undertake no obligation to update them. Our actual results may differ materially from the results forecasted and reported results should not be considered as an indication of future performance. Discussion of some of the risks and uncertainties related to our business is contained in our filings with the SEC, and we refer you to these public filings. During this call, 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. 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. Thank you for joining us on our Q4 earnings call today. I hope that each of you, your loved ones, and colleagues are all safe and healthy. Pure ended fiscal 2021 with great strength and growth, setting revenue and sales records for the quarter and for the full fiscal year. Our portfolio has never been stronger, with record sales in our Pure-as-a-service offering, FlashBlade, FlashArray//C, and Portworx. The completeness of our product suite accelerated sales growth in our enterprise and cloud segments in every theater and in our major verticals. Our Q4 results confirm the strength of our long-term strategy and are a leading indicator of our opportunity to accelerate growth. I am pleased to share our Q4 successes with you today. Our long-term strategy is to deliver a modern data experience to customers. It was gratifying that so many of our existing customers chose to significantly deepen their relationship with Pure as we've become an ever more critical component in their own plans for digital transformation. We also saw net new customer acquisition growth over last quarter and continued strength in enterprise. In Q4, we booked eight eight-figure deals with eight large enterprise customers, a new record. It was just two years ago that we began significant investments in our enterprise go-to-market team. Our strength in that segment this past year is a proof point of the successful execution of that strategy. Our ongoing commitment to marrying technological innovation with our customer-centric business model is increasingly recognized by customers and the industry. With seven years ranked as a leader, Gartner's recognition this year of Pure’s clear leadership across both ability to execute and vision in their Magic Quadrant for Primary Storage Arrays is a great validation of our strategy. We also improved our already leading excellence in customer experience as measured through our net promoter score. For calendar 2020, Pure’s third-party certified NPS was 83.5%, our sixth year in a leadership position and the highest score among vendors measured by Medallia. One of the most important components of our growth strategy is, of course, Pure’s leadership team. This quarter, we welcomed Ajay Singh, our new Chief Product Officer. As CPO, Ajay will be responsible for our five business units and our technology alliances and will be a key contributor to our strategy to deliver modern data services. He brings to Pure extensive expertise in software and services to accelerate our growth into our as-a-service model and cloud-native support. Our growth in Q4 is proof that our ability to deliver a modern data experience is resonating with our customers. They see the benefits of advanced technology from a trusted storage leader that supports a wide range of structured and unstructured data at scale and across any workload. But the Pure value proposition goes well beyond this. The Pure vision is to deliver real-time access to resilient hybrid cloud-managed storage services via code to developers and operations managers. Customers desire managed data services that are dynamic and provide a cloud experience with flexible on-demand consumption. Needless to say, we continue to dramatically outpace our industry in both innovation and customer delight, and I'm excited to share four reasons why customers continue to lead with Pure. First, Pure delivers the simplest storage platform to operate. We continue to innovate with what customers appreciate, namely seamless upgrades, cloud management, pay-as-you-go consumption models, and both traditional and cloud-native data services. This strategy is resonating with customers as validated in a Wikibon analyst report for cloud spending and adoption. Their survey showed that Pure leads both hyperscalers and on-premise legacy vendors in customer spending intent with an off-the-chart net score of 63%. Second, we continue to see strong customer adoption of our subscription services, which include our Evergreen and Pure as-a-Service offerings. Only Pure delivers a true enterprise-class utility with flexible storage consumption, a cloud experience on-premise, an easy path to move data to the cloud at any time, and aligns spend with actual consumption. This year we've continued to advance our subscription services platform, reducing complexity by eliminating additional licenses and support costs and introducing a service catalog with transparent pricing. This quarter, our subscription services grew over 30% from one year ago. New customers for our Pure as-a-Service offering included one customer over $10 million, as well as US customer Cloud@Work, MACA Mining Services in Australia, and German telecom provider, Broadcom. We saw customer adoption increase across every major area of the world. Given the significant customer benefits with our subscription services, we have created enhancements to our field compensation for these offers going forward. Third, last quarter, we expanded our industry-leading data services capabilities for containerized cloud-native applications with the acquisition of Portworx. Cloud-native databases, analytics applications, and AI frameworks such as Cassandra, MongoDB, Postgres, Kafka, Elasticsearch, SPARC, and TensorFlow are the tools upon which customers build their modern data pipelines. Pure has been successfully serving these applications at the highest performance levels with FlashBlade, and now, Portworx helps us expand support for these applications on any infrastructure, on-prem, or in the cloud, at any scale. We saw significant growth of in-cloud deployments of Portworx this quarter, with particular growth through our IBM partnership given our best-in-class support for Red Hat OpenShift, and IBM cloud pack for data. The integration of Portworx into Pure has been one of the best that I have ever experienced, and we are just beginning to leverage Pure’s go-to-market engine to drive Portworx. Earlier this month, we expanded our market leadership with major software updates to our flagship Purity software on both FlashBlade and FlashArray to deliver enhanced performance, comprehensive ransomware protection and security. We broadened file capabilities to serve more markets and use cases. Best of all, we enabled customers to adopt these new innovations without disruption, downtime, additional costs, or the requirement to rebuy new capacity. Sustainability is my fourth and final point. From our founding, Pure has focused on how our products can use less energy, require less cooling, need less maintenance, and take up less space in the data centers and to produce less waste. In the last eight years, we estimate that Pure’s FlashArray offering alone has saved over 4 billion kilowatt-hours in energy use, avoiding the greenhouse gas emissions equivalent to over 7 billion miles of automobile travel. It's eliminated 96% of data center rack space when compared to legacy solutions which is approximately 19,000 racks or over 10,000 tons of legacy gear not deployed. With Evergreen upgrades, customers continuously upgrade rather than discard their older storage equipment, avoiding the rip-and-replace required by legacy vendors and reducing waste in landfills. Pure’s industry-leading storage density allows customers to save on data center space and power when compared to other flash storage vendors. Now, with FlashArray//C, customers can fit 1 petabyte of effective storage into roughly one rack unit, the size of a pizza box. Paying for only what one consumes is the right model for customer’s bottom line, and right-sizing energy use and physical infrastructure ensures that customers don't pay to cool and power excess equipment. I'm very pleased with both the internal investments we've made over the past fiscal year and our focus on operational discipline. We made a commitment early in the COVID-19 pandemic that we would continue to make strategic investments in global talent focusing on innovation including our acquisition of Portworx, customer support, and scaling the company. We dramatically reduced travel, entertainment, and other operating expenses while increasing our investments in talent and critical growth initiatives in anticipation of increasing growth this year while continuing to deliver operating income and generating positive operating cash flows. Our employees and our charitable foundation, Pure Good, also stepped up investments focused on COVID-19 response, food and housing in our local communities, and in our Workforce Development Initiative. Continuing our thoughtful approach to operating in this new normal, we recently announced to the company that we plan to use a hybrid approach when we return to the office with most employees able to work from home part-time. We believe that the hybrid office model will deliver the best combination of individual and team productivity and allow us to continue to attract and retain the best employees in the industry. I have never felt more fortunate to be at Pure. Our dedicated Puritans, our loyal customers, and our partners and suppliers all displayed incredible perseverance, creativity, and positivity during the past 12 months despite the personal challenges they each faced. The effect of the COVID economy on Pure’s business has largely played out as we predicted over this past year. First, a short acceleration of business as customers shifted to work-at-home and online business, then a sharp pullback as they took stock both of their business prospects and new plans for digital transformation, followed by a gradual stabilization based on the new normal. Now, we look forward to a more significant economic growth as we expect the effects of COVID will begin to diminish during our fiscal Q2. I have increasing confidence that this year will be far better than last. On a macro front, I'm hopeful about the promise of increasingly plentiful and effective vaccines being distributed throughout the world. I believe that in this fiscal year, our customers will accelerate their investment in digital transformation with renewed confidence of economic recovery. They will be increasingly confident in their ability to deploy new vendors, new systems, and software into new use cases. And Pure will be high on their list. Thank you. And now, I will turn the meeting over to Kevan for details on our financials.
Kevan Krysler, CFO
Thank you, Charlie, and good afternoon. We are very pleased with the strength of our Q4 performance, which was much stronger than we planned. FlashBlade and FlashArray//C both achieved consecutive record sales. We continue to see strong demand with our enterprise customers who recognize the value that we are delivering. We completed a record number of deals above $10 million and also achieved record sales during the quarter to our Fortune 500 customers. Sales of our subscription services continue to be strong, consistent with what we have been seeing throughout the year, including one of our top deals above $10 million being Pure as-a-Service. Our sales growth excluding cancellable orders was slightly over 9% in Q4 compared to last year, driven by strength both in the US and international markets. We're also very pleased with new customer acquisitions during the quarter as 471 new customers chose one or more of our solutions. Now, turning to specific Q4 financial results. Total revenue of approximately $503 million exceeded our expectations, growing 2% year-over-year. Despite the strong comparators, Q5 last year was not impacted by COVID headwinds. Subscription services revenue grew approximately 32% year-over-year and represents approximately 30% of total revenue. As a reminder, subscription services revenue includes Evergreen subscriptions, the unified Pure as-a-Service subscription, which includes Cloud Block Store. Total revenue, both in the United States and international, saw slight growth compared to a strong Q4 last year. Our remaining performance obligations or RPO, which includes our committed and non-cancellable future revenue, grew approximately 24% year-over-year. Non-GAAP total gross margins in Q4 were 69.4%, up 30 basis points sequentially compared to 72.1% last year. Product gross margins were 69.1% compared to 73.3% last year. As you might recall, last year's product gross margin benefited from unprecedented pricing dynamics of NAND. Subscription services gross margins were strong at 70.2% compared to 68.1% last year. Non-GAAP operating profit during the quarter was approximately $36.7 million compared to $60.9 million last year. We were pleased that as we were navigating COVID-related headwinds, we continued to invest in the business while only slightly increasing overall operating expenses. Operating income for the year was $46 million, as operating expenses for the year grew less than 3%. Non-GAAP net income during Q4 was $38.8 million and non-GAAP net income per share was $0.13. The weighted average shares used for the Q4 non-GAAP net earnings per share calculation were approximately 297 million shares. We ended the quarter with over $1.25 billion in cash and approximately 3,800 employees. Cash flow from operations was $69 million and free cash flows were $48 million in the quarter. During Q4, we repurchased a little over 1 million shares for approximately $23.6 million, completing our $150 million planned purchase program. We have also announced a new share repurchase program of up to $200 million. Now turning to guidance, we will provide some color on how we're thinking about this year as well as Q1. We do not plan on updating our annual view as we progress throughout the year. For FY 2022, we expect that total revenue growth will be in the range of 14% to 15% during a continued growth of our subscription service offerings that will be a significant contributor to our overall performance. Capitalizing on the investments we made in FY 2021, we expect to grow operating income to near $90 million. Now, moving to our Q1 outlook. As visibility continues to improve and with the strength of our enterprise business and momentum of our technology platform, we are forecasting revenue will be $405 million, growing approximately 10% from last year. Consistent with our Q1 seasonality, we are forecasting an operating loss of $20 million for the quarter and expect to generate positive operating income in the remainder of the year. In conclusion, we are pleased to end the year on a high note, as our Q4 performance surpassed our expectations in the midst of continued COVID headwinds. We have confidence in our investments and innovation that we believe will drive accelerated revenue growth and continued high levels of customer satisfaction while increasing share value. We are excited to build on our momentum this year, capitalizing on the tremendous opportunities that we have in front of us. We expect COVID headwinds to lessen during our second quarter. With that, I will turn it over to the operator, so we can get to your questions.
Operator, Operator
Thank you. Your first question comes from Aaron Rakers of Wells Fargo. You may now ask your question.
Unidentified Analyst, Analyst
Hi. This is Jake on for Aaron. First of all, congrats on a great quarter. I was wondering if you could start out by talking a little bit about deferred revenue growth and reminding me what sits outside of deferred and RPO?
Charlie Giancarlo, CEO
Let me just start because I'd like to just start the overall conversation with the fact that we really did see an excellent quarter across the board, and given the strength that we've had in subscription revenues that we commented upon, as you might expect, we're seeing good growth and even greater growth in deferred than we see in actual revenues which bodes well for the future, gives us additional confidence overall going forward. Kevan?
Kevan Krysler, CFO
Yeah, Jake, let me just add on in terms of, obviously RPO or remaining performance obligations, when you're seeing growth sequentially, it's really being driven by the momentum we're seeing in our subscription services, principally around Pure as-a-Service and the unified subscription with CBS. We're seeing some strength as well on deferred revenue, and that's really in part due to the momentum overall. We're seeing both with our sales of our subscription services as well as increased momentum with the sales of our integrated solutions and appliances as well.
Unidentified Analyst, Analyst
Great. Thanks for that. And then, on another note, I was wondering if you could talk a little bit more about Portworx and what you’re seeing in the competitive landscape there?
Charlie Giancarlo, CEO
You bet. Right now, Portworx actually is almost the only game in town from what we can see with respect to two areas. One is SDS offering for container-based storage systems that operates both on-prem and in the cloud. The second is the Kubernetes layer on top which allows for the orchestration and management of data services. And in fact, we've recently provided additional information around Pete, what we call PX backup or Portworx backup that enables customers to automate by policy. The regular backup of the storage that they’ve created for their container-based systems. So and really, it’s the only capability that combines those two elements, and we’re seeing very good traction. We’re seeing good traction through our channels, and we’re seeing good traction directly by customers and in particular, what is especially gratifying is the fact that we have a very high uptake by enterprise customers. Large banks and other areas as well.
Kevan Krysler, CFO
Yeah. I would just add to that Charlie, that I think it's been really gratifying to see the different types of customers that are adopting Portworx and Kubernetes. On one hand, you have literally the largest Wall Street banks in the world transitioning all their applications to Kubernetes and using Portworx to build out very large shared container environments. Now, on the other hand, you have, for example, some of the largest gaming customers in the world that my kids spend probably too much time with unfortunately, where every time we log on globally, they're building more and more points of presence to host those gaming sessions, totally in the cloud, all powered by Portworx. And so the diversity between large on-prem as well as totally cloud-native use cases is amazing.
Charlie Giancarlo, CEO
It’s still early days, of course, but we're seeing good growth.
Operator, Operator
Your next question comes from Jason Ader with William Blair. You may now ask your question.
Jason Ader, Analyst
Thank you, Charlie. Can you discuss the current demand in the enterprise sector, highlight the strongest verticals for your company, and share any surprises you encountered during the quarter?
Charlie Giancarlo, CEO
We are observing, as highlighted in our comments, a significant increase in enterprise uptake. While we've been selling to enterprises for most of our existence, we only shifted our sales focus towards it a couple of years ago. Since then, we have seen two notable outcomes. First, there has been a substantial enhancement in sales to our existing enterprise customers, as they increasingly rely on us for more of their overall needs. Second, we are experiencing a quicker adoption by new enterprise customers, particularly those signing contracts worth eight figures. This year, we have added several new customers in this range, including a couple that were PaaS deals. Our reputation in the enterprise sector has remained strong, and we anticipate this trend will continue as conditions related to COVID improve.
Jason Ader, Analyst
And just any comments on verticals and then what surprised you in the quarter?
Charlie Giancarlo, CEO
Yeah. Frankly, the one vertical that where we had been struggling a bit is now coming through for us, and that is big banks. Big banks were, if you might say, more conservative in their use of new technology and especially new vendors. We’ve seen an opening up of that segment for us. We’re also strong in service provider and health care, and those have been good for us this year as well.
Jason Ader, Analyst
And then obviously, the cloud business continues to grow.
Charlie Giancarlo, CEO
Yes, we've discussed this before. Over 30% of our sales are to cloud customers. We refer to it as cloud 4 through n, from 4 to 1000, which includes companies that exclusively offer cloud services to their customers, as well as the cloud services of more traditional companies like Apex. Therefore, we are well-positioned in the cloud sector.
Jason Ader, Analyst
In federal, any quick one on that?
Charlie Giancarlo, CEO
Yeah. Federal is still not an area of strength for us, to be honest. That’s an area where we are making some changes and looking to make improvement.
Jason Ader, Analyst
All right. Thank you.
Operator, Operator
Your next question comes from Alex Kurtz of KeyBanc. You may now ask your question.
Alex Kurtz, Analyst
Thanks and congrats on the good quarter, guys. Just on RPO and thinking about what the right metrics are for measuring the business given the move to Pure as-a-service and Cloud Block Store, is that really how we should be thinking about the growth rate going forward? I'd just like to hear your thoughts on how you guys look at the growth of the business outside of reported revenue growth.
Kevan Krysler, CFO
Yeah, Alex. This is Kevan. A couple of things that we look at share. Obviously, the bookings outpacing revenue is one metric that we look at, and we were at 9% year-over-year growth on sales which is outpacing revenue really in large part given the continued momentum we’re seeing in our subscription services. If you break that down a bit more, we’re looking at the unbilled component of RPO and the strength there. That’s primarily driven by our Pure as-a-Service offering. Deferred revenue is really supported by the continued momentum we’re seeing around our Evergreen offering as well as the incremental momentum we’re seeing in sales of our appliances which includes the Evergreen support as well and subscription. So that’s kind of how we’re thinking about it and seeing good strength in momentum across the board there.
Alex Kurtz, Analyst
And, Charlie, would you add anything there? Because if the future of the company is increasingly going to be Pure as-a-Service, shouldn’t RPO be kind of at the center of the discussions around what the growth rate of the business is?
Charlie Giancarlo, CEO
On a longer-term basis, there are going to be other metrics, RPO certainly one of them such as ACV and net new. We talked about this in the past. We think we need to get through certain critical mass before we think it makes sense to start to identify those on a regular basis. But increasingly, as subscription becomes a larger and larger part of what we do, yes, we’re going to need to release more information along those lines to investors.
Kevan Krysler, CFO
Yeah. And, Alex, we’ll take a look at that as we go through this year. We do plan on having an Analyst Day this year and will land on a date, and obviously we’ll look at some other metrics that will give you a good read in terms of our overall subscription business. Because for me, it’s far beyond just Pure as-a-Service, which is great. But our Evergreen and Portworx are layered nicely into that as well obviously.
Operator, Operator
Your next question comes from the line of Karl Ackerman with Cowen. You may now ask your question.
Karl Ackerman, Analyst
Yes. Good afternoon, gentlemen. Kevan, could you discuss the linearity of OpEx leverage for fiscal 2022? I asked because the $20 million loss in Q1 appears a little bit larger than normal seasonality, but yet the full year outlook for operating margin, $90 million implies the best operating margin on record. So, I guess, maybe specifically, could you discuss the investments you are making in Portworx that might explain the outlook for Q1?
Charlie Giancarlo, CEO
Yeah, good question, Karl. And then I think the first thing I’d start out with is with Q1, you typically have this seasonality. That is our seasonally lowest quarter in terms of revenue, and that’s pretty consistent. We will benefit if you look at the compare in Q1 of last year on a couple of different areas, one which really around the fact that we did do some realignment with our workforce and took a benefit in Q1 last year. When I think about what we’re looking at in Q1 that might be a little bit different on the OpEx front, certainly some strength around our sales of our subscription services, so we do have more comp coming through as a result over time because of the subscription services. So, we’re dealing with that a little bit in Q1. But to your point, seeing a lot of strengths post Q1 in terms of what we see and returning to operating profitability, and to your point, really happy with the fact that we’re looking at almost $90 million of profitability for the year. What we’re doing is just capitalizing on the investments we made really through this COVID environment. We saw some early indicators of that return in Q4 and expect that to carry forward as we continue through the rest of the year. Just hopefully it helps you out, Karl.
Karl Ackerman, Analyst
Yes, it does, Kevan. Thank you. Maybe a question for Charlie. Earlier today, Seagate’s talked about how data growth is going to double every three years. While it would appear that most of these data will continue to be stored on high-capacity disk in the arrow, especially improvement shown from ATV road maps, your FlashArray//C addresses very well. I think the demand for low-cost storage across multi-tenant environment. And so, first, do you think FlashArray//C will remain the largest driver for you over the next two or three years? Second, now that FlashArray//C appears to be more than 10% of revenue, is there a way to frame the TAM or growth opportunity of your FlashArray offering? Thank you.
Charlie Giancarlo, CEO
It's a great question. We have provided TAM numbers in the past and believe that FlashArray//C fits within those figures, expanding our market reach. FlashArray//C is the fastest product we have ever launched and is the only one in its class that can compete with hybrid disk arrays on price. Additionally, as the price of QLC decreases and our advancements with 4C demonstrate, the cost of flash continues to drop per bit more rapidly than that of magnetic storage. This trend suggests that as costs align, a larger portion of the magnetic market will shift to flash. Our first-mover advantage in the secondary storage tier with FlashArray//C places us in an excellent position to capitalize on these changes.
Kevan Krysler, CFO
And the only thing I would add to that is there are some great analysts’ commentary just this last quarter about how we're a couple of years off from that complete convergence. But that commentary misses the benefit of data reduction. And so today, we actually deliver the value that folks think are years away of being able to replace disk in the data center completely with flash. And I think it's the crystallization of our founding vision of Pure 10 years ago to look at flash as something that would really be the dominant storage technology in the data center to deliver the all-flash data center. It seemed like a pipe dream 10 years ago, but those are the exact kind of deals we're doing today for customers, bringing together the strength of FlashArray, FlashBlade and FlashArray//C to go after every use case.
Charlie Giancarlo, CEO
And to finish your question, which has to do with the FlashArray//C versus everything else, it's a great new product and we expect great things of it. I also expect great things from FlashBlade and from Portworx. They're all in large growth segments of the market. It's certainly true that the secondary tier market has been immune to the economics of flash up until now, and it's equal in size and opportunity to the primary tier market that we've already taken advantage of. So, yes, we think it's going to be a great opportunity for us but not the only one.
Operator, Operator
Your next question comes from Rod Hall of Goldman Sachs. You may now ask your question.
Rod Hall, Analyst
Thank you for the opportunity. I wanted to ask about the eight large enterprise deals you mentioned. Could you elaborate on the competitive landscape in those cases? Was there a specific competitor you managed to displace? I'm also interested in any particular use cases that stood out to clients. It would be helpful if you could provide more insights into how you successfully secured those deals, and I have a follow-up question after that.
Charlie Giancarlo, CEO
Absolutely. It was a mixture of new and existing customers, mostly existing customers, certainly a mixture of portfolio on the verticals, big banks, cloud and traditional, more traditional enterprise companies. I would say that, on average, as I think across all eight of them, it shook out pretty similarly to our average competitive portfolio that is to say mostly Dell but certainly NetApp, very big win against NetApp and primarily those two vendors, I would say.
Rod Hall, Analyst
Okay. Great. And then I wanted to follow-up on the supply shortages that are out there and expectations that NAND price is going to go up later in the year. I wonder if you can maybe wrap those two questions into one answer.
Charlie Giancarlo, CEO
You bet. So, as you may recall, we have a very strong supply chain. We were unaffected, and, of course, our supply chain team was very busy. Our customers were completely unaffected at the beginning of last year when COVID hit. We have some of the best lead times in the business overall. As we look going forward, yes, we do expect NAND pricing to stabilize, if not to get a bit stronger, that is a bit higher in the next couple of quarters, as we think demand has picked up and supplies are a bit constrained. But we don’t expect any shortages. There have also been reports of course, on other semiconductor shortages. We’re on top of that. We don’t expect to see any, although, certainly lead times are starting to lengthen but we’re taking appropriate actions there overall. There was another part to the question was. I think that was it.
Rod Hall, Analyst
Well on the NAND that the margin impact you sort of remind us that you would expect any kind of…
Charlie Giancarlo, CEO
We don’t anticipate significant changes in the margins because NAND is performing consistently from our perspective. Therefore, we do not expect much fluctuation in margin related to NAND pricing.
Rod Hall, Analyst
Great. Okay. Thank you.
Operator, Operator
Your next question comes from Tim Long of Barclays. You may now ask your question.
Tim Long, Analyst
Thank you. Just two if I could. Just following on those big deals. Could you just talk a little bit about obviously, it was a great quarter. Talk a little bit about how the pipeline for the large deals looks and anything on the complexion there? And then second, can you, Charlie, touch a little bit on the commercial vertical? Obviously, cloud and enterprise were strong, so maybe just walk us through what’s going on there? I’m sure it’s a lot of macro but kind of the outlook for some recovery in that vertical? Thanks.
Charlie Giancarlo, CEO
Let me take that second part and then I’ll hand it over to Kevan. We continue to see weakness in commercial, although I will say we saw a serial strength in the end of that or sequential, I should say strengthening of commercial. But frankly, it’s still suffering, and it’s one of the areas that as COVID subsides, we hope to see improve. There are some early signs that that might be the case, but clearly, the mid-market has suffered much more than large enterprises overall on average. Our expectation of what we've built into our planning is that we should see because of both the summer months and hopefully some effect of the vaccine, we should see a dissipation of the COVID effects in the middle or somewhere in our Q2. That is in our forecast sort of is based on a lessening of COVID effects both in the commercial market, as well as in enterprise generally. But, yeah, commercial and mid-market are still suffering. But we're seeing some light at the end of the tunnel, and we're hoping that as COVID subsides, we're going to see that improve.
Kevan Krysler, CFO
And then just adding a little bit of light in terms of our guide for Q1 and annual in correlation with the big deals that we were really pleased to see in Q4. Look, I think we've got plenty of opportunities that they were looking at and working with customers on and we're hopeful. We'll continue the pace as we progress through next year including these large deals we saw in Q4 and building on that. But when we think about the opportunity set, it's really broader as we think about next year. Subscription services continues to have great momentum, and that's building for us. And then, obviously, that helps out with a little bit more certainty in terms of how that rolls out into revenue. And so, that's great for us to see. As we see build of our opportunities, we see some nice build-out further beyond Q1, which is nice in terms of our guide for the annual year. So we've got some good confidence on that. But it's broad-based and not completely focused, if you will, on the big deals, which we're always pleased to get.
Operator, Operator
Your next question comes from Eric Suppiger of JMP Securities. You may ask your question.
Eric Suppiger, Analyst
Yeah. Thanks for taking the question. First off, I'd just be interested to hear as you look out to the pandemic dissipating, how do you think that will materialize? What will change for you? Is it more just being able to engage personally with the customer or where do you think the most notable changes will take place?
Charlie Giancarlo, CEO
Yeah. We thought about this a lot. I think the most noticeable change will actually be customers being willing to start to re-enter the office. And why is that? Well, we depend a lot on, as a company on two things, one is commercial as we talked about. But the second one is customers being willing to take on new products or put products into new use cases. We largely still an on-prem vendor and their willingness to do so is enhanced tremendously when they can go into the office. You might imagine that using a new product and a new workload is something that customers can be concerned about. And when they're able to go into the office and address things, if something goes wrong, they feel much more comfortable being able to do that. Our dependence on both commercial and net new logos depends on customers feeling more comfortable to go into the office. So, that's really what we'll be looking at. Now, it doesn’t require 90% of their team to be able to go in the office, just their technology team to be able to feel comfortable going to the office trying new things. So, that's what we'll be looking at.
Eric Suppiger, Analyst
Okay. That's very helpful. You don't break this out, but can you talk a little bit about what portion of your customer base buys across the different product categories, FlashBlade, FlashArray, and maybe Pure-as-a-Service? Do you look at your cross-sell metrics? Anything you could share on that front?
Charlie Giancarlo, CEO
We analyze cross-sell metrics, and the findings are quite interesting. For FlashBlade, about 50% of our sales come from existing FlashArray customers while the other half are new customers. With Portworx, it's still early to determine trends. FlashArray//C primarily serves existing customers, but there are also new customers purchasing it. Overall, I would estimate a balanced 50/50 split, although it varies by product.
Eric Suppiger, Analyst
What about the Pure-as-a-Service?
Charlie Giancarlo, CEO
That's very interesting. We've had a very high percentage of net new customers on Pure-as-a-Service. It really has allowed us to enter new customers with a unique value proposition, where we might not have been given a chance before.
Operator, Operator
Your next question comes from Pinjalim Bora of JPMorgan. You may now ask your question.
Pinjalim Bora, Analyst
Thank you guys, and congrats on the quarter. Charlie, given that this is the first fiscal year for Dominic to put his investment on the sales and its processes, could you talk about any material changes that you’re thinking of how you’ve already put in place going into the new fiscal year in terms of concrete designs and construction changes?
Charlie Giancarlo, CEO
We have consolidated our overlay sales operations into a single unit, which will enhance our ability to manage technical sales effectively. This change will help us balance new products while seamlessly integrating more mature products into our main sales operations. We've also made adjustments to the compensation structure this year. While these changes are not major, they are aimed at balancing all our products and initiatives, particularly focusing on service periods and Portworx moving forward. Dominic's insights into enterprise sales and our software and services have reshaped our approach, enabling us to simplify our compensation program to concentrate on critical elements. We are also ensuring our sales team is well-trained and equipped with the necessary skills and knowledge to promote our complete portfolio.
Matt Kixmoeller, VP of Strategy
And I have to say just in terms of, Charlie, on the field compensation and what Dom and yourself are doing it really extends to Evergreen Gold subscription. We’re really trying to make sure that the field is promoting that given the value proposition there, Pure as-a-Service, Cloud Block Store, and Portworx as well and FlashBlade. We continue to highlight FlashBlade. We got wonderful momentum with FlashBlade and offering new cases, and that will continue as we look at the next year.
Pinjalim Bora, Analyst
I have a follow-up question for either Charlie or Kevan. The guidance appears strong, but I noticed the range seems a bit wider than usual. Can you provide some insights on how you view the environment moving forward? Would you say things are back to normal? Also, how do you see the year shaping up? Will there be a stronger ramp in the second half compared to the first half? Please help us understand.
Kevan Krysler, CFO
Yeah. I'll start with that tactically and let Charlie add on to it. But I think you're thinking about that right. So, we're looking at probably in the Q2 timeframe really to start to see noticeable diminishing effects, if you will, of COVID. We’ve built that in to how we're thinking about the entire year. And so that is playing into it. So obviously, the second half, we are looking for some incremental momentum in terms of how we're thinking about our annual outlook. Charlie, you have any thoughts you want to add on that?
Charlie Giancarlo, CEO
I think that's accurate. The main uncertainty we have is at the start of the second quarter and how the end of the quarter and the fall will look in terms of COVID. However, we believe that things will continue to improve throughout the second half of the year. It's worth noting that comparisons to the upcoming year will be unusual due to COVID's impact last year. That said, we feel fairly confident about our guidance and projections.
Matt Kixmoeller, VP of Strategy
Yeah. I’d just add on a little bit more in terms of obviously the momentum that we've seen this year and expect to continue next year in terms of outperformance on our subscription services, that give us a little bit more predictability in terms of how things will fall. We've got really solid growth drivers. As we've talked about with FlashBlade and FlashArray/C, we do expect continued momentum with enterprise. And as Charlie mentioned, it's really looking at the commercial and mid-market recovery really second half post-COVID if you will.
Operator, Operator
Got it. Thank you very much. This concludes the question-and-answer session. At this time, I will turn the call back over to Charlie Giancarlo for closing remarks.
Charlie Giancarlo, CEO
Thank you. In closing, I'd like to thank you all and thank all of our employees, our customers, and our partners for all of their support through this past year. Despite it all, Pure has accomplished a great deal both in terms of the innovation in our products, as well as our market penetration. Even with all of the uncertainty around the exact timing of the recovery from this pandemic, we're confident in our vision, our strategy, and our team's ability to grow and to scale Pure. I want to thank you all for joining us today. Goodbye.
Operator, Operator
This concludes today's conference call. You may now disconnect.