Pure Storage Surges on Q3 Results, Looks Ahead to Cloud Deal Benefits

Pure Storage shares surged 20% after the company reported fiscal Q3 results and guidance that beat consensus expectations. I spoke with CEO Charlie Giancarlo about it all, before the analyst call:

"We're seeing good momentum overall in the business," he told me. "It's, look, the macro is a bit tough right now. There's a lot of pressure on I.T. budgets from an OpEx standpoint, higher software, higher SaaS pricing. That being said, storage has has remained robust I would say, if not super strong. But what we're most pleased about this quarter is our design win with a hyperscaler. We've been predicting this, as you well know, all year long."?

Pure beat on the top and bottom lines for Q3, and guided to Q4 revenue above the Wall Street expectations, but because of the new hyperscaler (large cloud provider) arrangement, the Q4 operating margin guide was below expectations to support what Giancarlo framed as a significant deal.

The numbers:

Q3 revenue was $831 million versus $815 million expected. Non-GAAP EPS was $.50 verus $.42 expected.

For Q4, the revenues guide is to $867 million versus $856 million expected. The operating margin guide though is to 15.6%, versus 18.4% expected.

"This is a first time ever where a hyperscaler, for their standard customer-facing storage, is going to be using a system vendor rather than just commodity hard disks and SSDs," Giancarlo said. "And what we're providing them is a very cost-effective, high-performance solution that can replace 90% of their storage, which is hard disk today, and replace that with our what's called direct flash technology.?"

I also spoke with Giancarlo about cost discipline:

"We've over-achieved on both revenue and on earnings, over-achieved from a guidance and from a market expectation standpoint. And we're at 17% operating margin. We do expect that that will continue to improve over time, although for next year, because of our investment in this hyperscale opportunity, we're expecting it to flatten out a little bit in the short term."

Giancarlo said sales in Europe have been strong despite macro headwinds, and international sales are beginning to climb above 30% of revenue.

Two things that stood out to me about the quarter:

The stock popped 20% on these results in an overall lackluster enterprise spending environment.

And Pure is spending to pursue a larger, AI-driven opportunity that will materialize a year-plus from now. The idea of investing now to capture AI advantage in the medium term isn't just for the megacap tech names buying Nvidia chips anymore. It's also for the smaller players who are supplying them.