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Pure Storage (PSTG) Stock Down Despite Q2 Earnings Beat

Pure Storage Inc. PSTG reported non-GAAP earnings of 6 cents per share in second-quarter fiscal 2021, comparing favorably with the Zacks Consensus Estimate of a breakeven. The company had reported earnings of 1 cent per share in the year-ago quarter.

Total revenues improved 2% from the year-ago quarter’s level to $403.7 million. Further, the top line surpassed the Zacks Consensus Estimate by 2.15%.

Year-over-year increase in revenues can be attributed to momentum in subscription services, including Pure as-a-Service, Cloud Block Store, and Evergreen.

Stock Down on Bleak View

Following bleak fiscal third-quarter outlook, shares of Pure Storage were down more than 12% in the pre-market trading on Aug 26.

Pure Storage refrained from providing formal fiscal third-quarter guidance citing uncertainty in demand due to COVID-19-related business impact.

However, management anticipates that total revenues will remain flat on a quarter-over-quarter basis. The Zacks Consensus Estimate is pegged at $437.9 million, indicating sequential growth of 8.5% and year-over-year growth of 2.2%.


 

Notably, the stock has fallen 2.1% year to date, compared with the industry’s decline of 30.4%.

Quarter Details

In the fiscal second quarter, Product revenues (contributed 67% to total revenues) of $272.3 million declined 9% on a year-over-year basis owing to coronavirus crisis induced sluggishness across the United States. Nevertheless, management noted strength in FlashBlade business segments primarily on the back of existing customers and continued expansion of customer base.

During the reported quarter, Pure Storage added more than 300 customers, bringing the total count to more than 8,150 organizations.

Robust adoption of FlashArray was also noteworthy.

Subscription services revenues (33%) of $131.4 million surged 37% on a year-over-year basis, driven by the company’s ongoing support contracts and robust adoption of Pure as-a-Service, Cloud Block Store, and Evergreen subscription services.

Total revenues in the United States during the reported quarter amounted to $282 million, down 4% year over year. Meanwhile, total International revenues of $122 million, improved 20% on a year-over-year basis.

Latest Noteworthy Developments

Pure Storage recently rolled out second generation FlashArray//C, cost effective storage array solution to provide customers with higher performance capabilities and enable them to run complex cloud workloads onto a single platform.

The company also unveiled its latest offering, Pure FlashRecover, in partnership with Cohesity. Pure FlashRecover provides all-flash data backup and recovery in case of a ransomware attack for the enterprises.

During the fiscal second quarter, Pure as-a-Service customer base, which includes CDK Global CDK and Options IT, witnessed expansion. The service has been adopted by Arrow Energy, BidFX, Lafayette General Hospital, Dizzion Managed Desktop as-a-Service, and Telstra, to cite a few notable names.
 

Pure Storage, Inc. Price, Consensus and EPS Surprise

Pure Storage, Inc. Price, Consensus and EPS Surprise

Pure Storage, Inc. price-consensus-eps-surprise-chart | Pure Storage, Inc. Quote

Also, during the reported quarter, Pure Storage’s flash storage solutions were selected by ServiceNow NOW to drive performance and data management, and boost business value.

Margin Highlights

Non-GAAP gross margin expanded 40 basis points (bps) from the year-ago quarter’s level to 69.8%. The expansion in gross margin can be attributed to growth in revenues and margin expansion of Product and Subscription services.

Non-GAAP Product gross margin expanded 10 bps from the year-ago quarter’s level to 70.1%.

Non-GAAP Subscription gross margin came in at 69.2%, which expanded 180 bps on a year-over-year basis.

Total operating expenses increased 1.7% year over year to $338.8 million. As a percentage of total revenues, the figure came in at 83.9%, which contracted 20 bps on a year-over-year basis.

Pure Storage reported a non-GAAP operating income of $11.2 million in the fiscal second quarter, against an operating loss of $3.2 million in the prior-year quarter.

Balance Sheet & Cash Flow

Pure Storage exited the quarter ended Aug 2, 2020, with cash, cash equivalents and marketable securities of $1.293 billion, compared with $1.274 billion as of May 3, 2020.

Cash flow from operations during the reported quarter was $50.7 million compared with $35.1 million in the fiscal first quarter.

Free cash flow was $25.7 million compared with $11.3 million in the prior quarter.

During fiscal second quarter, Pure Storage returned $20 million to shareholders via share repurchases of 1.18 million shares, with approximately $45 million remaining in share repurchase authorization.

Total deferred revenues in the fiscal second quarter were $725 million, compared with $706 million at the end of fiscal first quarter.

Remaining performance obligations (RPO) at the end of fiscal second quarter were $956.4 million, up 4.9% and 24.2% on a sequential and a year-over-year basis, respectively. The metric represents total committed non-cancelable future revenues.

Conclusion

Pure Storage delivered better-than-anticipated fiscal second-quarter results, with revenues and earnings growing year over year. The company is banking on robust adoption of cloud storage solutions, including Cloud Block Store, ObjectEngine Cloud, and CloudSnap.

Furthermore, the company is well poised to benefit from incremental adoption of latest subscription-based Evergreen, Modern Data Experience and Pure as-a-Service solutions. The robust adoption of latest subscription services is anticipated to drive profitability in the days ahead. Also, solid pipeline and strength in recurring revenues hold promise.

Nevertheless, bleak fiscal third-quarter outlook remains a concern. Coronavirus crisis-led business uncertainty and sluggish enterprise IT spending are likely to dampen growth. Further, growing expenses on product development amid stiff competition NetApp NTAP and Dell is a headwind.

Pure Storage currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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