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Pure Storage, Inc. (NYSE:PSTG)
Q2 2019 Earnings Conference Call
Aug. 21, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pure Storage second quarter fiscal 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press * then the number 1 on your telephone keypad. If you would like to withdraw your question, press the # key. I will now turn the call over to Matt Danziger, Head of Investor Relations. You may begin your conference.

Matt Danziger -- Vice President, Investor Relations

Thank you, and good afternoon. Welcome to the Pure Storage Q2 fiscal 2019 earnings conference call. Joining me today are our CEO, Charlie Giancarlo; our CFO, Tim Riitters; our President, David Hatfield; and our VP of Products, Matt Kixmoeller.

Before we begin, I would 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 competitive, industry, and technology trends; our strategy, positioning, and opportunity; our current and future products; business and operations, including our operating model; growth prospects; and revenue and margin guidance for future periods. Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update them.

Our actual results may differ materially from the results predicted, and reported results should not be considered as an indication of future performance. A discussion of risks and uncertainties relating to our business is contained in our filings with the SEC, and we refer you to these public filings.

During this call, we will discuss non-GAAP measures in talking about the company's performance, and reconciliations to the most directly comparable GAAP measures are provided in our earnings material, press release and slides.

The 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 for at least 45 days and is the property of Pure Storage.

With that, I'll turn the call over to our CEO, Charlie Giancarlo.

Charlie Giancarlo -- Chief Executive Officer

Thank you, Matt, and good afternoon, everyone. Thanks for joining us on today's earnings call. I will begin the call with a summary of our Q2 results and highlights. Hat will then provide a go-to-market update, and finally, Tim will give a detailed review of our financials and our updated outlook.

Q2 was an exceptional quarter for Pure. Our Q2 performance was very strong and the team executed well. We saw a great momentum in the business and achieved profitability in our seasonal Q2, reflecting the inherent advantage of our technology and the strength and leverage in our business model. Revenue for the quarter was $309 million, up 37% compared with the same period a year ago. Gross margins were particularly strong at 68%, up 1.7% sequentially, and operating margins were a +0.3 %. All 3 measures exceeded the upper end of our guided ranges.

We expect this strength in gross margin to continue for the remainder of the year and we are raising our outlook, as Tim will share in more detail later. Pure's continued focus on customers and innovation has positioned us repeatedly at the technology leader. For the fifth consecutive year, Gartner has recognized Pure as a leader in their Magic Quadrant. And in the most recent report, Pure was positioned farthest to the right, and highest on both the execution and innovation axis. Our focus on software, next-generation applications, and bringing NVMe to the mainstream positioned us above all others competitors as we continue to democratizing Flash for an increasing number of use cases.

This strategy of democratizing Flash for the mainstream was on display at our Accelerate conference in May. At the event, we highlighted our customers' journey to a data-centric architecture, replacing old-style, scale-out, direct-attach storage designs. The optimization of fast-converged networks, compute and storage led by Pure has enabled enterprises of all sizes to build modern data-centric architectures with shared accelerated storage.

In Q2, we delivered on that vision. As you recall, last year we announced FlashArray//X, the first all-NVMe, all-Flash array. At Accelerate this May, we launched the //X family, which enabled NVMe across the entire product line. And in Q2, more than 50% of shipments were all NVMe.

In contrast, our competitors are just beginning to bring their NVMe offerings to market and only in their highest priced products. The speed of adoption of //X family of products has been impressive and we continue to expect that by the end of the year, the vast majority of our revenue will be NVMe. In short, our democratization of NVMe is working.

It was also a strong quarter for FlashBlade, as we saw expansion in our major use cases, such as AI and rapid restore, as well as our largest customers expanding their purchases with a material number of new customers acquiring FlashBlade for the first time.

During the quarter, we saw very promising momentum with our AI deployments of Array. We also recently completed the acquisition of StorReduce, Pure's first M&A transaction as a public company. StorReduce is a unique, cloud-optimized, de-duplication engine for object storage, which enables both hybrid and cloud-native architectures for managing large-scale, unstructured data. StorReduce's technology is 100% software and was designed to be cloud-first. We are excited about the natural integration points with both our current on-premise product portfolio and also its contribution to Pure's cloud integration and cloud services capability. We welcome StorReduce customers and partners and most importantly, the StorReduce team to the Pure family.

When I spoke to you a year ago, we outlined 3 operating priorities, including focus on our customers, operational excellence, and innovation everywhere. With an NPF score that continues to rise, industry-leading and increasing gross margins, a healthy, profitable business model, and a product portfolio that continues to lead the competition, we will continue to achieve new milestones and look forward to increasing our leadership. With that, I'll turn the call over to Hat.

David Hatfield -- President

Thanks, Charli. Q2 was indeed a stellar quarter for Pure, as our momentum continues to build. Pure's strategy to delivered unparalleled technology innovation, a differentiated business model, and a relentless focus on customer success has underpinned our consistent operating results. We are in a fantastic innovation cycle across our FlashArray, FlashBlade, FlashStack, AIRI, and Pure1 platforms. This innovation, together with the Evergreen architecture and business model that we pioneered, enables our customers to take advantage of these unique capabilities earlier and with no business disruption when compared with any of our competitors.

Our differentiated innovation and execution is not only validated in the Magic Quadrant, but Pure also scored the highest of all vendors in Gartner's critical capabilities report, being recognized as No. 1 in virtualization, database and OLTP, and BDI use cases, three of the largest revenue segments in the AFA market. Thousands of global enterprises turn to Gartner for guidance in identifying best-in-class companies to partner with, and we are proud of this recognition for the fifth consecutive year.

We are also pleased to share that for the fourth year in a row, Pure has increased its certified net promoter score to an 86.6, up from 83.7 last year, retaining our spot in the top 1% of all B2B companies. Critics have noted that as companies scale, it's common to see net promoter scales decline over time. However, it's rewarding to us, with our relentless customer-first focus, to defy this conventional wisdom. Our channel-centric, go-to-market strategy to take these unique capabilities to market is working, especially when we see our largest competitors taking more business direct.

The new partner program that we unveiled at our Accelerate conference last quarter has been well received and is showing quick results, particularly within our largest national partners. Our sales teams performed extremely well in the quarter and are benefiting from the differentiation in our current product cycle. We added nearly 400 new customers, for a total of more than 5,150 and we are pleased with the mix across our focus markets.

Win rates remained very strong across the board. And along with our industry-leading gross margins, it showcases that our sales team and partners are consistently able to quantify our unique value. FlashArray win rates increased sequentially and year-over-year, driven largely by our new all-NVMe FlashArray//X product line and the adoption of ActiveCluster. Quite simply, we don't think anyone should buy an AFA in 2018 without NVMe at its core, and only Pure can deliver this fully parallel architecture cost effectively to the market.

We also had a very strong quarter with our FlashBlade offering. Our rapid restore use case continues to enjoy strong momentum and the Q1 launch of our AI-ready infrastructure solution, AIRI, together with NVIDIA, expanded in Q2 with AIRI Mini, and has delivered strong early traction as well. Importantly, we're finding the simplicity of AIRI Mini to kick-start AI deployments and then easily expand is a value proposition that competitive solutions just can't match.

While still in the early innings, AI is proving to be a technology that cuts across many industries and all geographies. We now have multiple AI customers in finance, government, social media, technology, healthcare, automotive, and AI services, with a balance of customers from early stage start-ups to decades-old market leaders. Our data-centric architecture and consolidation message is resonating across all industries as well. With a number of million-dollar wins in Q2, the highest in our history.

We were particularly pleased with our progress selling into the cloud, healthcare, and financial services segments in Q2. Our cloud segment continues to represents approximately 30% of our overall business and enjoys the highest wins and repeat purchase rates across our customers. Across the enterprise segment, we saw continued progress in our customers, consolidating business applications and next-generation analytics into an shared accelerated storage platform, including both FlashArray and FlashBlade.

In the quarter, we had wins across some of the leading healthcare and financial services organizations, including the University of Texas M.D. Anderson Cancer Center, the New York Genome Center, Des Jardins Group, and The Royal Bank of Canada. Finally, as Charlie noted, we are thrilled about the acquisition of StorReduce. StorReduce has already forged strong partnerships with key public cloud providers and their technology enables multiple clouds and on-prem use cases, including multi-cloud data tiering, migration, and protection.

We look forward to sharing more on our plans for StorReduce integration and our overall cloud strategy in the months to come. The momentum in our business is fantastic. We're in a great innovation cycle, we're investing in the cloud, and customers and fellow Puritans are enthusiastic about the second half and the years ahead. It truly feels like we're just getting started. With that, I'll now turn the call over to Tim.

Tim Riitters -- Chief Financial Officer

Thanks, Hat. Q2 was a great quarter for Pure, as we exceeded our guidance ranges on all 3 of our guided measures: revenue, gross margin, and operating margin. Before I dive into specifics, I'll make my usual note that the gross margin, operating margin, opex, net income, and free cash flow numbers I will use are non-GAAP unless otherwise noted. Our reconciliation of these non-GAAP metrics to their GAAP comparables, as well as our full Q2 results and presentations are available on our investor relations website at investor.purestorage.com.

Total revenue for the quarter was $308.9 million, or 37% growth year-over-year, and exceeded the upper end of our guided range. Product revenues were $241.1 million, or growth of 34% year-over-year. Support subscription revenues were $67.8 million, or growth of 51% year-over-year. Revenue performance was driven by solid business fundamentals and strong execution by our go-to-market team.

Geographically, 74% of revenues came from the United States and 26% came from international markets. Total gross margin in Q2 was 68%, up 1.7 points from the previous quarter. This represents the highest gross margin performance we have seen in the company's history. These results illustrate the value we deliver to our customers, and validate the significant differentiation between our software-centric products and our competitors' retrofit architectures.

Product gross margin increased 1.6 points to 67.9%, driven by continued strength across all of our products, component cost savings, and the early adopter margin benefits associated with the launch of our FlashArray//X product line. Support subscription gross margins increased 2.1 points to 68.4%, driven by a continued increase in amortization of ongoing support subscription contracts as a result of our growing install base, continued solid execution in our support organizations, and timing of certain renewal bookings during the quarter.

Turning to operating margin, we delivered another quarter of profitability, with Q2 operating margins at +0.3%, representing an 11-point improvement over the same period a year ago and a 5-point improvement over the midpoint of our guidance. The out-performance in the quarter was driven by a strong revenue growth and gross margins above our Q2 guided ranges.

Net income in the quarter was +$2.4 million or +$0.01 per share, based on weighted average share counts of shares of 263 million shares. This compares to a net loss of -$20.7 million or ‑$0.10 per share, based on a weighted average shares outstanding of 209 million shares in Q2 of the last year. Total headcount at the end of the period was more than 2,450 employees, which represents an increase of approximately 150 employees during the quarter.

Turning the balance sheet and our cash flows, we ended Q2 with cash and investments of $1.1 billion, which was up slightly from last quarter. Free cash flow was including -$18.9 million in the quarter, including $7 million from our employee stock purchase plan. This compares to free cash flows of -$22.5 million during the year-ago quarter, which included $5 million from our employee stock purchase plan.

As a reminder, Q2 tends to be the lowest point of cash flow generation throughout our fiscal year. With that, we'll now turn to our guidance. For our third quarter, we expect revenues in the range of between $361 million and $369 million, or $365 million at the midpoint. We expect gross margins to be in the range of between 64.5% and 67.5%, or 66% at the midpoint. We expect operating margins in the range of between +4% and +8%, or +6% at the midpoint. For the full-year we expect revenues in the range of between $1.35 billion and $1.38 billion, a midpoint of $1.365 billion, which represents an increase of $20 million from our previously guided midpoint.

We are raising our gross margin range to between 65.5% and 67.5%, or 66.5% at the midpoint. We are also raising our operating margin range from between 2.5% to 4.5%, or 3.5% at the midpoint. The raising of our full-year guidance is an indication of the strong momentum we are seeing in our business, a validation that our strategy is working, and a statement on the excitement we have for the second half of the year. With that, we'll now open the call for questions. Operator?

Questions and Answers:

Operator

At this time, I'd like to remind everyone in order to ask a question, press *1 on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question comes from Aaron Rakers from Wells Fargo.

Aaron Rakers -- Wells Fargo -- Analyst

Thanks for taking the questions and congratulations on the good quarter. I was wondering if you could just dig a little bit deeper into the gross margin drivers here. In particular, I'm curious if what you're seeing from a NAND pricing dynamic, whether or not you're kind of able to abstract or that is a driver to any of the gross margin? And I guess just given on a forward-looking basis, it sounds like you feel like some of these dynamics will continue. How much confidence do you have in that as we start to see NAND Flash pricing decline and whether or not you would pass that through to your end users?

Charlie Giancarlo -- Chief Executive Officer

Hi, Aaron, Charlie here. Thanks very much for the question. I would break down the gross margin benefit that we had this quarter and what we see going forward on 3 different things. The first is, frankly, we're able to sell value. I think coming out with the //X series and just our increasing awareness of our Evergreen program is having the intended effect on our customer base. They understand the value that we bring and clearly we get premium now for our products and that's expanding.

Two is that yes, the //X series did bring more value to the customer and also because it gets enhanced performance out of the Flash, that gives us a benefit. Then third is, as we've mentioned in the past, we believe that we're about to take advantage of lower-cost NAND faster than anyone else in the industry. As we've been predicting for almost a year now, we thought we'd start to see NAND prices start to decrease or that we'd be able to get the benefit of decreasing NAND prices starting this past quarter and that's exactly what we saw. We saw the beginnings of that last quarter and we feel pretty good. We know what those NAND prices are going to be for us in the next quarter or two, so we feel pretty good about that.

Aaron Rakers -- Wells Fargo -- Analyst

Okay. And as a quick follow-up, as we think about the growth and just in general the storage market, your closest peer net app grew, what, 50% year-over-year in terms of the all-flash business. You guys grew 37%. I'm just curious, when you look at the overall market and what seems to be a pretty good demand backdrop, how do you think about traditional enterprise storage versus what you're seeing as far as a contribution from next-generation workloads, if you will, AI, rapid restore, within your product revenue stream?

Charlie Giancarlo -- Chief Executive Officer

Let me just state flat out that we're competing for the entire storage market. When we look at that, we grew 37% year-over-year and the rest of our competitors, at best, were high single digits. Let there be no mistake. You can't compare replacing some magnetic install base with putting in some new flash disks and identify that as being the same kind of growth rate as what we're seeing. We're growing 37% as a company. Hat, you want to add some color on that?

David Hatfield -- President

The only thing I would add is we were thrilled with our net new customer acquisition, nearly 400. That's 6 net new customers per day. I think the other folks have stopped talking about that because they really are relying on converting their install base. The win rates and gross margin are the two areas that are the headline here. Our win rates against NetApp and everybody else grew sequentially and grew quarter-on-quarter and year-on-year, while we're expanding margin. So, we think that pretty much nails it.

Charlie Giancarlo -- Chief Executive Officer

The last thing that I'll mention, if I can add in here, is that as we do see pricing decline with NAND over time, elasticity is real. We will be getting more and more of what are traditionally Tier 2 use cases, and that's a market expansion opportunity for us.

Aaron Rakers -- Wells Fargo -- Analyst

Perfect. Thank you, guys.

Operator

Your next question comes from Mark Murphy from J.P. Morgan.

Mark Murphy -- J.P. Morgan -- Analyst

Thank you very much. I will add my congrats on a healthy result. I want to ask you whether your confidence in 30% multi-year revenue growth increase is coming off a quarter like this, where the growth rates are higher than they were a year ago? You mentioned your net promoter scores rose even higher as well. So, does the confidence increase, and what factors do you think are essential to achieve sustainable growth at that scale, which is very rare in the technology markets?

Charlie Giancarlo -- Chief Executive Officer

We're very confident of the growth rate that we set out before. We're on track for $2 billion in a couple years' time, and hopefully hitting that on a run-rate basis next fiscal year. I would say that our confidence stems not so much from any one quarter's performance, but much more from the NPS scores that you identified that is the love of our customers, and just as importantly, the pipeline of products that we have coming out the door. We just released the //X series, but we have a whole pipeline of new capabilities that we'll be talking about over the next year and we feel very good about the innovation engine that we have behind us.

Mark Murphy -- J.P. Morgan -- Analyst

As a follow-up on your cloud adoption, I believe you recently had a SaaS company make a 7-figure initial purchase. Can you update us on the traction and maybe the types of discussions that you're having with the cloud and SaaS providers and maybe what you think this is going to bring to you in the second half of the year?

Charlie Giancarlo -- Chief Executive Officer

Yeah, so as I mentioned, the cloud business continues to be really strong for us. Multi-million-dollar wins initially. The highest repeat purchase rates and highest close rates. So, that continues to be a key area of focus for our selling teams in the Cloud 1000 and candidly, the top cloud providers overall. So, we're going to keep investing there. We were pleased with the upmarket bias emphasis that we had at the beginning of this year, and I think that's reflected in having the highest number of million-dollar wins in the quarter as well. Again, the cloud business is a key growth driver for us, but we saw great traction across enterprise and our commercial business as well.

Mark Murphy -- J.P. Morgan -- Analyst

Thank you very much.

Operator

Your next question comes from Wamsi Mohan, Bank of America Merrill Lynch.

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Thank you. Good afternoon. If you look at the competitive landscape, there's been a lot of talk about product SKU consolidation at the MC, some significant introduction of different channel strategies by others, but you guys delivered the best gross margin quarter in your history. Are you leaving some revenue growth on the table with these margins?

Tim Riitters -- Chief Financial Officer

Wamsi, thank you for the message. We don't think so. We certainly, I would say from a focus standpoint, we're focused on growth as a company. Now, we're not going to leave money on the table and certainly we take our premium as we can get it. But I've said this in the past. We certainly don't win on price, but we're not going to lose on price either. So, for every opportunity that our product is the best solution for, we're going to win that deal.

Charlie Giancarlo -- Chief Executive Officer

Yeah, Wamsi, and I'll just add that there's no doubt that this product cycle is benefiting the sales team, but I've been doing this for almost 30 years and I think we have the best sales team in this segment by far. I think that, in conjunction with our channel-centric go-to-market is really paying dividends. I think we're growing in the national partners, we're growing with the larger partners. That is a backdrop where the competitors are taking more deals direct. So, I just think we have a really nice competitive landscape to operate in with a really great sales team and great capabilities to differentiate.

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Okay, thanks for that. As a quick follow-up, you mentioned elasticity of demand as NAND price declines. As the NAND price declines have been fairly significant, what do you think that does to overall industry growth rates? Can we talk about a 10-point faster growth for the industry or how do you guys think about sizing that opportunity in terms of elasticity of demand?

Charlie Giancarlo -- Chief Executive Officer

Wamsi, that's a difficult question, frankly, to answer. We know that elasticity is real, but it's hard to project exactly what -- we, of course, see NAND pricing declines, but translating that into AFA market declines is a complex formula that's controlled largely by the large players more than us. As we mentioned in the past, we think they will not be able to take advantage of low NAND prices as quickly as we do, and therefore that may be longer in coming. So, a little bit difficult to predict, but what we do know for sure is as NAND declines, more of the magnetic market will come up for AFA replacement.

Tim Riitters -- Chief Financial Officer

Wamsi, this is Tim. That elasticity is something that we've tracked a lot since we've been a company. That elasticity has proven itself out in all of these sort of scenarios with NAND. NAND going up, NAND going down. So, it's a trend that we feel very confident in.

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Okay, thank you.

Operator

Your next question comes from Sherri Scribner from Deutsche Bank.

Sherri Scribner -- Deutsche Bank -- Analyst

Hi, thanks you. You guys have had very strong margins over the past couple of quarters, to some extent helped by the changes in NAND pricing. If you look at the guidance, it suggests margins come down a bit, but still kind of in the higher end of the range. I guess what are some of the puts and takes on your business and the gross margins doing better as we move through, not just this year, but longer term than your long-term target and what are some of the risks to the margins as you move into '19 with NAND prices maybe stabilizing?

Charlie Giancarlo -- Chief Executive Officer

Sherri, this is Charlie. Let me take the front end of that and then I'll pass it to Tim on the other side of it. Which is that the first thing, and I think this is very important, is that NAND pricing is part of our improvement in margins, but frankly the new //X series and the greater recognition of the value that we bring with Evergreen, and therefore our ability to maintain a premium for our product is, I think, probably the great advantage. So, the advantage in our overall solution, the model, the software that we bring, the capabilities that we bring with that software, and the premium we're able to get for it, I would say is probably the larger contribution to that. But certainly NAND pricing helps, and I'll let Tim take that.

Tim Riitters -- Chief Financial Officer

I would just echo Charlie on all of those dimensions. I think I'd really sort of focus on the software innovation. We've been talking about this for a long time about how we were software designed at its core, which has allowed us to optimize on whatever flash may be out there and whatever flash may be most advantageous for us. You've seen that in times of declining NAND. You've seen that in times of increasing NAND. There's a reason why we are at the top of industry in product gross margins and we expect that to continue.

Sherri Scribner -- Deutsche Bank -- Analyst

Okay. I guess just following up on that, thinking about your long-term target, you're clearly at the high end of that and the product mix, the value that you guys are providing, all seem to be big drivers of that and those don't seem to potentially be going away, so how should we think about those long-term targets? Are they maybe the low end is probably too consecutive and we should really be thinking about you being at the higher end long-term?

Tim Riitters -- Chief Financial Officer

What we've guided to is the rest of the year. So, we're feeling fairly confident there. We're not ready to change our long-term guidance on this. It's a bit too early. You alluded to mix. What you see in any new product line such as FlashBlade is that you get better margins as sales increase. So, I wouldn't put too strong a focus on mix going forward. As FlashBlade increases in sales, we'll get better gross. It is a lower gross margin product today, to be clear, but the margins are improving. I expect that's a normal course of events for new products.

Charlie Giancarlo -- Chief Executive Officer

And you saw that certainly over the medium term, Sherri, in terms of the guidance that we offered up. Obviously, raising a point and a half of gross margin for the full-year gives a statement in terms of the position we are in right now, where we have this significant lead in NVMe, the innovation is working very well. So, we really like what we see in the medium term.

Sherri Scribner -- Deutsche Bank -- Analyst

Great. Thank you.

Operator

Your next question comes from Katy Huberty from Morgan Stanley.

Katy Huberty -- Morgan Stanley -- Analyst

Thank you. Good afternoon. There's been a lot of discussion about product margins, but you've seen an even more impressive [inaudible] support margins over the last couple quarters. So, we'd love your thoughts as to why that won't continue to expand as revenue scales or is there some reason that you're approaching it on the [inaudible] support subscription margin?

Charlie Giancarlo -- Chief Executive Officer

Thank you, Katy. Operator, can you -- there's a lot of interference, Katy, on your line. I think you're asking about margin performance and why we might not expect that to continue going forward. Again, I'll start of with an answer and then let Tim conclude. As we've talked about in the past, our target was to get to mid single-digit profitability and then really pour on the gas in terms of growth rate overall for the company. That as long as we were profitable and that we could maintain growth in the 30% to 40% or a higher percent range, then our real focus as a company was going to be on maintaining growth. That is our aim. We do have our foot on the gas in terms of growth. Each quarter has the vagaries of hiring and expense and so forth, but our target is to really focus on growth.

Tim Riitters -- Chief Financial Officer

And Katy, our apologies, there was a little it of noise and static here. I think you were also asking a question about support margins. You're ability right. Support margins, if you look over the last several quarters, they've been climbing very, very nicely. I think it's really a combination of great efficiency and effectiveness by our wonderful, world-class support organizations. They're doing a fantastic job. But also as that business scales, there's inherent leverage in the business. And then finally, the Evergreen model is starting to kick in. We're seeing great renewal rates now at scale and really that's providing that nice lift on the support gross margin side as well. So, a lot of things to be excited about on both pieces of gross margin, if you will.

Operator

Your next question comes from Alex Kurtz from KeyBanc Capital Markets.

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Thanks, guys. Can you hear me OK?

Charlie Giancarlo -- Chief Executive Officer

Yes.

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Good afternoon. Just another clarification on the //X series. Tim, is there, I'll throw this out to anyone. Because you're delivering a significant difference in price-per-iops that your traditional products with the //X series, is there a segment of the high end of your install base that are seeing real value there and maybe your product margins could just structurally be higher going forward because you're providing so much more value at the really high Tier 0, Tier 1 workloads? Maybe there's just kind of like a reset on the top end of your install base? Then I have a follow-up on the cloud.

Tim Riitters -- Chief Financial Officer

Well, so Alex, on gross margins, we've always thought about our gross margins as a pool and a portfolio in the business. And so, we sell, as you head Charlie say earlier, value. And so, part of what you saw this quarter is those early adopters really putting //X to the test and //X to use, and they're delighted with what they're seeing. So, we're going to manage that pool. I wouldn't draw the next conclusion that gross margins keep going and going and going. But we've always managed the pool and with the //X series, it's no different.

Charlie Giancarlo -- Chief Executive Officer

I'll chime in. I think in general, we just have never believed in the high-end niche performance segment. Back to the earliest days of Pure, we believed in democratization and that's exactly what we've tried to drive with //X, bringing NVMe to the masses. And so if you look at achieving 50% of our product line on NVMe now, we think the far bigger opportunity is to drive consolidation with the product line.

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

We can follow up on the call-back on that. But just on cloud, when we look at the year, what's the cadence of the growth rates there relative to the rest of the business?

David Hatfield -- President

Alex, it's Hat. Continued progress on the 30%. We think that's reflective of where we're going to continue to have it march. Our up-market bias focuses on 3 key segments. Cloud 1000 is obviously at the top of the list. The Fortune 500, which is north of 35% now in G2K and then the largest non-public healthcare, government agencies. We saw nice progress across all three of those.

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

All right. Thanks, guys.

Operator

Your next question comes from Andrew Nowinski from Piper Jaffray.

Andrew Nowinski -- Piper Jaffray -- Analyst

Thanks a lot and congrats on the nice quarter. First, I want to ask about ELAs. One of your competitors started offering ELAs to larger strategic customers. Does Pure Storage offer these yet? And if not, are you going to begin offering these to the larger global customers?

Tim Riitters -- Chief Financial Officer

Andrew, this is Tim. No ELAs at this point in time. As the business scales and we think about software, that might be something we take a look at. But again, remember all of our products how we've gone to market in the past, is everything is included. And so that's one of the other reasons you're not seeing ELAs in our business right now.

Andrew Nowinski -- Piper Jaffray -- Analyst

Okay. Understood. And then last, I just want to ask about your hybrid cloud strategy. I saw your ES2 announcement at Accelerate, but how do you compete against NetApp if the client wants a storage platform that enables them to run the same operating system on Amazon as they do on-premise?

Matt Kixmoeller -- Vice President, Strategy

This is Kix. I'll take that one. I think we ability believe in the hybrid model of IT and we've made a number of announcements and develop initiatives around supporting that. So, at Accelerate, we announced our CloudSnap offering, which allows to integrate our arrays on prem and be able to send data to the cloud natively. Then if you look at the acquisition we announced today, we're excited about a lot of the hybrid that acquisition unlocks, to be able to federate data across both on-prem and hybrid cloud.

Andrew Nowinski -- Piper Jaffray -- Analyst

Got it. Thanks, guys.

Operator

Your next question comes from Ittai Kidron from Oppenheimer.

Ittai Kidron -- Oppenheimer -- Analyst

Thanks and congrats on a great quarter. A couple of questions for me. First for you, Charlie. Last call, you talked about how you're working hard to scale the business and one of the main reasons you came to this company is to make a lot of changes in the go-to-market and the enterprise approach. Help me think about some of the things that you've done. In what way are they already showing and in what way are they still not showing and there's still very much ahead of us to look forward to?

Charlie Giancarlo -- Chief Executive Officer

Ittai, thank you. I wouldn't say that I came to make a lot of changes. I certainly would say that I came to help the company to continue to scale going forward. Some of the changes that we made, which I think to the company to a large extent was already embarked on, was this upscale bias and what that meant. In terms of channel programs, in terms of product structures, in terms of marketing programs, and how we address enterprise and cloud-level opportunities. We've certainly done that.

As you know, we reorganized the company's business for a greater focus around business units and that's certainly given us greater focus for this year. Other things that are perhaps less apparent to the outside was just making sure that we had really good alignment around the main areas that were going to make a different for us going forward, such as what we do for enterprise customers, such as how we align all the way from supply chain to engineering to marketing to sales. So, I would say it was really just innovating around the edge or aligning what was already all the good practices at the company and refocusing around the ones that were going to make a bigger difference for us in the future.

Ittai Kidron -- Oppenheimer -- Analyst

Got it. Very good. And then for you, Kix, NetApp and NVIDIA also announced this relationship, I guess, around AI. How do I compare and contrast what you do with them versus what NetApp is doing with them?

Matt Kixmoeller -- Vice President, Strategy

The say imitation is the deepest form of flattery and that I think was certainly the case in those announcements. Look, I'll just point to a couple things. No. 1, we're seeing real growth in our add business. We continue to win jointly with NVIDIA and feel good about it. You can look at the public references we've put out. I'm not sure any of our competitors have put out any public AI references as an example.

The second thing I would say is that one of the things that really is an advantage of FlashBlade is it's scale from small to big. Mostly AI initiatives don't start huge, they start small but then they grow quickly as people get steam with them. One of the real advantages to our product line is you don't have to buy into our largest array on day one. You can start with a small FlashBlade and grow seamlessly as your add initiative grows.

Ittai Kidron -- Oppenheimer -- Analyst

Got it. Very good. Good luck, guys.

Operator

Your next question comes from Jason Ader from William Blair.

Jason Ader -- William Blair -- Analyst

Yeah, thanks. I have one for Tim and one for Charlie. For Tim, can you confirm that the //X series has a better gross margin than the other //M series? Because that's what it seems to imply from the margins this quarter.

Tim Riitters -- Chief Financial Officer

The short answer, Jason, at this point is yes. //X margins are better for us for the reasons I think we talked earlier on the call in terms of the value our customers are seeing and the value that we can capture from it. So, yes.

Jason Ader -- William Blair -- Analyst

Okay. And from a cost of goods standpoint, is it roughly the same for you?

Tim Riitters -- Chief Financial Officer

There's some benefits there because as Charlie alluded to earlier in the call, we're starting to see the benefits of NAND. I mean, we've seen a tight NAND market for the last year. We always thought that right around this time we'd see some relaxing on that bill of material components and that's indeed happening.

Charlie Giancarlo -- Chief Executive Officer

The other thing I would add is just with our direct flash architecture, we can now program directly to raw NAND. And so with //X, we're buying raw NAND instead of buying finish SSDs and that, of course, gives us an advantage.

Jason Ader -- William Blair -- Analyst

Great. Then for Charlie, maybe following up a little bit on Ittai's thread. Just obviously the business looks really strong, but where do you think the company can be doing a better job? Maybe a vertical or a geo? I guess maybe it's as much for Hat here too, just in terms of the sales and go-to-market side.

Charlie Giancarlo -- Chief Executive Officer

Coming in to any company, I always view it as an antique car. You're driving down the road, having a wonderful time, but you're only miles away from the alternator going or a brake pad or something like that. Every company always requires just constant tuning. So, in any particular quarter, there are things that we can do better. We want to make sure that we're well aware of those. So, having a company that is very transparent as to where its challenges are so that you can address them rapidly is very important and that's what we try to instrument here.

I don't know that it's useful to go into specific areas. But there are, to be clear, we started our journey focusing more up market. There's still a lot more work to do there, to be very clear. We're excited about our technical team and technology and the acquisition that we're announcing today. There's more that we can do there. We plan on bringing out more. We continue to fill out a number of areas. Both the features and capabilities of our product line, which as we've said in the past, we still have more to go there, as well as our cloud story. We continue to build there. So, lots of room for improvement but we're proud of where we are and very optimistic about how, as we continue to focus on these areas, how that'll improve the business going forward.

Jason Ader -- William Blair -- Analyst

Thanks.

Operator

Your next question comes from Erik Suppiger with JMP Securities.

Erik Suppiger -- JMP Securities -- Analyst

Thanks for taking the question. Congratulations. A couple of times you've referenced some of your competitors taking business direct. I assume that's EMC. Can you talk a little bit about what type of business you see that taking place and what actually has happened with some of your channel partners as that's opened up some opportunities?

David Hatfield -- President

Erik, this is Hat. Yeah, I wouldn't isolate it into one specific vendor. I think it's a trend that we're seeing across multiple. I think when we've got over 10 to 15 points of gross margin advantage in a differentiated product line that we just extended our lead even further, it's hard to compete with that. So, I think they're trying to do whatever they can do to win. Our success in competing with them is measured in terms of the expansion of the gross margin and the win rates.

And so, Dell, I think has changed the culture a bit of EMC. We see a lot of those folks leaving. Many of them are leaving to partners of ours. So, they've got deep domain knowledge. They've been beat by us quite a bit. They go over with a receptive embrace. We also see them coming here. It seems to me that the trend is they're more focused on top line and if they can get there with servers, they get there with servers versus focusing so much on storage. So, I think it's a general competitive landscape that benefits our uniqueness and we're very confident in the second half of the year.

Erik Suppiger -- JMP Securities -- Analyst

Okay. Then last question. Do you think you might start breaking out FlashBlade in some foreseeable future, maybe in fiscal '20?

Charlie Giancarlo -- Chief Executive Officer

This is Charlie. We really, as I've said in the past, breaking out individual line items on a reporting basis for individual products, especially new products that tend to be lumpy and tend to go through learning curves, I think can distract from the way that we're followed. FlashBlade did have a good strong quarter this quarter, so we're pleased about that, but I don't see breaking it out anytime in the near future.

Tim Riitters -- Chief Financial Officer

Eric, there's one thing to follow up as you mentioned on the partner as well. And so, the new partner programs that we rolled out have been really well received. The national partners, we're rewarding those partners that invest in us. So, there's a reciprocal relationship that as they're investing in practices and they're driving more leads to us, they benefit financially from that. So, that's an area we're going to continue to invest and I think it's that dynamic while the others are pulling away a little bit from the channel, at least as it appears to me and to us, is benefiting us from the largest national players.

Erik Suppiger -- JMP Securities -- Analyst

Very good. Thank you.

Operator

Your next question comes from Simon Leopold from Raymond James.

Victor Chiu -- Raymond James -- Analyst

Hi, guys. This is Victor Chiu in for Simon. I was hoping you could help us dig a little deeper into the longer-term opportunities and the role of flash specifically in newer applications like big data and AI. Because when we look back historically at how flash storage evolved, there was a time when it was considered an extravagance because the performance was so far ahead of the rest of the parts of the data center that it was hard to make the case for it economically. Obviously, that's shifted as compute hardware has advanced to the point where legacy disk is obviously the bottleneck in a lot of situations where flash is more standard.

So, I guess my question is, should we think about the progression in advancement of GPUs and other specialized silicons as being analogous in this respect and are the current flash platforms sufficient enough to meet the current needs, given that we're still in the early stages here? At what point ever do they become bottlenecks versus more specialized solutions like FlashBlade?

Matt Kixmoeller -- Vice President, Strategy

This is Kix. I'll take this one. I think we're excited about expansion on both sides of the spectrum. As you noted, with GPUs and AI and kind of a renaissance on the top end of performance, that's creating demand that frankly only flash can serve and so that's helping us sell NVMe and some of the higher-end performance offerings. Then as you look at the forward motion of NAND cost price declines, we think we can go after even more terabytes with a data center that would have only been in a layer of disk before. Then the final thing and ultimately the StorReduce acquisition from us is about going after terabytes that might even have landed on disk or tape and modernizing those as well, leveraging cloud storage as the cheaper storage as opposed to on-prem. And so we think it's high time to modernize everything and we're seeing good opportunities in both directions.

Victor Chiu -- Raymond James -- Analyst

Okay. Thank you.

Operator

Your next question comes from Mehdi Hosseini from SIG.

Mehdi Hosseini -- Susquehanna -- Analyst

Thanks for taking my question. Most of the good questions have been already asked. I have a couple of follow-ups. Looking at your acquisition announced tonight, it's very intriguing and very interesting, especially the de-dup feature of this acquisition. Two follow-ups. Do you see this acquisition running independent for a few years before embedded into your flash products, or is it going to be embedded into the FlashBlade as you try to scale your object-oriented products? And I have a follow-up.

Charlie Giancarlo -- Chief Executive Officer

That was a very good question, Mehdi. Thank you for that. By independent, I think you mean will we sell it as software running on a standard hardware and the answer to that is yes. To be clear though, for the immediate next several months, our plan is to continue to maintain and support their customers, but not to add new customers while we, you might call it purify the software. That is, make it compatible with our management. Make sure that it has the kind of reliability that our large customers are going to expect. The kind of availability in that environment.

We'll talk more about this toward the latter half of the year. We'll be able to describe exactly how this folds into our overall product line and the exact program of what he new product announcements are on that. As Tim might have mentioned, both the expenses as well as the revenue are incorporated in our current guidance, so we don't see it being a major [crosstalk].

Tim Riitters -- Chief Financial Officer

And to be clear on the revenue side, Mehdi, for the rest of this year we don't anticipate any dollars in the guide. Nothing is baked into the guide right now for that acquisition.

Mehdi Hosseini -- Susquehanna -- Analyst

Okay, got it. And one follow-up on NVMe. When do you expect NVMe will fabric solution to be supported by fiber channel?

Charlie Giancarlo -- Chief Executive Officer

I think as you're aware, when we look at the NVMe opportunity, the biggest opportunity within our systems, that's where most of the latency in a storage transaction occurs, so that's what we focused on first. We promised that we would be bringing out NVMe over fabric by the end of this year. As we stated publicly, our first goal is to actually start on the IP side and then to follow that on the fiber channel side. So, we are absolutely on track with our deployment of the IP side this year and we expect fiber channel next year.

Mehdi Hosseini -- Susquehanna -- Analyst

Okay, got it. Thank you.

Operator

Your next question comes from Rod Hall from Goldman Sachs.

Rod Hall -- Goldman Sachs -- Analyst

Hi, this is [inaudible] on for Rod. Thanks for taking my questions and congrats on a good quarter. I had a couple questions. On FlashArray, in order to have that win rate increase quarter-on-quarter, just wondering if it's solely done by your NVMe or anything else that's seeping in there? And I've got a follow-up.

David Hatfield -- President

This is Hat. The product cycle overall I think is contributing to that. There is no doubt that the FlashArray//X really extended our moat and differentiation is having a big effect on our biggest business.

Rod Hall -- Goldman Sachs -- Analyst

Okay. That helps. Any particular geography or any product that you're seeing better win rates?

David Hatfield -- President

We've seen them consistently across the board for years and that hasn't changed. So, I think we'll continue to focus on driving our success in the largest markets internationally and the largest segments that we've got. We did see a particularly strong quarter in the Americas in Q2, which we were thrilled with, and obviously it being our largest business, when that grows, it really helps the overall top line as well.

Rod Hall -- Goldman Sachs -- Analyst

Good. One last question. What kind of plans are you seeing in the FlashBlade business? You mentioned that you're seeing larger deals more frequently? Any further color on that would be helpful. Thanks.

David Hatfield -- President

I would just say I'll hit the first part and Kix maybe you can follow up underneath it. We're seeing great traction in three real-use cases. One is the rapid restore use case. Another one is in backup and exit data replacements. And the third one is in this next-generation analytics and AI. And so all three of those are very repeatable and we're seeing great traction and success across segments. We talked about in The New York Genome Center. It's one of the largest competitive installs that we're aware of in this area. We also talked about RBC. This is a great win for us with one of the largest banks globally. There's a whole bunch of other successes that we had across healthcare, large SaaS companies, and public sector. So, we're seeing great adoption across those three use cases, across segments.

Rod Hall -- Goldman Sachs -- Analyst

Perfect. Thanks so much.

Operator

Your next question comes from Eric Martinuzzi from Lake Street.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

I had a question regard the StorReduce. Just wondering if this is, did you find that you were maybe lacking something in the product portfolio, so not having this capability cost you maybe in some competitive bids or is this really more about broadening your current offering to the install base so that you're there with them when they want to have a hybrid capability?

David Hatfield -- President

I'd say a couple things. First off, we don't have [inaudible] today in FlashBlade. So, this is a natural fit in that sense. But in the broader equation here, oftentimes when we go out and meet customers around big data, they have hundreds of petabytes of data. Bringing hundreds of petabytes to FlashBlade probably isn't realistic. So, we often get into a discussion with them about how we can move tens of their petabytes to flash, but we need some lower tier for the rest of the data. We think the rest of the data should be in the cloud. If you look at a previous workflow from a decade ago, customers might have used three flavors of disk and tape. We think the future is flash and low-cost public cloud storage.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Okay. Then as far as the partner education, I understand you've got to do some integration on the technology side, but what about the timeline for getting the partners smart on this capability?

David Hatfield -- President

Once we engineer and purify the product, as we talked about, it'll be a full Pure product that will launch as we do with any. Train all of our partners, work to drive technology partner integrations, all the normal stuff.

Charlie Giancarlo -- Chief Executive Officer

And we feel like we've got the time to be able to do that, so we feel comfortable about the timelines we have in place for that.

David Hatfield -- President

Perhaps it's also useful to mention that this product also brings strength in new partnership areas. StorReduce was successful in creating a number of pod partnerships as well. We intend to embrace and extend those partnerships.

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Thanks.

Operator

Our last question comes from Steven Fox from Cross Research.

Steven Fox -- Cross Research -- Analyst

Thanks. Good afternoon. I'll keep in quick. Just on the channel-centric focus and also the ramp-up in the larger scale wins. It seems to be creating some operating expense leverage, as well as gross margin leverage. Can you just sort of talk about whether your expectations for further opex leverage have changed going forward given the success you're having? Then I had a very quick follow-up.

Tim Riitters -- Chief Financial Officer

This is Tim. No. I think you're right in suggesting that there is leverage there to be had, but I would sort of just point to the guidance that we issued here today raising our full-year profit up. So, there is inherent leverage in the business. The business is performing well and very healthy, but I don't think it's changed our long-term view of the dynamics and go-to-market and the success we've been having.

David Hatfield -- President

I would just add that a lot of the investments we make up front take some time to come through and so we're seeing the benefits of some of that. Candidly, we're doubling down. I think our competitors in the market are going to feel us in the second half as we invest in our channel partnerships, invest in market awareness, and invest in additional capacity. So, we're really excited and motivated about the second half. Kevin, this one is for you. EFD.

Steven Fox -- Cross Research -- Analyst

And Tim, just real quick on the cash flows for the full-year guidance now. What does this sort of say about, not necessarily cash flow from operations -- you've been specific about that -- but free cash flow now as we think about your investments for the full year. Where do you think you come out for the year roughly on the free cash flow line?

Tim Riitters -- Chief Financial Officer

Steve, we've never really guided free cash flow. It just can be noisy. It has to do with cash collection, spending, and individual quarter boundary or anything like that. I think all we've done is qualitatively said last year we were positive free cash flow for the year, a small amount. We definitely anticipate being a stronger FCF generation year this year. But really point people on our progress to the operating margin, which is a much more stable and sort of predictable number than sort of any given quarter of FCF.

Steven Fox -- Cross Research -- Analyst

Understood. Worth a shot. Congrats on the great progress.

Tim Riitters -- Chief Financial Officer

Thanks, appreciate it.

Operator

I will now turn the call over to Charlie Giancarlo for closing remarks.

Charlie Giancarlo -- Chief Executive Officer

Thank you, Mike. Everyone, we're proud of our progress this quarter and we're proud of empowering our customers to succeed. I really want to thank the entire Pure team and our global partners for their tireless efforts and their dedication. Lastly, on behalf of all Puritans globally, I'd like to welcome again the StorReduce team, along with their customers and partners, to the Pure Storage family. We believe that the StorReduce team has built an incredibly exciting technology that has the opportunity to make a major impact on the next generation of cloud storage architectures. Once again, I want to thank all of you for joining us on this call today. It's been a pleasure talking to you and I look forward to chatting with you in the days and weeks to come.

Operator

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

Duration: 59 minutes

Call participants:

Charlie Giancarlo -- Chief Executive Officer

Tim Riitters -- Chief Financial Officer

David Hatfield -- President

Matt Kixmoeller -- Vice President, Strategy

Aaron Rakers -- Wells Fargo -- Analyst

Mark Murphy -- J.P. Morgan -- Analyst

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Sherri Scribner -- Deutsche Bank -- Analyst

Katy Huberty -- Morgan Stanley -- Analyst

Alex Kurtz -- KeyBanc Capital Markets -- Analyst

Andrew Nowinski -- Piper Jaffray -- Analyst

Ittai Kidron -- Oppenheimer -- Analyst

Jason Ader -- William Blair -- Analyst

Erik Suppiger -- JMP Securities -- Analyst

Victor Chiu -- Raymond James -- Analyst

Mehdi Hosseini -- Susquehanna -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

Eric Martinuzzi -- Lake Street Capital Markets -- Analyst

Steven Fox -- Cross Research -- Analyst

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