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Pure Storage, Inc. (NYSE:PSTG)
Q2 2020 Earnings Call
Aug 21, 2019, 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 2020 Earnings Conference Call. [Operator Instructions]

I will now turn the call over to Matthew Danziger, Vice President of Investor Relations. You may begin your conference.

Matt Danziger -- Vice President, Investor Relations

Thank you, and good afternoon. Welcome to the Pure Storage second quarter fiscal 2020 earnings conference call.

Joining me today are our CEO, Charlie Giancarlo; our CFO, Tim Riitters, our President, David Hatfield; and our VP of Strategy, 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 various 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 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 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 -- Chairman and Chief Executive Officer

Thank you, Matt, and good afternoon, everyone. Thank you for joining us on today's earnings call. I will begin by sharing our high-level results from the quarter, Hat will provide a go-to-market update, and Tim will offer a detailed review of our financials.

We had a strong quarter and the fundamentals of our business remain solid. For Q2, revenue was $396 million, growing 28% year-over-year, which was above the midpoint of our guidance. Our industry-leading gross margin grew to 69.4% and operating margin was a negative 0.8%, beating our guidance range.

In less than 10 years, we disrupted the storage industry by creating solutions that are intelligent, automated, and modern and delivered 10x improvements in the performance, the cost of operation, and usability. We are now setting a bold new path for Pure for our second decade which will deliver the next set of 10x breakthroughs. Our goal is to take the fragmented and antiquated data storage environment and recreate it into a unified, automated, multi-cloud data experience.

Pure delivers a modern data experience to our customers. Unlike legacy infrastructure vendors, Pure enables customers to utilize more of their data, while reducing the complexity and expense of managing the infrastructure behind it. We provide a data experience that creates a common operating environment across multiple data centers and clouds, easing operations via APIs and intelligent AI-driven automation. We now offer our customers integrated hybrid cloud and on-prem solutions, consumable as a flexible subscription to deliver that modern data experience.

Looking at the market as a whole, Pure is clearly out-executing our traditional competitors, some of whom have expressed concerns around the macro economy. We do not believe the macro environment has affected us this past quarter.

What we do see is a significant transitory NAND supply/demand imbalance which impacted component prices and the storage industry as a whole. We expect this situation to continue to affect us for the balance of the year given the natural lag between component costs and storage market pricing. However, we are already seeing NAND pricing rise in the spot market, and suppliers are delaying additional fab capacity. We believe these signals point to an improving market next year.

As compared to others, Pure's continued exceptional growth and margin leadership highlight our differentiation which is consistently validated by our growing, happy customer base. Our results underscore that our strategy is working. We also know that it is in challenging market environments when our superior value proposition enables us to gain even more market share.

In today's world where data is at the core of digital transformation, legacy vendors have inexplicably decreased their investment in innovation and instead are relying on commodity hardware and software. They attempt to convince customers that all systems are the same, and that price is all that matters. Customers, however, understand that an investment in innovation is an investment in their future.

Our continued investment in successful innovation is one of several reasons we are growing faster than public market competitors. At our Accelerate conference next month, we will announce ground-breaking portfolio additions and future innovations as part of our strategy for the next decade.

Pure's focus on priorities important to CIOs today, building a hybrid cloud; transitioning to fast, consolidated data architectures; deriving business value from AI and analytics; and enabling customers to rapidly recover from IT failures, means that more customers than ever are choosing Pure. We are the essential company driving change in the data industry, providing an unparalleled experience which delivers business outcomes and ensures customer delight.

Now, I would like to share more personal news. As you may have read in our Press Release, our CFO, Tim Riitters, will be leaving Pure for personal reasons. An executive search is already under way for our next CFO. Tim will participate in that process and will help in the transition.

When he first joined Pure, we were less than $200M in revenue, a private company. We had 600 employees, and just one product. Five years later, we disrupted an entire industry, we have grown almost 10x, consistently delivering double-digit annual revenue growth. We achieved profitability, acquired two companies, and dramatically expanded our portfolio. He's been an invaluable asset and has had an incredible impact on our company. I want to personally thank Tim for his years of excellent service, his consistent energy and care, and for his friendship and partnership over my tenure.

With that, I'll turn it over to Hat.

David M. Hatfield -- President

Thanks, Charlie. And let me add my thanks to Tim for all he has done over the past five years. We hope you can enjoy some much deserved time with family and friends.

Pure is positioned to help enterprises tackle their most strategic IT initiatives, is gaining market share, and enabling our customers to achieve outcomes that were not previously possible. Our industry-leading customer satisfaction, our Evergreen ownership model, and our expanding suite of solutions position us not only as the most innovative, but also the safest choice for our customers.

In contrast, Pure is growing approximately 10x faster than any competitor and their rate of spending on innovation is on average 2x less than Pure's R&D investment. Customers are challenged with navigating competitor product-line consolidation and disruptive upgrades, while Pure's customers reap the benefit of our Evergreen experience with its continuous expansion of new capabilities and services.

We believe that data is strategic to our customer's digital transformation journey. Data requires innovation and investment, especially as new application architectures are driving unprecedented levels of performance, parallelism, and multi-cloud data workflows. Customers are selecting Pure because we enable them to simultaneously modernize their existing applications and accelerate their adoption of hybrid cloud, containers, DevOps, AI, and real-time analytics, at scale.

Unlike our competitors, who are simply shipping commodity storage arrays, Pure's modern data experience is cloud-managed, AI-driven, constantly improving, and consumable via a flexible subscription model that can be deployed in a hybrid IT environment. This is not your grandparents' data storage environment.

Our focus on the largest consumers of storage across Cloud, Enterprise, Commercial and Public Sector markets is working. Customers are realizing Pure's differentiation and our win rates continued to hold nicely. We finished the quarter with more than 6,600 total customers, adding approximately seven net-new each business day, equating to more than 450 new customers in Q2, the highest number in any Q2 of our history.

During last earnings, we discussed the increase of new sellers and the transition we encountered in Q1. In Q2, we were pleased with the level of sales execution and the quality and ramp of new sellers. This quarter, we closed a number of large transactions, including a 50% increase in million-dollar deals from Q1. We were particularly pleased with the progress in our Enterprise and Public Sector segments, as both outpaced the growth of our overall business.

Turning to our technology and strategic partnerships, we saw continued progress across our ecosystem in the fastest growing segments of the market. Alliances include Splunk and Elastic in next-generation analytics, NVIDIA for AI and Machine Learning, Cisco for mission-critical converged infrastructure, and a broad range of data protection partners to deliver the next-generation of Rapid Restore and Data Protection.

We were thrilled with the continued FlashBlade momentum, specifically in the Rapid Restore and data analytics use cases, as well as the excitement for our Cloud Data Services, including Cloud Block Store on AWS. We will share more on this with them at Accelerate next month.

To highlight some of this momentum, in Q2 a large U.S. government agency chose FlashBlade and Splunk SmartStore to meet policy objectives for regulatory compliance and to manage a large scale implementation. As a result, the agency eliminated multiple copies of data, reduced their physical footprint by 8 to 1, and avoided thousands of dollars in potential penalties for power and space consumption, achieving a highly compelling TCO.

Another notable customer success in the quarter, a large global asset management firm, chose Pure for ease of management, cloud-native automation, and orchestration in their hybrid cloud environment. By freeing up time, resources, and money, this firm can now focus on their own innovation instead of day-to-day operations.

And finally, the interest in our unique unified subscription model across hybrid IT with our Cloud Data Services and Evergreen Storage Service, is growing. This quarter, a mid-sized hospital in Illinois invested more than $2 million in our ES2 offering. This customer moved their existing infrastructure to a 100% subscription model with Pure, which enables easy capacity and performance planning, and will allow them to shift to Cloud Block Store on AWS under their ES2 contract. Customers like this have realized that ES2 empowers them to utilize our technology on-premises today, while also preserving future flexibility for where and how they will architect their data strategy going forward.

We are as excited as ever to execute on our long-term vision and provide freedom for organizations to build for today and tomorrow. Pure's Q2 performance and rapid market share gains against the competition demonstrate our differentiation from our traditional peers. We truly are just getting started. See you at Accelerate next month.

And with that, I will now turn it over to Tim. Tim?

Tim Riitters -- Chief Financial Officer

Thanks, Hat. Q2 was a strong quarter for Pure as we continued to demonstrate industry-leading growth, gross margins, and continued innovation across our product portfolio in an evolving environment.

Before I dive into the 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. Reconciliations of these non-GAAP metrics to the GAAP comparables, as well as our full Q2 results and presentation, are available on our website at investor.purestorage.com.

For the quarter, total revenue grew 28% year-on-year to $396.3 million. Product revenue grew 24% year-on-year to $300.1 million and support and subscription revenue grew 42% year-on-year to $96.2 million. Geographically, 74% of our sales came from the United States and 26% came from our International markets for the quarter.

Our gross margins continue to be industry-leading, with product margins well above our competitors and aggregate gross margins reaching an all-time high in the quarter of 69.4%, up 1.3 points sequentially. Total gross margins reflect the significant differentiation and innovation we deliver to our customers.

Product gross margins in the quarter were 70%, up 1.3 points, due largely to benefits we are seeing in component cost declines. Support gross margins were 67.4%, up 1.1 points sequentially. The sequential increase in margins was due both to ongoing efficiency improvements, along with an approximately one-half point impact from one-time benefits in this line of business.

Moving to operating margin, in Q2 operating profit was negative $3.2 million, or negative 0.8% of revenue, and compares to an operating profit of $0.9 million, or 0.3% in the year-ago quarter. Operating profit was better than expected due primarily to over performance on gross margins for the quarter.

Q2 net income for the quarter was positive $2.5 million or positive $0.01 per share. This compares to the year-ago period of positive $2.4 million or positive $0.01 per share. The weighted-average shares used for the per-share calculations are 271 million shares in Q2 and 263 million shares in the year-ago period.

Moving to the balance sheet and cash flow, we finished the quarter with cash and investments of $1.18 billion, an increase of $16 million from the previous quarter. Our quarter-on-quarter increase in cash was driven primarily by strong free cash flow in Q2 which is a typically low quarter for us.

Free cash flow in Q2 was positive $19.9 million, which includes $5.7 million of impact related to our employee stock purchase plan. Adjusting for the normal impact of our employee stock purchase plan, free cash flow was positive $14.2 million in the quarter.

We delivered strong deferred revenue growth in the quarter. Deferred revenue at the end of the quarter was $607.3 million, an increase of 47% over the same period a year ago. The strong deferred revenue performance was driven by three ongoing key trends, meaningful year-on-year renewals growth, longer initial subscription agreement purchases, and the early traction of our ES2 product.

In addition, you will note from today's press release, Pure's Board of Directors has authorized an up to $150 million stock repurchase program. This program demonstrates the confidence in our company strategy and our long-term growth potential. Our top priority continues to be investing in our business for growth. At the same time, this program gives us one more capital allocation tool to return value to shareholders in periods where we can repurchase shares at reasonable levels and will help reduce the net amount of employee stock award dilution going forward.

Now I will turn to our guidance. As it relates to revenue, first and most importantly, as Charlie mentioned we are in an inflection phase with respect to the NAND pricing environment with price declines falling faster in Q2 than we had originally anticipated.

While we were able to show strong top line growth in Q2 in spite of these circumstances, we want to be mindful of this dynamic as we think about the rest of the year in developing our guide. We believe a more balanced revenue and NAND market environment will emerge as the quarters progress, and return to the consistent long term NAND market trend line.

Second, while we did not see any specific indications that macro impacted our business in the quarter, we nevertheless want to be mindful of the environment given the recent headlines and cautionary tone of other infrastructure vendors. We remain confident in our ability to drive growth in the quarters ahead.

With this as context, for the third quarter of fiscal 2020, we expect, revenues in the range of between $434 million to $446 million, or $440 at the midpoint; non-GAAP gross margin in the range of between 66% to 69%; and non-GAAP operating margin in the range of between 3% to 7%, or 5% at the midpoint.

For the full year of fiscal 2020, we now expect, revenues in the range of between $1.645 billion and $1.715 billion, or $1.68 billion at the midpoint. Non-GAAP gross margin in the range of between 67% to 69%, and non-GAAP operating margin in the range of between 2.25% to 4.75%, or 3.5% at the midpoint.

You will notice that our operating profit guidance remains unchanged. This speaks to our focus on thoughtfully and carefully investing given the current environment, and adjusting our spend plans to maintain our profit goals despite the reduction in our top line expectations.

As I wrap up, I'd like to offer some final thoughts on why we continue to be excited about the road ahead here at Pure. Number one, Our Q2 results highlight Pure's momentum, with us growing roughly 10 times faster than any of our public competitors. Number two, the fundamentals in our business remain strong. Number three, we are on the cusp of a significant and exciting product cycle. And finally, we remain focused on driving a smart and profitable business.

In closing, as Charlie mentioned, I have made the personal decision to leave Pure. My last day will be later in the year, and in the interim I'll participate with the selection of and transition to our new CFO. And I will be at Accelerate next month and look forward to meeting many of you at our Investor Day. It has really been an honor to serve as Pure's CFO. The company is positioned well for the future, and I am excited to see what Pure does in its next decade.

With that, I'll turn it back to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Alex Kurtz from KeyBanc.

Alex Kurtz -- KeyBanc -- Analyst

Thanks, guys. Can you hear me OK?

Charlie Giancarlo -- Chairman and Chief Executive Officer

You bet. Hi, Alex.

Alex Kurtz -- KeyBanc -- Analyst

Hey, before we get into questions, I just want to say, Tim, it's been a real pleasure working with you, and maybe we will see you on the mountain one day.

Tim Riitters -- Chief Financial Officer

I appreciate it, Alex. Thank you.

Alex Kurtz -- KeyBanc -- Analyst

Yes. Best of luck on what's next. So as I understand -- as I try to understand your pricing dynamic points you made in the prepared remarks, can I just give a quick example and you can tell me how far I'm off here. So at the beginning of the year, customers are expecting maybe $2 to $3 per effective gig, when they came into a deal now with this oversupply and end market, maybe they're looking for $1 to $3. And so your reps are hitting their numbers, but now they'd have to ship extra bit to get to the original guidance. Is that the right framework?

Charlie Giancarlo -- Chairman and Chief Executive Officer

Yes. We're just shipping more terabits -- terabytes per sale, right. And when prices drop more rapidly than you expect, it takes a while for customers to adjust to the idea of two things; one is buying more terabytes for workloads that they've already planned, but now looking at new workloads, at new tiers, and that takes a little more time and planning on the customer side. So, as I've said many times in the past, Alex, that, in a steady -- we live in an environment with steadily decreasing component in commodity prices, right. That's the entire tech market. And as long as it's slow and steady, the market equilibrates on that, but you do have quarters where it's faster than you expect and it takes a while for the customers to catch up with that, so that's what we saw.

Alex Kurtz -- KeyBanc -- Analyst

And just to be clear, cohorts as far as their yield rates have been trending correctly, any context there, Tim?

Tim Riitters -- Chief Financial Officer

Yes. You mean sales cohorts or customer cohorts?

Alex Kurtz -- KeyBanc -- Analyst

Yes. No, sales cohort.

Tim Riitters -- Chief Financial Officer

Sales cohorts performing nicely. I mean, as you know, we had a big class come in this year and that's -- the early signs are positive.

Alex Kurtz -- KeyBanc -- Analyst

Thank you.

Charlie Giancarlo -- Chairman and Chief Executive Officer

Yes.

Operator

Your next question comes from Matt Cabral from Credit Suisse.

Matthew Cabral -- Credit Suisse -- Analyst

Yes. Thank you. Also wanted to ask where the lower guidance, just wonder if you could parse a little bit between just the push you're making in the larger enterprise deals versus the more run rate commercial business and just help us understand the incremental caution that you're putting into the guidance and just how that compares to where you were looking about it 90 days ago?

Charlie Giancarlo -- Chairman and Chief Executive Officer

Yes, I'll let Hat answer that first piece, but really, those two things are quite separate for us. We're not the balance, let's say, between enterprise and commercial is not -- it did not affect or calculate into our guide at all, but I'll let Hat answer the complexion between those two.

David M. Hatfield -- President

Yes, really good progress in enterprise. In my prepared remarks, we talked about enterprise and the public sector both outpacing the growth of the company. That's a highlight. Quarter-on-quarter, more million dollar deals closed, including a couple of the larger ones we talked about in Q1 for seven and eight figures. So we feel great about the momentum in the business overall.

Matthew Cabral -- Credit Suisse -- Analyst

And then on gross margins, obviously came in meaningfully above your range for the quarter. Just wondering if you could talk a little bit about how you're balancing growth versus profitability? And just if you think there's an opportunity to get a little bit more aggressive against what seems to be a little bit more of a difficult environment out there?

Charlie Giancarlo -- Chairman and Chief Executive Officer

Yes. You know, I've said this before. We don't win on price, we don't lose on price, and generally, we're not losing on price. So, I think the upward margin reflects the fact that we do get to take advantage of lower component pricing before the rest of the competition, so that adds a little bit to it. I think if we thought that we could win a deal, especially with a new customer by discounting, we do it. So that's not holding us back. So generally, those are not the things that -- pricing is not the thing that's holding us back.

Operator

Your next question comes from Pinjalim Bora from JP Morgan.

Pinjalim Bora -- JP Morgan -- Analyst

Great. Hey, guys, thanks for taking my question, and congrats on the strong Q2. I also wanted to deal on the revenue guidance, is there a way to basically pause the 300 points or so of cut. I mean, well, how much is macro concerns? How much is the pricing environment?

And then I know the narrative in the market is across your peers is pretty bleak. But are you seeing any signs of macro softness in the pipeline or maybe more scrutiny or maybe Brexit related weakness or any kind of signal which is causing you to be more prudent with the guidance?

Tim Riitters -- Chief Financial Officer

Yes, so this is Tim. The first part of your question, we're not just discussing some big number, but the majority of it is really the pricing environment that Charlie talked about. As it relates to macro, certainly we want to put some sort of prudence in there as well. And that's a second-order reason for the guidance.

But to your question about the signals we are seeing, one of the big measures I look at is push deals. And our push deal number was down quarter-on-quarter, right, which, if you're into a macro situation, that you'd expect that number to go up. So we're just really not seeing those signals. When we're driving the leadership in differentiation we are -- it's obviously a good thing, but we didn't see those signals.

Charlie Giancarlo -- Chairman and Chief Executive Officer

And really just to add to that, when you're an innovator and a share taker, I think the macro tends to affect you less because your -- so we may -- you may be out there and we may just be a little less sensitive to it. But we're a share taker right now. And so, that's not what -- as Tim said, it's mostly the pricing environment that is the -- that has created the caution.

Matthew Cabral -- Credit Suisse -- Analyst

Understood. I just want to ask a follow up on DR strength. Obviously, you kind of jumped out of the page and I think part of the reason you said is longer initial subscription agreements. Has there been a meaningful change in the duration for these agreements? And then is that the main driver for the Group cloud store [Phonetic], because I think, ES2 is probably pretty small.

Tim Riitters -- Chief Financial Officer

Yes. So on deferred revenue, a couple of things. Number one, the main reason for deferred revenue growing the way it is, is renewal -- is our renewal business or our subscription business, subscription renewal business. That evergreen model is indeed working, and we're starting to see big tranches renew a very nice renewal rate. So that's really what's happening and the main reason. On elongation of the overall initial rates that's happening, but it's more of a second order effect than the primary reason, which is renewal.

Matthew Cabral -- Credit Suisse -- Analyst

Got it. Thank you so much.

Operator

Your next question comes from Katy Huberty from Morgan Stanley.

Katy Huberty -- Morgan Stanley -- Analyst

Yes. Thank you. Just looking at your guidance versus consensus coming into today, you lowered October, but not so much the January quarter. Is there something you see in terms of large deal pipeline or product cycles that give you more confidence around the January versus the October quarter?

Tim Riitters -- Chief Financial Officer

Katy, this is Tim. Really it is a question of more sort of challenging and easier comps last year. So if you look at last year, given some things we had in Q4, it's a relatively easier comp, and so by definition, it's less of the adjustment that we made versus the harder comp is in Q3.

Katy Huberty -- Morgan Stanley -- Analyst

Okay. That makes sense. And Tim, DSOs have run higher the last three quarters, is there a changing dynamic in terms of timing of deals or collections as you move toward subscription or something else going on that's impacting DSOs?

Tim Riitters -- Chief Financial Officer

Yes, something is slightly different, Katy. We've talked a lot about our upmarket focus and getting into larger and larger enterprise customers. Those enterprise customers tend to be more forceful in wanting longer extended terms, and it's a great use of our balance sheet. We'll do that any day if we can get into big accounts. So this will typically take a little bit longer term, and that's what you're seeing more than anything else in New York.

Katy Huberty -- Morgan Stanley -- Analyst

Okay. And then just lastly, sales and marketing as a percentage of revenue continues to grow despite pretty significant scale and market leading growth rate. Do you have a view as to when we can start seeing sustainable leverage on the sales resources that you put in place?

Tim Riitters -- Chief Financial Officer

I'll take that, Katy. You know, as we said at the beginning of this year, this was going to be a major investment year for us as we expanded into enterprise and really believe that with the addition of new products that are coming out this year and early next, that we were really going to be able to take just more larger share in the enterprise, but of course, it's the asset that that matter. So I would expect that this will be the year when you start to -- this will be the last year where you see that, and you'll start to see it come down in future years.

Katy Huberty -- Morgan Stanley -- Analyst

Okay. Thank you. Congrats on the quarter. Best of luck, Tim.

Tim Riitters -- Chief Financial Officer

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 Leopold. Can you provide some color around the linearity in the July quarter, specifically whether you saw business slow during the month in July and reduce pipeline as you go into the October quarter?

David M. Hatfield -- President

Yes. This is Hat. I'd say that we actually saw a really strong July. And we had solid linearity throughout the quarter, but different what some of our peers were seeing, we actually see things really had great momentum toward the end and continue momentum in the beginning of Q3.

Victor Chiu -- Raymond James -- Analyst

Okay. And I guess, let me say, do you have any metrics, I guess, to give us an update on progress in the new sales hires and ramping up the speed and how that's impacting the progress toward pivoting toward larger deals?

David M. Hatfield -- President

Yes. We're super diligent on looking at all the cohort classes. We have 27 cohort classes that we've had since I've been here and we look at the past couple of months. And what we measure is the ramp to productivity relative to their peer group and so we've seen the largest classes we've had over the last couple of quarters come in and deliver in line with expectations and in line with our previous cohorts. So, it's early days, and we're spending a lot of time and energy driving enablement, etc, but really nice early signs.

Victor Chiu -- Raymond James -- Analyst

Okay. Thank you.

Operator

Your next question comes from Steven Fox from Cross Research.

Steven Fox -- Cross Research -- Analyst

Thanks. Good afternoon. First, I was wondering if you can give a little more color on the public sector. You mentioned one large win. How broad was the growth that exceeded overall growth beyond that one win? And then I had a follow up.

Charlie Giancarlo -- Chairman and Chief Executive Officer

Yes, public sector has been an area that we've been investing in for the last couple of years. We've wanted to get into a more meaningful run rate. And I think the last two quarters that we've seen, three quarters that we've seen real consistent growth quarter-on-quarter. It's across the large central agencies in the federal government in the U.S., as well as state and local governments coming in and contributing. So it's nice breadth. We feel positive that that will continue especially into the September quarter for the end of the fiscal year. And so we feel like we've kind of starting to get our stride in the public sector business, in the U.S. in particular, but also globally.

Steven Fox -- Cross Research -- Analyst

Thanks. And then just as a follow up, when we think about the transition to NVMe, which you guys have moved forward pretty rapidly, I mean, what is that? What's the impact been on financials from just that technology transition?

Charlie Giancarlo -- Chairman and Chief Executive Officer

Yes. Thanks for that question. So as you may recall, we were the -- while we innovated in both cases, both at the back end and the front end, that we were the first to incorporate NVMe on the back end. And of course that helped both margin and pricing, and made us competitive in the market, helped overall performance of the systems versus the competitors.

And then just a couple of quarters ago, we introduced it on the front end with the NVMe over Fabrics. We are seeing a very nice interest level by the most advanced customers. As you may recall, NVMe over Fabric requires a change in overall rack architecture. We're seeing a nice pickup there, but it's early days. Kix, you want to add.

Matt Kixmoeller -- Vice President, Strategy

No, I think that was great. I mean, the only thing I would add is, as we talked with industry analysts, I think in the last quarter, we mentioned that we're at this point kind of a majority of our businesses shipped with NVMe, and comments from the analysts lead us to believe that we're far, far ahead of any competitor in that regard.

Steven Fox -- Cross Research -- Analyst

Great. That's helpful. Thank you.

Operator

Your next question comes from Aaron Rakers from Wells Fargo.

Aaron Rakers -- Wells Fargo -- Analyst

Yes. Thanks for taking the question, and also, Tim, it's been great working with you and wish you the best of luck. I want to go back to kind of the sales leverage question. Can you first of all talk about maybe any updated metrics around the success that you've seen as far as bundling across the product portfolio, given kind of the expansion that you've seen? And then also in this last quarter, I know a couple of quarters ago, you had a large GSI systems integrator alignment. Have you started to recognize revenue from that relationship or is that still that $100 million plus opportunities still in front of us?

David M. Hatfield -- President

Hey, Aaron, this is Hat. Yes, so first of all, the portfolio motion is really working well. It's a key contributor to why we're thrilled with the FlashBlade performance, but we also saw really nice uptick in our FlashStack business. And as we introduce new products, the ability to have our core reps attach that to their deals or find other opportunities to that portfolio motion is super encouraging. So we haven't provided any specific metrics on that, but we're seeing a nice uptick on the percentage of our core sellers selling multiple products, which is really the key pull through metric that we look at.

And on the GSI win that we mentioned a couple of quarters ago, yes, we did see some incremental contribution from that in the quarter and seemed great pipeline build in the number of product announcements with their organization specifically and then broadly across the rest of the GSI sector, we're seeing nice momentum. So that route to market, as we talked about, was going to be critical for us, and it's nice to see it starting to contribute net revenue in the quarter.

Aaron Rakers -- Wells Fargo -- Analyst

Okay, perfect. And then real quick follow up, is there -- as flash pricings kind of normalize here as we look forward, can you help us just understand why we should expect gross margin to fall possibly below 68% again in the product gross margin line or do you think that we've hit kind of a new level of sustainability on product gross margin?

Tim Riitters -- Chief Financial Officer

Yes. Aaron, this is Tim. What I would point to is the guide that we offered for the year. I mean, again, we have raised it for the full year, which speaks to the environment we're in. As it relates to a longer term gross margin number that -- we don't typically talk about a longer term number in an earnings call, so we're probably looking at that.

Aaron Rakers -- Wells Fargo -- Analyst

Fair enough. Thank you.

Operator

Your next question comes from Tim Long from Barclays.

Tim Long -- Barclays -- Analyst

Thank you. Just two quick ones, if I could. Just back to the large enterprise and OpEx, can you just talk a little bit about where we are with the investment needed to better penetrate that? It sounds like you're seeing good traction with the large deals, if you can just talk about the investment and where we are?

And then secondly, you mentioned the ES2 traction and maybe if you can talk about cloud data services as -- how does the trajectory look there over the next few quarters for those businesses? Thank you.

David M. Hatfield -- President

This is Hat. Let me take the first part of that. You know, the investments really are across a number of areas, one is sales capacity, and so we've obviously made a significant investment in Q4 and Q1 of that; two, is relative to market and so one of the reasons why we've been highlighting the GSI wins and the managed-service provider wins with Rackspace and others, those are critical routes to market to be able to go get access to the enterprise customers that take some time to build. But we see really nice trajectory on that, as well as continued growth of the mix of the pipeline of larger deals. And I think as we look at those metrics, all very encouraging signs.

As Charlie mentioned, we do expect to get some leverage as that capacity comes online through next year and the year beyond that. And, those are opportunities where the TAM is higher. So we do get and we'll expect to get more revenue per quota bearing head, that are catering to those enterprise customers.

Charlie Giancarlo -- Chairman and Chief Executive Officer

On to the question about the cloud data services, so I'd say, overall, we're still in the beta phase with our Block Store, but it's already turning to be a success for our product line as a whole. If you talk about the platform motion that Hat mentioned earlier, having a cloud dimension to our platform has materially changed the kinds of conversations we're in. And how people look at not only the platform today, but where it can take them in the future. The flexibility we provide around ES2 to be able to deploy on-prem and extend that to the cloud in the future, again has really materially changed the discussion.

In terms of the beta, going really well. Great results from that so far, and come to accelerate next month. You'll hear more from both us and Amazon at Accelerate.

And customers that are using it on Amazon.

Aaron Rakers -- Wells Fargo -- Analyst

Okay. Thank you very much.

Operator

Your next question comes from Andrew Vadheim from Wolfe Research.

Andrew Vadheim -- Wolfe Research -- Analyst

Yes. I had a follow up on the DSO question. So if we move to the other side of the balance sheet, you saw days payable go down meaningfully as compared to the prior year. So it seems like it's taking longer to collect, but also it seems like customers are allowing you as long to pay. And together, those kind of seem like tepid indicators. So, is there anything else to read macro-wise from this?

Charlie Giancarlo -- Chairman and Chief Executive Officer

No, not at all. On the balance sheet, on the on the asset side, we talked about the reason AR does sort of rise a little bit. On the AP side, it's just timing. There's not really anything we're seeing in any of our vendors which would change terms or whatnot. So that I would read into that.

Andrew Vadheim -- Wolfe Research -- Analyst

Okay. And then maybe just a follow up on the public sector commentary. So strength in the quarter, but any indication there might be pull forward that occurred and you might potentially dilute what we will see in the October quarter?

Charlie Giancarlo -- Chairman and Chief Executive Officer

No, I don't think so. It's still reasonable -- to our overall top line and the deals that we're getting, our new wins that they build on. So there's not a lot of pull forward in this quarter or the quarter before. And we're optimistic about what we'll see in the fiscal year end.

Andrew Vadheim -- Wolfe Research -- Analyst

Thank you.

Operator

Your next question comes from Jason Ader from William Blair.

Jason Ader -- William Blair -- Analyst

Thank you. First question just for Charlie, can you give us an update on ObjectEngine? And then also just Cloud Block Store. Can you talk about some use cases where the customers that you've seen traction with are applying the technology?

Charlie Giancarlo -- Chairman and Chief Executive Officer

Sure. Well, yes, the rapid restore has proven to be a really strong product introduction for us. This is based on FlashBlade, ObjectEngine helps in that depending on the circumstances, but Rapid Restore, a lot of customers never realize that they can get back up and running in less than an hour, and it's proven to be a major mover of that overall FlashBlade product line.

As Kix mentioned on Cloud Block Store, because it's in beta of course, there's no revenue to speak of yet. We do have customers that are looked -- I feel fairly confident we'll see the first revenue in Q3, but as you know, it's a subscription revenue, so it's -- it'll be recognized ratably over the life of the contract. But we have many dozens of beta customers and some of whom are talking about standardizing their application development as they go into the cloud on Cloud Block Store, so very promising, but very early days.

David M. Hatfield -- President

And I'll just add, you asked about use cases, I think one of the things we've been pleased about is really the diversity of the use cases where we see people wanting to do application migration, but actually in both directions. So people are interested in doing, say, dev test on-prem deploy in the cloud or the other way around. People are interested in DRS as the use case between on-prem and cloud, and then, of course, just application mobility. So still early days, but we're encouraged by what we're seeing.

Jason Ader -- William Blair -- Analyst

Okay. And then second question for Tim. Tim, have you made any different assumptions on conversion rates in your guide relative to how you've -- your normal guidance methodology?

Tim Riitters -- Chief Financial Officer

Well, I think, Jason, it is a function of acknowledging pricing as well as sort of ensuring that, so we think about macro as well. I mean, implicit in that is to think about different sort of ways of measuring conversions. I think the short answer is, yes.

Jason Ader -- William Blair -- Analyst

Okay, great. And good luck to you, Tim.

Tim Riitters -- Chief Financial Officer

Thank you.

Operator

Your next question comes from Karl Ackerman from Cowen and Company.

Karl Ackerman -- Cowen and Company -- Analyst

Hi. Two questions, please. The first question, I was hoping you could address how you think philosophically about utilizing more of the channel as well as changing your pricing structure with the channel? I ask that because the cynic would say you don't have an innovation or technology challenge, you have a variable cost challenge. So perhaps that changes with the new CFO, but any color on the company's plans to rein in discretionary and semi variable spending amid this soft and demand backdrop would be very helpful? And I have a follow up, please.

Charlie Giancarlo -- Chairman and Chief Executive Officer

Karl. That's an interesting question. We changed our pricing structure about a year ago in order to accommodate the channel, where we went to that standard discount across all of the product lines and made the pricing more transparent more easily and gave them much clearer discretionary powers, if you will, in terms of how to price the product without Pure being involved. I think we were -- it took us all time to get all the tools out. That is all the electronic tools and so forth, but that's been largely done now. So I'm not quite sure where the question is ending up, but we have provided now very standard pricing into the channel. Of course, when prices drop more rapidly, we follow-up with our list price changes, so that they can follow the same swim lanes if you will, which we've done and do continuously. So, do you want to handle rest of the channel question, Hat?

David M. Hatfield -- President

Yes. So, philosophically, the channel has been incredibly a productive asset for us from the very beginning and we anticipated continuing to do so, and the majority of our net new customers are identified by our channel partners, getting the right routes to market to map to the customers that we're segmenting in. Our GSIs are getting us access to large scale enterprises that was very difficult for us to get access to on our own.

And we're driving toward independence, so we can actually lower our costs by leveraging the channel over time to be able to quote and configure and sell independent of Pure. And so, as I look at the channel or the partner ecosystem, those are all accelerators and routes to market. But to the extent they don't deliver that value to us, we'll look at that very practically and making sure we're getting the right ROI for every dollar we put into it.

Karl Ackerman -- Cowen and Company -- Analyst

That's helpful. If I may move back to the outlook question, one of the investor questions I've received is, how much visibility do you have at attaining your new revenue outlook for 2019, which has been curtailed again? Yes, core fundamentals from several peers would suggest the overall IT spending environment, perhaps might get worse before it gets better and mid-range competition may be accelerating. You've mentioned earlier on this call how NAND pricing and not the macro is the larger factor. But I guess, are there any steps that you may provide or that you have taken that would enable you to have perhaps better visibility over a multi-quarter time pricing, and how we should think about that as investors? Thank you.

Charlie Giancarlo -- Chairman and Chief Executive Officer

We continue -- every time we have a learning process as we had over the last couple of quarters with respect to, in particular, this pricing challenge. We bring that into our planning model going forward. But I'll tell you that in -- it's certainly the case that when you have a commodity market that is less steady, less linear, it does get it, it does make it a little more challenging to predict going forward. With that, we try to incorporate everything that we are aware of this time, including the signals that we're seeing from the commodity market, which as I said, that, overall, the commodity prices are firming up.

Now, we also believe that, our strategy overall is working. I mean, we are growing. I mean, despite let's say, a modification of our forecast, I mean, we're growing, in some cases 40% or more faster than our competition. That means, we're actually gaining more share. And I do believe that in tough times, leaders, that is the time when leaders take more share. We are putting out -- a boat loaded new products this year and early next, and I think that's going to allow us to continue to win in the future. But short-term swings are more difficult to predict.

Operator

Your next question comes from Rod Hall from Goldman Sachs.

Rod Hall -- Goldman Sachs -- Analyst

Yes. Hi, guys. Thanks for the question. I guess, I wanted to go back to these dynamics around NAND and just ask kind of a question about what you're assuming in terms of contract pricing lead time or lag time I should say to the spot market. So we know that it lags, but are you then assuming because the spot market has been recovering, are you assuming that then positively impacts your revenues in that fiscal Q4 implied guidance?

And then can you also talk us through -- sort of the margin puts and takes around this? Because we understand that lower NAND pricing is leading to lower revenues and then that's partially offset by higher gross margins but then we expect the impact on gross profit there to be neutral unless you pass through 100% of the component cost reductions, but then gross profit guidance is coming down. So I know that's kind of a long-winded one, but just the dynamics of those margins relative to what you've commented on the component pricing changes in the revenues would be helpful? Thanks.

Charlie Giancarlo -- Chairman and Chief Executive Officer

Right. Well, Rod, you've, I think perfectly identified the fact that it creates a complex environment. Because the one thing I think that you alluded to, but then explicitly mention is also the elasticity of the market. That is, pricing goes down, you can now compete for more workloads, workloads that would go to hybrid or to disk because the pricing of semiconductor flash now is more competitive. So when you roll that all together, what really -- what occurs is that in day one, you're pricing is lower, you've got to sell more terabytes to do it, customers may not yet be ready for those more terabytes.

But as they do, as they understand the lower pricing, start looking at other workloads, they can bulk up on it. It's the ability of our sales force to convince the customer that they should -- while prices are low, that they should buy more terabytes. It's all those things that go into making the quarter at the end of the day. With respect to margins, because we do believe that we are able to take advantage of the costs before our competitors, generally it is a good news for margins for Pure. So it's -- we think of it -- we think of it affecting our margins less than it does the most immediate quarter.

And as to timing, yes, we see it as, we see the spot market and as well as our indications that, new fab capacity is being delayed by NAND suppliers as positive for the pricing environment, but whether that hits our market in Q3, Q4 or Q1, that's always -- that's more difficult to predict.

Rod Hall -- Goldman Sachs -- Analyst

Okay. Thank you.

Operator

Your next question comes from Nehal Chokshi from Maxim Group.

Nehal Chokshi -- Maxim Group -- Analyst

Yes. So that was actually really strong deferred revenue at especially relative to our model. And you did give the three reasons of strong renewals, longer initial subscriptions and ES2 traction. I guess, first of all, the longer initial subs is that on ES2 or is that the other cloud-based products?

Charlie Giancarlo -- Chairman and Chief Executive Officer

Our traditional mainline goodness, Nehal.

Nehal Chokshi -- Maxim Group -- Analyst

Okay, got you. And so could you parse those three drivers in terms of what were the biggest drivers or percentage of the strong deferred revenue?

Charlie Giancarlo -- Chairman and Chief Executive Officer

In terms of order of operations is the biggest to smallest. So again, renewals first, elongation of contracts second, and then ES2. And we're not talking about what they are on a percentage basis, but it gives you at least a sense of magnitude on how they stack up.

Nehal Chokshi -- Maxim Group -- Analyst

Okay. So, this is your second reduction and full year guidance. Have you guys actually reduced the sales quarter along with this reduction in your guidance? Or are the salespeople are still marching the same objectives that was initially laid out for their own plans?

David M. Hatfield -- President

Yes, we don't comment, Nehal. This is Hat, on quota piece, but they're marching toward the productive goals that we put out for them and those are all data driven and opportunity based inside of their territories. And so that's what we're focused and we're driving toward participation of those folks hitting their goal.

Nehal Chokshi -- Maxim Group -- Analyst

Okay. And then finally, definitely appreciate the million dollar deals increased 50% Q-over-Q, but can you give color on how that did on a year-over-year basis?

Charlie Giancarlo -- Chairman and Chief Executive Officer

Yes, nice progress, up year-on-year as well. So continued momentum there.

Nehal Chokshi -- Maxim Group -- Analyst

Thank you.

Operator

Your next question comes from Mehdi Hosseini from Susquehanna Financial.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Hi. Thanks so much for taking the question. This is David Ryzhik for Mehdi. Charlie, you talked about some meaningful additions to the portfolio to be announced that Accelerate. Would those be commercialized by Q4, and does your implied Q4 guide include some impact from those new products? And I had a follow-up.

Charlie Giancarlo -- Chairman and Chief Executive Officer

Yes. We've got some very exciting new products, some of which will be GA and some of which we will announce at beta. But there will be new GA products in -- at Accelerate.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Got it. Thanks. And can you maybe provide an update on your international strategy. Maybe give us, what percentage of business is international and maybe what steps you're taking to diversify the revenue base?

Charlie Giancarlo -- Chairman and Chief Executive Officer

Yes. We continue to see great progress internationally, a 24% of our revenue, I believe on the quarter. Had a particularly strong quarter on APJ, which was great, and nice to have that business come online. And obviously, you want to be looking at the biggest business, which is the Americas business in the context of that international growth, and we've had three consecutive quarters of improved performance in our Americas business. And so, that's a great indicator of the health.

We think that's driven by the enterprise and public sector that we talked about. The portfolio motion that's there and the routes to market really kicking in. So of course, that leaves EMEA, and EMEA was a little softer than what we would expected, but any given quarter, you're going to have some segments perform higher and some perform lower, but we feel great about the pipeline in the second half for EMEA as well. So really nice contribution and in line with expectations.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Great, thanks. And Tim, best of luck to you. It really was a pleasure.

Tim Riitters -- Chief Financial Officer

Thank you, David. Appreciate it.

David Ryzhik -- Susquehanna Financial Group -- Analyst

Thanks.

Operator

Your next question comes from George Iwanyc from Oppenheimer.

George Iwanyc -- Oppenheimer -- Analyst

Thank you for taking my question. With the strong new customer adds, can you maybe give us a little bit more color. Is there anything changing with the size of the lands or the makeup of the customers you're adding?

Charlie Giancarlo -- Chairman and Chief Executive Officer

Well, no. As we've been very clear on saying, volume isn't the focus, the quality is. And so we saw a really nice mix across our focus segments of cloud, enterprise, public sector and commercial on a global basis. So continuing to focus on that G2K, native-cloud 1K and non-public kind of the central government organization.

So we saw progress across all of those theaters. We like the 450 number. In our situation, we have to go take share from somebody. So 450 or seven net new customers per day -- business day. Everybody else is trying to protect their base and we're having to go out and win that news. So we keep a real focus on the quality and the execution there. We think it's a really nice indicator.

Relative to size, we don't talk about ASP specifically. We're seeing nice lands in each of those segments, they vary by segment, as you'd appreciate. But we're seeing nice lands and we're also seeing a continued progress on our repeat purchases. So when you look at the fundamentals, we've got to go win and take share from somebody. We're doing that better than anybody else. We're doing so at a nice ASP and our repeat purchase rate. So the temporal nature of this pricing dynamic, I think is what it is, that we'll drive through and gain our share in Q3 and Q4. We feel great about next year.

George Iwanyc -- Oppenheimer -- Analyst

All right. And expanding on that from a competitive standpoint, so are win rates ticking up a little bit in the current environment, and is that helping drive those lands? Or are they primarily just a larger channel presence that's giving you a chance to land across more customers at the same time?

Charlie Giancarlo -- Chairman and Chief Executive Officer

Yes, we saw a nice quarter-on-quarter uptick on win rates. Year-on-year, they're stable and kind of across the board. So you're going to see little nuances on a quarter-by-quarter basis by competitor. But broadly speaking, we saw a nice pickup quarter-on-quarter, so I think that's the majority of the contribution. Our biggest competition remains not being in the fight in the first place which we are at bats.

And so, as we continue to invest in our channel and continue to make them more independent, it's getting in more and more fights on the front end. We've always said, we take a lower win rate in exchange for more at bats and I maintain that. So -- but we feel great. We're clearly differentiating ourselves, especially in the market like this with the competition, and we feel like it's the time for us to really dig in and grind, and pop out the other side of this with a lot more market share.

George Iwanyc -- Oppenheimer -- Analyst

Thank you. And Tim, best of luck.

Tim Riitters -- Chief Financial Officer

Thank you.

Operator

Your next question comes from Eric Martinuzzi from Lake Street.

Eric Martinuzzi -- Lake Street -- Analyst

Yes. My question has to do with the use of cash, you've got a tremendous amount of cash on the balance sheet. Typically, people put that to work either M&A or investing in the business, you guys are obviously pulling the lever with the repurchase program. But I guess, are we inferring from the actions that you're taking that there's not really a front-burner M&A opportunity and that you're not interested and kind of taking a deeper dive into maybe a mid-year course correction on sales hiring to continue to press and take share versus competitors?

Charlie Giancarlo -- Chairman and Chief Executive Officer

Yes.

David M. Hatfield -- President

No, our M&A strategy remains the same, which is build, partner or buy. And we have the assets to be able to do that with cash or if appropriate, stock as well. We do see a very well priced asset right now, it's called Pure Storage. And so our Board has enabled us to take advantage of that.

Operator

There are no further questions at this time. I'll turn the call back over to Charlie Giancarlo for closing remarks.

Charlie Giancarlo -- Chairman and Chief Executive Officer

Thank you. As you can see, Pure is clearly outpacing and out-innovating the legacy vendors. By creating a modern data experience, we're offering a dynamic solution that solves our customers' problems today and in the future. I want to thank Tim for his partnership over the last two years, Tim. He has had an impressive impact on Pure and he will be missed. We wish him the very best on his new adventure. And then all of us here look forward to seeing many of you at Accelerate next month. And I want to thank you for your time today.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Matt Danziger -- Vice President, Investor Relations

Charlie Giancarlo -- Chairman and Chief Executive Officer

David M. Hatfield -- President

Tim Riitters -- Chief Financial Officer

Matt Kixmoeller -- Vice President, Strategy

Alex Kurtz -- KeyBanc -- Analyst

Matthew Cabral -- Credit Suisse -- Analyst

Pinjalim Bora -- JP Morgan -- Analyst

Katy Huberty -- Morgan Stanley -- Analyst

Victor Chiu -- Raymond James -- Analyst

Steven Fox -- Cross Research -- Analyst

Aaron Rakers -- Wells Fargo -- Analyst

Tim Long -- Barclays -- Analyst

Andrew Vadheim -- Wolfe Research -- Analyst

Jason Ader -- William Blair -- Analyst

Karl Ackerman -- Cowen and Company -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

Nehal Chokshi -- Maxim Group -- Analyst

David Ryzhik -- Susquehanna Financial Group -- Analyst

George Iwanyc -- Oppenheimer -- Analyst

Eric Martinuzzi -- Lake Street -- Analyst

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