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Pure Storage, Inc. (NYSE:PSTG)
Q1 2022 Earnings Call
May 26, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Pure Storage First Quarter Fiscal Year 2022 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference call, Mr. Sanjot Khurana. Please go ahead.

Sanjot Khurana -- Vice President of Investor Relations

Thank you and good afternoon. Welcome to the Pure Storage first quarter fiscal 2022 earnings conference call. My name is Sanjot Khurana, Vice President of Investor Relations at Pure Storage. Joining me today are our CEO, Charlie Giancarlo; our CFO, Kevan Krysler; and our Vice President and Chief Architect, Rob Lee.

Before we begin, I would like to remind you all that during this call, management will make some forward-looking statements, which are subject to various risks and uncertainties. These include statements regarding the COVID-19 pandemic and related disruptions, our growth in sales prospects, competitive industry and technology trends, our strategy and its advantages, our current and future product offerings and our business and operations. Any forward-looking statements that we make are based on facts and assumptions as of today and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted and reported results should not be considered as an indication of future performance. A discussion of some of the 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 the earnings press release and slides. This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Pure Storage.

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

Charles Giancarlo -- Chairman and Chief Executive Officer

Hello, everyone, and thank you for joining us today. I hope you and your loved ones are healthy and looking forward to better days ahead as summer begins, vaccination rates increase and the beginning of the end of COVID restrictions in many parts of the world comes into view. Our hearts go out to our friends in India and other countries still suffering from the scourge and we pray that they will soon recover.

Pure delivered very strong results in Q1. We drove double-digit growth against a strong comparison with Q1 of last year. I'm also happy to report that our strong quarter was broad-based, with balanced contributions across every aspect of our business. We continue to see enterprise expansion validating our investment in world-class enterprise products, services and our go-to-market teams over the past two years. In this quarter, we also saw our commercial segment strengthen its contribution, particularly in customer acquisitions, where we increased net new customers year-over-year.

Our US and our international teams, both achieved double-digit year-over-year growth this quarter and our new products again saw a significant annual growth. Our industry-leading subscription business saw fantastic growth, up 35% over the same quarter last year. Pure's unique Evergreen and as-a-service models, continue to resonate strongly with customers and differentiate us from the rest of the industry. Competitors are attempting to recreate our capabilities through financing, marketing and professional services, but cannot change their legacy systems to match our non-disruptive upgrades, API management or remote operations and support. Pure has doubled the number of partners selling Pure as-a-Service year-over-year and our channel partner bookings are growing nicely. And, we recently announced new incentives and offerings to enhance subscription sales through our channel partners to build on this momentum.

Our operating profit exceeded expectations this quarter, reflecting our revenue over performance, paired with prudent expense management. The strong growth this quarter was achieved during continued COVID restrictions and is based mostly on improvements in our operations and our customers' increasing confidence in our brand.

We have been reasonably accurate in our predictions of our business environment since the pandemic started. I feel confident that as vaccination rates increased globally and our markets return to some semblance of normal office culture, that our business momentum will increase even further. This month we kicked off our Annual Accelerate Digital Event and so far, we have connected with more than 17,000 attendees, a new record for attendance, 60% higher than last year. The significant annual increase in customer, prospect and partner participation at our Accelerate Conference is an indicator of how strongly our Modern Data Experience strategy is resonating in the market. We reiterated our vision of Pure's Modern Data Experience and showed how leading organizations like Aegis Sciences, NASA and Roblox are using Pure's data platform to modernize their infrastructure, modernize their operations and modernize their business applications.

We announced updates to the Pure1 Digital Experience, our cloud-based management platform for all of Pure's products and services and we released the latest version of Portworx Enterprise. We also provided greater details on our Bare Metal as-a-Service solution with Equinix and our newest Purity software enhancements. All of these new capabilities and more will continue to be featured in workshops throughout the entire month-long Accelerate Event. Customers have shown excitement for our promise of leading-edge automated infrastructure that is continually improving without disruption.

Pure's Modern Data Experience delivers modern infrastructure that enables modern operations, supporting the needs of modern business applications. We believe that these three steps are fundamental in every company's digital transformation journey and are made possible by Pure's Modern Data Experience. The first component of our Modern Data Experience is enabling our customers to modernize their infrastructure. Our Modern Data infrastructure provides easy to deploy, reliable services, manageable by IT and developers alike, through APIs and code. We provide common services, interfaces and management across on-prem and cloud and with Pure as-a-Service, we provide customers a single unified contract across clouds. Customers can operate, both existing business-critical applications and next-generation cloud-native applications, in a hybrid cloud environment.

Our founding vision of the all-flash data center is being further realized with Pure's FlashArray//C, the first all-QLC flash array that pushes flash to a new tier of workloads, where our competitors are stuck competing with disk. FlashArray//C saw double-digit growth this quarter and continues to be our fastest growing new product ever. Just last week, Pure's FlashArray family was recognized as a Gartner Peer Insights Customers' Choice.

You don't need to be in technology to know that data insecurity is not only a nuisance, but matter of national security. In the last few years, we brought industry-leading data protection to our entire portfolio, allowing enterprises to protect their data from ransomware with the ability to restore from protected copies within hours of a breach. Customers like Be The Match, which is operated by the National Bone Marrow Donor Program have chosen Pure FlashArray//X and FlashBlade platforms with safe mode data protection and rapid restore capabilities, to protect their mission-critical data in the event of a breach. Meadville Medical Center in Pennsylvania is another customer who subscribes to Pure as-a-Service, with safe mode, so that if they ever need a safe mode snapshot to recover their data, they know that they can be back online within hours. We launched a new safe mode dashboard in Pure1 this quarter, which provides a consolidated view of the ransomware protection of all Pure arrays in a customers' fleet, delivering peace of mind, that an organization's data franchise is protected by this extra layer of ransomware protection.

Pure's unique Evergreen capability is the cornerstone of a modern infrastructure, with the ability to continually update technology and services without disruption to a customer's environment. In fact, 98% of our arrays that were deployed over five years ago are not only still in use, but have been modernized in many cases to our most recent models. Our systems like most cloud services, are upgraded to the most modern technology, consistently non-disruptively and transparently to the application. Our Purity software, Evergreen model and Pure1 Management System uniquely position Pure to deliver a true as-a-Service modern infrastructure experience to our customers.

The second component of our Modern Data Experience is modernizing operations. After all, the value of modern infrastructure is deeply diminished if you operate it with yesterday's manual processes. Modern ops mean standardizing service offerings and making them available to the organization via a Service Catalog and APIs. Doing that delivers DevOps, data science teams and application developers, the storage as code experience they have come to expect. Pure as-a-Service is a key element of our strategy for modern ops.

Pure as-a-Service continues to be the industry's storage as-a-Service benchmark and we're very pleased with its growth this quarter. Launched in 2018, it unifies block, file and object storage across all tiers and performance and private and public clouds into a unified data storage subscription and is the foundation of a true hybrid cloud experience. Customers such as the City of Denver use Pure as-a-Service to automate data management. They use Pure to monitor and deliver performance upgrades and even variable capacity for seasonal events like elections. With the flexibility of Pure's Cloud Block Store, for both AWS and Azure, as an option in their Pure as-a-Service subscription, we are seeing strong interest from companies who want to simplify their data architecture with a proven solution, while reaping the benefits of both, private and hyperscaler clouds. Pure as-a-Service is differentiated not only by the inherent agility of the Evergreen architecture, but also by the as-a-Service user experience we deliver via Pure1, our META AI engine and our proactive support experience.

Pure1 has now broadened its predictive fault analysis and resolution, using telemetry gathered from across Pure's ecosystem, including Bare Metal, VMs and containers. Our expanded AI-driven workload planner can now suggest the right service tier for Pure as-a-Service Subscriptions or infrastructure purchases. The Pure1 service catalog was expanded this quarter, so customers can easily add, upgrade, suspend, resume, limit and renew Pure as-a-Service capabilities as needed. These SaaS tools work together to give customers the insight and intelligence they need to confidently make storage subscription decisions.

The investments we've made to modernize infrastructure and operations supports our customers' desire to develop truly modern applications, which is the third pillar of the Modern Data Experience. Modernizing applications leverages cloud-native architectures, specifically containers and Kubernetes, to take advantage of more efficient computing, new programing models, hybrid cloud architectures and new capabilities, like real-time analytics and data streaming. The latest version of Portworx Enterprise announced that Accelerate gives customers an automated Kubernetes native storage experience for container-based applications, wherever they live. Portworx Enterprise now delivers deeper integration across the Pure family, fully enabling both FlashArray and FlashBlade for enterprise scale and resiliency in production environments. It utilizes Pure1 for enhanced observability and proactive support and complete provisioning automation on all Pure systems. Customers are using Portworx to enable containerized workloads to run seamlessly across the cloud, including Pure Storage Arrays, Bare Metal infrastructure and even third-party storage solutions. Just three quarters since acquisition, we have fully combined Portworx and Pure products into the integrated, simple and Evergreen platform that Pure is known for.

As the number and range of modern applications increases and the volume of unstructured data increases, organizations are reducing the complexity of their data architecture with fast object storage, where Pure's FlashBlade remains the market leader. At nearly $1 billion in cumulative sales, it is the preferred choice for customers needing a unified fast, file and object platform for their modern business applications. In fact, FlashBlade is a leader in GigaOm's new Radar for High-Performance Object Storage, validating Pure as the pioneer in the fast object space.

Overall, our product and market leadership is expanding. We continue to deliver the industry's most advanced platforms, greatest reliability and total cost of ownership with the most innovative service models. Altogether, we are well on our way to delivering a complete Modern Data Experience to customers worldwide.

I'll now turn the call over to our CFO, Kevan Krysler for a deeper look at the numbers. Kevan?

Kevan Krysler -- Chief Financial Officer

Thank you, Charlie and good afternoon. We are very pleased with the broad-based strength of our Q1 results and continued momentum.

We delivered double-digit revenue growth despite both a tough compare, as well as continued uncertainty of COVID-19 and its influence on markets across the globe. Our sales growth, excluding cancelable orders also reflected strength, growing 13% compared to last year. Our remaining performance obligations or RPO, which includes our committed and non-cancelable future revenue is slightly over $1.1 billion, growing sequentially 24% year-over-year.

In particular, what was most impressive about our performance this quarter was the strength across our entire business. Double-digit sales growth from our key geos; strong contribution from our channel partners; performance across our entire product and solution portfolio including FlashArray//C and growth from both our existing and new customers, including our commercial business. We were very pleased with the strength we saw in new customer acquisition, which grew 15% year-over-year, also driven in part, by our commercial business.

Now turning to specific financial results for the quarter. Total revenue grew 12% to approximately $413 million. International revenue grew 14%, while revenue in the United States grew 12% compared to last year. Again, consistent with what we saw throughout last year, sales of our subscription services continue to reflect momentum. Subscription services revenue grew approximately 35% year-over-year, and represents approximately 39% of total revenue. Non-GAAP total gross margins continue to reflect the differentiated value of our software and solutions, improving sequentially to 70.5% in the quarter and continues to be on the high-end of our long-term expectations. Non-GAAP product gross margins were 70.2% and non-GAAP subscription services margins were 71.1%. Subscription services margins improved both sequentially and year-over-year. Product gross margins improved slightly sequentially and were 73.3% in Q1 of last year. Product gross margins this quarter reflect both accelerated growth of our FlashArray//C and increasing supply chain costs required to secure product for our customers.

We achieved slightly positive non-GAAP operating profit during the quarter, which outperformed our expectation. Contributing factors include, revenue outperformance, lower expenses due to the COVID environment, including less travel and physical marketing events, as well as lower-than-planned hiring.

We ended the quarter with over $1.23 billion in cash, and approximately 3,800 employees. Cash flow from operations was $21 million and capital expenditures were $28 million during the quarter. Capital expenditures during the quarter included a higher mix invested in our Pure as-a-Service infrastructure. We returned approximately $30 million of capital to repurchase slightly over 1.38 million shares as part of our $200 million share repurchase program.

Now turning to guidance. As previously mentioned, we are very pleased with our steadily increasing momentum over the last two quarters, while continuing to navigate the various challenges created by COVID-19. We expect the challenges created by COVID-19 will continue to recede, as we progress throughout the year and that our momentum will continue. Q2 revenue is expected to be approximately $470 million, representing double-digit growth of 16%. We also expect non-GAAP operating profit will be approximately $15 million.

As I mentioned last quarter, we will be guiding one quarter at a time and will not be updating our annual view, but we will provide some additional color on how we are thinking about the impact of our Q1 over-achievement for both revenue and operating income. We expect that revenue over-achievement will be accretive to our annual view, primarily due to increasing supply chain related costs that we anticipate, we expect that approximately half of our operating income overachievement during the quarter, will be accretive to our annual view. We are excited to build upon our broad-based momentum in Q1, by continuing to create best-in-class outcomes, services and experiences for our partners and customers.

With that, I will turn it over to the Operator, so we can get to your questions.

Questions and Answers:

Operator

Thank you, ladies and gentlemen. [Operator Instructions]. Your first question comes from the line of Karl Ackerman with Cowen.

Karl Ackerman -- Cowen and Company -- Analyst

Yes, thank you. Good afternoon. Two questions if I may. With regard to your current outlook, Kevan, I was hoping maybe you could tell us regarding exabyte growth. I guess what could you tell us regarding exabyte growth per box, from your hardware business. I ask because in the context of the NAND market, that is seeing bit growth increase at a roughly 30% clip. The all-flash array revenue is flattish on a year-over-year basis, but component pricing seems to have bottomed and I'm wondering whether maybe some of the deflationary pressures from on-prem enterprise spend still recovering abates going into the second half of the year. And then if you could speak to anything regarding the capacity points per array, as we think about that growth in exabytes in the second half of the year as well.

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah. Karl, this is Charlie. Let me start on that. Well, Kevan, I think pulls together some of the stats on that. Overall, I would say that our overall flat -- there has been overall growth in our FlashArray product line, counting both FlashArray//X and FlashArray//C and we're really pleased to see that growth for that product line continue. And I have to say that that I remain very bullish that we'll continue to see growth in that product line, in addition of course to FlashBlade and Portworx, all of which are seeing strong growth overall. And then if you count in along with that, the growth that we're seeing in subscriptions and PaaS, in particular, which does not show up immediately on the top line, because of the accounting for subscription basis. We are seeing good growth overall.

And I'll just comment for a moment on the supply chain side on the NAND. First is, you're correct. We probably will not see, although we entered the year, that is the calendar year with some deflationary pressure initially, through the remainder of the year, you're exactly correct, it's unlikely to see any downward pricing in NAND and actually likely to see some upward pricing on the raw NAND as we go forward and that'll be overall industry affecting. And of course because most of our sales are very competitive in nature, we also saw a slight increase in ASPs and I would expect ASPs to hold reasonably steady plus or minus through the year overall. So I think you're correct. We're not going to see a lot of deflationary pressure this year. Yeah. And I agree. Charlie and I think one of the thing I would add is, the inflationary pressure is just broader than NAND as well. So we're seeing it across the supply chain, but again that's been considered in terms of how we're thinking about our Q2 guide and that's why in the prepared remarks, I commented that about half of our over-achievement for operating profit would be viewed as incremental to our annual guide. And then finally on the exabyte, we'll definitely ship more exabytes this year than we did last year for sure. In terms of average, I think we're cautiously optimistic that the average will go up, but spending tends to -- and I'm expecting that overall spending for data storage this year will also increase for the market as a whole. So I hope that provides you some indication.

Karl Ackerman -- Cowen and Company -- Analyst

That does, I appreciate that gentlemen. For my follow-up, in your prepared remarks, you spoke about how Pure Cloud Block Store is now GA at AWS and Azure, and so I'm curious whether you'll be breaking out this business like one of your primary peers and maybe jumping the gun a little bit, but any thoughts on when this may reach $100 million annual run rate? Thank you.

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah. Karl, let me just hit the first point on Cloud Block Store and how that combines really nicely with our unified subscription of Pure as-a-Service and that's really why I think we're seeing a lot of continued demand and momentum with Pure as-a-Service and we're quite excited about Cloud Block Store on Azure.

And Rob, do you have some comments on that? It'd be great to share some thoughts on Cloud Block Store with Azure.

Robert Lee -- Vice President and Chief Architect

Yeah, absolutely. We're super excited just to see the continued growth in the overall cloud portfolio. Cloud Block Store key component for the modern -- the traditional applications and now expanding from AWS to Azure, we see that is adding just a ton of value to the unified subscription. As an example, one of the large FSI customer this quarter who is undergoing a tremendous growth in their business, struggling to keep up on their legacy gear, brought Pure in under the unified subscription and was able to get immediate performance, capacity and elasticity benefits on-prem as well as utilize Cloud Block Store on Azure to move their disaster recovery environment over to the cloud. And so I think that flexibility and the elasticity we're able to deliver just goes to speak to the benefits of the software subscription, the software approach and just the overall unified subscription through which we deliver the cloud products.

Karl Ackerman -- Cowen and Company -- Analyst

Thank you.

Operator

Your next question comes from Sidney Ho of Deutsche Bank.

Sidney Ho -- Deutsche Bank -- Analyst

Thanks for taking my questions. My first question is on the gross margin. Clearly, you guys are doing very well there, over 70% and continue to be higher than the high end of your target range, should we expect gross margin to stay at these higher levels, considering subscription services revenue will likely grow faster than product revenue? I think you guys talked about some inflationary pressure there or really does it depend on what type of service is driving the growth or are there other considerations to think about?

Kevan Krysler -- Chief Financial Officer

No, I think that's a great question and I think the inflationary pressure we're seeing, really more lends itself to product gross margins. But again, we are very pleased with what we saw coming out of the quarter, really with strong gross margins throughout, both on the product and subscription side and to your point, above kind of a high-end of our expectations. And now as we progress through the year, on the product gross margin side, we would expect to see some pressure on product gross margins due to what we're seeing on the supply chain, but again we've accounted for that in terms of our Q2 guide and in my prepared remarks around the annual view.

Sidney Ho -- Deutsche Bank -- Analyst

Got it. Maybe a follow-up question is on the enterprise side of things. You guys have been highlighting the strength in the enterprise business last quarter, this quarter, but the data points in general in the market hasn't been -- I would say it's kind of mixed -- some semiconductor companies would say it's still kind of weak, maybe just starting to get better. Can you talk about why you are seeing things differently and if the overall market does start to improve in the second half, do you think your enterprise business will also accelerate along with the market, just of a higher starting point?

Charles Giancarlo -- Chairman and Chief Executive Officer

The answer to both is, yes. The reason why we're seeing such good overall expansion of our enterprise businesses is because of the investments we made as a Company. Remember, just two or three years ago, we were largely a commercial company with some deployments in enterprise. We made major investments both in products as well as our go-to-market team to really become a brand that would be respected by a broader set and really by the enterprise customer environment at large. And I think we've achieved that from a brand perspective, but we're still early in many ways in our expansion into enterprise. So I expect that expansion, which is not secular specific to the investments that we made to continue. So really for us, it's about penetration into what was for us a new market and I think you're comparing us perhaps to companies that had a mature market in enterprise and therefore are not -- probably are still waiting to see the secular growth in the enterprise segment. Secular growth in enterprise can only help us, as we continue to expand in that space.

Sidney Ho -- Deutsche Bank -- Analyst

Okay, great. Thank you.

Charles Giancarlo -- Chairman and Chief Executive Officer

Thanks.

Operator

Thanks. Your next question comes from Jason Ader of William Blair.

Jason Ader -- William Blair & Co. -- Analyst

Yeah, thank you. Hey Charlie, we've definitely heard in the last let's say 12 to 18 months, there has been an inflection point in demand for micro services and Kubernetes technology and I was just wondering, obviously you guys saw that and that's why you bought Portworx, but how is this manifesting I guess in terms of activity, pipeline, demand for Portworx and then maybe can you give us a sense of when you think it's going to start to be more material for your business?

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah. As you know, it is a subscription-based business and therefore it's a ratable -- it takes a while for ratable products to make a big difference to the topline. But, I have to say that, both revenue growth is -- we're talking in and around doubling of revenue growth and we've seen a much even larger expansion of pipeline. So I'm going out a bit on the limb here, but it's going very well. And the strategy of aligning and having single management and single layer, that is the Kubernetes layer. For customers to be able to manage both, their traditional applications as well as their modern application, so-called cloud native applications. You are in under one umbrella, supported by everything from a start-up environment or a new development environment with a small number -- with a small amount of storage under the original Portworx SDS layer and then expanding into a full multi-petabyte production environment, using a highly reliable arrays, either FlashArray or FlashBlade and to have that all done non-disruptively, it's a very powerful promise that we're able to deliver to our customers. So, so far so good. We're seeing a lot of interest. We're seeing, as I say, very fast expanding demand. But as we mentioned in our last call or two, it's probably going to be a year or two before it really becomes truly noticeable on a top line that's growing even outside of Portworx.

Kevan Krysler -- Chief Financial Officer

Yeah. And Charlie, maybe just add on to that, we're quite pleased with the integration that's going on there, right. We've got new version of Portworx Enterprise that we're quite excited about. And the synergy that we're now seeing with our existing Pure customers is pretty strong as well. And I don't know if you or Rob wanted to give a little color on that.

Charles Giancarlo -- Chairman and Chief Executive Officer

I'll talk a little bit about it. Just eight months roughly, after the close of the transaction, we've integrated all of our products now with more to come. What we've seen in customers and we've indicated this, but there is a repeating. About half the customers are Pure customers, about half, that is the buyers are people that we've been talking to for years. And the other half of the buyers are new buyers for us, sometimes in the same account, sometimes new accounts, but on the development side. And it's a one-two punch of us being able to leverage what we already do and learn about a new area that makes the acquisition a really compelling one, I think.

Robert Lee -- Vice President and Chief Architect

I'll just jump in there. Part of what makes that one-two punch particularly powerful is, and this is a fast-growing space. This is a significant and secular transition and how applications are built, frankly, this is how most modern applications are being built today. And so we've really taken the strategy of investing in the full suite of data management capabilities to be able to help a customer deploy, build, deploy and get to production in multiple environments, whether that's on-prem, in the cloud, hybrid cloud or multi-cloud and across the whole spectrum of development life cycle, whether they're just getting started, getting the staging or going to global production scale. And so early days, but really exciting.

Jason Ader -- William Blair & Co. -- Analyst

Thank you.

Operator

Your next question comes from the line of Rod Hall of Goldman Sachs.

Rod Hall -- Goldman Sachs -- Analyst

Yeah, thanks for the question guys. I guess I wanted to come back to the question of cost, not so much NAND, because I think that's fairly -- it seems like it's relatively predictable. But I'm wondering, Charlie, what are you guys seeing in other cost lines like freight and things like that, we hear a lot of people talking about various different upward pressure on cost into their businesses. And then as a kind of add-on to that, what do you think your pricing power is, if you were to continue to see upward pressure on cost across the Board? Thanks.

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah. Great questions. Look, we're seeing -- there is pricing pressure on the supply side across the Board. I'd say it's more acute on some of the component area. NAND is seeing some, but it's true on all of the different components. Freight, a bit, I can't say that that's been a tremendous driver for us, but I'm going to take your guidance and I'll look at it. But the costs are going up. At the same time, as you probably know, Rod, a lot of our -- most of our sales are competitive in nature and so our pricing is determined much more by the competitive environment in a particular deal than it is by our costs. And so there will be some balancing with ASPs, I'm sure. Exactly how much that is, we can't be 100% confident, but as Kevan mentioned, we've incorporated our best guess into the guide. So we feel fairly good about it. There may be some effect on our margins. I don't expect it to be severe, because again, we operate 100% of the time in a generally a competitive environment.

Kevan Krysler -- Chief Financial Officer

And then, Rod. Maybe I'll just add on a little bit more to that. So specific to what we saw in Q1 on the ASP front, we actually did see some improvement on ASPs and I attribute that really to two factors. I think we're doing a really nice job of continuing to sell the value of our solutions, but I also think the general inflationary issues we're seeing around the supply chain is playing into that. And so we'll just have to see how that plays out for the remainder of the year. But I think broader as well, when we get back to the supply chain issues, locally, where we've got very strong relationships with our suppliers and so we're very confident in terms of working with those suppliers, in terms of making sure we can meet our customers' needs. And we're just being very cautious and monitoring very actively. I think our supply chain team is doing a tremendous job, navigating us through this, no different than what they did in the COVID environment. So we're quite pleased with how things are progressing, but I think the themes are, general inflationary concerns across the Board, especially with some of the smaller componentry and then we did see some improvement in ASPs.

Charles Giancarlo -- Chairman and Chief Executive Officer

I do want to just underline that, really our suppliers have been wonderful to work with. It's a tough environment out there, they are under a lot of pressure, but, A, we have good relationships with them, but, B, they've worked with us really well and I couldn't be more pleased with the suppliers that we work with.

Rod Hall -- Goldman Sachs -- Analyst

Okay. Do you guys mind if I sneak another one in. I know it's a long answer, but --

Charles Giancarlo -- Chairman and Chief Executive Officer

Not at all. Please.

Rod Hall -- Goldman Sachs -- Analyst

Okay. The other is just on -- your product revenue was clearly negatively impacted through COVID. I'm assuming because you've got exposures to some of these industries that were affected, that I don't remember exactly what you said about that. I'm just curious, what you think your exposure to the reopening benefited industries are, travel, leisure, all that kind of stuff, what sort of industrial exposure you think you have to reopening? Thanks.

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah. Thanks, Rob. In the past, when we talked about the COVID exposure, it had more to do with the fact that as a relatively new vendor and one that was focused on growth, it was -- customers not being able to be in the office and their lesser willingness to try new things, whether that's new products, new vendors or new used cases for existing products. And so the way we look at this is that as we return to an environment where customers are more willing to try new things, including maybe a new vendor, but it may just be one of our new products or maybe one of our existing products in a used case where they currently use competitors' products or it's a new use case entirely. They're going to be much more willing to do something new and different. And so that's what we're looking forward to. It was less about us being exposed to highly exposed segments and much more about reluctance to engage in new activities by our customers.

Rod Hall -- Goldman Sachs -- Analyst

Great. All right. Thanks a lot, Charlie. Appreciate it.

Operator

Your next call comes from the line of Wamsi Mohan of Bank of America.

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

Hi, yes. Thank you. Sorry to get back on this inflationary topic, but can you be more specific on whether -- how much of that potentially is logistics versus procurement versus increased pricing from your suppliers and do you see that impacting revenue at all? It sounded like you guys alluded to sort of the cost impact of -- not all the upside flowing through in the back half, but what about revenue? And I have a follow-up.

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah. Thank you, Wamsi. Well, Wamsi, look, in the context of it being a -- there being a lot of uncertainty in the supply chain, that being said, we feel reasonably confident about Q2, we feel reasonably good about Q2. It's very difficult to talk about Q3 and Q4 with high levels of confidence, but we have a high degree of confidence in both, our own operations team that have really performed from a customer standpoint flawlessly throughout COVID and up until this day and with our suppliers who we work with very closely. We think it's been -- there are situations where every day, where components that one thought were available suddenly become unavailable, also component availability changes every week. And then one is looking for those components elsewhere. So it's both, a supply issue as well as a cost issue, as we identified costs are going up largely on the supply side, I think less so on the logistics side at least for us. And as I said, it's a bit of an uncertain world. But that being said, we feel reasonably confident on Q2 that it won't affect revenue on Q2 and I would just want to put that caveat there, reasonably confident and Q3 and Q4, we're just going to keep -- we'll update you every quarter as to how we feel about this.

Kevan Krysler -- Chief Financial Officer

Yeah. Maybe I can go into a little bit more detail in terms of what we saw specifically in Q1. So we actually did see improvement in ASPs as I mentioned previously. That was more favorable in terms of what we are doing on discounting. And again, I think that's both, what we saw with the supply chain, but I also think our field is doing a really nice job in selling the value of our products. And frankly, what we saw with product gross margin this quarter, I viewed as very favorable, again on the high-end of our expectations, despite kind of navigating through what we're seeing on the supply chain side. And then, obviously, we had some really great traction, as we mentioned with FlashArray//C and given that that's a newer product for us. We had some gross margin pressure with FlashArray//C as well, which when you then look at the total gross margin profile is very positive for us. So hopefully, that is helpful for you.

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

Yeah, no, it is, thank you for that. And then if I could follow up. We're seeing an increased proliferation in competitive offerings of as-a-Service, on-prem as-a-Service, Dell with Apex now and Linux [Phonetic] has been around with HP. I think Charlie, in your opening comments you referred to some competitive offerings that were largely financing, not necessarily technology enhancements. I was wondering how you would characterize the competitive landscape through the lens of these offerings. Thank you.

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah, thanks. Thanks, Wamsi. So largely as you described it, I'll put some additional detail behind that. As you can tell from both the prepared remarks, I know that some of you perhaps have been attending our Accelerate Conference as well, what you see us delivering is a true as-a-Service experience from a technology perspective, the way the customers interact with it, the way that they're able to manipulate it through code and API. The fact that it is constant and continually improving without disruption are very similar to any type of SaaS offering. These are all service qualities, whereas most of our competitors are very much -- are focused on financial constructs to make it look like a Service and a big telltale from my point of view, is that, when we provide Pure as-a-Service, we are actually selling to our customer, an SLA, it's not an array, it doesn't have a product name, we are providing them a service level agreement that actually has teeth to the agreement. We have to deliver the service level that we otherwise are financial penalties to us.

Our competitors tend to provide an objective with no teeth whatsoever and there are named products in it. So it really is a financing construct that they put together. For us, the fact that it's subscription, basically is the fact that what we're offering is a Service and so naturally it becomes -- naturally becomes a subscription.

The last thing I'll mention is that, it exists both on-prem and across the cloud with CBS. The subscription, it doesn't matter where the customer puts their data and they manage it all through the same management system. So really is a pan-cloud true technical service and therefore of course a unified subscription, very different than just the financial construct.

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

Thanks Charlie.

Operator

Your next question comes from Amit Daryanani with Evercore.

Amit Daryanani -- Evercore ISI -- Analyst

Good afternoon. Thanks for taking my questions. I have two as well. I guess, first off, if I take your July quarter guide, the first half of the year, we're going to do 14.5% growth, give or take. And your compares actually get fairly easy in the back half and very simplistically, my tendency would be to say, simpler -- easier compares would suggest growth accelerates in the back half versus the first half. I would love to understand so what are the factors we should consider, as we go into the back half, because the compares would suggest we should see an acceleration. Just what factors should we think about in the back half would be helpful.

Kevan Krysler -- Chief Financial Officer

Yeah, I'll start it more tactically and Charlie, feel free to jump on in. And obviously we are expecting some acceleration in second half, with our -- where we landed for Q1 in our guide for Q2 and then looking at what that plays out to for second half. We get some ramp on that and obviously just to highlight as well, Q4 is generally our seasonally highest quarter in terms of sales, which is beneficial. But early signs of FlashArray//C, I think that's going to parlay itself throughout the year.

And I think in particular, what was exciting across the Board for us is what we saw from a broad-based perspective. I mean we saw really kind of everything driving with strength, whether that's enterprise. Commercial, this is the first time we were really seeing some strengths on commercial and I think it's important to highlight that, we are very pleased to see that strength coming through this quarter, despite still being in a COVID environment. So that was great to see. Obviously, Pure as-a-Service and what we're seeing across the Board with Portworx. So it's really this balanced strength that we've seen in Q1 that we really do think that momentum, which really started in Q4 will continue throughout the year,

But Charlie, anything else you'd want to add to that?

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah. I would say that, as we look at the year, Q1 was still the quarter we've just had, a 100% under COVID rules. We're still -- while we might be kind of seeing maybe some green-shoots come up mostly around the promise of people getting back to the office, we're yet to see any real pickup due to that phenomenon where we believe we may see that in Q2 and then we'll be in a better position, once we have our next quarter's earnings of being able to say what the rest of the year might look like. But given that all the experience we've had to-date this year have been a 100% under COVID rules, a little bit hard to speculate as to the second half of the year.

Amit Daryanani -- Evercore ISI -- Analyst

Fair enough. Hopefully we don't have a third wave and exploration sustains for you folks. If I could follow up on the commercial segment, I know you talked about seeing better momentum over there. Can you just touch about what is driving the momentum here? Is it just a better engagement with the channel or the sales force is doing something different? And then are the commercial customers now engaging with the different product set with Pure versus what your traditional enterprise customers have done.

Charles Giancarlo -- Chairman and Chief Executive Officer

I'd say there are a number of phenomenon that we're seeing at work. There is no question, I think we might have mentioned this in the prepared remarks that we're seeing increased, what we call partner-sourced deals and a large part of that is commercial. So we believe that that is going to only continue, we're really seeing a good pickup by the partners overall.

Second, we do think there is a bit of a resurgence of commercial, that number of them have gotten their feet underneath them, if you will in this COVID environment and are back in the market. We think that's just beginning by the way, I don't think that's a big phenomena. But I think that was a large part of it. And I do think that FlashArray//C is in fact are selling not just into the enterprise, but into the commercial market as well. And so I think that also opens up a bit of that. So I think it's a little bit of three of those things, but I think a lot more to come.

Kevan Krysler -- Chief Financial Officer

Yeah. And I'd just add Pure as-a-Service too, Charlie.

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah, that's right. I think the thought -- many may think that Pure as-a-Service largely appeals to large enterprise customers, but we have a set of programs for Pure as-a-Service, specifically in the commercial market, it's doing very well there.

Amit Daryanani -- Evercore ISI -- Analyst

Perfect. Thank you very much.

Charles Giancarlo -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Simon Leopold of Raymond James.

Simon Leopold -- Raymond James Financial Inc. -- Analyst

Thanks for taking the question. I'm going to ask maybe a little bit of an odd one, but my perception on this call was that Charlie, you sounded more upbeat on the FlashArray//C and my recollection is that on the prior call, you sounded more upbeat on FlashBlade and I could be reading too much into it, but I guess I want to get a sense of whether that was intentional and maybe how you think about sort of the new product cycles here, is something shifted in your thinking or how do we kind of separate these two trends. Thank you.

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah, no, we just like to share the wealth and sometimes we'll spend a bit more time on one than the other. So you shouldn't take any. And I was getting tired of hearing myself talk, so I didn't want to bore you all to death with adding on even more. No, both products we're very excited about, they both fill different niches. The FlashBlade product, very highly scalable product, a scale out product capable of supporting multiple simultaneous workloads at unbelievable speed, really good for scale out environments for AI, machine learning, analytics and rapid recovery, all in one platform, all at the same time. FlashArray//C, now with file, a great what's called scale-up platform, now competitive with from a pricing level, with hybrid disk for that secondary tier. So, no, we're very proud of both platforms. From quarter-to-quarter, you may hear us spend a little bit more time with different products, including Portworx and FlashArray//X. So you may hear us just spend different amounts of time each quarter for color on each product.

Kevan Krysler -- Chief Financial Officer

And Simon, I'll just add that this was a quarter where we had strength across our business and we had a plethora of options to choose from in terms of what we wanted to emphasize. And so the first thing is, we just had strength across the Board and then obviously C, we're very impressed with what's going on with C. And I also say that FlashBlade acquired new unstructured data scale-up customers at a much faster rate this quarter than what we saw in the previous year-over-year quarter. So good stuff happening all the way around and not meaning to ignore anyone in particular.

Simon Leopold -- Raymond James Financial Inc. -- Analyst

Great. No, I appreciate it. And then follow-up is hopefully pretty easy. But where are you in your thinking on your own organization maybe returning to sort of pre-COVID expense levels, in the sense of reintroducing travel and items like that? How should we think about your own internal planning for those kinds of activity? Thanks.

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah. You can imagine that we are putting a lot of work and focus on that. As we've discussed last quarter, we plan on adding to the bottom line of this year and years ahead. So as we start to reintroduce some of those other expenses, obviously we'll slow down other expenses, we do expect to grow into this, but I think the annual guide we provided last quarter for modest bottom line growth and Kevan's addition to that commentary on this call, you should expect us to continue down that path. So we expect overall that the percentage of our expenses to total will come down, so that we add more to the bottom line.

Simon Leopold -- Raymond James Financial Inc. -- Analyst

Thanks for taking the questions.

Charles Giancarlo -- Chairman and Chief Executive Officer

Thanks, Simon.

Operator

Your next question comes from Tim Long of Barclays.

Tim Long -- Barclays -- Analyst

Thank you. Two if I could as well. First, can you talk a little bit about kind of deal sizes and win rates and kind of some of those metrics? And if there's anything that's just kind of different when we're looking at the commercial side and the larger enterprise in those metrics view or any trends worth highlighting.

And then second, I just wanted to dig into FlashArray//C a little bit more. It sounded pretty good in the quarter, double digit, but overall was double-digit, so given there's such a huge TAM when we're thinking about this as we go through the year and into next year, what's going to accelerate the growth rate there? Is it new used cases or pieces of your customer base that you got to penetrate further? So what is it that kind of allows that product to really take on that much larger TAM? Thank you.

Charles Giancarlo -- Chairman and Chief Executive Officer

Sure. Thanks. Win rates have stayed -- this is something we analyze all the time. Win rates have stayed roughly steady. It's very much in line. Whenever our win rates get a bit too high, we are worried we're not in enough fights, and we did expand the number of fights that we are in this quarter and win rates have held pretty steady. And no big changes vis-a-vis any one of our competitors. So the win rate ones remains, pretty much at historical rates.

Kevan, do you have any comment on deal size? I don't have that off hand. I think it's roughly the same, but I don't have any.

Kevan Krysler -- Chief Financial Officer

Yeah. Overall deal size, we are very pleased with what we saw in deal size. Now obviously, Q1 of last year, we were fortunate to get some really large deals, in part due to folks working on mission-critical and addressing their needs on that front in terms of work from home. So I would say that the significant larger deals were a little bit less this quarter, but I was really pleased with the balance we saw, multitude of deals over $1 million. So nothing to highlight in terms of significance. Other than it was broad based across the Board and in terms of what we saw and then lesser larger deals that we saw.

Charles Giancarlo -- Chairman and Chief Executive Officer

C growth was, you're right, double-digit is a very wide range, but C growth, we also gave you commentary that C has been and continues to be our fastest new product from a growth perspective. So you can assume that it's a higher number -- significantly higher number than our average -- than our growth overall as a company. It does open up that second tier market for us, both on the block side, but also somewhat on the file side and as we add more and more features We think it's going to add even more market opportunity for us on the file side. So it's still while -- on the block side it's a mature product, on the file side it's still early days. And so I think we're going to see continued expansion of our opportunity there.

Tim Long -- Barclays -- Analyst

Okay, thank you.

Charles Giancarlo -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Matt Sheerin of Stifel.

Matthew Sheerin -- Stifel Nicolaus -- Analyst

Yes, thank you. I just wanted to ask regarding your commentary about the growth in the channel partners and the contribution to new customers, as well as the commercial market, what's behind that? I know that you put some new channel programs in place in the last couple of years, but what accounted for that traction and do you see that roster expanding further, particularly given the rollout of Azure with it's very strong support base in the channel?

Charles Giancarlo -- Chairman and Chief Executive Officer

Yeah. Thanks, Matt. We do. I think there is several reasons for it. One is, we're a 100% partner model, meaning that we don't go direct. So one of the things that partners really like about us is that, they know that we're fair and that we'll work with them and that when the going gets tough in a competitive environment, we're not going to just take it away from them. So that loyalty is reciprocated by the partners themselves. I think we've continued to make it easier and easier for the partners to sell our product. First of all, the product itself is very straightforward, very simple, requires relatively little busy work by the partners to set up and to be able to operate and to be able to service and of course it's highly, highly reliable.

And that also makes for a better customer experience, which partners care about the customer experience, because that's what gets the partner more business from that same customer. So I think the values of the Company itself that we represent high NPS, high reliability. The fact that we don't stray to a direct model when the going gets tough. And you're right, we've worked a lot and we'll continue to work on our partner programs, especially aggressive growth programs, in specialized expertise programs, with our partners to enable them to evolve as companies and enable them to provide a better experience overall for our customers.

Matthew Sheerin -- Stifel Nicolaus -- Analyst

Okay. Thanks very much.

Operator

Your next question comes from the line of Shannon Cross of Cross Research.

Shannon Cross -- Cross Research, LLC -- Analyst

Thank you very much. Just one from me actually. And it's a little bit big picture. I'm curious, when you think about recurring revenue, which I believe is now at about 39% of revenue and obviously growing, given the mix shift that's going on. Where do you see that topping out or how do you see the migration continuing? I'm just curious, if we get to a certain point where customers would rather -- more of a capex kind of model or do you think this is something where eventually the entire model shifts there. Thank you.

Kevan Krysler -- Chief Financial Officer

It's a great question Shannon and I'll start off. Look, our first big milestone that we're looking at is 50% of our revenue. It would be the big next milestone for us. And look, at the end of the day, though it's still customer first in terms of what they prefer with flexibility, so we won't force a particular model on them in terms of how they want to consume our technology and drive their outcomes. But I do think 50% is a good target for us to have longer term, in terms of recurring revenue, especially with what we're seeing with the momentum around Evergreen and Pure as-a-Service with our unified subscription coming on board, as we've talked about with Cloud Block Store, both AWS and Azure really will complement that. And then following that and we've talked about that as well, which is Portworx and our solutions around modern apps.

Anything else you want to add, Charlie?

Charles Giancarlo -- Chairman and Chief Executive Officer

No, I think that covers it.

Kevan Krysler -- Chief Financial Officer

Okay.

Shannon Cross -- Cross Research, LLC -- Analyst

Curious what long term sort of refers to, I mean are you talking a couple of years out or --

Kevan Krysler -- Chief Financial Officer

Definitely, that will be a couple of years out and how we're looking at that and then we'll give some more details on that in our Analyst Day, which we're contemplating in the month of September.

Shannon Cross -- Cross Research, LLC -- Analyst

Great, thank you.

Kevan Krysler -- Chief Financial Officer

Thank you, Shannon.

Operator

Your next question comes from the line of Kathryn Huberty with Morgan Stanley.

Kathryn Huberty -- Morgan Stanley -- Analyst

Thank you. Charlie, can you talk about some of the metrics that underscore your confidence in the second quarter? For instance, what did pipeline growth look like, where is backlog versus normal seasonality, what sort of linearity did you see in the quarter. Just some of those metrics and leading indicators that drive the confidence. And then I have a follow-up.

Charles Giancarlo -- Chairman and Chief Executive Officer

Sure. Thank you, Katy. Great to speak to you. So, we saw a number of things. One is, good linearity, but frankly improving through the quarter. So definitely seeing signs, as I said, green shoots and improvement as we went through the quarter. We don't give specific details on pipeline, but pipeline that supports the Q2 guide that we've provided, based on the kind of metrics and analysis that we've done in the past and a hard look at that. We're not basing it tremendously on any kind of hope for dramatic improvement in the whole COVID situation in Q2. We think it's fairly balanced, from the standpoint of not a bit -- a lot of wishes or hopes, for change to the positive. So we think it's sort of a prudent and balanced guide. Good support from things that are near term, near-term deals, near-term pipeline. So nothing magic I would say in the guide. We believe we can get there with business as what we've seen over the last couple of quarters.

Kathryn Huberty -- Morgan Stanley -- Analyst

Great, that's helpful. And then just a follow-up. Kevan, as I think about NAND price inflation, in the past, the industry and Pure in particular has been able to pass through the higher costs, such that it's somewhat neutral to profit dollars, maybe some pressure on gross margin percentage, but it is typically fairly neutral. Is there a reason that you would expect it to play out differently this time or is it just a function that this is just getting started, and there is a lot of moving pieces within different cost buckets and so you want to be conservative and assume that some of the upside you saw in the first quarter gets offset by this dynamic, as you move through the year?

Kevan Krysler -- Chief Financial Officer

Katy, it's really much more of the latter that you articulated. And really if this was just a NAND that we are looking at, I think we would follow that thesis perfectly in terms of how we think about NAND pricing, to be able to pass that off. But look, I think the issues we're seeing around the supply chain are much broader and there's really broader general inflationary concerns that we've talked about at the component level, I mean the smallest components are driving our supply chain team with a lot of work and we do have inflation there. Now the interesting thing in Q1 is, we were successful generally around increasing our ASPs and I do think in part, that's due to the inflation that we were seeing. The question is, can we maintain that with the broader supply chain constraints that we're seeing and that remains to be seen. Obviously, we're confident in terms of our Q2 outlook and but that is the reason why we were only talking about taking half of our over-achievement for operating profit for the annual view.

Charles Giancarlo -- Chairman and Chief Executive Officer

And if I might just insert, because I don't want there to be a confusion, Katy. I know you're aware of this. But it's not as if we pass higher cost along, we've never raised prices. But what does happen is, because our deals are competitive, we're competing every day against competition and when their -- when their costs are higher like ours, all the vendors become more cautious in terms of their discounting. And that's why the ASPs tend to float a little bit with costs, but it's never a quite one-for-one and timing this quarter versus next quarter, how long is people's supply contracts are in place for and so forth, plays a role. So there's always a little bit of movement because of timing.

Kathryn Huberty -- Morgan Stanley -- Analyst

That makes perfect sense. Thank you.

Kevan Krysler -- Chief Financial Officer

Thank you, Katy.

Operator

This concludes the question-and-answer session. At this time, I will turn the call back over to Charlie Giancarlo for closing remarks.

Charles Giancarlo -- Chairman and Chief Executive Officer

Thank you, Operator. I want to thank everyone on the call again. I want to put out thanks to all of our customers and our prospects for the trust that they've put in the Company and to our partners and suppliers for their really strong collaboration and their support and also to all of our employees for the innovation and hard work over the past many, many quarters and throughout the COVID period. We're excited ourselves to be getting back to work later this summer and we wish all of you on the call a very happy summer. Take care.

Operator

[Operator Closing Remarks]

Duration: 69 minutes

Call participants:

Sanjot Khurana -- Vice President of Investor Relations

Charles Giancarlo -- Chairman and Chief Executive Officer

Kevan Krysler -- Chief Financial Officer

Robert Lee -- Vice President and Chief Architect

Karl Ackerman -- Cowen and Company -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Jason Ader -- William Blair & Co. -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

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

Amit Daryanani -- Evercore ISI -- Analyst

Simon Leopold -- Raymond James Financial Inc. -- Analyst

Tim Long -- Barclays -- Analyst

Matthew Sheerin -- Stifel Nicolaus -- Analyst

Shannon Cross -- Cross Research, LLC -- Analyst

Kathryn Huberty -- Morgan Stanley -- Analyst

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