Pure Storage (PSTG) Q4 2022 Earnings Call Transcript

Pure Storage (PSTG -2.22%)
Q4 2022 Earnings Call
Mar 02, 2022, 5:30 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 fourth 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. Mr.

Khurana, please go ahead.

Sanjot Khurana -- Head of Investor Relations and Corporate Treasurer

Thank you, and good afternoon. Welcome to the Pure Storage Fourth Quarter Fiscal 2022 Earnings Conference Call. My name is Sanjot Khurana, vice president of investor relations and treasurer at Pure Storage. Joining me today are our CEO, Charlie Giancarlo; our CFO, Kevan Krysler; and our CTO, Rob Lee.

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 the COVID-19 pandemic and related disruptions, our growth and 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 our earnings press release and slides. Additionally, when we refer to sales in our prepared remarks, we mean total bookings, excluding cancelable orders. 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'll turn the call over to our CEO, Charlie Giancarlo.

Charlie Giancarlo -- Chief Executive Officer

Hello, everyone, and welcome to our call. I hope you are healthy and faring well given the many challenges of the current environment. I'm very pleased to report that Pure delivered a fantastic Q4, capping off a great fiscal year. Our quarterly revenue grew 41% over last year's strong Q4.

This past quarter, we again enjoyed strong growth, especially in the Americas, our largest theater and we grew across enterprise, commercial and public sectors. I'm especially pleased with our growth in both net new logos and subscription annual recurring revenue, indicating great progress against our long-term strategy. Full year revenue growth was 29% and the annual growth of our subscription revenue was 37%. Revenue growth and operational leverage drove strong profit and cash flow growth in fiscal '22.

As we stated in our Financial Analyst Day presentation in September, our total addressable market of more than $60 billion across both storage and storage as a service continues to provide expansion opportunities for Pure. We believe that our strong performance is clear evidence of Pure's increasing strength. Three things are necessary for sustainable growth, which we have steadily developed within Pure: First, sustainable growth requires highly differentiated technology with sustainable competitive advantage. Pure's focus on developing Purity software and our direct flash technology to maximize the many advantages of solid-state storage is unique in our industry and has taken many years to develop.

Second, Sustainable growth requires a broad portfolio that addresses a full range of customer needs, a portfolio that we have steadily developed over the last several years. Third, sustainable growth requires the ability to support customers in all major market segments, commercial, enterprise, public sector, and cloud. Pure now has all three of these elements to drive our growth for many years to come. Pure's highly differentiated technology enjoys a strong sustainable competitive advantage.

Many of Pure's advantages stem from core software architecture decisions that are practically impossible to retrofit into pre-existing software. Among our advantages are the simplicity in the design and use of our products, the ability to realize the best price performance from raw flash, and the ability to perform nondisruptive upgrades for both hardware and software, which deliver a cloud-like experience. While some competitors make claims of nondisruptive upgrades in their marketing, they consistently fail to deliver. Furthermore, Pure's proprietary hardware provides higher performance, reliability, and longer lifetime while requiring less space, power, and cooling than competitors' commodity-based systems.

Competitors would need entirely new designs and years of new software development to replicate Pure's advantages. Pure's growing portfolio of industry-leading storage and data management products has propelled the growth of our enterprise business to greater heights. Customers appreciate the simplicity of our portfolio which supports the majority of their traditional workloads with just two hardware architectures sharing a common software architecture. And their cloud-native workloads with Portworx all integrated through Pure1 and all available as a service.

They appreciate our ability to provide common interfaces and APIs between on-prem and the cloud. They have embraced our ability to support their development of cloud-native applications with Portworx. They're excited by our vision to provide automated data management with Pure Fusion and Portworx data services. And they are overjoyed as we consistently deliver nondisruptive upgrades year after year and soon decade after decade with our Evergreen design, a model that has been claimed competitively but never replicated.

The effect of our portfolio is evident not only in our continuing penetration into large enterprise, but also in our recently announced collaboration with Meta. Meta chose Pure when it needed a storage partner to deliver powerful and scalable storage capabilities for their AI research supercluster. With FlashArray and FlashBlade, their AI supercomputer has unparalleled performance and benefits from a broad range of our technology's advantages, underpinned by Pure's foundation of simplicity, reliability, and sustainability. We announced a record number of new products and services this past fiscal year, including Purity upgrades for ransomware and disaster recovery, additions to our FlashArray//C-series, FlashStack as-a-Service, Pure Fusion, Portworx data services, and major enhancements to our Pure1 digital experience.

This past December, we announced FlashArray//XL, which delivers 5.5 petabytes of capacity in up to 80% less space and power than competitive all-flash solutions and it's off to a great start. Our product pipeline for FY '23 is no less ambitious, and I am incredibly excited about the year ahead. Our vision and technology to deliver a cloud operating model to our customers' multicloud data environment, spanning their private cloud and public cloud providers continues to resonate and grow. This vision is based on the concepts of first, providing common frameworks and APIs to both on-prem and hyperscaler environments; second, enabling fully automated data management to IT organizations through policy; and third, the abstraction of these IT created data classes for developers access through API.

We are seeing strong interest in this transformational model built on Pure Fusion, Portworx, and delivered by Pure1. We have enjoyed great success with our strategy of delivering a simple set of Evergreen data platforms that enables customers to focus more on leveraging their data than on managing their storage environment. Customers have rewarded us with market share gains and recognized us with the highest third-party certified Net Promoter Score in almost all industries of 85.2 for the calendar year 2021. From our primary focus on the commercial market just five years ago, we have expanded our skills and infrastructure to support all major markets.

Today, our enterprise business model is fully capable of supporting the largest global organizations, both public and private, with a portfolio of products, subscription services, support, and professional services. We do this with the help of a growing set of capable partners. We're now adding an ability to serve large hyperscalers and MSPs. We are proud to partner with the world's largest global system integrators and managed service providers to make Pure a preferred part of their solutions.

We recently announced a global partnership with Kyndryl, combining the power of Pure's offerings and Kyndryl's expertise to deliver industry-leading solutions to customers' most complex challenges. Our joint customers are already benefiting from this partnership. One of the world's leading shipping and logistics companies chose Pure as-a-Service to build a secure data infrastructure for its new logistics offering for its clients. Being part of a major digital transformation to improve shipping and logistics worldwide, has special poignancy as we face supply chain challenges that continue to affect all companies.

I feel confident that we have one of the most robust supply chains in the business. Pure has invested in strong relationships with our supply partners and flexible multisource global operations over many years and we benefit from the architectural advantages of our integrated hardware designs. While there have been numerous supply chain challenges over the last year, and we are certainly not invulnerable to disruption in the future, we have navigated and managed them well and continue to meet our customers' demands. Earlier, I had mentioned that Pure solutions are able to provide customers higher performance and reliability with significantly less space power and cooling than competitive all-flash products, in many cases, utilizing up to 80% less power in space.

Lower energy use by our products will significantly reduce the environmental footprint of our customers' data centers. Third-party reviewed competitive comparisons will be one part of our full Environmental, Social and Governance, or ESG report, which we will publish later this month. In our first ever ESG report, we will identify our environmental achievements and future goals for improvement in our operations and downstream use of our products, as well as our current state and future plans on talent recruitment and retention and diversity, equity, and inclusion. And finally, our governance and business practices.

I would like to comment on three additional topics of broad current interest. First, the so-called great resignation, then inflation, and then our response to the Russian invasion of Ukraine. As is widely reported, employee attrition is elevated across all industries and especially in technology. However, the flip side of this coin is that there has never been a time in my memory when so much great talent was available all at one time.

And we saw a strong traction in hiring during Q4. Our continuing success, large market opportunity and high employee satisfaction scores have made Pure a talent magnet. Inflation is also real, and there is no countervailing benefit. I believe this will be with us for some time, and we have assessed impacts to employee compensation and other operating expenses, which we have considered in our guidance.

We are carefully monitoring the situation in Ukraine. And I am dismayed by the wanton disregard for both national sovereignty and human life currently on display. Our hearts go out to the people of Ukraine and all those affected by the conflict. We have ceased all shipments in support services in Russia and Belarus, which represents a small amount of business for the foreseeable future.

We are providing support as appropriate to our employees and their families. In closing, I would like to thank our customers, partners, and especially our employees for their trust and support of Pure this past year. Through all of the challenges over the last several years, Pure has thrived. We have innovated, we've grown.

We've battled competitors, large and small, and we've taken market share. Most importantly, we have delighted ever more customers by delivering solutions beyond their expectations. This simple formula will continue to fuel our growth for years to come. Over to you, Kevan.

Kevan Krysler -- Chief Financial Officer

Thank you, Charlie, and good afternoon. We saw outstanding execution and performance across our entire company, achieving record revenue, operating income and cash flows. Demand continued to be very strong across our portfolio of solutions, services, and geographies, especially in the U.S. and Canada.

Although supply chain challenges continue to persist, we executed for our customers, delivering our solutions and minimizing delays. Growth of our subscription business is robust as we continue to create value-based outcomes for our customers. Subscription annual recurring revenue, or ARR, grew 31% to nearly $850 million. Also, our subscription net dollar retention or NDR at the end of the year exceeded 120% compared to our long-term target of 115% as a result of expansion growth from existing customers.

Remaining performance obligations, or RPO, which includes our committed and noncancelable future revenue, was over $1.4 billion, growing at 29%. We acquired 470 new customers, reflecting increasing strength. New customer acquisitions were balanced across geographies, market segments, and our solutions portfolio. Our total customer count now exceeds 10,000 customers, which also includes over 50% of the U.S.

Fortune 500 companies. Now turning to financial results for the quarter. Total revenue for the quarter grew 41% to approximately $709 million. Revenue in the United States grew 51% and international revenue grew 20% year over year.

Subscription services revenue grew approximately 42%. For the full fiscal year, total revenue grew 29% to nearly $2.2 billion. Our fiscal year includes 53 weeks contributing both additional revenue and costs. Excluding the revenue contribution arising from the additional week, total revenue for the quarter grew approximately 37% and 28% for the year.

Total non-GAAP gross margins were nearly 69% this quarter. Non-GAAP product gross margins of 67% were slightly impacted by higher supply chain-related costs. We were very pleased with how we actively managed our supply chain challenges in partnership with our suppliers. Our integrated software and hardware designs continue to be very valuable as we manage these challenges.

As we continue to sell the value of our solutions, we expect product gross margins to be in the high 60s, consistent with our long-range expectations. Non-GAAP subscription services gross margins were solid at 73% this quarter. We achieved record non-GAAP operating profit of nearly $119 million and non-GAAP operating margins of 16.8% this quarter while also continuing to make investments to drive growth. Increased operating costs included higher compensation due to our strong performance, increased hiring, and an additional week of operating expenses of approximately $17 million.

Non-GAAP operating profits for the year also achieved a record high of $235 million and 10.8% non-GAAP operating margins. As we have highlighted in previous quarters, the COVID environment was a tailwind to our operating profits contributing approximately 2 to 3 points of benefit to our fiscal 2022 operating margin, slower than planned hiring, significantly reduced travel and the reduction of physical marketing events were the largest drivers. Now let's turn over to the balance sheet and cash flows. We ended the quarter with over $1.4 billion in cash and approximately 4,200 employees.

Our strong overall financial performance was also reflected in our cash flow from operations of $138 million this quarter. Capital expenditures were approximately $21 million. For the year, we more than doubled our cash flow from operations to more than $400 million and generated more than $300 million of free cash flows. With our strong balance sheet and cash flow generation, we paid off our outstanding credit revolver balance of $250 million after the close of our fourth quarter.

We continue to return capital to shareholders through share repurchases. We repurchased approximately 2.4 million shares during the quarter and approximately 8.5 million shares during the fiscal year. Our $200 million share repurchase program has been completed and we have also announced a new share repurchase program of $250 million. Now turning to guidance, which is based on a 52-week fiscal year.

Our performance in fiscal 2022 set new records for revenue, operating profit, and cash flows. Our strong revenue growth this year benefited from a substantial sale of FlashArray//C to Meta, includes an extra week in the fiscal year, and reflects an easier compare to fiscal 2021, which was impacted by COVID-related headwinds. We see broad-based demand strength continuing this year for our solutions and subscription offerings and expect our Pure as-a-Service offering to grow at a much faster rate than our overall company growth rate. As we consider these factors, we expect revenue in fiscal 2023 will be approximately $2.6 billion, growing 19% to 20%.

Revenue in Q1 will be approximately $520 million, growing 26%. Operating profit substantially expanded this year as a result of strong operating discipline and operating leverage. As we have previously highlighted, operating profits also benefited from slower-than-anticipated hiring, less travel, and fewer physical marketing events due to the COVID environment. While we do not expect the majority of these COVID-related benefits to recur next year as business operations become more normalized, we anticipate operating margins to expand modestly through continued operating discipline and leverage.

We remain committed to investing in innovation for growth, while also contemplating higher inflation next year. With these considerations, we expect to achieve non-GAAP operating margins of approximately 11.5% and non-GAAP operating profits of $300 million for the year. Non-GAAP operating profit in Q1 is expected to be $16 million. In closing, I am very pleased with our execution and performance.

Our consistent commitment to innovation and creating best-in-class experiences for our customers are really the driving forces of our success as we have seen. And I want to thank our entire Pure team and our channel partners for their outstanding execution this year. With that, I will turn it over to the operator so we can get to your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] In the interest of time, we ask that you please limit yourself to one question and one follow-up question. [Operator instructions] We'll pause for just a moment to compile the Q&A roster. And your first -- our first question comes from the line of Amit Daryanani from Evercore.

Your line is now open.

Amit Daryanani -- Evercore ISI -- Analyst

Thank you and congratulations on a great set of numbers here. My question really is you officially announced Meta as a customer and they had this white paper that sort of outlined their storage [Inaudible] on the super AI cluster that they have. Can you talk about sort of the breadth of this engagement? And I think you all know the revenue contribution from back in October, but maybe to talk broadly, what led them to choose Pure Storage versus building their own? And then what does it mean from a revenue perspective, if this cluster gets to one exabyte that they've talked about in their white paper?

Charlie Giancarlo -- Chief Executive Officer

Amit, Charlie Giancarlo here. Thank you for opening up the questioning. So Meta, I think, is a great example of the power of our portfolio because we had started working with Meta, formerly Facebook, actually some years ago using the FlashBlade platform on some of their AI initiatives. But as they look to scale out that AI initiative, what they really needed behind it was a data lake, something that could hold data at the right performance, although not necessarily to directly feed the GPUs.

But that would provide high performance, but frankly, at a price that would compete with disk. And in addition, they had other constraints in their environment, space, power, and cooling being an important element. Frankly, not only did they look at their own technology internally, but they looked at outside vendors as well. And at the end of the day, we were -- our FlashArray//C product which forms that data lake behind the AI cluster was the only product that could satisfy all of the requirements on it.

But it really shows the power of portfolio that is, I think, driving our growth across enterprise and around the world. And we do believe that it's what's going to allow us to continue to expand our overall footprint. Let me turn it over a little bit to Rob Lee here to perhaps give you a little bit more behind the super cluster and then Kevan, on the revenue.

Rob Lee -- Chief Technology Officer

Yeah, Amit, just to add on to what Charlie said. Again, I just highlight this is a great example of use case benefiting from the entire portfolio. As Charlie mentioned, we started working with Meta, formerly Facebook, over five years ago, first supporting, I would say, their AI research environment, directly supporting data scientists, doing ad hoc kind of AI model training against the FlashBlade. And as that environment grew and continues to grow, they built around at a larger production AI supercluster environment, which Meta has come out and described.

And now in that environment, what they look to Pure to provide with FlashArray//C is really what we have described as more of a general data storage, bulk data storage capability, right, something that provides a huge capacity, certainly high performance. And then meeting the balance of needs that Charlie called out in terms of a very efficient power, cooling, and footprint associated with it. And so I think a couple of things of note here. One is, well: a, great validation of our technology and advantages, but b, I think it's a great sign that look, the transition from disk to flash is absolutely happening.

We see it in the enterprise. We're now starting to see it in the hyperscale environment. And we believe to a degree, this is not only happening, but it's inevitable.

Kevan Krysler -- Chief Financial Officer

And I'll just close, Amit, with some -- share some thoughts in terms of the revenue contribution. But without getting into specifics, obviously. Certainly, from a revenue outlook, we've built some revenue in for Meta. And I would say it's in line with our overall company growth rates for next year.

Amit Daryanani -- Evercore ISI -- Analyst

Perfect. That's really helpful. And if I could just follow up quickly on your commodity, I think, has been a big discussion, especially what's happening to NAND pricing. I'd love to understand what are you seeing from a NAND pricing perspective? And then what are you embedding really in the fiscal year guide relative to commodity prices?

Charlie Giancarlo -- Chief Executive Officer

Yeah. We're expecting that the constraints, let's say, in the NAND production over the next couple of quarters is going to put upward pressure on NAND pricing. We do expect that to flow through and eventually come back down in pricing later in the year. We're not expecting huge swings to be direct, but slight upward pressure in the early part of the year and then downward pressure later in the year.

That's our expectation. Of course, events have a way of changing expectations pretty quickly these days. So -- but that's what we're currently going with.

Operator

Thank you. Your next question comes from the line of Meta Marshall from Morgan Stanley. Your line is now open.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks. Wanted to see -- clearly, you guys stated you were seeing traction across a lot of different customer types. But just any details on kind of the magnitude of the beat, particularly as we look at the guide and we get to more of a seasonal kind of downtick there.

Just any context for just where all of the upside came from? And then you noted that you were saying maybe that all of the COVID savings or COVID tailwinds don't come back or on the opex side, but just what you're expecting in terms of how much of that 200, 300 basis points would come back in fiscal '23?

Charlie Giancarlo -- Chief Executive Officer

Meta, first of all, welcome to Pure. Thank you for joining us. Look forward to be working with you over the next -- for the foreseeable future. On your question, as mentioned, we really saw, from a product line perspective, broad-based strength and particular strength in the U.S.

I'd have to call out -- I'd have to say both commercial and enterprise were strong. Commercial over -- we've been commenting on these two markets consistently quarter by quarter. Commercial has been slower to come back during this latter COVID period, but we really are starting to see some real strength in commercial building, especially over this last quarter. But our ability to be penetrating deeper and deeper into enterprise, both new customers, but in particular, penetrating more deeply in existing customers has been very strong, and it was really broad-based in the Americas.

Good strength internationally as well. But I'd say, this past quarter, the Americas really -- has really shown it's -- the power of the IT environment in the U.S. has been very strong.

Kevan Krysler -- Chief Financial Officer

Yeah, I'd agree with that, Charlie. I think the U.S., Meta just had an outstanding quarter for us. In addition to what Charlie was saying, I think what we're seeing in the U.S. is really leveraging our expanded product portfolio and technology and solutions.

With FlashBlade, we're really seeing some good traction on that front. So it's a shout-out to our sellers and channel in terms of the performance there. I think your next question was in terms of contribution with the COVID tailwinds. I think it's probably fair to say around 2 points, Meta, in terms of how we're thinking about that.

Meta Marshall -- Morgan Stanley -- Analyst

Perfect. Thanks and congrats on the quarter.

Charlie Giancarlo -- Chief Executive Officer

Thanks.

Operator

Thank you. Your next question comes from the line of Jason Ader from William Blair. Your line is now open.

Jason Ader -- William Blair -- Analyst

Thank you. Hey, guys. I guess -- I thought it was a typo when I saw the number for the quarter, the revenue. I mean that's just a monster beat.

I guess relative to the guidance, can you guys help us just understand how much of the upside came from Meta and how much came from other sources?

Charlie Giancarlo -- Chief Executive Officer

Jason, no confidence, a typo, really. Look, Jason, I don't think we could have or would have guided a quarter that was this strong. It was certainly a very strong quarter. But I think it really has to do with starting -- the company starting to hit on all cylinders as we identified a strong portfolio now.

The brand are very strong now across the board in terms of major markets. Our ability to sell and support them now widely respected and simple fact that we can cover more of the use cases that they have with, without a doubt, the industry-leading products. And I think we're just hitting on more and more cylinders. In terms on -- Kevan, do you want to cover the guide?

Kevan Krysler -- Chief Financial Officer

Well, yeah, and I'll just tack a little bit more on to that, right? So it's really interesting for us, right, because the linearity we saw was actually really strong all the way throughout the quarter, end to end, which was really impressive for us. Again, the U.S. and Canada, frankly, outdelivered for us. And it was across the board, as Charlie said.

Enterprise, strong; commercial, strong; public sector, strong. The other thing that was interesting is we did stress test a lot in terms of, hey, were we seeing a lot of pull-forward activity due to supply chain. And frankly, we didn't see anything abnormal to that front. So yeah, really strong for us.

Jason Ader -- William Blair -- Analyst

Was Meta a 10% customer for the year?

Kevan Krysler -- Chief Financial Officer

No, I believe they were not.

Jason Ader -- William Blair -- Analyst

They were not. OK. And then one quick follow-up. On the -- I may have missed this if you talked about this, so I apologize, but the -- one of your competitors talked about constraints on low-level components, not on NAND, but on low-level components in their arrays, which created some challenges in terms of shipments and overall in their guidance.

Is that something that you guys saw? I think they talked about it happening kind of mid-December. And just curious as to whether you guys were impacted by that?

Charlie Giancarlo -- Chief Executive Officer

Yeah, absolutely. That's a big challenge across the industry. We've -- obviously, we sync up with other companies, other manufacturers and those low-level parts have been a consistent problem throughout the industry. So every -- almost every day, there's a new challenge that challenges the supply chain team.

So yes, no, it's a -- just to give you a sort of a broader view of the supply chain, I anticipate a question that might be coming up. We had indicated last quarter that we thought it would bottom out in Q4. And it probably has, but it hasn't really improved. It's still bouncing along the bottom, I'd say.

And you never know another day when there's a new challenge that comes up, I think we've managed it well, but it's -- we're still waiting to see signs that we're on the upswing.

Kevan Krysler -- Chief Financial Officer

It's almost becoming a new normal for us because obviously, this is the same, very similar challenges we were working through last quarter that we're very successful in partnership with our suppliers and delivering for our customers. But I'll tell you, I think the real benefits we're seeing is the value of our integrated hardware and software solutions that we over and over again keep talking about, and it just keeps getting validated as we're working through these challenges that Charlie outlined.

Operator

Thank you. Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is now open.

Rod Hall -- Goldman Sachs -- Analyst

Yeah, thanks, guys. I want to ask the first question with regards to opex and opex leverage. I was just kind of looking at Arista's opex, their sales, and marketing to sales costs about 8% and you guys are about 30%, and that's fair because you distribute to a bunch of enterprises and hyperscale is pretty new to you, but that's the sort of sales and marketing ratio that a company that distributes more to hyperscale is capable of. And I just wonder, do you think over time if hyperscale mix increases, the marginal opex related to that in either such a small number of customers, Charlie, could start to approach that lower number.

I'm just wondering how you think about that hyperscale mixing into that sales and marketing costs. And then I've got a follow-up.

Charlie Giancarlo -- Chief Executive Officer

Right. Absolutely. No, that is the right example, right? I mean if you look at Arista's numbers, they operate on somewhat lower gross margin and higher operating margin due to lower sales and marketing. And that's the business model for selling into hyperscalers.

As we go down that path, the model for us will be mixed. That is to say that there'll be an enterprise business model that will have a higher gross margin, but higher sales and marketing expense and a cloud business model likely to have lower gross margin, but lower sales and marketing expense. Those are the trade-offs that are made. My view is both of which should improve over time to give us higher operating margin.

Kevan Krysler -- Chief Financial Officer

Well, in our subscription businesses as well.

Charlie Giancarlo -- Chief Executive Officer

And the subscription -- well, I mean, at higher gross margin as well.

Rod Hall -- Goldman Sachs -- Analyst

Right. Yeah. That's why I thought. Thanks for all -- that's helpful.

And then my follow-up was the Meta revenue up, down, or flat in Q4 on Q3?

Kevan Krysler -- Chief Financial Officer

Far down. I mean we just had a little bit of revenue coming in from our hyperscalers. So the majority of that revenue we saw in Q3.

Charlie Giancarlo -- Chief Executive Officer

And we should remember that generally, that is the way with large -- whether hyperscalers or service providers, it can be quite lumpy on a -- for an individual player.

Rod Hall -- Goldman Sachs -- Analyst

That makes sense. And when you guys think about that revenue then, you talked about the growth of it being kind of in line with the company growth. I didn't know what you meant by that. Are you saying sort of prorate the revenue you got in the second half like multiply it by two and grow that at the company rate? Or are you saying look at the absolute total of revenue in the year?

Kevan Krysler -- Chief Financial Officer

Yeah, keep it pretty simple, right? So when you take the outlook for next year and our growth rate, applying that on top of it, it's a general good framework to start out with.

Rod Hall -- Goldman Sachs -- Analyst

But the question is on top of what?

Kevan Krysler -- Chief Financial Officer

What we did this year, what we did this year.

Rod Hall -- Goldman Sachs -- Analyst

OK. Just the absolute number, not prorated or anything.

Kevan Krysler -- Chief Financial Officer

That's exactly right.

Rod Hall -- Goldman Sachs -- Analyst

OK, great. Thanks, guys. Appreciate it.

Operator

Thank you. And our next question comes from the line of Pinjalim Bora from J.P. Morgan. Your line is now open.

Pinjalim Bora -- J.P. Morgan -- Analyst

Great. Thank you for taking my questions. Congrats on an absolutely great quarter. It seems like -- Charlie, listening to your vision in the prepared remarks, it sounded like Portworx will play a bigger role in the future.

First, is that right? And then what are you seeing or hearing from customers with respect to the need for persistent storage and containers and kind of the maturity of container-based environments. And do you expect Portworx to be an important component of the growth equation in 2022?

Charlie Giancarlo -- Chief Executive Officer

Well, first of all, we absolutely expect Portworx and our continuing development of Portworx and Portworx data services to be foundational for us, for the future in next generation, what they call cloud-native development based on Kubernetes and containers. It's a very different environment than traditional storage, traditional data environment and therefore required a new way and a new set of -- new software to be able to support that. And we have the industry-leading product in Portworx. We're getting very extraordinarily good traction with Portworx across a wide range and growing range of customers.

Now that being said, I would not call containers or Kubernetes mature by any means. We're still -- that is the industry and customers are still very early in their development of container-based applications, but it is a -- when I say that, it's because most of their new developments are in -- are on containers using Kubernetes, but they have -- a very few of them have gone into production. And it will take, obviously, over time, years for those production workloads to reach full scale. But you always want to be on the leading edge of these very fundamental and foundational changes.

Rob, do you want to add?

Rob Lee -- Chief Technology Officer

Yeah, no, absolutely. Just to add to that, Pinjalim, you asked the question about the growth and realization around stateful versus stateless containers. I think it's a great example of the maturity curve that Charlie is talking about. And I think as the technology around containers matures and the adoption increases in the enterprise, we're seeing a couple of things.

One is a realization that state matters and being able to store data, get it back and have all the enterprise resilience around it, it really does matter, as well as the enterprise data management workflows that go around it, whether that's a backup, disaster recovery, security or migration needs. And that's where we really see customers across the board, recognizing that Portworx is really the only solution out there that's able to solve the entire set of data challenges and needs around the container environment, whether that's the container storage infrastructure, the data management workflows or now with Portworx data services, providing the data service and application tool capabilities with the integrated and curated database deployments. So net-net, definitely earlier in the maturity curve, but we're seeing great adoption and great growth within Portworx, and we think that's going to be an increasingly important part of our strategy going forward.

Pinjalim Bora -- J.P. Morgan -- Analyst

Got it. Thank you. And Kevan, just a follow-up on the RPO growth. It's a fantastic number, 29% at $1.4 billion scale is pretty impressive.

Are you seeing any kind of an elongation of contract duration that might be positively impacting that growth rate? Or would you say it's more apples-to-apples in terms of contract duration year over year?

Kevan Krysler -- Chief Financial Officer

Hey, thanks for the question. And I think it's pretty consistent from a duration standpoint. And then again, I do point the analysts' face to our subscription ARR because I really do think that's a really good measure of the health of our subscription businesses and obviously, NDR, which we published is greater than 120% exiting the year.

Pinjalim Bora -- J.P. Morgan -- Analyst

Got it. Thank you. 

Kevan Krysler -- Chief Financial Officer

Yep.

Operator

Thank you. Your next question comes from the line of Aaron Rakers from Wells Fargo. Your line is now open.

Aaron Rakers -- Wells Fargo Securities -- Analyst

Yeah, thanks. Thanks for taking the questions. And I'll ask two as well since nobody stuck to the one. So I guess the first question I have is that in terms of the hyperscale cloud opportunity, we've talked a lot about Meta.

But as we look out over the next 12 months, do you think we come out of that timeframe, saying, hey, it's more than just Meta? Have you had engagements with other cloud hyperscale customers on their own AI projects? Do you expect that customer base to expand as you look forward?

Charlie Giancarlo -- Chief Executive Officer

Well, we're putting work and effort into it. So I certainly expect it to expand as we move forward. The exact timing of these things. This is -- as I'm sure you're familiar, I mean, these are like engineering designs.

It's like engineering, it's like selling into a new rack design for each hyperscalers, which itself takes several years for the hyperscaler. So a, it's a little bit difficult to predict the exact timing, but we do have conversations ongoing. It's certainly my expectation. But I can't say that it's near term.

It's -- but 12 months is a long time. I hope to have an update there. It's definitely a strategic importance to the company overall. Rob, do you want to add? I'm sorry, go ahead.

Rob Lee -- Chief Technology Officer

No, I think you hit it, Charlie.

Aaron Rakers -- Wells Fargo Securities -- Analyst

And then as a follow-up, I know it's probably too early to kind of update Analyst Day kind of comments that you provided back in September. But just thinking about the growth that you had outlined that mid-teens CAGR of revenue for fiscal '22 through '25. Maybe you can help us rate it like -- did that assume that you were going to see some of these hyperscale cloud opportunities come to fruition? Or was that not necessarily baked into that expectation at that point?

Charlie Giancarlo -- Chief Executive Officer

I think it basically it didn't assume like a huge -- some type of hockey stick growth from the hyperscale environment. It assumed a moderate -- at the time, we obviously had already talked about a hyperscaler, which was Meta, obviously, -- so we assumed we'd get some from that, but I can't say we assumed a lot of it.

Kevan Krysler -- Chief Financial Officer

Yeah, I think that's fair, Charlie. In addition to that, we are assuming obviously acceleration with our subscription businesses overall as well, which is part of our long-range expectations in model.

Operator

Thank you. Your next question comes from the line of Simon Leopold from Raymond James. Your line is now open.

Simon Leopold -- Raymond James -- Analyst

I hate to sort of focus on the negative with all the things you -- metrics you've beaten on, but I want to make sure I understand what occurred in your gross margin, specifically, product gross margin in your January quarter in that, I was under the impression that October was depressed because of the customer mix. And I don't think you have the same customer mix with the Meta shift down. So I want to maybe unpack this a little bit and then see if we can get an understanding of what affects, what elements are continuing in the April quarter, as well as the fiscal '23 outlook on product gross margin? Thank you.

Kevan Krysler -- Chief Financial Officer

Yeah, it's a great question, Simon, and I'll take it. This is Kevan. First of all, we're quite pleased with the product gross margins, but I do understand the question. And we certainly did see some impact with higher costs at the component level that Charlie talked about, as well as indirect costs, including logistics that were impacting us, and we saw a little bit of that coming through this quarter.

But look, we're continuing to benefit from selling the value of the integrated hardware and software architecture that I've alluded to and Charlie's alluded to and expect our ASPs to really be healthy, especially as our competitors who really sell in a cost plus start increasing the pricing, and we've seen that in the marketplace. And so in my prepared remarks, I talked about the fact that we continue to expect product margins to be in the high 60s, and that's again, consistent with our long-term expectations and understanding the challenges we're working through on the supply chain. So thanks for the question.

Simon Leopold -- Raymond James -- Analyst

Thank you very much.

Operator

Thank you. Your next question comes from the line of Wamsi Mohan from Bank of America. Your line is now open.

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

Yes, thank you. If I could just follow up on the prior question on product gross margins. If we go back to two quarters ago, we're talking about 330 basis points of margin compression. And clearly, the supply chain environment is quite challenged.

So as you think about this high 60s gross margin going into next year, is the underlying assumption that we're not going to see supply chain improvement? Or is there embedded in there some -- a full year of hyperscale revenue that could play some depressing role in the gross margin mix at least?

Charlie Giancarlo -- Chief Executive Officer

Yeah. Wamsi, I think it's -- you're asking a complex question. Let me give it a start. First of all, we do think that we had some timing-related issues associated with the gross margin in Q4.

It was not the hyperscaler related. When you have rapidly changing prices as we saw in our costs rather, as we saw in Q4, you can't always adjust for them right away through ASPs. But we see very strong ASPs because of the value of our product. We expect that the -- unless we have new challenges, which we are -- which we're unaware in Q1 and Q2, we're expecting these temporary gross margin -- product gross margin costs to effectively pass through.

And we've been guiding for high 60s in our gross margin for many years. That's -- and so that's not a change from the past.

Kevan Krysler -- Chief Financial Officer

You know, maybe I can add just a little bit more to that in terms of your specific questions. So to be clear, we did not build in degrading product gross margins due to hyperscaler transactions. So I want to be clear on that. We do expect supply chain challenges to continue.

But to Charlie's point, we sell on value, always have. The value of our software both Purity and Pure1, the integrated architecture of the hardware and software. And that's what we've been doing even before, obviously, the supply chain challenges. And that's really the validation point that Charlie is alluding to on the ASPs and why we believe our ASPs will respond accordingly and why we continue to believe that our product gross margins will be at our long-term expectations in the high 60s.

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

OK. That's helpful. And if I have a follow-up. When we think about this hyperscaler revenue, I think, Charlie, you mentioned that you first engaged with Meta maybe five years ago.

Obviously, it took a while to sort of get to a healthy revenue level there with that customer in this past fiscal year. So why should -- now that the proof of concept is sort of behind you, a lot of the technology like heavy lifting is sort of behind you, why should we expect growth rate to be in line with your aggregate growth rate when it's coming off a much smaller base and sort of it seems like a lot of the heavy lifting and proof of concept is sort of behind you, why shouldn't we expect a much faster growth on that piece of the business?

Charlie Giancarlo -- Chief Executive Officer

Well, Wamsi, from your lips to God's ears. Of course, it's certainly something that we hope to see. But of course, every new sale depends upon a new engineering engagement in a new data center or rack design with each customer, right? I will point out that while it took -- your chronology is correct. We sold them FlashBlade, and we have been selling them FlashBlade for AI uses over the last five years.

But the reason why we got the -- really I would say, generational and/or hockey stick type of order with FlashArray//C had more to do with the fact that we -- that Pure finally cracked the price performance level of disk, of midrange disk in such a way that it became compelling for a more traditional use case, which was a data lake type of use case. That's only just beginning. That level of price performance is just beginning. So it's a new, if you will, concept for the hyperscalers, and they're just getting used to it now.

And of course, now they have to design to it and so forth. So it's really a question of timing and the hyperscalers now starting to realize the opportunity for a new technology. I will identify one additional thing, which is that the benefit of our FlashArray//C or QLC in delivering against the traditional use case is not limited to the price performance. We're able to deliver now just incredible performance relative to the environmental footprint of the storage involved, environmental in the case of power and cooling, environmental in terms of space and environmental in terms of landfill footprint.

If you waste footprint at the end of the day, much far less waste. So we think these are going to make a larger -- are going to be of larger importance to both enterprise and hyperscalers going forward.

Rob Lee -- Chief Technology Officer

And Wamsi, this is Rob, if I could just add in. I think specific to your question, which was, hey, we've built this relationship with Meta. How do we see the growth there? And why isn't that perhaps inflecting faster? I'll just go back to remind you that just like each hyperscaler firm and environment is different. Each environment within a particular firm is different as well.

And so each one of those -- going back to Charlie's comments, each one of those necessitating an engineering-driven almost design win process. Now certainly being a partner for Meta in one part of their environment and making them successful there helps us versus being in a new account. But just like we're having discussions with other hyperscaler firms, it's early days there. This is a longer process, much more of an engineering-driven design process in sale.

And so it's just going to take some time.

Operator

Thank you. Your next question comes from the line of Sidney Ho from Deutsche Bank. Your line is now open.

Sidney Ho -- Deutsche Bank -- Analyst

Thanks for taking my questions. Congrats on a great quarter. My question is on the demand side. Clearly, your peers talk about constraints impacting the growth that -- you guys did a great job managing the supply chain and upsided your own expectations.

Do you think some customers are adopting your solutions because they couldn't get the hard-drive-based product? What -- so the question is, what do you think the sustainability of these wins once supply constraint frees? And then kind of related to that, do you think your as-a-service offering is benefiting from these constraints? And even if you have -- if you are, do you have enough capacity to serve this upside?

Charlie Giancarlo -- Chief Executive Officer

I think, Sydney, so on average, I would say, we don't see a significant amount of business that -- there are a few anecdotal cases where we did get business because of supply constraints, but they are few and far in between. I think this is very fundamental demand based on the expansion of our portfolio and our -- and the number, and the segments that we're able to go after right now. And so we do believe it's sustainable for the three reasons that I identified in my opening remarks, which is that we now have a much broader product line than we had just a few years ago. We sell into more segments.

And our technology is different -- it has sustainable differentiation, difficult for the competitors to be able to -- easy to claim but difficult to actually deliver. So I think for those reasons, we're on the early stages of sustainable demand growth.

Sidney Ho -- Deutsche Bank -- Analyst

OK, thanks. And then my follow-up question is, I want to ask about this Rule of 40. Clearly, fiscal '22 was a good year. I think it was up 44%.

I guess, you benefited from some of the reduced expenses from COVID. How do you think about the Rule of 40 this year? Revenue growth is about 20%. So I guess, indirectly asking about your free cash flow of margins.

Kevan Krysler -- Chief Financial Officer

It's a great question. And yes, we kind of outdid ourselves this year, didn't we, in terms of the Rule of 40. It was outstanding. And any metric we look at including the Rule of 40 framework.

But look, our FY '22 performance in of itself really doesn't change our long-term view that we've shared about sustainable improvement within the Rule of 40 framework. And look, when we look at our FY '23 outlook, it's tracking well with the long-term expectations that we set and discussed on Financial Analyst Day with you guys a couple of months back.

Operator

Thank you. Your next question comes from the line of Nehal Chokshi from Northland Capital Markets. Your line is now open.

Nehal Chokshi -- Northland Capital Markets -- Analyst

Yeah, thank you. And stunning results, especially in the context that you accelerated a 41% year-over-year product revenue growth with virtually no help from Meta, so spectacular. So the question actually is, is that you're guiding to 20% year-over-year growth in the April quarter, and you talked about that the driver here is a renaissance of IT spending within the Americas. Why should this continue to [Inaudible] into the April quarter and beyond?

Kevan Krysler -- Chief Financial Officer

Yeah, I'll start, and I'll let Charlie kind of hit it from a macro standpoint. But when we chatted about this in a fair amount, right? We're seeing strong demand across our portfolio, which obviously has been expanded. But we're seeing good success across our entire portfolio, including our subscription businesses. Key markets, key geographies, or peak business no matter what we're looking at, we're seeing strength.

So that's a plus for us in terms of the demand signal that we're seeing. But I also think when you think about our FY '23 outlook for revenue growth, just a few reminders for you, right, in terms of FY '23 compare. Obviously, we had the large opportunity with Meta that was helping us out in FY '22. We have an extra week of revenue in '22.

And again, without taking anything away from our outstanding performance in FY '22, our growth rate was simply an easier compare because obviously, fiscal '21 had some COVID-related headwinds that we're working through. So and then when I complement later on, the Pure as-a-Service growth with Cloud Block Store that we expect that growth to significantly outpace our company revenue growth rate for next year. And as a reminder, with Pure as-a-Service, revenue is recognized over time. So obviously, there's an impact there.

But hopefully, that's helpful for you.

Operator

Thank you. Your next question comes from the line of Tim Long from Barclays. Your line is now open.

Tim Long -- Barclays -- Analyst

Thank you. Just one follow-up and a question and a follow-up. Just I'll kill the hyperscale one more time here. I think from one of the answers, just curious if when you think about some of the other large customers since you were in Facebook for a while, you had at least somewhat of an advantage.

Was one of the answers implying that for the other large hyperscalers, you don't have that same level of relationship coming in? Therefore, it's a little more challenging. And then the second question is if you could just talk a little bit about kind of deal size and particularly cross-selling across -- more broadly across the products, I think you talked about FlashArray//EX doing really well and obviously C has done well. So can you just give us some color around cross-sell and how that's impacting repeat sales and deal sizes? Thank you.

Charlie Giancarlo -- Chief Executive Officer

You bet. Thanks, Tim. So regarding the hyperscaler, we're not necessarily strangers to our hyperscalers, but if we are in them, we tend to be in their IT organization, lessen their production organization. And it's a different -- as you may know, those are different relationships.

We do get -- we have high marks in their IT organizations, but it's still different. And as I said, remember, it is an engineering design win that has to go in more like a chip sale, if you will, than like a traditional enterprise system sale, so they take a while. Highly integrated with their teams, and we are at earlier stages, no doubt, we were already engaged in a production environment in Facebook. So that's certainly part of it.

In terms of the broader portfolio, what's really interesting here is just having the broader portfolio convinces customers to take us into more of their environment and greater amounts of their wallet spend. And so regardless -- and I don't mean to diminish, if you will, the portfolio sale that does take place. But even without a portfolio sale, it's opening up new opportunities for us. A significant portion now of our deals are portfolio sales.

That is more than one product going in at the same time in the transaction that takes place. So that's growing nicely as well. But it's really convince customers that we're a vendor that, frankly, any time that they're looking to put in a new storage capability or replacing the existing storage capability that they have to consider us.

Tim Long -- Barclays -- Analyst

OK. Thank you.

Charlie Giancarlo -- Chief Executive Officer

Thank you.

Operator

Thank you. Your last question comes from the line of Krish Sankar from Cowen and Company. Your line is now open.

Krish Sankar -- Cowen and Company -- Analyst

Yeah, hi. Thanks for taking my question. And Charlie and Kevin, thank you very much, and congrats on the great results. I have two quick questions.

One is on the profitability. What gives you the confidence in the profitability for the whole year? I understand you spoke about opex going up because of inflation and COVID costs of working, but like your inventory is also at the all-time low. So I'm just trying to figure out, is there -- what is the level of confidence on profitability? And then I had like a big picture question for Charlie. Thank you.

Kevan Krysler -- Chief Financial Officer

Hey, welcome, Krish. I know you're new to the community as well in Pure. So welcome to you. And yes, let's spend a little bit of time on profitability.

And I think we spent a fair amount of time walking through our thoughts on the gross margin side for product. We haven't spent much time on the subscription gross margin, which as you saw, was quite solid for us both for the quarter and for the year. And we think that trajectory will continue. And look, I just -- when you look at the operating leverage and discipline that we achieved this year.

In addition to the COVID tailwinds and primarily within go-to-market sales and marketing, although all areas really benefited this year. But we're just going to continue that momentum simply, right? So we're going to continue to invest in growth, which is an absolute priority for us. But with that discipline and growing our global workforce, we think we can continue on our journey of increased profitability and feel quite comfortable with our modest operating margin expansion.

Krish Sankar -- Cowen and Company -- Analyst

Great. Thank you for that, and thanks very much for the kind words. And then just as a quick follow-up for Charlie. You spoke about IT spending.

I'm just kind of curious like -- there are some views that IT spending growth was strong last year and might grow this year, but maybe the second derivative turns negative. So I'm kind of curious from your viewpoint, was there any budget flush in Q4 and things normalized this year? Or is it -- how to think about IT spending as a whole relative to Q4 and into FY '23 for you?

Charlie Giancarlo -- Chief Executive Officer

Yes. We had a very strong linearity throughout the quarter. So there was no specific budget flush, either through December, which would typically be when most companies have their fiscal year, or to the end of our fiscal year, which was end of January, beginning of February. So no, I can't say budget flush was much of a consideration at all.

It was really -- I'll go back and say, that was really based on the overall strength of our business and competitiveness of our portfolio. Looking forward, obviously, we have better insight into the first half of the year than the second. And as we look at both industry and economic watchers, as well as other companies in the IT space. We seem to see a theme of believing that this first half or at least more confidence in the first half than the second half.

So I think that's probably more of what goes into the thinking.

Operator

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

Charlie Giancarlo -- Chief Executive Officer

I want to thank you all for joining us today and especially Meta and Krish, who are with us for the first time. Certainly, here at Pure, we're looking forward to not only this quarter but to our sales kickoff, which starts next week, and I'm going to welcome all of our sellers. It's going to be virtual, hopefully for the last time, this time around. But we are broadcasting to you for the first time legally maskless from our Mountain View headquarters, and we're hoping that's a sign of things to come.

Thank you all very much again for joining us and look forward to talking to you next quarter.

Operator

[Operator signoff]

Duration: 66 minutes

Call participants:

Sanjot Khurana -- Head of Investor Relations and Corporate Treasurer

Charlie Giancarlo -- Chief Executive Officer

Kevan Krysler -- Chief Financial Officer

Amit Daryanani -- Evercore ISI -- Analyst

Rob Lee -- Chief Technology Officer

Meta Marshall -- Morgan Stanley -- Analyst

Jason Ader -- William Blair -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

Pinjalim Bora -- J.P. Morgan -- Analyst

Aaron Rakers -- Wells Fargo Securities -- Analyst

Simon Leopold -- Raymond James -- Analyst

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

Sidney Ho -- Deutsche Bank -- Analyst

Nehal Chokshi -- Northland Capital Markets -- Analyst

Tim Long -- Barclays -- Analyst

Krish Sankar -- Cowen and Company -- Analyst

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