Pure Storage stock plunges on weak outlook

Pure Storage (NYSE: PSTG) stock dwindled above 2% after the bell as the sales outlook for the Q3 and full-year failed to impress the street. However, the storage provider reported better-than-expected results for the second quarter.

The company’s stock has plunged 30% since May after the first quarter results failed to impress the street. Earlier this month, the share price touched a new 52-week low of $12 mark.

Disappointing Outlook

For the third quarter, the company is guiding revenue of $434-446 million ($440 million at the midpoint) compared to $466 million projected by the street. The company usually doesn’t provide earnings guidance, but analysts are anticipating non-GAAP earnings of 13 cents per share.

Looking ahead for the full-year guidance, Pure Storage has revised downwards the outlook provided in the prior quarter. The company is now expecting sales of $1.645-1.715 billion ($1.680 billion at the midpoint), which is lower than the $1.70-1.77 billion ($1.73 billion at the midpoint) provided last quarter. The street is projecting top line of $1.73 billion and non-GAAP earnings of 22 cents per share.

Q2 Performance

Revenue rose 28% to $396.3 million aided by strong growth from product sales (up 25%) and subscription services (up 42%). Adjusted earnings came in at 1 cent per share, flat over last year. Analysts were projecting revenue of $393.1 million and adjusted loss of 4 cents per share. The company surpassed estimates on both the top and bottom line metrics.

Pure Storage is expecting increase in demand for its products as data analysis by companies are witnessing huge adoption. In addition, the trend towards moving towards flash-based storage devices from traditional disks is going to be a tailwind for the cloud-based flash-storage offerings.

Client Trend

The company added 450 clients in the second quarter, bringing the total client base to nearly 6,600. Client additions improved 28% over prior year period. Out of the total customers, above 40% are Fortune 500 firms.

As of June 30, the top 25 customers had spent about $9 on new purchases from $1 of initial purchase within the first 18 months. If we take into account the entire client base, from $1 initial purchase, the clients made $2 purchase within 2 years.

This trend is encouraging for investors and expected to continue in the latter half of the year. It clearly shows the ability of the company to up-sell its products to its existing clients.

Expenses Update 

Operating expenses surged 28% due to increasing spending on research and development (R&D) and sales and marketing (S&M) and general & administrative (G&A) metrics. R&D expenses jumped 27% while S&M costs increased 29% followed by 18% jump in G&A spending.

The company is currently improving its product offering in line with the customer demand. As a result, it is seeing increased investments in R&D and sales and marketing to broaden its reach. This is going to be a drag on the earnings in the latter half of the year.

Earlier this month, NetApp (NTAP) Q1 earnings surpassed estimates, while revenues came in line with consensus. Revenue contracted 16% while adjusted EPS was down 38% due to drop in product and hardware maintenance services.

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