Pure Accelerates Its Path To Profits

Pure Storage finished its financial year on January 31, so ahead of the company’s flagship Accelerate conference this week in San Francisco, I took a look at the company’s progress since my last dive into Pure’s financial reports.

I continue to like what I see (I’ve been fairly bullish on Pure for a while now), and it appears the rest of the market is starting to agree with me at long last.

Pure’s stock has been rising pretty consistently for the past year, from $9.94 USD on May 19, 2017, to $23.67 USD on May 18, 2018, a rise of about 132%. Not too shabby. Part of the gain is due to a market-wide rise, but the NASDAQ composite is only up 20% in the last year so most of the gains are more directly related to Pure.

Let’s dive into why.

This is my favorite chart for Pure’s numbers at the moment. It shows the relentless progression towards profitability that I look for in a company. We see SG&A and R&D dropping as a percentage of sales, which shows that the company is benefitting from greater scale efficiencies that we’d expect to see as revenues climb. Each additional sale isn’t as hard to do, and this is while Pure continues to produce new products and offers at the pace required of a high-tech company in a competitive space.

Getting these costs lower is the key to profits for Pure. The company has been consistently reducing them since IPO, and sales continue to grow. Net income is just -17% of sales in 2018 (according to my analysis), continuing a positive trend for the past couple of years from -48.5% in 2016, to -33.7% in 2017. That’s a consistent rate of loss reduction for two years of 15-16 percentage points each year, so one more year of that performance gets Pure very close to its first net profit since IPO.

However, sales growth is slowing. From 2016 to 2017, gross sales grew 65.3% (from $440 million to $728 million), while from 2017 to 2018 sales grew 40.5% to $1,023 million. Gross margin seems to have settled at around 65.4%, so getting overheads down while continuing to grow sales is the key here. Pure has reduced General and Admin costs down under 10% of sales, which is good to see, while R&D spend is now at 27.3%. Sales and Marketing seems to be the key cost to reduce here, since a major reduction in R&D would compromise Pure’s ability to compete in the fast moving high-tech market. Maybe there’s still some fat in the R&D departments, but I’d be inclined to focus on getting more efficient with sales and marketing.

Pure’s technologies continue to be in demand, particularly with the explosion of interest in analytics, machine learning, and AI. People keep generating more data, particularly as we continue to put sensors and computers in everything from farm moisture monitors to doorknobs. Analysing all this data takes lots of storage accessed very quickly by lots of compute. Pure’s partnership with NVidia in the AIRI platform is a smart way of making fast analytics infrastructure easy to buy. More and more companies are looking to jump on this bandwagon, and Pure is selling a high quality shovel for those embarking on a search for gold in them thar data piles.

The general storage trends also help Pure. Advances in compute and software makes additional data services easier to provide without compromising on performance, and newer low-latency technologies like NVMe flash and storage-class memory are pushing the older flash technologies down-market. Flash is a mainstream technology now, not just for exotic high-end workloads, and once you’ve experienced the qualitative step change of moving from disk to flash, it’s hard to go back.

There will still be plenty of demand for cheap-and-deep systems built on disk, but the active-processing workloads that drive business will move to flash if they haven’t already, and that helps Pure.

Of course, every storage vendor worth its salt has an all-flash offering today, so Pure will need to continue to assert its position as a leader in the high-end, high-margin part of the market with new products and interesting offers. Pure is priced at a premium, so it needs to continue to justify that premium and convince customers to buy. If the hype of AI and machine-learning falls off, or companies fail to realize the benefits they believe they’ll get from these projects, that could well put the brakes on Pure’s growth.

Personally, I think the benefits of many AI/ML projects are over-hyped. However, I think there are enough genuinely valuable uses that for every company that gets burned by failing to do its due diligence, there is another that will learn from the mistakes of others and find a real use for these interesting techniques. The explosion in sensor data from IoT style devices is going to require a lot of edge-processing, and we’ve already seen Microsoft talk up this Intelligent Edge as a new datacenter location. Pure is well placed to capitalize on the growth of that market.

I’m happy to be corrected, but it’s hard not to be positive about Pure’s prospects. Hopefully, we see some solid announcements at this year’s Accelerate to justify my optimism.

This is not financial advice and is provided for entertainment purposes only. I don’t own any Pure stock. Getting professional advice from a licensed financial advisor is often a good idea.

This article first appeared in Forbes.com here.