Making Markets EP41: Pure Storage CEO Charles Giancarlo on a Big Earnings Beat & Customer Obsession
In this episode of Making Markets, Charles Giancarlo, CEO of Pure Storage, talks about why digital transformation is still top-of-mind, and how the company continues to grow, take market, and win through a strategy driven by customer experience. It’s a tough market out there, but if you have the right products and you think ‘customer experience first,” there seems to be an opportunity to keep growing and define what is going on in the macro environment.
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Daniel Newman: Charlie Giancarlo, CEO Pure Storage, welcome to Making Markets.
Charles Giancarlo: Thank you Daniel, pleasure to be here.
Daniel Newman: Yeah, it’s great to have you as part of the esteemed guest that I’ve had on this show. It’s always interesting and Pure Storage is a success story and a company that I’ve been following for a long time and I’ve long wanted to have you on this show so I know the audience is going to be really excited to have you here. You guys did just report some earnings and we’re going to talk about that in a little bit.
But I always like to start off when I have a chance to get you and your peers on this show talking a little bit about the broader market and what’s going on. We’re here, it’s the middle of September, I know people sometimes listen to these things on-demand, it’s 2022 and we’re in a pretty tough market. If you look at historical data, this has been one of the worst markets in decades. You’ve got a lot of pressure between interest rates, between inflation, we’ve got still some sustained wars and threat of wars on different fronts. How are you feeling about the macro environment? Let’s start with an easy one.
Charles Giancarlo: Well, there’s changes coming for sure, go figure, money starts costing something and the market’s change. We’ve been living on 0% interest rates now for some time and money is about to start costing something. When it does, investors have other places to invest their money on a relatively lower risk basis. So, I think what we’re really seeing is a big adjustment. Go figure, the governments inflate their currency by 20%, what do we see? We see some inflation, which we can expect for a while. And in addition to that then the fed has to raise interest rates and then money gets parked on the sidelines waiting for those rates to peak so we’re seeing a lot of money come out of the market. But if you look at the real economy, you also see some changes taking place.
First of all, consumers are tired of being cooped up at home, they want to get out, they want to enjoy themselves. They want to be with other people so they’re looking to travel, they’re looking to go out to dinner, they’re looking to get out for entertainment. And so, you’re seeing a big shift to where dollars are spent. They’re not spending it on another TV, they’re not spending it on streaming, binge-watching videos, they want to spend it outdoors. And so, I think we’re seeing also just some change in where money’s being spent. But consumers have also never had this much savings in many years. And so, I think that the fundamental economy is still relatively strong. Yes, we’re seeing a lot of disruption, we’re seeing disruption in where money is invested, seeing disruption where money is spent.
For our industry, for the IT industry though, digital transformation is still top-of-mind because these companies have seen that companies that were more digital, that were more virtual fared better in a disruptive environment. And so, that investment is going to continue, even if it slows down a bit. So, in terms of my personal point of view, I’m expecting the economy to soften a little bit but not to go into massive recession. And the great thing about recessions, if there’s one good thing about it, Alan Greenspan said it best is, “The one thing you can count on in a recession is it always ends.” So, I think we’re going to see the same here.
Daniel Newman: Yeah, that’s some encouraging words for everybody out there because it does feel sometimes like you’re in the abyss when things are going downward, whether that’s the value of your home, whether that’s the value of other assets, your equities, your 401(k), sometimes it does feel like the falling knife and of course, the same euphoria that people think it’ll never stop going up. I laugh all the time as someone who goes on CNBC and I listen to some of my cohort and colleagues and I still remember October last year everyone saying, “Buy tech, buy tech, buy tech,” and then this year in March, April, May, when oil had gone to just unbelievably high prices and people are out there recommending oil and you’re like, “There’s got to be a contrarian play.”
Your peer Bill McDermott from ServiceNow came on the show and we talked about this concept of teching your way out. And effectively, all companies are going to have to figure out that balance of how digital transformation and technology, automation and AI are going to enable them to run more efficiently, to optimize supply chains, to deliver customer experiences with less cost and greater satisfaction. It’s going to be digital and it’s going to be technology. My sentiment I share with you, Charlie, I think some consumer technology might suffer, especially in the middle and lower tiers, the commodity-ish, I know they’re not truly commodity but the lower end. I still think iPhones will sell, I still think the higher-end stuff will keep selling.
It’s just like the high-end cars are not being hit the way the middle cars are because like you said, all that savings, all that wealth that people created is still there. But technology, cloud, AI, storage, these are core components of a company’s digital transformation and I just don’t see it going away. Maybe it’ll slow a little bit, but if you’re long and you know if you’re a market person and you’re an investor, there’s a lot of great companies on sale.
Charles Giancarlo: There’s a lot of great companies on sale and you can never time the peak and you can never time the bottom. So, although I think this peak’s been coming for a long time and some people might’ve felt like they got out early but if you got out a little early, that’s fine. I do think people will be coming back into the market when interest rates do peak and it starts coming back down. And a conversation we recently had, it’s the quality companies that will really start to distinguish themselves during the downturn.
Daniel Newman: Oh, absolutely and I do like that you said that. I mean, we’re going to smash demand, we’re going to keep rising rates, no one’s going to want to buy houses, no one’s going to want to buy cars, the economy’s is going to come to a bit … it’s going to have to come to a bit of a halt and then they’re going to have to turn the other knob. It’s just they’re going to go, “Okay, time to bring them down.” So, patience wins, Charlie, patience wins.
Charles Giancarlo: Patience wins, well, and balance, patience and balance, right?
Daniel Newman: I like that. So, let’s talk about Pure a little bit, I appreciate that perspective on the overall market. You had earnings, what about two weeks ago?
Charles Giancarlo: Right.
Daniel Newman: Just outstanding. I talked about it with Pat Moorhead on the Six Five, we were gushing. And I don’t like to be that way as an analyst, I got to be neutral. But all the numbers were going in the right direction and I want to get a little … First, just give me the quick recap, I know it’s probably a distant memory. You’re starting to plan for the next quarter.
Charles Giancarlo: We’re already in the new quarter so what have you done for me lately? But yeah. No, a quick recap is we grew 30% year over-year for what is our Q2, which ended at the end of July, so very strong growth. We saw our subscription are up over 30% at 955 million. Gross margins held strong, good strong operating income, good strong free cashflow. So, really the results speak for themselves. We continue growing in what others have described as a tough market. We believe it’s still a very strong market and we raised our guidance for the year to two and three quarter billion. So, we’re definitely seeing some good demand through the rest of the year.
Daniel Newman: Beat-and-raise, I haven’t heard much of that in the last couple of quarters. In fact, I called this quarter the great guidance reset for most companies. This was the quarter that most CFOs and boards just bit the bullet, Charlie. They’re just like, “Yeah, I guess we’re just going to tell people …” because as you know, the part of the magic formula to being a public company is just beat-and-raise. If you just beat-and-raise every quarter, you’re going to be a fan favorite. And so, sometimes when you hit the end of a growth cycle, you’ve got to do like a, “Hey, we’re going to actually guide way down right now and then we’re going to get back-”
Charles Giancarlo: Well, if you have nothing left in the tank, but you got to be careful running a public company as well is you never really want to get ahead of your speeds, right?
Daniel Newman: Yeah.
Charles Giancarlo: And so, we took all that into account and we feel fairly comfortable with where we ended up.
Daniel Newman: Yeah, I can’t imagine in this current market you would have been beyond ambitious to what you felt you could do. And of course, nobody gives guidance they don’t feel as … I hope. Nobody’s giving guidance they don’t think is possible. But I do think in this particular quarter there was a lot of reflection being done by you, your leadership, your board, you talking to your sales leaders being like, “What are you seeing? What are you feeling out there?” And clearly you came back and said, “Hey, there’s momentum, there is momentum here.”
Charles Giancarlo: Also, we’re a share-taker in a very large market and that makes a very big difference. The market doesn’t have to grow for us to grow. We can continue taking share, even if it were a down market, which I don’t believe. But even if it were a down market, I believe we can continue taking share and growing well.
Daniel Newman: So yes, with that in mind hitting our momentum, part of the momentum is look, it’s a large market, you’ve certainly shown a mix of products and services, people level. What do you say is the key elements that are driving that share-taking and those wins that are allowing you to keep growing?
Charles Giancarlo: Yeah, we have two or three really special attributes as a company. For one thing, we’re really the only company in our business that’s treating data storage, data management both a high technology business and a growth business. This area of the business was considered a commodity some years ago and even by the vendors. And when the vendors consider a technology, a commodity, they stop investing in it. And that’s allowed us to put out a number of firsts in the industry and we continue to do so. We’re at the top upper-right in the Gartner Magic Quadrant, if it’s Giga-owned that’s measuring us, we’re closest to the center of their bullseye.
We’re always the number one in terms of the technology that’s being technology leadership and ability to execute. Secondly, we started investing in expanding into the large scale enterprise and cloud some years ago and we’re seeing a real return on those investments. And even though we continue to penetrate that area, our overall wallet share in large enterprise still is rather small compared to some of the large players. So, that just allows us incredible amounts of expansion opportunity, which we’re taking advantage of.
Daniel Newman: Yeah, that definitely seems to be part of it. The enterprise play is one of those things where companies sometimes they wet their beak just a little and see if they can get there. And it seems to me like you dipped your toe, wet your beak and you showed up and all of a sudden you were almost surprised at how fast and how well it was received in that market because of course, there are very entrenched incumbents in the particular space you’re in.
Charles Giancarlo: Yes.
Daniel Newman: And so, how surprising was it to you or did you expect it?
Charles Giancarlo: Well, surprise is probably not quite the right word because you go into something expecting to win but if you win bigger than you first expect, it’s a pleasant surprise. Something that is not a big point or a big topic in our industry is net promoter score. I don’t know if you’re familiar with net promoter score, it’s a very tough metric for customer satisfaction. And we have an unprecedented 85.2 net promoter score, that’s out of 100 and our competitors are in the 20s, at best in the 30s. So, what it tells you is that customers when they do experience our company and our product are so overwhelmed with the performance, with how well it operates compared to what they knew before that they’re rating us nines and tens. And why is that? Well, we have something we call evergreen. This is something really new.
Evergreen means that our products never get old. So, what does that mean? We’ve sold products 10 years ago and if you were to go visit those products today in the customer, they’d look like the product we sold last week, without ever having to resell them because we sell our products with a subscription that means that we consistently upgrade both software and hardware. And you use the Apple analogy. It’d be like you talking on your Apple phone and while you’re talking to me on your Apple phone, you take it down a few minutes later and you notice it’s a brand new phone, both hardware and software and you never had to get off the phone in order to be able to enjoy that new experience. That’s what we do with our products are our customers every day. We upgrade, we update without ever taking our customers environment down.
That’s just an incredibly, it’s just an experience that customers just don’t have from other vendors. Another advantage we provide is something that I’ve been selling or have been trying to sell for five years, to be honest with you, for four years customers just didn’t care and now all of a sudden they care a lot. And that’s our environmental performance. We have 10 times better power space and cooling so we’re 1-10th, the power, the space, the cooling of disc products and we’re up to five times better power space and cooling than our competitors, all-flash products. So, as you might imagine, now that energy, especially in Europe and the Far East is at such a premium and ESG being such a critical consideration for both investors and customers, our performance on the energy front is over the top.
Daniel Newman: Yeah, you’ve definitely built, you beat me to it Charlie, I was going to ask you about the NPS, CX. I always found it pretty fascinating how much energy the company’s put into making it customer-centric. And again, I’ve done a lot of studies on the customer centrism and I always talk about what I read as the 88 rule. And the 88 rule is that 80% of companies believe that they’re truly differentiated but only 8% of their customers do. And so, there’s always been this massive disconnect between companies thinking they’re differentiated and actually being differentiated. Your analogy about the Apple phone, the idea that, “Hey, software and hardware is constantly refreshed and kept current,” it really is what IAS and SAS is all about, right, those two things?
Charles Giancarlo: That’s right.
Daniel Newman: So, you’re basically IAS and SAS in a sense of always the newest infrastructure, always the newest software. And to your point, the customer, you create some transparency and ubiquity to those things so they know it and it’s constant and they don’t worry about it. And there’s no wonder you get a really high net promoter score when you’re comparable is often rip and replace.
Charles Giancarlo: It is roughly every five years, the customer has to re-buy the same, it’s like your car except when you replace your car, you’re generally able to sell your old one. And in the case of storage and IT products, no, they have to basically throw it away and re-buy the same thing all over again but for us that’s not true.
Daniel Newman: Maybe the CFO was able to depreciate it or something but yes, it’s not exciting, it certainly isn’t great on the budget. And this has driven a lot of that sort of OpEx versus CapEx discussion that’s made the hyperscale cloud and made consumption economics so popular is in the end technologies the cycles are getting shorter, the requirements are getting big, larger, the need for compute and of course data is exponential. And so, the need for enough storage and enough memory has to grow at a pace that can keep up with the scale of compute.
Charles Giancarlo: 100%.
Daniel Newman: And that’s another challenge that everybody is facing right now, every company, every enterprise facing, “Okay, we’ve got all this data, we’ve got to give enough compute,” so it’s an advent of flow, more data, more memory, more storage, more compute and then it’s just a cycle. And you’re basically saying it’s an outcome as a service that we fulfill the cycle.
Charles Giancarlo: Absolutely correct. That’s what customers want, an outcome is a service. They’re looking for outcomes not for products, not for even software, they’re trying to deliver an outcome to their organization or to their customers. And the closer we can get them to that outcome, the better we do and the happier the customers we make.
Daniel Newman: Yeah, I love that. So, let me look to the future just a little bit with you. What is the next phase of innovation? So, you’ve built your core products, I know you’ve made a few acquisitions along the way, you’ve gotten into container services and a few. What’s the next wave of innovation for Pure within the confines of what you can share?
Charles Giancarlo: Sure. Well no, we’ve been vocal about this. We think the next wave of innovation is delivering to our customers and allowing our customers to deliver to their customers and to their developers a cloud operating model. Now, you might say, “Well, the hyperscalers have that cloud operating model.” And yes, they have it within their cloud but what they don’t deliver to their customers who are running private data centers or who are operating on multiple clouds, the ability to run it across clouds.
And so, what we’re delivering are a set of services where our customers can, first of all, manage their entire environment, both on-prem, in Kolos if they use Kolos or in the hyperscalers if they’re on one or more hyperscalers to operate their data environment as a cloud of data, cloud of storage, cloud of data management that is structured according to the rules, regulations and policies that our customers want to operate with and then offer that to their developers or their customers as code.
In other words, that instead of their internal developers having to go to IT and say, “Construct for me this type of environment,” now their developers just like if they went just to Amazon or just to Azure can go to their own IT organization and say, “I want such and such a number of terabytes, petabytes that have certain characteristics,” and get it immediately on demand as software through code. So, what’s the purpose of that? Very simple. It’s to improve the speed of development, improve the agility of organizations, improve their ability to satisfy their developer’s needs so that they can deliver products faster.
Daniel Newman: Yeah, there’s no question that there is a massive importance in infrastructure, cloud scale providers to win the appeal of that developer community.
Charles Giancarlo: Exactly.
Daniel Newman: It’s not just the CIO anymore and the developers are driving so much and of course, migrations and shifts to even the business line leaders with no code and low code, but we’ll save that for another day, Charlie.
Charles Giancarlo: We actually do have one more, we do have one more thing that we’re working on a goal, I would say that we were founded on and that is delivering the all-flash data center. So, let me just spend a minute on that. Today, flash, the same storage that’s used in your iPhone is used by enterprise companies for about 10%, maybe 20% of their needs, it’s for high performance. And it’s because flash is expensive and hard disk has been cheap. Well, we’re now right at the cusp of being able to deliver flash for the price of hard disk. And when that happens, the remainder of the 80% or so of bits and information that remain on hard disk is going to switch over to flash for 10X the savings and power space and cooling, improvements in reliability. And we see that as the next stage of growth. So, we’re very excited about this.
Daniel Newman: There’s a lot to be excited about and of course, it seems your customers are excited because the thing about the model you have is it’s sticky, once they’ve signed up, it’s that constant, constant, constant, it’s been set up to be optimized and you don’t see the SAS economics, companies don’t change unless it’s got to be really bad, it’s got to be really-
Charles Giancarlo: They got to screw up for them to want to change.
Daniel Newman: And with the net … I mean, can you tell me just off the top of your head, the retention rate? It’s got to be extremely high with your-
Charles Giancarlo: So, the last time we reported it, which was at the beginning of the year, it was 115% and I’m not satisfied with that, I’m expecting that to go up.
Daniel Newman: Well, that’s a combination of diversifying your products, giving more things to add. And of course, with inflation you probably could add another 50, 75%.
Charles Giancarlo: I believe so, yeah.
Daniel Newman: I’m kidding but gosh, it feels like it, at least on the amount we could add for pricing. Have you seen what cars cost? Anyway.
Charles Giancarlo: It’s absurd. Absurd.
Daniel Newman: It’s horrible.
Charles Giancarlo: During the downturn, we never raised our prices so it’s also builds trust with your customers.
Daniel Newman: Well, what I was going to tell you, and I like that you said that, I’ve had this conversation with a few people and I’ve said, “There’s going to be a lot of people on the other side of this supply chain that will not be able to come back from this.” So, I hope they made enough by really gouging every person, a company person that they could because I know, and I know there’s a few people on my list, Charlie, I’m going to remember.
Charles Giancarlo: People remember, absolutely.
Daniel Newman: That really took advantage of the moment. So, 30 seconds because I’m going to let you go. If someone said to you, “Hey, what’s the one thing we think the market doesn’t fully appreciate or understand about Pure Storage?” What would you say?
Charles Giancarlo: I would say that they don’t understand that we are primarily a software company that wraps it in iron, that the improvements we make each and every year in terms of just delivering to our customers a service that keeps getting better and we’re being rewarded with that with a net promoter score, with higher gross margins and frankly, with ever increasing subscription revenue. And then finally, that at the end of the day, we’re going to win because we’re investing in this business like it’s high technology and our competitors still treat it as a commodity. So, I would put it in down to that.
Daniel Newman: I love that you said that, I think the companies that have hardware bends that have been able to convince the market that software is how they lead, have all done far better than companies that are still trying to say, “Hey, we’re great on hardware.” It’s not that hardware’s not important, semiconductors will eat the world, I said this before the pandemic. I say it all the time because I was right. But in the end it is the software that drives all the experiences.
Charles Giancarlo: Absolutely correct. That’s right.
Daniel Newman: And so Charlie Giancarlo, CEO of Pure Storage, thank you for joining Making Markets. It’s pleasure to have you, let’s have you back again soon.
Charles Giancarlo: Thank you Daniel, really appreciate the time. Take care.
Daniel Newman is the Chief Analyst of Futurum Research and the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio