Operator: Good day and welcome to the EverPure first quarter fiscal 2027 financial results conference call. Today's conference is being recorded. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. At this time, I'd like to turn the call over to Paul Dyett, Vice President of Investor Relations. Please go ahead.
Paul Dyett: Thank you. Good afternoon, everyone, and welcome to EverPure's first quarter fiscal year 2027 earnings conference call. On the call, we have Charlie Giancarlo, Chief Executive Officer, Derek Robbiati, Chief Financial Officer, and Rob Lee, Chief Technology and Growth Officer. Following Charlie's and Tarek's prepared remarks, we will take questions. Our press release was issued after close of market and is posted on our website where this call is being simultaneously On this call today, we will make forward-looking statements which are subject to various risks and uncertainties. These include statements regarding our financial outlook and operations, our strategy, technology, and its advantages, our current and new product offerings, our ability to procure a sufficient supply of components and manage our supply chain, our hyperscaler opportunity, and competitive industry and economic trends. 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 related to our business is contained in our filings with the SEC, and we refer you to these public filings. During this call, all financial metrics and associated growth rates are non-GAAP measures other than revenue, remaining performance obligations, or RPO, and cash and investments. Reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. This call is being broadcast live on the EverPure 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 EverPure. Our second quarter fiscal 2027 quiet period begins at the close of business Friday, July 17, 2026. With that, I'll turn it over to Charlie.
Charlie Giancarlo: Thank you, Paul. Good afternoon, everyone, and welcome to EverPure's Q1 fiscal 2027 earnings call. Q1 was another outstanding and a truly remarkable quarter reflected in the strength of both top and bottom line. Revenue growth of 35% year on year is a very strong start to our fiscal year 27. Operating profit nearly doubled year over year to $159 million. Sales momentum started off strong and continued to build throughout the quarter. Revenue and operating profit exceeded the high end of our guidance range, and we foresee continued strength throughout the year, as will be seen in our revised full year guidance. Undoubtedly, much of the recent strength in the market has been kindled by the current supply chain crisis. But our strength is also driven by increased win rates for our solutions in contested opportunities. Our market share gains are accelerating as customers increasingly adopt EverPure as their preferred vendor for data storage and management. Growth was driven by broad-based strength across our core businesses and geographies. Large deals, above 5 million, were up in high double digits compared to prior year. and our commercial business also showed strong momentum. New customer logos were up 20% year on year. We also achieved significant marquee expansions, including a global financial services customer that relies on EverPure as foundational infrastructure for private cloud environments across virtualized and Kubernetes-based workloads. It highlights the strength of our platform as customers bridge traditional and modern application architectures. As expected, Q1 included relatively little revenue associated with our hyperscale products. As discussed last quarter, we expect hyperscale product revenue to rise significantly in Q3 and Q4 based on customer order commitments. In the AI space, FlashBlade EXA scored more wins this past quarter, including application in AI machine learning and financial services GPU accelerated trading applications. One FinTech customer, using advanced GPU-based AI modeling for algorithmic trading on global financial markets, selected FlashBlade EXA for their high-performance AI infrastructure. The firm has processed more than 13 million transactions during their peak trading day, underscoring the performance and consistent reliability that FlashBlade EXA delivers in data-intensive AI environments. More broadly, we are now beginning to displace competitive AI storage products in the enterprise and neocloud markets. as customers transition to our FlashBlade family for its unmatched performance, operational simplicity, flexibility, and overall quality. As Tarek will explain, current sales performance has been positively affected by industry-wide cost and price increases. In my over 40 years in technology, I have never seen another supply chain situation remotely like this. Obviously, these price increases are of great concern to our customers. Consequently, on April 23rd, we published a letter to customers explaining our position and philosophy during this supply chain crisis. In particular, we wanted our actions and intentions to be clear and transparent. In the letter, we reassured our customers that we would share the cost pain with them and not seek to profiteer from the crisis. To this end, we have carefully managed our component supplies to enable us to hold off price increases until far later and far less than competitive price raises. As mentioned last quarter, We are choosing to operate at the lower end of our product gross margin range to help our customers while component costs escalate. We expect product gross margins will begin to recover in the second half of our year, but the recovery is likely to be gradual as costs continue to rise. The current environment has enhanced the benefits of our Evergreen One storage as a service offering. Evergreen One benefits from longer contracts, lower upfront costs, and longer lifetimes. This allows us to blend costs over many years, leading to more stable and lower operating costs for customers. An increasing number of customers are choosing Evergreen One to enjoy the benefits of Everpure. Evergreen One sales were up 73% year on year in Q1, reflecting greater customer appreciation for the operational and financial benefits of our storage-as-a-service model. Our enterprise data cloud strategy continues to gain momentum. Security Fusion adoption, which enables customers to build their own data clouds, doubled in Q1, with more than 1,200 customers. Wins and expansions include Card Connect, a subsidiary of Fiserv, and EAND, formerly Atisalot, as well as a leading North American financial institution and a large Asian healthcare IT provider. This growth reflects rising customers' interest in developing their own enterprise data clouds and reinforces Purity Fusion's strategic role within EverPure's architecture. One state department of revenue, which processes more than $9 billion annually, told us that Fusion gave them the ability to scale and manage infrastructure with the simplicity of the cloud, but within their own data centers. It allows their staff to provision with confidence while providing more time or higher value strategic work. Our acquisition of OneTouch, which closed earlier this month, will expand EverPure's opportunity to help customers manage their enterprise data. OneTouch enables customers to better manage all of their data, whether on pure products or not, both on-prem and in the cloud. This technology allows customers to build full data catalogs across all enterprise data, add semantics, as well as full ontologies and knowledge graphs to comprehensively manage their global enterprise data. These capabilities will enable customers to reduce the number of copies of similar data, increase the utility and quality of their data, and reduce the cost of data preparation for AI and analytics. Regarding our hyperscale business, our solution continues to make steady progress with an expanding set of hyperscale, cloud, and large tech titan customers due to its enhanced efficiency, flexibility, and reliability. we are currently investing significant resources in system qualification with multiple prospects. As stated previously, we expect to significantly expand shipments of our hyperscale product in the second half of this year and even further next year. We look forward to providing more details on our product advancements, particularly our expansion into advanced data management at our upcoming Accelerate conference in June. as well as at our financial analyst meeting scheduled for September 23rd here in Santa Clara. We continue to operate in a very dynamic macro environment. The current supply chain crisis, created by seemingly insatiable AI demand, has entirely eclipsed the tariff crisis of last year. Costs and component shortages now change rapidly and are challenging to predict with any degree of certainty. We have confidence in our ability to weather these challenges better than most because of our architectural advantages, strong engineering and supply chain capabilities, and our excellent supplier relationships. The current market turmoil has highlighted the importance of trust and transparency and has separated true partners from profiteers. We are building Everpure to be a long-term trusted partner with customers,
Derek Robbiati: channel partners suppliers employees and our long-term shareholders i will now turn the call over to tarik to provide greater insight into our performance and our expectations for the remainder of the year thank you charlie q1 was an exceptionally strong quarter for everpure highlighted by revenue growth of 35 percent year over year and operating profit growth of more than 90 percent both surpassing the high end of our guidance range. Performance was broad-based across our core business segments and geographies, and as expected, we had a minimal contribution to product revenues from hyperscalers in the quarter. We expanded the number of customers transacting during the quarter while delivering solid execution on large-scale opportunities. Product revenue, which includes revenues from hyperscale shipments as well as a portion of Portworx software revenue when sold as term licenses, grew 55% year-over-year to $577 million. Our Q1 results reflected the combined impact of higher pricing and some degree of customer purchase acceleration as customers move proactively to secure product availability and mitigate anticipated future price increases amid ongoing supply constraints. We entered Q2 with a strong pipeline and continue to see healthy demand trends across the business. Based on this momentum, we expect continued strength throughout the year, as reflected in our increased full-year guidance. FlashBlade EXAC continued to gain traction, delivering a number of new wins, including deployment supporting AI and machine learning applications, as well as GPU-accelerated trading environments within financial services. While still in early stages, we are seeing strong engagement and active discussions with dozens of prospective customers across the AI ecosystem. Our market share gains are accelerating, driven by strong competitive win rates across enterprise and commercial businesses, and an increased rate of competitive displacements, thanks to our unique ability to support practically all storage needs and use cases. In Q1, we expanded our customer base by 275 new customers, and our penetration of Fortune 500 now stands at 64%. We also added 223 new logos in our commercial business, which attests to the strength of our business across all segments. We completed the acquisition of OneTouch on May 7th and are actively integrating the technology into our platform to further enhance our capabilities in preparing and managing data for AI-driven applications. We are very excited to welcome the OneTouch team to Everpure. Together, Everpure and OneTouch will enable customers to focus on readying infrastructure for AI and unlocking the strategic value of their data. This combination strengthened our ability to help organizations maximize the value of their data assets in an increasingly AI-centric environment. As a reminder, we expect OneTouch to be approximately 12 million dilutive to operating profit in fiscal year 27 and to become accretive to operating profit within 24 months from the acquisition on a post-Synergies basis. Turning to margins and profitability, total gross margin was 70.1%, while subscription services margin was 75.6%. Our gross margin stood at 65.5% in line with our long-term range of 65 to 70%, representing an increase of 150 basis points year-over-year and a decrease of 180 basis points sequentially. As foreshadowed in our Q4 earnings call, the sequential change in product gross margin was primarily driven by increased commodities costs, partially offset by price increases, and shifts in customer and product mix towards higher performance flash arrays and blades. As anticipated during our last call, revenue contribution from our hyperscale business in Q1 was minimal, and we continue to expect the significant majority of hyperscaler revenues in H2 of fiscal year 27. We expect aggregate product gross margins to improve in the second half of the year, supported by the contribution from hyperscaler revenues, which we expect to yield 75% to 85% gross margins. However, the recovery of product gross margin, excluding the contribution from hyperscalers, is expected to be gradual as pricing actions continue to catch up with ongoing, volatile, and rapidly rising input costs. Operating profit of $159 million grew over 90% year-over-year, resulting in an operating margin of 15.1%. Strong revenue growth and operational discipline drove this excellent performance. Moving on to our subscription business, Q1 subscription services revenue of $476 million increased 17% year-over-year, accounting for 45% of total revenue. Our annual recurring revenue, or ARR, grew 19% to over $2 billion, which represents a sequential acceleration of nearly 300 basis points from Q4 2026 growth levels. Consistent with last quarter, our remaining performance obligations, or RPO, grew 41% to $3.8 billion, driven by the execution of large deals and strength of our Evergreen Forever and Evergreen One offerings. CCD sales for our storage-as-a-service offerings of $165 million grew 73% year over year. The recent supply chain pricing environment has reinforced the value proposition of our evergreen one storage as a service offering, which has experienced significantly lower price increases Evergreen One benefits from longer-term contracts, reduced upfront costs, and extended asset life cycles, enabling us to spread costs over multiple years and deliver more predictable, cost-efficient operating models for customers, driving strong year-over-year growth momentum. With respect to our geographic mix of revenues, U.S. revenue was $739 million, growing 39%, and international revenue was $314 million, growing 27% year over year. International revenue represented 30% of total revenue in Q1, 2027. Scaling our international presence represents a significant opportunity and a key strategic focus for the company. Moving on to our balance sheet, our balance sheet remains robust with over $1.5 billion in cash and investments at the end of the quarter. Cash flow from operations was $180 million impacted by elevated sales activity, including higher commission payments pertaining to Q4 overachievement, driven by the strong demand environment, as well as merit bonus payments. Capital investments were $68 million, representing approximately 6.5% of revenue for the quarter. Our capital investments supported the continued scaling of our hyperscale business as we ramp up investments to qualify more NAND for various hyperscalers, tech titans, and cloud providers, and accelerate growth of our Evergreen One subscription offering. As a result, free cash flow was $112 million. In Q1, we repurchased 1.3 million shares, returning approximately $84 million to shareholders. We also paid $101 million in withholding taxes on employees' awards, offsetting dilution of approximately 1.6 million shares. We currently have about $245 million remaining under our existing $400 million repurchase authorization announced in Q4 of fiscal year 26. Finally, our headcount increased sequentially by 211 employees, bringing our total headcount to 6,600 employees. Now, turning on to guidance. As I mentioned earlier, a portion of this year's strength comes from the current supply chain environment. The sudden sharp and continuing rise in the cost of components has forced the entire high-tech industry to raise prices. price increases have led to higher sales per unit and customer pull-ins to buy ahead of future price increases. We estimate that these two effects represented nearly a third of our Q1 year-on-year revenue growth and will continue to drive performance in future quarters this year. The strength of our Q1 results, good short-term pipeline visibility in Q2, and continued momentum we are seeing across our customer base gives us confidence to increase our full-year guidance. For Q2, we anticipate revenue to be in the range of $1,095,000,000 to $1,105,000,000, representing approximately a 28% year-over-year increase at the midpoint. We expect operating profit to be in the range of $195 million to $205 million, representing approximately a 54% year-over-year increase at the midpoint. Again, I would like to remind everyone that we continue to expect hyperscale product revenue to rise significantly in Q3 and Q4 based on customer order commitments. Consequently, for fiscal year 27, we anticipate revenue to be in the range of $4.41 billion to $4.51 billion, representing a 22% year-over-year increase at the midpoint. This is a 300 basis points increase from our previously provided revenue guidance of 19% year-over-year growth. We expect operating profit to be in the range of $820 to $860 million, representing approximately a 32% year-over-year increase at the midpoint. This is more than 600 basis points increase from our prior provided operating profit guidance. In terms of seasonality, we entered fiscal year 27 with very strong momentum and are executing extremely well in a difficult supply chain environment. The current full year guide indicates that 48% of our revenues will be generated in H1-27 compared to 45% in prior years. I would like to finish by saying that our execution focus is a balancing act between short-term pipeline generation to improve visibility and drive sales on a quarterly basis while keeping an eye on sustainability of demand in H2 of fiscal year 27 and beyond. As Charlie said, we're not looking to profiteer from this crisis and have been prudent with our price increases and consistent with terms and conditions offered to customers in order to continue to enhance our market share and protect the franchise for the long term. In normal circumstances, Such strong momentum in first half revenue in our core enterprise and commercial business would drive a higher full year guide with a seasonality akin to prior years. However, in today's highly dynamic environment, it is too early to call for further upside to our guide in the second half of fiscal year 27 as market participants adjust to price levels that are unprecedented globally. Yet, we continue to be confident in our ability to execute our priorities this year and beyond. With that, I'll now turn the call back to Paul for Q&A.
Paul Dyett: Thanks, Tarek. Before we begin the Q&A session, I'll ask you to please limit yourselves to one question consisting of one part so we can get to as many people as possible. If you have additional questions, we kindly ask that you please rejoin the queue and we'll be happy to take those additional questions as time allows. Operator, let's get started.
Operator: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by one. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your questions. We'll pause here briefly as questions are registered. Our first question comes from Amit Daryanani from Evercore. Please go ahead. Your line is open.
Amit Daryanani: Good afternoon, everyone. Thanks for taking my question. Given the strong 35% growth we saw in Q1 and the guidance plus 28% growth in Q2, could you spend some time about how should we think about the demand trajectory in the back half of the year? And really, when I think about your guidance framework, you know, It implies a bit of a natural deceleration in 2H, or are you simply embedding more conservatism given the current component pricing and maybe even the timing of some of the AI infrastructure deployments that are happening? If you could just spend a little bit of time on the back half dynamic, that would be helpful. Thank you.
Charlie Giancarlo: Yeah, Amit, thanks for the question. Hope you're well. Look, the second half of the year is, frankly, in this environment, this is a very dynamic environment. It's dynamic on the supply chain side, obviously pricing, you know, has been very dynamic, and it frankly changes almost every week. And so, you know, being able to be, to have high, you know, visibility into the second half of the year, I think is somewhat unrealistic to anyone's calendar. What I will say is, you know, we saw very strong demand, as you can see in the first quarter. We continue to see strong demand now. So the two things that, frankly, we'd want to see before raising guidance You know, one of which is, you know, will demand continue given these historically high prices or will we start to see some demand destruction? We don't know. And the second is the supply environment, which is very unstable. There are a lot of shortages and we have to get through. You know, we have to be able to ship what we promise and make sure that we have the supply to do that. And that is a full time job at the moment. So I think it's more a matter of not knowing what the second half of the year has in store for us, despite the fact that we are seeing very good demand at the moment. Thank you, Amit.
Paul Dyett: Next question, please.
Operator: Our next question comes from Aaron Rakers from Wells Fargo. Please go ahead. Your line is open.
Richard Streifler: Hi, this is Richard Streifler on for Aaron. I was just wondering, with the rapidly increasing context windows and tokenomics now becoming top of mind for many workloads, in pure innovating in the granular prompts caching. What innovations have, what indications of AV cache moving to SSD storage have you seen thus far? And can you help us better understand the conversations you're having with customers on this dynamic?
Rob Lee: Yeah, absolutely, Richard. This is Rob. I'll take that question. Uh, look, I mean, I think the, um, you know, the entire space of inference and technologies that support inference, uh, continues to involve, uh, you know, we've, uh, you know, continue to be, uh, you know, supporting, uh, leading customers in this space as well as, uh, uh, you know, Nvidia and, and other, um, ecosystem partners that are, uh, driving, uh, innovation here. Um, you know, I think the, uh, as we look at the increase in context windows and what that's driving in terms of memory and, and, and storage. Overall, the more tokens, the more data you try to process, the more context you need to assemble. And we do see that as driving more demand of memory, both in the GPU servers, remote memory, remote storage. And that's a large part of our partnership with NVIDIA, our solutions that we've developed around NVIDIA technology, such as KV caching, as well as future plans and product roadmaps that look at where the expansion of context memory is likely to go in the future.
Paul Dyett: Thank you, Richard. Next question, please.
Operator: Our next question comes from Howard Maugh from Guggenheim Securities. Please go ahead. Your line is open.
Howard Maugh: Great. Thanks. I want to congratulate you all on a really strong quarter. My question is for Tarek. You said that hyperscaler shipments or the ramps will decrease in Q3 and Q4 is based on customer order commitments. Can you quantify what's actually contracted versus forecasted in the full year guide? And could the supply shortages result in higher shipments at a higher ASP to your lead hyperscaler than you expected before?
Derek Robbiati: We don't. Thanks for the question. We don't quantify specifically the revenues that we will derive from hyperscalers. These are really based on customer order commitments that were agreed before the beginning of this fiscal year. So we are on track for that. We feel very good about the prospects of our hyperscaler business. Let me reiterate to you what we said at the end of our Q4. during our earnings call, we do feel very comfortable with the prospects of this business in fiscal year 27 and beyond, and we expect a multiple of the revenues we generated in 26 to be realized in fiscal year 27. Thank you, Howard.
Paul Dyett: Next question, please.
Operator: Our next question comes from Mike Sikos from Needham & Company. Please go ahead. Your line is open.
Matt Kalitrion: Hey, guys, this is Matt Kalitrion from Mike Sikos over at Needham. Thanks for taking our question. We're curious on what you're seeing regarding customer reaction to the Evergreen One price increases. Are customers still viewing SaaS as advantageous to CapEx outlays and signing larger deals, or are they more hesitant around watching their spend?
Charlie Giancarlo: No, as you might have picked up – sorry, Matt, this is Charlie. What you might have picked up from my dialogue is that Evergreen One – orders were up higher than the overall company revenues and up a little bit higher than the CapEx side. So actually I'm not seeing as much uptake as I would have predicted because actually the economics of Evergreen One are even better in this very high pricing supply chain environment. Largely because, you know, it's a long-term contract for us. We get to blend the costs over many years, including many years prior to today. And the customer doesn't have to buy as much early on. They only have to buy what they need rather than what they think they're going to need several years from now. So it's a great economic deal. We are seeing increasing, and that was proven this quarter. And I expect as we go forward, we'll see it grow even more relative to the CapEx purchase.
Derek Robbiati: Let me add to what Charlie has said. Evergreen One is an incredibly attractive value proposition in the current environment where As Charlie said, customers buy only what they need. I'd like to point out to the fact that we increase prices on our traditional CapEx products just below what the competitors have done, but we increase far less our pricing on Evergreen One, which makes it very attractive. And we are making significant CapEx investments to support our Evergreen One business. We have very strong demand for the business as it stands. Thank you, Matt. Next question, please.
Operator: Our next question comes from a Chris Shankar from TD Cowan. Please go ahead. Your line is open.
Chris Shankar: Yeah, hi, thanks for taking my question. I have a question for Charlie. I'm just kind of curious, you know, there's a lot of talk about enterprises adopting agentic AI and things like that. And yet when I look at your revenue, if you back out the price increase from February, not quite seen an insertion. So I'm kind of curious, where are we in the enterprise AI adoption cycle? Is it imminent? Is it happening? Is it more like a next year thing? Any kind of comment on that would be very helpful. Thanks.
Charlie Giancarlo: Yeah, I would say that the vast majority of the enterprise AI purchase cycle is still in the cloud. So there's a lot of adoption, but not a lot of development of their own native hardware capabilities on-prem, and I think for very good reason. But secondly, I would say this is, I'm speaking about traditional enterprise. I would say in certainly sovereign clouds, in tech titans, There is a lot of on-prem development, but relatively little. You might see it somewhat in the high-end banking, a bit in the automotive industry and in pharma. But outside of that, it's very low.
Rob Lee: And, Krish, this is Rob. Just to add on to what Charlie said, I think that in the enterprise at this point, most of the initial uptake is in the cloud or SaaS-based or hosted. That said, for enterprises that are operating AI on-prem, we're seeing them being able to take advantage of our existing solutions. And we don't see enterprise AI deployment on-prem necessarily as creating a whole new storage environment. We want to be able to serve that environment. We are serving that environment with our standard product today. And that's a large part of our sales motion as we go and speak with enterprise customers who are early on the journey of AI adoption, which is that AI doesn't require dedicated storage infrastructure to serve within the enterprise environment.
Paul Dyett: Thank you, Krish. Next question, please.
Operator: Our next question comes from Samak Chatterjee from JP Morgan. Please go ahead. Your line is open.
Samak Chatterjee: Hi. Thanks for taking my question. Charlie, if I can go back to your comments about visibility into the second half and reasons to sort of not try to really talk. We have a great view on demand just here for the second half. Maybe if you can talk about the pipeline that you have, how far does it extend in terms of the pipeline you're looking at? And in terms of the pipeline, are you seeing what actions you're taking on pricing with your customers where you're delaying as well as taking lower pricing than some of your competitors? Is that leading to any share gain in the pipeline as well? Thank you for
Charlie Giancarlo: Well, yeah, we won't know fully until the analysts come out with their reports in another month or two time. However, if you take the one-third that we identified, you can see that, you know, we're growing well in the 20s without the effect of pricing or pull-ins. And so we think that is a clear signal that we are picking up share. Also, our win rates are significantly higher. over the last couple of quarters, and that started before the price increases as well. So I think these are positive signs that we are picking up market share.
Paul Dyett: Thank you, Semek. Next question, please.
Operator: Our next question comes from Jim Fish from Piper Sandler. Please go ahead. Your line is open.
Tim Shoupston: Hi, guys. This is Tim Shoupston for Jim Fish. Thanks for picking our questions. Just kind of going off of the competitive win rates that you had mentioned, can you just speak a little bit to what you're seeing from the competitive landscape and how the competitive dynamic may have changed recently? Thank you so much.
Charlie Giancarlo: Well, I think that, you know, there's been by the systems vendors, the vendors that sell more than just storage, we're seeing a lot more focus on AI and on servers, frankly, on GPU servers and other activities. much less focus on their storage side of the business. I think from our direct storage competitors, what we've seen is that our strategy of really being able to provide all of a customer's storage needs with the same software environment, block file and object, everything from relatively low cost on Flash to the world's very highest performance on our FlashBlade EXA, and then tying that all together with what we're calling the enterprise data cloud, that is being able to manage it all as a system or as a cloud rather than as individual boxes, is making just a huge difference. The simplicity of our offering, the fact that, you know, from a total cost of ownership, we're significantly stronger, is driving a lot of customers to come our way. Frankly, we have higher reliability than anyone else, and every time there's a an issue with reliability in our competitive products that gives us a new opportunity with the customer.
Rob Lee: And I'll just add one thing to that, which is to say, you know, this dynamic pricing environment is very challenging for customers, as you might imagine, with market prices moving as quickly and as severely as they have. At least customers, you know, in a tough spot from a budget point of view and from just an understanding which way is up point of view, And this is where our strategy of being, you know, very transparent, very moderate, and very, I would say, empathetic to the degree we can in moderating these increases I believe is accruing to our favor as well.
Derek Robbiati: I agree. I'd like to underscore what Rob has said a second ago. It's really important to understand that our growth rate is not based on price. As Charlie highlighted, only a third of our growth realized in the quarter came by way of price increases and pull-in. The rest is therefore volume and customer wins, and we're winning across multiple customer segments and geographies, and we feel very pleased with our performance as a market share taker. This is why we were pretty considerate and intentional in the way we practiced our price increases. We increased price, that's true, but far less than the competition to protect the franchise for the long term and continue on our market share gains trajectory.
Paul Dyett: Thank you. Next question, please.
Operator: Our next question comes from Wamsi Mohan from Bank of America. Please go ahead. Your line is open.
Wamsi Mohan: Yes, thank you. I was hoping maybe just that last comment, you may talk, right? Like I've heard of this growth coming from pricing and pull forward. As you think about the second half, going back on this question, how much of this are you expecting to sustain? I think you said somewhere on the call that you expect this to be a multi-quarter trend. I'm guessing you mean from a pricing standpoint, but there's also this notion that enterprises might continue to pull forward from future, including calendar 27, because there's just sort of no seeming end to the price increases at this point in time. So curious if you're building in any incremental pricing and pull forward as you think about the rest of the year and what that split was in the quarter. Thank you so much.
Charlie Giancarlo: Yeah, Wamsi, I would say that we're not calculating into our forecast at the moment any additional pull forwards. I will say that we project that there will be further price increases this year, but that doesn't go into it. That is just something that we have to plan on as we go forward to make sure we can maintain our margins, et cetera. But we haven't rolled that into a forecast from a revenue standpoint. So to your point, Yes, as long as prices keep going up, we're likely to see pull-ins, but that has not been factored into a second half guide by us. Thank you, Wansi.
Paul Dyett: Next question, please.
Operator: Our next question comes from Eric Woodring from Morgan Stanley. Please go ahead. Your line is open.
Dylan Liu: Hey, everyone. This is Dylan Liu for Eric Woodring. Thanks for taking my question. So, Charlie, can you just elaborate a bit on what you're hearing from hyperscalers in this environment as it relates to the adoption of your DFMs? Because the price differential between HDDs and QLC NAN is only expanding given the NAN inflation. So how much of an impact is that having on your conversations and potential timeline to adoption with new major hyperscalers?
Charlie Giancarlo: Yeah, thanks for the question. And it's great to have an opportunity to clarify this. You know, our solution is a replacement for both SSDs and for hard disk. Also, hard disk has been sold out through 2028. So I would say that at this point, if we ask about the tenor of our conversations with the hyperscalers, they are effectively desperate for storage capacity of any type in any form. So it's certainly helped to increase the urgency of the qualification process in those hyperscale environments. That being said, we still have to go through the qualification process. And then there's always the question of how much NAND is actually available for ourselves as well. And so all of that has to get rolled into these conversations. But if I were to net it out, I'd say the urgency is higher because it's not dependent on disk or no disk. because it's sort of capacity at any price if you can get it. Thank you, Dylan.
Paul Dyett: Next question, please.
Operator: Our next question comes from Param Singh from Oppenheimer. Please go ahead. Your line is open.
Param Singh: Yeah, hi. Thank you for taking my question. I was wondering if you could provide some quantitative insight into the memory pricing. You know, from my best understanding, contract pricing was up 60% year-over-year beginning of the year. It has been 100% year-over-year a month or so ago, and it looks like it might go up, but spot pricing is stabilizing. So any insight on what you're hearing from your non-suppliers, one? And then, two, a lot of these suppliers are talking about long-term agreements. So I want to understand if you are participating in some of those long-term agreements, and are those agreements only for supply, or is there some sort of pricing component that is also fixed as part of those agreements? Thank you.
Charlie Giancarlo: Wow, your numbers are very low. We'd be glad to buy from those suppliers that you've just identified at that pricing levels. Prices have gone up anywhere from 5 to 10x, you know, on the spot market. Long-term contracts were not worth the paper they were written on at former prices. So everything now is being quoted at best with 30 days of longevity. So pricing in both memory as well as NAND is up, you know, just an incredible amount. And the demand is so high, it's still able to be sold at that level as well. So yeah, your numbers are very low. And that's why we've never seen anything like this in, you know, my entire career. You know, I've seen prices, you know, sometimes double over an 18-month period. We're talking about prices doubling every 18 days.
Paul Dyett: Thank you, Param. Next question, please.
Operator: Our next question comes from Mehdi Hosseini from SIG. Please go ahead. Your line is open.
Mehdi Hosseini: Yes. Charlie, just going back to the previous few questions, what would your revenue be if there was no shortages of NAND? Let's say you can procure as much NAND as you wanted to. How much upside would there be to a 4.5 billion revenue target?
Charlie Giancarlo: Oh, I see. Well, the timing of when we sell NAND to hyperscalers is determined by their build-outs, by our combined ability to be qualified, and then the build-outs by the hyperscalers. So that determines timing. but i think uh you what uh what cause would tell you what i would tell you is we could probably sell every terabyte of nan that we could source thank you maddie next question please our next question comes from tim long from barclays please go ahead your line is open hi this is alyssa shreve's on for tim long i was just following up on one of the prior questions around the you know the pricing dynamics you're seeing
Alyssa Shreve: I understand that you said that they're, you know, most likely there'll be further price increases into the year. But are you also changing on your side the timeline in terms of quotes you're giving to customers? Are you truncating that timeline? Anything else you're doing there to kind of manage just given the dynamic pricing environment? Thanks.
Charlie Giancarlo: Yeah, thank you for the question. Unfortunately so, yes. So we've done a number of things. One is our typical The typical cadence, if you will, of a discussion with a customer around a price for a specific quote would be about 30 days of discussion between the sales team and the customer trying to figure out what the exact configuration of the quote would be. And then we'd typically provide a 90-day quote, a quote that's valid for 90 days. That was for the last 15 years up until February. At this point, we're at 30-day quotes. There are other vendors out there, not all of them in our business, but other that won't even provide a price until the product ships. They'll provide a quote at an uncertain price. We believe that that's not the right way for us to operate with our customers or with our channels. So but currently we've had to drop it down to a 30 day price quote.
Paul Dyett: Thank you, Alyssa. Next question, please.
Operator: Our next question comes from Simon Leopold from Raymond James. Please go ahead. Your line is open.
Simon Leopold: Great. Thank you very much. Appreciate it. I just want to get a better sense of how you're thinking about the longer-term trends of input costs, particularly NAM chips, in that it sounds like that market is expected, if you're a buyer of NAM chips, to improve in the coming quarters. Just wondering what your expectations and what you've built in for the longer term. Thank you.
Charlie Giancarlo: So actually, no, our expectation is that there'll be continued price increases at least through the summer. I can't really project further than that, but through the summer, there'll be further price increases. To a large extent, capacity has been sold out through 27 at this point in time. There is an interest to have long-term contracts into 28. That's always a difficult thing to determine at today's pricing, whether or not it makes sense to do that. But, you know, for the most part, fab capacity across the board, not just NAND, everything, NAND, memory, CPUs, and now it's affecting even low-end chips, is sold out. And fab capacity has been shifted towards the higher margin components, which has put pressure across the entire semiconductor industry. environment. So, you know, it's really driven by just demand completely outstripping fab supply. And until the demand and supply comes into balance, you will continue to see price increases.
Paul Dyett: Thank you, Simon. Next question, please.
Operator: Our next question comes from Matt Bryson from Wedbush Securities. Please go ahead. Your line is open.
Matt Bryson: Hey, thanks for taking my question. I want to go back to guidance. I understand the current market makes it really difficult to forecast future periods, but I'm just having some problems with the math. So if I think about pricing being up 15% to 20% in Q1, and you said your pricing's up 70% now, so you've got like a 50%, 55% delta, then for me to get to your Q2 numbers, I need your bit shipments or your system shipments to be down like 50% Q1Q. And then similarly, when I'm thinking about Q4, for instance, in my model, I had system sales up like 15% to get to numbers. But if pricing is going to be up 70% or more, then I need like bid shipments or system shipments to be down 55%. I guess my question is, is that math right? Is it a sourcing problem? Or is it demand destruction? And then, or is it that your mix is just shifting so quickly to peer-to-service that it's shifting how your revenues look?
Derek Robbiati: So I'd say to you, there are many dynamics in here. First, we get an order. It could be in a prior quarter, and then we ship it in the current quarter. that is also part of the dynamic that has to be factored into the equation. And so we do not expect the number of systems that we ship to decline as much as you highlighted, far from it. We do believe that the growth in units of what we sell continues to be pretty strong. What we indicated as far as the first quarter is concerned, is that only a third of our growth came in by way of pull-ins and by way of pricing. So the rest is volume. And the volume is there because the demand is there. But now the question is, how long does that last in a context where, you know, the whole industry participants are testing price levels that were unprecedented before? But for the second half of the year, we have no reason to believe that volumes of shipping, shipment volumes will drop to the extent that you highlighted.
Rob Lee: And Matt, just to throw one more variable in there, you know, as you might imagine, we've given you some numbers about average price increases, you know, the price increases varied across the portfolio. And as you might imagine, in an elevated pricing environment, the value of our high performance solutions becomes even more magnified. And so we do see, you know, an expected mix shift within the portfolio that is baked into some of the numbers in there.
Paul Dyett: Thank you, Matt. Next question, please.
Operator: Our next question comes from Asia Merchant from Citigroup. Please go ahead. Your line is open.
Asia Merchant: Great.
Operator: Thank you very much.
Asia Merchant: Could you just highlight how to think about subscription margins, like what drove the delta here? Was it the increased capex investment that you guys talked about? And I think you talked about product growth margins operating maybe perhaps towards the lower end of your range, excluding hyperscalers. Could you help us understand about subscription margins going forward? I would think that as you have more evergreen subscription services, those margins would improve. So if you could just help clarify that, that would be great. Thank you.
Derek Robbiati: Yes. So first of all, for the first part of your question on subscription gross margins, there was a sequential quarterly gross margin drop by about 1.4 points for our subscription services. This is really driven by a mix and shift away from evergreen one as part of our subscription revenue. But this is temporary. And the reason why I want to highlight this to you, it's because if you really look at our ARR growth, it has accelerated by 300 basis points to 19%. And our remaining performance obligations remains extremely strong in growth terms. We grew our RPO by 41%. And then, I'm sorry, could you repeat, Asya, the second part of your question?
Asia Merchant: Just how do I think about these margins going ahead if it's temporary like you highlighted? Yeah. So for subscriptions, yeah.
Derek Robbiati: Yeah, yeah. The product gross margins we flagged at the beginning of the fiscal year that product revenue gross margins excluding the contribution from hyperscalers would be at the bottom end of our range 65% to 70%, which is our long-term target. And, you know, in this first quarter, we came at sixty five point five. So right where we thought it would be. And then moving forward, you know, you have to think about product gross margins as being again, another mixed effect between, you know, revenue that is catching up with the underlying costs. But we feel good about what we guided, which is sixty five to seventy percent gross margin with the progressive recovery of product gross margins to the upper end of that range. in the upcoming quarters.
Charlie Giancarlo: I would just say with respect to the services gross margin, as Tarek mentioned, that was a temporary decline. We expect those to continue to increase over time. Thank you, Asya. Next question, please.
Operator: Our next question comes from Eric Martinetti from Lake Street Capital Market. Please go ahead. Your line is open.
Eric Martinetti: Yeah, I want to talk a little bit about the OneTouch pipeline, just the receptivity to EverPure as kind of the advanced data management provider of choice. Is there a strategic verticals where it's kind of a slam dunk, your low-hanging opportunity?
Charlie Giancarlo: I would say that it's very early, and we'll be going into much greater detail on this at our Accelerate conference next month. But OneTouch now gives us and our customers the opportunity to really map all of their data across all of their data sources. So not just what's on our product, but what's on competitive products, but what's also in the cloud, what's on their SaaS platforms, and to map it in several respects. One is just to know where all their data is, which is a major cybersecurity problem. And that's exactly where OneTouch started its business. But they go further than that, which allows them to understand the semantics of the data, which means they can also map the context of the data between the different data sources, which means you can get a full knowledge graph where the customer can get a full knowledge graph of how their different data sources relate to one another. And we think this is going to be very powerful in a world of AI where now with AI, it's the old phrase, garbage in, garbage out. And if the quality of your data source is poor, the quality of your answer is poor. What OneTouch will allow customers to do is really rationalize and get a better understanding of their data sources, rationalize those data sources, and be able to have a better source for their AI agents and their analytics.
Rob Lee: Yeah, and Eric, just to add on to that, as Charlie said, Our strategic interest in OneTouch really is driven by a lot of the capabilities that they will help add to the portfolio in terms of data intelligence. But between those capabilities, as well as their current product in data security posture management, this is driving a lot of initial interest in a lot of enterprise accounts and in typical verticals that we're strong in, such as financial services. That said, early days, we just closed the acquisition earlier this month. But early signs, you know, of interest and demand are positive.
Paul Dyett: Thank you, Eric. We have time for one more question. So the next question will be the last.
Operator: Our last question comes from David Vogt from UBS. Please go ahead. Your line is open.
David Vogt: Great. Thanks, guys. Appreciate all the color given the difficult operating backdrop. Maybe, Tarek, can I come back to you with regards to the second half? I guess what I'm trying to think through is presumably your outlook three months ago included the benefit of some pricing dynamics and the lag effect, as well as some pull forwards in the quarter. Can you help us understand, you know, obviously you took the guide up by about a hundred million dollars plus for the full year, but you benefited probably from like 90 million in Q1. Can you kind of share with us how you're thinking about what the impact of pull forward and the lag effect in Q2 and the rest of the year looks like? Because by my math, it looks like then core storage is going to be a bit of a challenging thing Second half backdrop and I get the uncertainty, but just trying to get a sense for how you're thinking about the underlying demand for the business, given the uncertainty in the second half of the year. Thanks.
Derek Robbiati: OK, so let's let's put things a little bit in perspective here. So first of all, demand continues to be robust across all business segments, enterprise and commercial commercial alike. we've raised prices significantly since the beginning of fiscal year 27 we raise prices later and lower than the competition but to the extent that you continue to have price increases and perception by market participants that they will continue to be price increases there will be pull-ins and in our first quarter of this fiscal year we we said on the call that about a third of our growth can be attributed to price increases and pull-ins. This will continue. The question is to what degree in the second half. And that is a big unknown because no one will truly be able to point out at what point will customers stop buying and wait for prices to come down over time. So our guide has to be looked at over the long term And it's important to understand that in the beginning of last fiscal year, we were growing at 11%. We guided midway through last year at 16% growth. And now we're guiding for this fiscal year north of 22% growth on a full year basis. There are quarterly dynamics, but there's no question our growth is accelerating year over year. because of the quality of our products and our value proposition.
Paul Dyett: Before we conclude, I think Charlie has final comment.
Charlie Giancarlo: Yeah, before we close, first of all, thank you all for your time. And before we close, I also want to thank our customers for their trust and our employees for their dedication, our partners and suppliers for their collaboration and our investors for continued confidence. We also look forward to seeing many of you and certainly many of our customers and partners that are Accelerate Conference next month, and hopefully many of you all at our Investor Conference on September 23rd. Thanks all for listening, and see you next quarter.
Operator: That concludes the Everpeer First Quarter Fiscal 2027 Financial Results Conference call. Thank you for your participation. You may now disconnect your lines.
