Good day, ladies and gentlemen and thank you for standing by and welcome to the Pure Storage Third Quarter Fiscal Year 2021 Earnings Release Conference Call. [Operator Instructions]

I would now like to introduce your host for today's conference call Ms. Nicole Noutsios. Ms. Noutsios, please go ahead.

Nicole Noutsios - Investor Relations

Thank you and good afternoon. Welcome to the Pure Storage third quarter fiscal 2021 earnings call. My name is Nicole Noutsios, Investor Relations at Pure Storage. Joining me today are our CEO, Charlie Giancarlo; our CFO, Kevan Krysler; and our VP of Strategy, Matt Kixmoeller. Before we begin, I would like to remind you that during this call management will make forward-looking statements, which are all subject to various risks and uncertainties.

These include statements regarding the COVID-19 pandemic and related disruptions, our growth and sales prospects, including our Q4 outlook, competitive, industry and technology trends, our strategy and its advantages, our current and future product offerings, including Portworx, and 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 the 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. 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.

Charles Giancarlo - Chairman and Chief Executive Officer

Good afternoon and good evening everyone. Thank you for joining us on today's earnings call. As we look to the end of 2020 with relief and look forward with high hopes for a brighter 2021, my thoughts are with all of you on this call. I hope that you, your families, colleagues and friends are all staying healthy and faring well. The challenges and the changes we've experienced this year have been extraordinary and seem never ending and they have certainly reset all of our expectations and assumptions. COVID has been the change agent of this decade and we have all learned many lessons in stamina and resilience.

Like you, I am excited about the many reports on the fantastic progress with vaccines and therapies created by the world's scientists, doctors and engineers. However, we all know that there will continue to be challenges due to the virus and its economic impact for months to come for all of our communities and stakeholders. Through all of the challenges that COVID created this past year, Pure has been there for our customers, delivering capacity, performance, and services that enabled our customers to cope and thrive during the crisis.

I feel confident that regardless of the rate of progress in the battle against COVID, Pure and most of our customers have turned the corner on their plans and ability to operate in this new normal. I am pleased with this quarter's performance and the progress Pure has made. Growth in our global Enterprise business continues to provide me with confidence that we will exit this downturn with an accelerated opportunity. Our strategy and our vision to deliver the Modern Data Experience strongly resonates with our customers.

In our first 10 years, Pure completely changed customers' expectations of what they should see from storage arrays and storage vendors. In our second decade, we are changing the expectations for hybrid cloud data and storage management. We are growing from a two-product company to offering a full, multi-cloud data services platform, increasing our relevance to both those who build infrastructure, that is IT, and those that build applications, namely developers and DevOps.

I am very pleased to welcome the Portworx team, now part of the Pure family. Portworx brings to Pure a Kubernetes data services platform for cloud-native applications running across container-based hybrid cloud environments. With Portworx and our existing Pure Service Orchestrator, or PSO, we have expanded our industry-leading data services capabilities to both traditional and cloud-native applications and containers. We've made good progress with the integration and the Portworx team continues to perform well, easily beating their pre-acquisition sales plan. Our strategy with Portworx is to continue their software-defined storage, container and Kubernetes-control roadmap, and layer in Pure's capabilities with VMs and bare metal workloads, all managed through our unique, SaaS-based, Pure1 management system.

Customers are looking for more complete solutions to their digital transformation. They are not specifically looking to migrate to subscriptions. They are not specifically moving to SaaS and hyperscalers because it's the cloud. Customers are moving to services and suppliers that provide the outcomes they desire, rather than just the means for customers to create those outcomes themselves. Pure's solutions continue to evolve to enable customers to automate their data storage and management and to deliver data management as code to their developers. And importantly, like our Purity software, Portworx is just as comfortably deployed in-cloud as on-premises, supporting a new set of customers who are born in the cloud and may never consider on-prem infrastructure. This quarter, we saw strong momentum in both existing and new Portworx customers including Eurobank, Expedient and DataScan and I'm pleased to share that we were just named a leader by GigaOm for Kubernetes Data Protection.

Leading customers are choosing containers, Portworx and PSO to build and run their most strategic new initiatives. They are also choosing to use object storage for these same advanced systems, and we are benefiting from this demand in the continued strong momentum for FlashBlade. FlashBlade continues to be chosen by customers to consolidate and modernize their unstructured data across a number of uses including technical computing, analytics, and rapid recovery.

Momentum with customers like First National Bankers Bank, the Louisiana Office of Technology Services and Sinai Health System demonstrates that FlashBlade continues to be the leading choice to enable rapid recovery to defeat ransomware. We are also seeing strong interest and initial customer adoption for our recently released FlashRecover solution to modernize the entire data protection stack.

This quarter, Cadence, a global leader in electronic design and computational software, selected Pure's fast file and object service through our Pure as-a-Service offering to accelerate their transition to a modern IT environment and to automate their data services. FlashBlade's performance and ability to consolidate many workloads, combined with our consumption-based model and Service Level Guarantees, enables Cadence to increase developer productivity and accelerate their time to market. Customers like Cadence are looking to deliver outcomes to their developers.

Pure's Subscription Services, which include our Evergreen and Pure-as-a-Service offerings, had strong growth again this quarter. Selecting Pure-as-a-Service in Q3, organizations such as ME Bank in Australia and The University of Texas Health Science Center recognize the flexibility and choice that these offerings provide. Our unified subscription in Pure-as-a-Service, which includes Cloud Block Store, enables customers to subscribe to storage both in their data center and in the cloud, paying for only what they consume, making migration to the public cloud possible at any time without worrying about stranded assets. The operational benefits of subscribing to a service managed by Pure makes their lives substantially easier.

Today marks another milestone and industry-first for our Pure-as-a-Service offering with the announcement of the Pure Service Catalog. The new Service Catalog provides cloud-like transparency by publishing pricing for on-premises and hybrid cloud storage delivered as a service so customers can easily choose the right storage service level for each workload. Combined with Pure1's AI-driven workload planner, customers can place workloads on the right storage service tier based on intelligence derived from thousands of customer scenarios.

FlashArray//C, well into its second generation, continues to grow at an accelerated pace. This month, FlashArray//C received the Best of Show Award at the Flash Memory Summit for Most Innovative Flash Memory Technology. The performance and financial efficiencies delivered by FlashArray//C enable customers to both consolidate workloads and reduce costs below that of hybrid disk arrays. The full FlashArray portfolio enables customers to address a wide range of price performance levels for both block and file workloads, all delivered by our single Purity code base. The services available under our unified subscription on prem and in the cloud are powered by the same Purity software, providing customers flexibility and consistency in how and where they want to place their applications and consume their data services. As we scale our Company from a single product just four years ago to a broad-based provider of data storage capabilities, we continue to scale our management team as well.

Earlier this month, we announced Dominick Delfino as our new Chief Revenue Officer, reporting directly to me. Dominick brings fresh perspective and incredible expertise selling subscription and consumption-based business models with software innovation at their core. He has a deep understanding for our customers' digital transformation strategies and is well-versed in introducing new solutions into the market, working closely with customers to deliver solutions that improve their business outcomes. I am excited to welcome him as we position Pure for its next stage of growth.

Navigating the ebb and flow of this COVID crisis has certainly been an exercise in flexibility and resilience for all organizations and actually all individuals worldwide. As we have stated in prior earnings calls, after a rush to solve for new, urgent and immediate needs in Q1, companies reset in Q2 to replan their digital strategies given the new environment.

This past Q3, we saw customers begin to re-engage with clearer plans to drive digital transformation. As part of these new initiatives, customers have largely done away with business as usual and are looking to simplify their operations, yet provide their developers with efficient and self-service infrastructure. Pure's offerings provide the efficiency, reliability, and automation these customers are craving. And with environmental impact concerns rising in importance, Pure makes it easy for organizations to improve their sustainability initiatives with the savings in power, cooling, and electronic waste we deliver across our portfolio.

Pure has made fantastic progress over the last several years to position us well for the future. We have dramatically expanded our product portfolio. We have enabled our capabilities to be run and consumed as a service. We have created a true hybrid cloud environment for enterprise workloads. And now we deliver storage solutions for cloud-native application development and deployment. Even with the uncertainties which remain in the economy from the pandemic, we are confident in our vision, our strategy, and the ability of our team to grow and scale.

With that, I'll turn it over to you Kevan.

Kevan Krysler - Chief Financial Officer

Thank you, Charlie and good afternoon. We are pleased with our Q3 financial performance and execution as we continue to navigate headwinds caused by COVID-19. Our Q3 results demonstrate the value our product and subscription solutions provide to our customers. Strong sales and recurring revenue growth continues for both our Evergreen and unified Pure-as-a-Service subscription offerings.

Q3 total revenue was $410.6 million, down 4.2% year-over-year, slightly exceeding our expectations at the beginning of the quarter. Product revenue was $274.5 million, down 15.1% year-over-year and Subscription Services revenue totaled $136.1 million, growing 29.5% year-over-year.

Subscription Services revenue during Q3 represents approximately 33% of total revenue, up from approximately 25% of total revenue during Q3 of the prior year. Subscription Services revenue includes Evergreen subscriptions, and our unified Pure-as-a-Service subscription, which includes Cloud Block Store. We were pleased with the strong sales growth and demand for our Subscription Services, Flashblade and FlashArray//C offerings during the quarter. Our investments in innovation continue to drive results as both our FlashBlade platform and our second generation FlashArray//C offerings achieved their highest level of sales during the quarter. Customers, including large enterprise customers, continue to invest in our FlashBlade platform for their high-performance file and object needs, including data protection.

Our remaining performance obligations, or RPO, which includes our committed and non-cancelable future revenue grew approximately 25% year-over-year, slightly exceeding $1 billion at the end of the quarter. Total deferred revenue which is included in RPO was $763 million growing 19% year-over-year. Bookings or sales during Q3, excluding cancelable orders, was generally flat declining less than 1% year-over-year.

Total revenue in the United States during Q3 was $302.1 million, declining 4% year-over-year and total international revenue was $108.5 million, declining approximately 3% year-over-year. Across our full solution portfolio, we continue to acquire new customers despite the challenging environment created by COVID-19. We acquired over 316 new customers this quarter compared to 379 customers during Q3 of the prior year.

Non-GAAP gross margins for product and subscription services during the quarter was 69.1% compared to 71.7% during the same quarter in the prior year. Non-GAAP product gross margin declined approximately 3 points year-over-year and 0.5 point sequentially. Non-GAAP product gross margins in the prior year benefited from both cost reductions caused by the unprecedented price reductions of NAND, as well as mix shift where we sold larger FlashArray systems.

Non-GAAP Subscription Services gross margin increased approximately 0.5 point year-over-year and declined 1 point sequentially. Non-GAAP operating profit during the quarter was approximately $3.4 million, compared to $29.1 million during Q3 of the prior year. Operating expenses during the quarter have remained relatively flat year-over-year as we continue to invest in innovation and scale.

Non-GAAP net income during Q3 was $1.8 million and non-GAAP net income per share was $0.01. Non-GAAP net income in Q3 of the prior year was $34.2 million and non-GAAP net income per share was $0.13. Weighted-average shares used for the non-GAAP net earnings-per-share calculation was 284.8 million shares in Q3 and 272.2 million shares in the prior year.

We are pleased to have completed the close of our acquisition of Portworx during the quarter. Our purchase of Portworx was funded through a combination of our revolving line of credit and cash. Total cash and investments at the end of Q3 is approximately $1.2 billion.

During Q3 we returned $21.4 million to shareholders through share repurchases of 1.36 million shares. Approximately $23.6 million of our share repurchase authorization remains. Total headcount at the end of the quarter was approximately 3,860 employees.

Now moving to our Q4 outlook. We remain confident in our strategy and execution as we navigate the impacts caused by COVID-19. Visibility of business conditions has improved, but uncertainty of the near-term impacts the global resurgence of COVID may have on our business continues to exist. While we navigate the impacts of COVID, we will continue to share internal expectations of our business performance, but not provide formal guidance.

We are pleased to see strong sequential broad-based growth of our total product pipeline opportunity. However, we have not achieved the same levels as Q4 of the prior year. Our current internal view is that total revenues for the full fiscal year will be $1.66 billion representing approximately 1% of growth and total revenues for Q4 will be approximately $480 million, a decline of 2% year-over-year.

We expect operating expenses during Q4 to increase slightly year-over-year, including a full quarter of investment for Portworx. With our current view of revenue, we believe operating profit for the full year will be approximately $35 million and approximately $26 million in Q4.

Overall, we are pleased with our Q3 financial performance and execution and resilience of our employees, partners and customers. The performance, simplicity and flexibility of our solutions are creating valuable outcomes for our customers which is further accentuated during the COVID-19 environment. Our rich portfolio of solutions including the addition of Portworx positions us for strong revenue growth, including growth of our recurring revenues.

With that, we will now open the call for questions.

Question & Answers

Questions and Answers:

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Operator

[Operator Instructions] And your first question comes from the line of Jason Lear [Phonetic] of William Blair.

Jason Ader - William Blair - Analyst

Yes. Hi. I wanted to know from you guys if you have any sense of pent-up demand going into 2021 and then any update on NAND pricing and how that's - how that might be impacting the Street pricing?

Charles Giancarlo - Chairman and Chief Executive Officer

Yeah. Thank you, Jason. Good to hear your voice. We're very pleased with what we saw in terms of pickup in momentum in Q3. The improvement in visibility and the fact that our customers plans seem to solidify during the quarter all the way through the end of the quarter is a very good reason for optimism as we go forward.

I don't know that I call it pent-up demand as much as I would call it the new - their planning for - their plans for digital transformation, if anything, are accelerated. And that's good news for the collection and storage of data as well as managing that data and being able to take more out of it to improve their business. And I think that is going to be - that is going to continue even after the COVID is long forgotten. And so - and with all of the optimism around vaccines, I think we see that come spring or early summer, we'll start to see new buying patterns and new acceleration emerge. Whether that's pent-up demand or whether that's based on accelerated digital transformation trends, I'll leave that up to you.

Jason Ader - William Blair - Analyst

Thank you.

Operator

Your next question comes from Alex Kurtz of KeyBanc Capital Markets.

Alex Kurtz - KeyBanc - Analyst

Yeah. Thanks. Can you guys hear me okay?

Charles Giancarlo - Chairman and Chief Executive Officer

Absolutely, Alex.

Alex Kurtz - KeyBanc - Analyst

Great. Hope everyone is safe and healthy and we'll have a good Thanksgiving week here.

Charles Giancarlo - Chairman and Chief Executive Officer

Indeed.

Alex Kurtz - KeyBanc - Analyst

So, Charlie, you brought in a new Head of Sales, obviously from a very strong background in software and subscription. And it's clear that with Pure-as-a-Service doing well, there is a move towards a bigger focus on this type of selling motion and licensing to your customers. So I guess if you could just frame up how you would talk to your sales organization and to some big customers next fiscal year, like what's the message from Pure about how you want to be selling a product, how you wanted to - how you want to be licensed? And ultimately for, Kevan, like what does this mean for revenue growth because obviously deferred would start to pick up? So some big top-level questions, just do the best you can on those.

Charles Giancarlo - Chairman and Chief Executive Officer

You bet. And - well, actually I'm fully practiced because I addressed my entire sales force on this just a couple of weeks ago at our Global Leadership Summit. So the world is changing and the world is changing from - if you ask why are they going to SaaS, why are they going to the cloud, it's not because it's in the cloud. It's because they are choosing to - they are choosing services and vendors that provide them with outcomes - better outcomes rather than just the means for a customer to develop the outcome for themselves.

SaaS, if you will, if you go to a SaaS service it actually provides a direct interface to their internal customers with a solution rather than just providing, for example, software for the customer to implement themselves. And so as we go forward, we are increasingly tailoring our solutions to provide those outcomes for customers. What our customers want is data management, not a device that for them to be able to create data management out of. And you see that in our Pure-as-a-Service offering that we announced today, which is our Pure Services Catalog where a customer now can go online, find all sorts of tools to measure and figure out what type of service categories and tiers they need for their workloads and then completely subscribe to it online. And whether it's on-prem or in the cloud, Pure takes the responsibility for delivering that to the customer as set of service level guarantees.

So increasingly, our approach is to provide customers what they need both on-prem and in the cloud, but to do so through a service offering. Now that does generally mean migrating to more of subscription style of sales although the customers can get this even if they go with a capex purchase. But we've been signaling for quite a while that we're - our expectations that subscriptions would be picking up as a percentage of our sales. That has largely come out to be true as you can tell from our announcements this quarter about the improvement in overall subscription sales and we expect that to continue to be true. But we will manage that. We are - the forecasting that we're providing to the Street takes that into account. And so we feel comfortable with that. And, of course, we think this is a better solution for our customers. And so increasingly our sales team wants to go where the customers are going and they feel good about the changes we're making.

Kevan Krysler - Chief Financial Officer

Now, I'll just add a little bit to that, Charlie. Look, a third of our revenue is really coming from subscription services to begin with. So we've got a great start to this transition. And given that our Evergreen subscription model is running at scale, the idea that we're going to have ramp of our Pure-as-a-Service unified subscription will have less of an impact, in my mind, on total revenue though there will be some impact. The other benefit that we'll see is obviously Portworx being part of our subscription revenue. And that will be incremental to our growth curve as it relates to our subscription services.

Alex Kurtz - KeyBanc - Analyst

Thank you.

Operator

The next question comes from Aaron Rakers of Wells Fargo.

Aaron Rakers - Wells Fargo - Analyst

Yeah. Thanks for taking the question. I want to kind of build on that last comment around subscription. I think one of the metrics that's always a little bit interesting is just the RPO balance expansion. And that delta relative to deferred revenue I think it was up about 47.5% year-over-year. Can you just remind us how much of that is of the true subscription business? And was there any Portworx contribution in that number this quarter?

Kevan Krysler - Chief Financial Officer

Great question and this is Kevan. How are you doing, Aaron? In terms of the differential, when you look at it sequentially and the growth we're seeing sequentially between deferred revenue and RPO, that is really our Pure-as-a-Service offering that's contributing to that build. And then Portworx, we don't have a significant contribution though there would be some contribution to RPO for Portworx.

Aaron Rakers - Wells Fargo - Analyst

And just as a - just as a quick follow-up, maybe you've got one of your competitors also reporting tonight. I mean, just curious PowerStore has been in the market for a quarter or better now. Just kind of update us on what you're seeing in the competitive landscape as you say the digital transformation is poised to kind of accelerate?

Kevan Krysler - Chief Financial Officer

Yeah. I'm going to underwhelm you here, Aaron. We're just not seeing PowerStore. I mean, the little we're seeing of it is not being terribly successful. So if anything when it's introduced to a customer, gives us an opportunity to go in because it's always a disruptive upgrade to the customer regardless of which of the products that they're attempting to sell or upgrade against. So it's just not been - it's not been a big factor.

Our win rates generally with Dell have been very consistent. They're consistent quarter-by-quarter. I'd say no - not terribly different this quarter, if anything, a little bit better. So PowerStore has been largely apt [Phonetic]. I will say that most of the time even if they're going with PowerStore they quickly change their bid to PowerMax and that's the more typical competition for us.

Operator

Your next question comes from the line of Pinjalim Bora of JPMorgan.

Pinjalim Bora - JPMorgan - Analyst

Thank you. Hey, Charlie and Kevan. The first question, just on the pipeline. I think you said the pipeline is up, but is not as much as last year. But help us understand the composition of the pipeline that you're seeing. Last quarter I think you kind of it indicated that the maturity curve is towards the early stage. Has that changed at all as we head into Q4?

Kevan Krysler - Chief Financial Officer

Yeah. Great question. And absolutely, when we're looking at the pipeline composition you are right in terms of the year-over-year compare. What we are pleased with is the strength we're seeing sequentially in our build from Q3 to Q4, which gives us some confidence in terms of our internal view of our Q4 outlook.

And then when we actually peel that back a little bit, we are confident to see some evolution in terms of the aging of those pipeline opportunities. As you mentioned, when we are going into Q3, we saw that we are getting some nice bill, but those were earlier-stage opportunities. And as we're looking at Q4, we see a much better balance between early-stage opportunities as well as advanced stage. So nice evolution in terms of what we're seeing sequentially between our Q3 and Q4 pipeline.

Pinjalim Bora - JPMorgan - Analyst

Understood. Thank you for that. And, Charlie, one for you. Talking to some of your partners we have kind of gathered that there has been a few mid eight-figure and even larger PaaS contracts. Help us to understand what's driving that? Is that transitory as companies try to preserve cash outlay right now in this environment or do you think it's kind of a fundamental change in hardware buying behavior?

Charles Giancarlo - Chairman and Chief Executive Officer

Well, I think it's beginning of a fundamental change in - well - and again, I won't say it's hardware buying behavior. We're delivering this as a service. So I really want to call attention to the fact that - and especially with PaaS 2.0, but actually also when we first introduced PaaS it was a lot more than just a financial construct for customers to acquire hardware. We're delivering it as a service. They have no commitment to a long-term holding of the hardware and it's a unified subscription with the same set of services, in fact the same software in the cloud.

And increasingly every aspect of their usage, if you will, of the service will be service-oriented. That is to say that it will be fully managed, it will scale up and scale down without disruption and without the customer getting involved in that at all. We take full responsibility for it. So I just want to identify that it's not about acquiring hardware, it really is about subscribing to a service that just happens to be on their premise as well as in the cloud. And I do think that over time we'll see more and more of this, absolutely.

Matt Kixmoeller - Vice President, Strategy

Yeah, just to jump in for a second, I think Charlie is really hitting on one of the key differentiators of PaaS from our competition where we're really pursuing this like a product opportunity. If you look at our competitors their offerings tend to come from their financial services groups and this is kind of dressed-up leases in a different name. We have a business unit that has engineers, has a GM who is running this program and we're thinking about how we really changed the entire customer experience around and as-a-service experience.

And so hopefully what you've seen with the launch of the Service Catalog today is a good example where we're really rethinking what's the entire way a customer thinks about purchasing a service, looks at their existing workloads and uses AI-driven modeling tools to understand the right service and then just enjoy the same level of transparency that people have today in the public cloud around open service pricing, performance SLAs and then driving the process for getting procurement going. So really it's the beginning of a whole new interaction with customers at Pure.

Operator

And your next question comes the line from Nehal Chokshi of Northland Capital.

Nehal Chokshi - Northland & Co. LLC - Analyst

Yeah, thanks, and congrats on strong results and strong guidance as well, in my opinion. I want to go back to a discussion on RPO, especially the unbilled RPO portion, which - it was up $16 million Q over Q which is more than the $5 million in the year-ago period. So clearly on a year-over-year basis, as Aaron had alluded to, a nice acceleration. But it's still a stepdown from the $20 million-plus in the past two quarters. So is that a deceleration of the performance of the past few quarters or is there some seasonality that you're seeing with the Pure-as-a-Service - the unified Pure-as-a-Service offerings?

Charles Giancarlo - Chairman and Chief Executive Officer

Nehal, really I think this may be more of the fact that we did a large Pure-as-a-Service deal this quarter and we're able to bill for the entire amount upfront. So that entire portion is actually in deferred revenue. So when we look at our Pure-as-a-Service trends quarter-over-quarter actually they are very strong and we're quite pleased with those trends. What you're looking at between the unbilled portion versus deferred revenue, we do have some mix in there where we've got some PaaS deals that are being reflected in deferred revenue because we were fortunate to bill for those upfront.

Nehal Chokshi - Northland & Co. LLC - Analyst

I see. Okay. Great. Fantastic. Congratulations.

Charles Giancarlo - Chairman and Chief Executive Officer

Thanks, Nehal.

Operator

Your next question comes from Karl Ackerman of Cowen.

Karl Ackerman - Cowen & Co. - Analyst

Yes. Good afternoon. Charlie, starting with you first, if I may, your internal outlook is healthy considering the headwinds across commercial. Are you seeing any rebound internationally, particularly in Europe, that is giving you greater confidence for January quarter or are you actually seeing a sustained improvement in on-prem in the US and I have a follow-up? Thanks.

Charles Giancarlo - Chairman and Chief Executive Officer

Yeah. So interesting, Karl. So I think international really shows the effect of COVID on business in general. So, as you know, in Q2 we saw a real improvement in international overall as they came out of the crisis earlier than did the US and so we saw an uptick.

In Q3, in contrast, we saw Europe in particular, but Asia - but international in general start to go back into lockdown early - late September, early October and already we started right around the same time with a little bit of latency, we saw the effect on our business. So COVID really does have an effect on the local economies whichever country it happens to hit and it's why we're a little bit cautious for Q4. But we do believe at the same time that businesses now have become, let's say, more accustomed to operating in the COVID environment and therefore they are more robust in terms of pursuing their IT and digital transformation plans. So we don't expect the kind of turndown that we saw in Q2.

Even with our cautious optimism, we feel that - we feel confident in how we're looking at Q4 right now. But clearly I think once - the same effect that we saw in Europe when they came out of the crisis in the spring gives us confidence for this spring, especially let's say around the spring to summer of this year and then with vaccines we think that'll be a longer-term phenomenon. So we're very much looking forward to the future, but we do believe the next few months are reasons to be a bit more cautious.

Karl Ackerman - Cowen & Co. - Analyst

Yeah. Understood. I appreciate that. For Kevan, it's quite apparent that your recent acquisition and expansion of as-a-service offerings today underscore your desire to increasingly shift your portfolio toward a recurring revenue model. How does that impact opex growth in 2021 or the next couple of quarters? When we think about that, will 2021 be characterized by an investment year in sales and marketing. I guess, we've modified our sales approach, but how do we think about the ability to get leverage on the opex side because it's certainly, I think, a great initiative? But if we could think about that from an opex side that would be helpful. Thank you.

Kevan Krysler - Chief Financial Officer

Yeah. Thanks, Karl. When I think about our operating margin leverage potential even with the transition to increasing Pure-as-a-Service and our subscription offerings, both are very achievable and we're planning on that as we look out to next year. I think we're making some great efforts across the board to leverage our investments, especially this year as we kind of invested ahead of the growth curve, if you will, going into next year. So I'm looking to actually improve operating margin and profitability even when considering growth in our subscription offerings.

Operator

Your next question comes from Mehdi Hosseini of SIG.

Mehdi Hosseini - Susquehanna International Group - Analyst

Yes. Thanks for taking my question. I wanted - I have two follow-ups. Let me go to your presentation slides, specifically slide number five and six. Obviously the number of new customer addition has declined on a year-over-year basis. But what is interesting, the revenue mix is shifting. And I just want to get some clarification. Is that just driven by the change in the customer type, more driven by app developers and is that what's driving a more - better projects, especially impacting the subscription services? Is that the right way of thinking about on a year-over-year basis?

Kevan Krysler - Chief Financial Officer

Well, I'll take that first, Charlie and then feel free to add on. I mean when we think about our new customers, our new customers will either purchase our Pure-as-a-Service offering which would contribute to our subscription services or they will purchase our integrated appliance that comes with our Evergreen subscription and so that will play into it as well. But we're also getting a significant amount of momentum with customers who are continuing to invest in Evergreen subscriptions from a renewal standpoint and that momentum is really coming from our existing customers. And so that hopefully would answer that question specific to the mix occurring.

Charles Giancarlo - Chairman and Chief Executive Officer

Yeah. Well, let me also answer in terms of mix of new customers overall and as you point out a decline in year-over-year, first of all, I have to say that given the COVID environment, we're pretty pleased with the number of new customers we've been able to gain because in the COVID environment clearly incumbents tend to have a bit of an advantage as new customers are just more - as customers are more cautious about considering changes to their existing environment. That being said, if you were to break down the new customers or the net new logos, what you'd find out is a good growth as a percentage in enterprise and of course lower net new logos in commercial and simply again because commercial is under pressure worldwide, much more so than enterprises in terms of numbers from the corona environment. So again, our expectation is that when the corona pandemic abates, hopefully by spring, that we should see a good pickup in this.

Kevan Krysler - Chief Financial Officer

Yeah. Thanks, Charlie. But the momentum when we think about our recurring revenues will be driven probably more from our existing customer base as well.

Charles Giancarlo - Chairman and Chief Executive Officer

Much more from the existing customer base, yeah.

Mehdi Hosseini - Susquehanna International Group - Analyst

Got you. And one quick follow-up, more of a housekeeping item. When I - looking at the product revenue, as we look into next fiscal year and increase availability of the QLC NAND is that going to have a positive impact on product margin or would you prefer passing that along to customer to increase market share?

Charles Giancarlo - Chairman and Chief Executive Officer

Yeah, let me take a try. I think it's a little bit early for us to be able to opine with great confidence on that. But I suppose my belief is that we're utilizing QLC first and primarily to penetrate into new markets in the disk space and therefore disk economics are the ones that we're competing with in that environment. And as such, I would expect margins to be consistent with our overall Company margins rather than to be used strictly as an enhancement. I think over the long term, it may improve overall product margin. But in the short term I expect that we will be utilizing it to penetrate into that market.

Matt Kixmoeller - Vice President, Strategy

And I'd also say that your question somewhat implied that our QLC product was being limited by availability of NAND and that's not the case. We are in the second generation of that product being GA now. We've now shipped the largest QLC flash module in the industry, our 48 terabyte module. And so we're in a really great place from a supply point of view to supply that product and we believe that's really differentiated in the market.

Operator

Your next question comes from Simon Leopold of Raymond James.

Simon Leopold - Raymond James - Analyst

Thanks for taking the question. First thing I wanted to ask a little bit more about this announcement you've made today about publishing the Service Catalog. I guess I'm trying to think about the potential consequences. One scenario might suggest this could trigger price wars responses from your competitors. On the other hand, I could imagine maybe this leads to less discounting by you, given that you're putting prices out in print for your customers. Just wondering how you think about the various scenarios or outcomes from this action you've taken.

Matt Kixmoeller - Vice President, Strategy

I'll take the first stab at that. Look, I guess the first thing here is we're doing this because it's something customers demand. And increasingly customers want to self qualify research solutions on their own, do so and understand relative pricing and then contact the sales rep or channel partner when they are much further along in the buying process. And so this is - from a Pure point of view, it's all about really upping our digital go-to-market chops and being able to sell how customers want to buy much more on this cloud model.

In the case of the Service Catalog what we published in there are MSRP prices and so a customer can get a discount obviously by coming to Pure and working to our channel programs and that's not published. So there is still some room for negotiation in there. But what the Service Catalog does do is it allows them to very openly see what the different services are, see what the performance levels are so they can make a good choice around, okay, is it worth a two times increase in spend to get a certain amount of increase in performance. And indeed if you look at the new service tiers that we've introduced, we now offer a 10 times range in pricing for a 26 times range in performance. And so there is quite a range of services and customers have the right service level for every workload in their environment.

Simon Leopold - Raymond James - Analyst

That's very helpful. And just maybe as a follow-up, I think earlier in the Q&A, you talked about customers adjusting to this new normal. So even as we aren't fully back [Phonetic] and don't have a vaccine widely available yet, your customers are adjusting to how they do business. With that in mind, do you think that your next quarter basically as we turn into next year, you might defy normal seasonality that we might have a more muted sequential decline as your customers are sort of catching up to business that they didn't do during the pandemic's worst period? Thank you.

Charles Giancarlo - Chairman and Chief Executive Officer

Well, it's an interesting question. Look, we're not epidemiologists here, but I think it's fair to say that our expectation would be that COVID will be with us through the early spring and then hopefully start to abate at that point in time. And I would expect to see then a return to growth economically across the world. That's what we're planning on right around that time and then get back to - so that might suggest greater seasonality next year simply because the beginning of the year might be a little bit more muted than the end of the year. But from that point going forward, I would expect to start to get back to our normal seasonality.

Kevan Krysler - Chief Financial Officer

What I was pleased to see is a couple of things. I was pleased to see our performance in Q3 followed by what we're seeing currently is sequential strength going from Q3 to Q4. And I think those are positive actually because I think the COVID resurgence, back to your point Simon, in terms of folks knowing how to sell in this new environment, customers being more comfortable purchasing, I think will help mitigate this resurgence we're seeing globally. And then we just need to see how Q4 performance evolves throughout the quarter. But, look, we're really confident in our growth drivers that especially with what we saw in Q3 in terms of our subscription services, FlashBlade performance and FlashArray//C. So it's coming together for us. COVID certainly creates uncertainty and to Charlie's point, we do expect that to continue in Q1, but we're going in the right direction.

Operator

And your next question comes from Tim Long of Barclays.

Tim Long - Barclays - Analyst

Thank you. Yeah, just two if I could as well. Just wanted to follow up on FlashArray//C, just curious what you can - what you've kind of learned from gen one to gen two of that product. Maybe just win rates, deal sizes, new applications, what are you seeing as that product evolves? And then second, Charlie, if you could just give us, it sounded like enterprise was pretty strong. Could you just give us a little color around small, medium businesses and what do you think it's going to take to see a better rebound from that customer group? Thank you.

Charles Giancarlo - Chairman and Chief Executive Officer

Yeah. Well, let me give it a shot. In terms of the - let me start with the second one first, which is that commercial as we, I think as other companies have identified as well the mid-market and small medium have as a group been harder hit by the COVID crisis than large enterprise. And perhaps because they were not quite as ready to operate entirely online as were many of the large enterprises that had already invested in it. So I think just a generally stronger economy overall will help that. As you can see there it's not completely disappeared. The net new logos indicates - by us indicates that there is still a healthy commercial market, but it's far muted from pre-COVID days overall.

I'm sorry, remind me the first part of the question.

Tim Long - Barclays - Analyst

FlashArray//C.

Charles Giancarlo - Chairman and Chief Executive Officer

Oh, FlashArray//C.

Tim Long - Barclays - Analyst

Yes.

Charles Giancarlo - Chairman and Chief Executive Officer

I'll pass it to Kix in a second. But I think the main thing is that with FlashArray//C, with it's primary target being the secondary tier market and disk economics, the additional pricing flexibility that it gave us to go after the disk market when we are able to introduce true QLC has made a big - had made a big difference and allowed - the very fast early momentum allowed that to continue.

Matt Kixmoeller - Vice President, Strategy

Yeah. And I guess the only other thing I'd add is that it just hasn't been the type of product that's been very hard to sell in terms of going and finding very focused use cases. It turns out our customers run disk-based arrays for a wide range of use cases. And so really the easiest way to go to market, whether it is just to go to a customer who has already bought in and understood the benefits of flash at the high end of their application space and ask them were they still run a disk array and work with them to say, look, if we can actually sell you an all-flash array that brings a simplicity and performance of flash and it's actually 30% less expensive than a disk array, why do we need disk still.

Operator

Your next question comes from Eric Martinuzzi or Lake Street.

Eric Martinuzzi - Lake Street - Analyst

Yeah. Wanted to pick apart the pipeline a little bit by vertical. I would assume the strength that you've seen at least sequentially has been from the - would have been more resilient verticals, financial services, healthcare, government. Any green shoots in some of the other more COVID exposed verticals, your transportation, hospitality, entertainment that sort of thing?

Charles Giancarlo - Chairman and Chief Executive Officer

Eric, I would not call out any of the more affected verticals right now as, from our point of view, showing green shoots. I would say that we were less exposed to those industries to begin with. But no, we've not - I can't say that we've seen the significant changes in the - in how they are faring, at least from buying signals to us over the last couple of quarters.

Kevan Krysler - Chief Financial Officer

Yeah, Tim [Phonetic] what I would add on that is just the enterprise strength was - it was across many of our verticals and that was broad based and it was global.

Charles Giancarlo - Chairman and Chief Executive Officer

Right.

Kevan Krysler - Chief Financial Officer

So that was kind of a new green shoot for us in terms of what we are looking at. We've had resilience across the board on enterprise, but the broad-based growth we saw in enterprise was actually pleasing for us.

Eric Martinuzzi - Lake Street - Analyst

Okay. And that was that got into the pipeline as well?

Charles Giancarlo - Chairman and Chief Executive Officer

Correct.

Eric Martinuzzi - Lake Street - Analyst

Thank you.

Operator

Your next question comes from Katy Huberty of Morgan Stanley.

Katy Huberty - Morgan Stanley & Co. LLC - Analyst

Thank you. Good afternoon. Kevan, what's the revenue contribution from Portworx that's embedded in your fourth quarter internal model? And then, Charlie, can you provide a bit more color on Paul's decision to step down as COO? Are there - and are there any other changes or hires that you're planning to make on the back of his departure? Thanks.

Kevan Krysler - Chief Financial Officer

I'll hit the Portworx first, Katy. Super excited with this strategic acquisition. Revenue is actually pretty small in terms of contribution as we look out into Q4. We'll probably see that start to build in RPO and deferred revenue before that starts making its way in any significant or meaningful way to revenue.

Charlie, do you want to hit Paul?

Charles Giancarlo - Chairman and Chief Executive Officer

Thank you, Katy. Yeah, I want to thank Paul for his contributions to the Company over the past year or so that he has been here. And he has really brought a lot of structure to our operations at the Company and contributed a lot and also was part of recruiting Dominick to the Company.

In conversations with Paul as we were recruiting Dominick, Paul started to feel, and I had to agree, that Dominick is going to bring a lot of capabilities into the Chief Revenue Officer role that Paul had been handling and Paul felt that, look, given Dominick coming on board and given the excursion [Phonetic] of Jason Rose as Chief Marketing Officer and so forth that we really had now a strong operating cadence and that Paul's role as Chief Operating Officer was not really as required at the Company and that he had a number of opportunities that he could go pursue and so maybe it was better to make that change. And so we agreed with that. Paul is going to continue with us through the end of the quarter to ensure a smooth acquisition with Dominick and then move on. And I do want to thank Paul for what he has contributed.

And while I have this moment, I want to thank KD as well for his leadership of the sales force over the last three years on a global basis. KD has gotten us - over his period of time leading the sales force, we've doubled almost every aspect of our Company, the revenue, the size of the Company, the size of the sales force etc. and he's done a great job. Bringing Dom on board really signals the fact that we're changing as a company having now moved from a single product to a two-product to now a full portfolio both in the cloud and on-prem and increasingly moving to subscription and Dominick brings the right type of background for this next step in our journey and so we're very pleased pleased with that overall.

Katy Huberty - Morgan Stanley & Co. LLC - Analyst

Thank you for that color.

Operator

And this concludes the question-and-answer session. At this time, I'd like to turn the call over to Charlie Giancarlo for closing remarks.

Charles Giancarlo - Chairman and Chief Executive Officer

Thank you. In closing, I'd like to thank all of our employees, our customers, our partners and for all of you on the call for your hard work and dedication to our mission. It's been a wild year and it's not over yet. I'm looking forward to working with all of you to build a much better 2021. Thank you for joining us today and stay safe and please have a very happy Thanksgiving to all of you. I know we all need the rest. Please take time with family and I look forward to engaging with you in the future. Take care.

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PURE STORAGE INC

Q3 2021

Earnings Transcript

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