Due to realignment of analyst coverage, we are withdrawing coverage of the following equities: AAPL, ANET, CSCO, DELL, FLEX, HPE, HPQ, IBM, JBL, JNPR, NTAP, NTNX, and PSTG. Our final ratings, price targets, and estimates should no longer be relied upon.
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PSTG reported F3Q20 earnings after the close yesterday posting a 3% miss on the topline vs. our model, accompanied by the fourth cut to F20 revenue guidance. Products revenue came in at 8% YoY growth (600bps miss vs. Wolfe) with the F4Q guide implying an even worse sequential decline. The stock traded down 24% in the aftermarket. We believe the price reaction was overdone, but the results and guide rightfully question the company’s ability to maintain similar elevated growth multiples vs. the industry in the near-term.
We detail our quarterly VAR survey, where we queried 51 value-added storage resellers globally in October for business in July-September. We provide both industry and company level results and walkthrough the stock related takeways.
Yesterday (09/17/19) PSTG hosted its annual investor session at its Accelerate user group conference. The company took a direct step to challenge hybrid/disk by adding another head to its AFA hydra, the FlashArray//C, priced at a ~40% discount to the //X. PSTG also announced an extension of the core premise of the Evergreen model by introducing aaS distribution for its entire product line. We continue to like PSTG as a secular grower in storage as well as its ability to execute—it distanced its gains in AFA in the prior quarter relative to the group. We also like the optionality at enterprise accounts that its enhanced suite of products provides, but concede that it needs to demonstrate proof points at its larger accounts, especially penetration at existing accounts.
Mid-20% growth looks better with each passing print. PSTG reported F2Q20 earnings yesterday after the close, posting inline numbers but issuing the second cut to F20 revenues on the back of disappointing demand elasticity. But expectations are down for the space and a mostly intact V in the V*P revenue equation was enough to send the stock up 3% in the aftermarket. The company demonstrated that challenges in AFA in the quarter were not uniform. F20 growth has come down from 30%+ to mid-20%s, but premium to market has maintained or perhaps increased. We remain Outperform rated.
VARs see overall IT budget spend likely growing, albeit in the low single digits. One reseller mentioned that business had a sudden stepdown entering July. Another touched on global uncertainty; European deals stepped up CIO supervision in 70% of cases, leading to 20% uptick in sales cycle length. Overall, VARs recognize that 2018 provides a tough compare for enterprise spending, potentially exacerbated by recent signals of weakness, but they continue to see IT capture a larger share of overall corporate budgets.
John Treadway has worked with large enterprises considering both private and public cloud implementations, first at Cloud Technology Partners, which was acquired by HPE, and now at Symphony Solutions, where he is CEO. Although hyperscaler revenue growth is moderating, he argues it is mostly due to tough comparisons as cloud approaches $70bn of revenue. He says AWS’s Andy Jassy might be right that only 3% of workloads are in the cloud by dollars.
In addition to tracking the five major tech sectors—Hardware, Semis, Software, Internet, and Services—we have added 2-3 subsectors for each for greater granularity. We show their performance in our weekly Wolfebytes.
AWS gains decelerated from 41% in 1Q to 37% in 2Q and Microsoft from 73% to 64%, still solid results that suggest workloads continue to move to public clouds and capex should improve in the second half. Google Cloud’s stated $2bn includes G Suite. We don’t have history from the company, but our estimates suggest a doubling YoY as Thomas Kurian begins to triple its salesforce. Full-year growth for the top four should be about 40%. We are hosting cloud consultant John Treadway Tues at 2pm.
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