Enterprise data storage company Pure Storage reported a lower-than-expected sales outlook for the rest of its fiscal year, citing headwinds from its shift to a subscription model. PSTG stock fell sharply Thursday, despite third-quarter earnings that topped Wall Street's expectations.
Pure Storage said late Wednesday that it earned an adjusted 50 cents per share on $763 million in third-quarter sales. On average, analysts polled by FactSet expected Pure Storage to earn an adjusted 40 cents per share on $761 million in sales for the quarter, which ended Nov. 5.
Earnings for Pure Storage climbed 61% year over year while sales increased 13%. The quarter is Pure Storage's fiscal 2024 third quarter.
PSTG stock tumbled more than 12% to close at 33.31 on the stock market today.
PSTG Stock: Forecast Short Of Views
Mountain View, Calif.-based Pure Storage offers high-speed data storage systems for businesses using all-flash chip technology. Facebook parent company Meta is a major customer.
The company's forecast for the next quarter apparently triggered the harsh reaction from investors.
For the current fiscal fourth quarter, Pure Storage forecast $782 million in sales. Analysts expected $919 million, according to FactSet. And for its full fiscal year ending Feb. 5, Pure Storage forecast sales of $2.8 billion. Analysts were looking for sales growth of 7% to $2.96 billion.
Shift To Subscription Model
In an interview with CNBC shortly after the earnings report was published, Pure Storage Chief Executive Charles Giancarlo said investors will recognize Pure has a "good story," once they've had more time to digest the results. Giancarlo also noted that the company is transitioning to a subscription model that is based on consumption of its storage tools, called Evergreen One.
"As we move to the subscription model, of course, that means near-term capex revenue is substituted by longer-term, and richer, subscription and consumption revenue," Giancarlo said. "Most of the change in the forecast is really due to that accelerated approach toward the consumption model."
Subscription services revenue for Pure Storage climbed 26% year over year to $309.6 million, the company said.
Pure Storage had an additional headwind in a $41 million order from a telecom company that will not be fulfilled until after the fiscal year, Chief Financial Officer Kevan Krysler said on the earnings call.
Wedbush analyst Matt Bryson maintained an outperform, or buy, rating for PSTG stock in a client note Thursday. He said the business still has solid prospects and the shift to subscription revenue will have tangible benefits.
"However, we also believe the stock's reaction might have been far less precipitous, if management had done a better job communicating the impact of a shift toward (software-as-a-service) revenue with the Street," Bryson wrote. That would include providing a more metrics showing the uptake of Pure Storage's services options
PSTG Stock: Data Storage Group Leader
Prior to the drop following its earnings report, PSTG stock had gained 5.7% Wednesday to close at 37.93. Another data storage company, NetApp gained more than 15% Wednesday following its earnings report late Tuesday. The company beat estimates for earnings and revenue and gave a sales forecast ahead of consensus.
With Thursday's drop, PSTG stock gapped below its 50-day and 200-day averages, according to IBD MarketSmith.
Heading into its earnings, Pure Storage ranked first out of 10 stocks in IBD's Computer-Data Storage industry group, according to IBD Stock Checkup. Shares have an IBD Composite Rating of 87 out of 99.
