Shares in Pure Storage (PSTG) are sinking 11% in Wednesday’s pre-market trading after the company’s earnings beat was offset by the anticipation of continued headwinds for the third quarter.
Specifically, Q2 Non-GAAP EPS of $0.06 beat Street expectations by $0.06 while GAAP EPS of -$0.25 came in in-line with forecasts. Revenue was up 1.9% year-over-year at $403.7M, and topped Street expectations by $8.43M. Subscription services revenue surged to $131.4M, up 37% year-over-year.
Nonetheless, the results reflected moderation in year-over-year product growth (-9.3% vs. +3.4% last qtr.) as COVID-19 headwinds slowed US activity. Indeed, strong international revenue growth (+20% YoY to $122M) was offset by US weakness (rev. -4% YoY), especially in commercial accounts.
Gross margin (GM) of 68.0% also fell short of the 70.2% estimate (with non-GAAP gross margin at 69.8%), reflecting incremental mix-driven pressure on product GM (70.1%), while support GM (69.2%) improved.
Looking forward, management did not provide formal quarterly guidance, but commentary highlighted flattish quarter-over-quarter revenue trends and expectations for a small 3QFY20 operating loss (-2% OM) reflecting ongoing investment. (See Pure Storage stock analysis on TipRanks).
Following the results, Oppenheimer’s George Iwanyc reiterated his buy rating on the provider of flash-optimized storage solutions with a $20 price target. “The cautious view isn’t surprising, but the lack of QoQ product revenue improvement is disappointing and could keep the shares rangebound” the analyst commented.
“We’d stay the course and reiterate our Outperform rating seeing longer-term levers in product execution, growing subscription/recurring revenue mix, and ongoing sales/GTM investment” Iwanyc told investors, adding that the guidance doesn’t anticipate any macro improvement, which puts a positive bias on meeting/exceeding 3QFY21 targets.
Overall, Pure Storage scores a bullish Strong Buy Street consensus, based on 10 recent buy ratings and 3 hold ratings. Meanwhile the average analyst price target of $20 indicates 19% upside potential from current levels. Shares are currently trading down 2% year-to-date.
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