Pure Storage's Small Q1 Beat 'Not A Thesis Changer'

Although Pure Storage Inc PSTG reported a beat quarter for 1Q, while raising its guidance for 2Q, Morgan Stanley’s Katy L. Huberty pointed out that the beat was lower than expected.

Huberty maintained an Overweight rating on the company, while lowering the price target from $25 to $23.

Beat Results

The analyst mentioned that Pure Storage’s customer growth doubled during 1Q, as compared to the previous quarter, even before the scheduled shipment of FlashBlade in 2H17.

Although revenue beat the estimate by 2 percent, lower than the beat of 10-16 percent seen in recent quarters, Huberty does not see this as a significant slowing of momentum.

Seasonality Effect

“While the company didn't point to any pressures in the quarter, we note that C1Q is always a slower period of IT spend, especially so this year,” the analyst stated.

Huberty also believes that Pure Storage’s strategy to front-end load its new sales hires might further aggravate the weak seasonality in 1Q.

“With gross margins 70bps above our model and potential for incremental sales as FlashBlade launches in F2H17, our thesis of Pure continuing to lead the all flash storage transition appears intact,” Huberty pointed out.

Free Cash Flow

The 1Q free cash flow came in ahead of the estimate, with Pure Storage generating positive cash flow from operations for the second consecutive quarter.

“Management expects strong cash flow trends in F2H17 due to seasonality and expects to hit sustainable positive FCF in the second half of calendar 2017,” the analyst added.