Pure Storage's Aggressive FY2018 Guidance Looks Worrisome

| About: Pure Storage (PSTG)


Company reports Q4 results modestly above expectations.

Very weak Q1 guidance due to an increase in new customers and more pronounced seasonality.

Fiscal year 2018 guidance appears aggressive.

Management's explanations on the call not overly convincing.

Valuation looks cheap but risk profile has increased substantially.

Pure Storage (NYSE:PSTG) just reported its Q4/FY2017 results and largely continued its recent streak of modest beats on both the top and bottom line relative to analysts' expectations amidst record new customer additions.

Moreover, the company provided initial FY2018 guidance very much in line with the street's current estimates and even projected sustained positive cash flows to be achieved in the second half of the fiscal year.

Picture: Pure Storage "FlashBlade" Blade - Source: Company Website

But it was, in fact, the company's strikingly weak Q1 guidance that caught my attention as management guided revenues 15% below the current consensus estimate of $204 mln and operating margin to a whopping negative 25%.

On the call, management spent a lot of time explaining the reasons behind the poor Q1 guide and even more time to reassure analysts and investors about the company's ability to deliver the sizeable ramp up in revenues and earnings required in subsequent quarters to live up to full year guidance.

Management specifically stated the following characteristics influencing the Q1 guide:

  • moderating overall revenue growth causing greater seasonality in the business
  • record number of new customers added in Q4/FY2017 which usually start with smaller deployments leading to a lower bookings number
  • expectations for a sizeable ramp-up of the company's new FlashBlade product over the course of FY2018

Asked by analysts about their optimism to achieve the required, sizeable increase in growth rates beyond Q1, management pointed to the following:

  • increased salesforce with expectations for strong productivity levels
  • FlashBlade product sales already performing above the required growth levels
  • strong repeat order patterns from existing customers

Frankly speaking, I was less than impressed with management's statements and, judging by the sheer number of questions centering around the full year guide on the call, analysts weren't entirely satisfied with the explanations provided to them, either.

Moreover, the projected, substantial moderation of growth in the company's main FlashArray product line obviously raised some eyebrows among analysts as well as the fact, that competitors like DELL/EMC are already on the market with offerings similar to Pure Storage's new FlashBlade product.

Accordingly, I see substantial risk for Pure Storage to miss its aggressive FY2018 targets by a wide margin with a good chance for the issue to become evident already in the company's Q1 report three months from now.

That said, I still expect the financial community to give Pure Storage the benefit of the doubt for now, due to its mostly good execution history and an inexpensive valuation at just 1.5x projected FY2018 sales adjusted for the company's strong cash balance of almost $550 million.

Personally, I am looking for analysts to largely affirm their views on the company tomorrow morning with my expectations for the stock to open only modestly in the red. In this case, I will be looking to establish a short position, as I could envision some of the company's larger, institutional holders to reassess their investment thesis in light of the increased risk for a substantial downward revision to revenues and earnings projections going forward.

As a daytrader, I will most likely cover the position at session end at the latest point regardless of the outcome but might very well revisit the stock going into the company's Q1/FY2018 earnings release.

Bottom line:

Pure Storage's weak Q1 guidance substantially increases the risk for the company to fall well short of seemingly aggressive FY2018 targets. For now, I do expect analysts to largely give the company the benefit of the doubt but will nevertheless look to enter a daytrade on the short side tomorrow.

Should the company indeed be forced to revise expectations going forward, the stock will easily crater to new, all-time lows.

Given the heightened risk profile, I would advise investors to sell their shares despite the inexpensive valuation.

I will revisit the stock on the short side going into the company's Q1/FY2018 earnings release.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in PSTG over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Busted Growth, Earnings, Short
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