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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Pure Storage Third Quarter Fiscal Year 2022 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded.
I’d now like to introduce your host for today’s conference call, Mr. Sanjot Khurana. Mr. Khurana, please go ahead.
Thank you, and good afternoon. Welcome to the Pure Storage third quarter fiscal 2022 earnings conference call. My name is Sanjot Khurana, Vice President of Investor Relations at Pure Storage. Joining me today are our CEO Charlie Giancarlo, our CFO Kevan Krysler and our CTO Rob Lee.
Before we begin, I would like to remind you that during this call, management will make some forward-looking statements, which are subject to various risks and uncertainties. These include statements regarding the COVID-19 pandemic and related disruptions, our growth and sales prospects, competitive industry and technology trends, our strategy and its advantages, our current and future product offerings and our business and operations. Any forward-looking statements that we make are based on facts and assumptions as of today, and we undertake no obligation to update them. Our actual results may differ materially from the results forecasted, and reported results should not be considered as an indication of future performance. A discussion of some of the risks and uncertainties relating to our business is contained in our filings with the SEC, and we refer you to these public filing.
During this call, we will discuss non-GAAP measures in talking about the company’s performance and reconciliations to the most directly comparable GAAP measures are provided in our earnings press release and slides. Additionally, when we refer to the sales in our prepared remarks, we mean total bookings excluding cancelable orders. This call is being broadcast live on the Pure Storage Investor Relations website and is being recorded for playback purposes. An archive of the webcast will be available on the IR website and is the property of Pure Storage.
With that, I’ll turn the call over to our CEO, Charlie Giancarlo.
Welcome everyone. As American families and many of you get ready for Thanksgiving, all of us at Pure extend to you our Thanks for joining us today to discuss another terrific quarter. We are very pleased with our Q3 results, which demonstrate what can be achieved when great innovation and enthusiastic customer focus work together. Our Q3 revenue was up 37% year-over-year with double-digit quarter-over-quarter growth across all product lines and across both US and the international markets. We are also pleased with our strong profitability trend continuing through this fiscal year.
With a sustained and steady growth across all key regions, products and customer segments, Pure continues to take share in this large and growing market. Our strategy to deliver a modern data experience to our customers and partners continues to lead the industry with new firsts almost every quarter as we deliver on all aspects of the modern data experience.
Modernizing data infrastructure, operation and application, this quarter we announced the latest additions to our product portfolio that brings storage and applications even closer together Pure Fusion, our new software defined multi-cloud self-service storage environment is a major advance that will allow customers to better manage their data in a multi-cloud environment, while enabling developers to deploy sophisticated data storage services on demand.
We also announced Portworx Data Services, which will further allow those self-same developers to quickly deploy production grade data services on Kubernetes, together with advances and our Pure1 digital experience, Pure is enabling a cloud operating model for enterprises everywhere and engagement has been strong. Our next announcement on December 8, will push infrastructure modernization even further and extend the breadth of our FlashArray platform.
Today all of Pure’s capabilities are available as a service, we continue to see strong growth across Evergreen, Pure as a service and Portworx, which together represent a third of our revenues, Gartner has once again validated Pure’s leadership in both of their Storage Magic Quadrant, recognizing our execution and vision in primary storage and in the rapidly growing file and object market for unstructured data, given our speed and breadth of innovation, it should not be a surprise that more and more customers are purchasing the full Pure portfolio.
This quarter, the Commonwealth of Massachusetts chose a full Pure as a service solution with FlashArray and FlashDeck for block performance and capacity. FlashBlade for unified fast file and object. And our Portworx suite to containerized and modernize applications. The Commonwealth of Massachusetts said that what put Pure ahead of the competition was our ability to provide them with what they describe as a data plane as a service offering that can work with any data type provide ransomware protection and rapid recovery and scale seamlessly all delivered through an SLAs for transparency, reliability and cost effectiveness.
One of their first use cases will be to modernize an application for Massachusetts law enforcement using Pure and Portworx they will provide fast distributed access to criminal record information with no degradation even under heavy load, increasing the safety of their law enforcement personnel and the public. Pure continues to see strong adoption in the public sector, state and local governments and agencies have long been a strong segment for Pure.
I am pleased that we are seeing steady progress and traction with US federal and international governmental agencies. For instance we now have deployments in all three branches of the US federal government and three branches of the US Department of Defense. Enterprise and commercial markets continued to experience strong growth. Pure is proud to deliver our modern data experience to now more than 50% of Fortune 500 companies and almost 50% of Fortune's Global 500 list companies, which speaks to the universal appeal of our portfolio.
I will now turn briefly to two topics very much in the news and on the investor’s minds. Our global customers and prospects are beginning to appreciate the power and green advantage of Pure and by power I am not referring to IOPS or throughput, and by green I am not referring to our evergreen subscription. Simply speaking, Pure’s products use dramatically less energy and create far less waste than competitive offerings. We take this expanded scope and responsibility very seriously and look forward to publishing our first environmental, social and governance report early next calendar year, when customers learn how much our solutions reduce energy, space and waste in their environmental footprint.
Pure becomes a true partner in helping them achieve their ESG objectives. Supply chains on everyone's mind, and no company is immune to this disruption. As we have reported in the past, Pure has built a very robust supply chain based on strong, open and trusted relationships with our partners. Our strategy incorporates manufacturing and operations in multiple sites and on multiple continents to enable flexibility, resilience and global responsiveness.
This past quarter, global semiconductor availability was more challenging than last quarter, and we expect this environment to continue into next year. However, our operations team and the strong partnerships we've built with our suppliers have continued to work well, minimizing impacts to our customers and our business. Knowing that our products are helping people all over the world is incredibly motivating to our team. I am proud of how well Pure employees have innovated, executed, and delivered our modern data experience to customers, despite the continuing COVID environment and the many other challenges they may individually face.
I'd like to give a special shout out and congratulations to our new Chief Revenue Officer, Dan FitzSimons, who in his six years at Pure has risen to every challenge we've thrown at him, most recently leading our America's business to increasing excellence. Dan salivation is indicative of the deep leadership and bench strength we have across the company. Given the effectiveness of our team, the quality of our products and the strength of our customer and partner relationships, the future remains bright for Pure.
Kevan, over to you.
Thank you, Charlie and good afternoon. We are very pleased with the continued robust demand across our entire portfolio, as well as our execution delivering both strong revenue growth and operating profit during the quarter. The high demand we saw this quarter was balanced across our portfolio, key geographies and market segments.
It was evidenced by our sales growth of an incredibly strong 41%, excluding countable orders. Our sales growth this quarter also includes sales of FlashArray//C to one of the top 10 hyperscalers. Our supply chain team and suppliers continue to execute, minimizing disruptions for our customers, despite an increasingly supply constrained environment, that is dynamic. We are also pleased with the continued progress of our subscription business as subscription services revenue grew approximately 38% year-over-year.
Subscription ARR or annual recurring revenue was $788 million at the end of Q3 growing at 30% compared to last year. Subscription ARR includes the annualized value of all active subscription contracts as of the last day of the quarter, plus annualized on-demand revenue. Remaining performance obligations or RPO, which includes our committed and noncancelable future revenue, was over $1.2 billion, growing at 27%. We saw an improvement in new customer acquisition with 345 new customers representing 12% year-over-year growth. New customer acquisitions were balanced across geography, market segments and our solutions portfolio. Our total customer count has exceeded 9,500 customers, which includes over 50% of Fortune 500 companies.
Now turning to additional specific financial results for the quarter. Total revenue grew 37% to approximately $563 million. Revenue in the United States grew 35% and international revenue grew 42% compared to last year. With the strong demand this quarter, including the sale of FlashArray//C to one of the top 10 hyperscalers products, revenue was very strong, growing approximately 37%. Non-GAAP total gross margins were 68.5% this quarter. The decline in non-GAAP total gross margins, both sequentially and compared to the last year is driven by non-GAAP product gross margins, which were 66.7% in Q3. Our sales of FlashArray//C to one of the top 10 hyperscalers this quarter and to a lesser extent, increasing supply chain costs were the primary drivers we saw impacting product gross margins this quarter.
Non-GAAP subscription services margins continued to trend favorably at 72.1% this quarter. We achieved nearly $70 million of non-GAAP operating profit and 12.3% of non-GAAP operating margin this quarter. Increasing revenue growth, sales efficiency and the effects of the COVID environment contributed to our increasing profitability. We estimate that the effects of the COVID environment are approximately two points of benefit to our operating margin this quarter.
These reduced expenses generally relate to significantly reduced travel, physical marketing events and slower than planned hiring. We ended the quarter with over $1.36 billion in cash and approximately 4,000 employees. Cash flow from operations of $127 million, we're again very strong this quarter and capital expenditures were $25.7 million during the quarter.
We returned approximately 56 million of capital to repurchase slightly over 2.3 million shares. At the end of the quarter we have approximately $70 million remaining from our $200 million share repurchase program.
Now turning to Q4 guidance, we expect strong demand in Q4 with estimated revenue to be approximately $630 million, growing 25%. We also expect continued healthy profitability, with non-GAAP operating profit estimated to be approximately $90 million in Q4 representing approximately 14% non-GAAP operating margin. For the full fiscal year given the strong performance of our business in Q3 and outlook for Q4 we are also raising our annual guidance. We now expect that our revenue for FY 2022 will be $2.1 billion growing approximately 25%. Non-GAAP operating profit is estimated to be approximately $206 million representing approximately 10% non-GAAP operating margin.
In closing, our highly differentiated and innovative portfolio and services is why our customers are choosing Pure. I want to thank our entire Pure team and channel partners for continuing to deliver terrific results while navigating a dynamic environment.
With that, I will turn it over to the operator so we can get to your questions.
[Operator Instructions] Our first question is from the line of Jason Ader from William Blair.
I didn't know if you wanted me to do a dance or something.
Yeah.
Okay. So, I guess my main question is, can you rank water the main factors to driving your outperformance, I mean, obviously, this is a bit of a weird year, given that the cops are pretty easy, but yeah you guys seem to be executing really well. So maybe just macro execution, new products and then maybe competitor weakness, because we know that some of your competitors are struggling with supply, and I don't know that you think that's factoring in as well to your performance?
Yeah. Jason, thank you for the question. And first of all, I'd say that we had a hard time describing this quarter only in the sense that everything went very, very well this past quarter. So calling any one thing out really seemed to only diminish everything else that was going very well. So very, as I mentioned, very balanced across new products to be a lot longer, the longer balanced and strong growth across from our sales force, so very balanced among the sales force pretty general terms.
Obviously, as you point out, the comps are easier, but even if you were to comparison two year comps, the coming together of the investments that we've been making over the enterprise, the investments we've made in broadening out our product line to be a much to major enterprises. The fact that, we did invest in enterprise, which COVID environment, all of these have really contributed to our strength and the fact that we've continued to advance the technology contributed to our strength.
And the fact that we’ve continued to advance the technology to the extent that, even as we pointed out, hyperscalers looking to utilize us in their infrastructure, and of course, that will be lumpy business, which we saw this quarter that that added to this quarter. But, again, it's very promising for us in terms of we think all these investments will continue to pay dividends as we go forward. So does that does that?
Yeah, that's great. And then that's perfect. And Kevin, is there any early look at fiscal 2023 and how we should be thinking about both top line? And then, the operating margin, obviously, you've got some serious outperformance this year that, you just mentioned 2 points coming from kind of COVID related benefits. And you kind of just broad strokes on fiscal 2023 for us?
Yeah, Jason. And again, when we think about it from a demand lens continues to be robust. As we think about Q4, I wouldn't see a significant change in demand as we look beyond Q4. Now, with that being said, it's probably a bit early to get specific views, as you mentioned for next year, I would like to see how the remainder of this year plays out with our guide that is reflecting continued strength in Q4. A couple of call-outs when we do think about next year.
Look, these terrific growth rates that Charlie mentioned for all the great reasons, but are also aided as well by the COVID environment, so we do need to take that into account. And then obviously, the hyperscalers opportunity that's being reflected in this quarter is a consideration as well when we think about when we think about next year. But hopefully that's helpful, Jason.
Your next question comes from the line of Aaron Rakers with Wells Fargo.
Yeah. Thanks for taking the question. I guess, I kind of build off that last point can you help us [indiscernible] how meaningful that cloud opportunity was this last quarter? I think last quarter you talked about an eight figure deal, did that all impact this last quarter, is there any expectation of a follow-on for cloud opportunities and you may be in that same vein, can you talk about, I think recently announced a relationship or a deal with Microsoft Azure for EDA, was that the cloud relationship or is that something separate from your opportunities and I have a follow-up.
Right okay Aaron, so first of all, no the EDA announcement was separate from the top 10 hyperscaler obviously if we felt we could have announced it, we certainly would have. But the customer is - wants to keep this confidential, so we certainly respect that on the hyperscaler. But the EDA one is one that – yes we work very closely with Microsoft to develop it where customers want it to have very high speed performance on EDA workloads that it's not necessarily restricted or we don't believe that the architecture is restricted to EDA workloads, but we think that it's something that's going to scale well for us. So we're looking forward to that but the hyperscaler was different. I'll let Kevin respond with how we've given you some insight into how the hyperscale affected the quarter.
Yeah I mean it’s not that different than how we were talking about it last quarter as part of our guide. But hey if you think about with the quarter being completed, if we were to exclude the hyperscaler opportunity that came through this quarter, our year-over-year growth would more likely be in the high 20s is a good way to be thinking about it.
Okay. And that's helpful. And just so I understand there's nothing embedded in this quarter from a hyperscale top 10 win. We announced the wind last quarter, but we booked it and fulfilled it this quarter. So this – that is in Q3.
Yeah.
Yeah. And then as the quick follow up, I'm just curious on gross margin. I know you talked about the hyperscale deal impacting gross margin, but product gross margin, cost headwinds and stuff, do we think that those, start to abate? Do you feel comfortable still that that 70% plus gross margin that you outlined at the Analyst Day is achievable and how should we think about that in the next couple of quarters? Thank you.
Yeah. That sounds great. In that gross margin, I think on the 70% was more akin to the subscription, our subscription business. But hey, when we think about it from a product gross margin or total perspective we look the largest driver really this quarter was the hyperscale or opportunity did have some headwinds, obviously with the increasing component, costs that we saw in the quarter, but that would be a much lower driver, if you will, in terms of what we saw in the sequential and year-over-year drop in the product gross margins. And hey, when I think about looking into the Q4, I do expect our product gross margins were normalize back to what we typically see in the high 60s is a good way to think about it. And that's even obviously considering the cost increases that we're contemplating.
Your next question comes from the line of Simon Leopold with Raymond James.
Thanks. Appreciate you guys taking the question. I wanted to [indiscernible] where you are in terms of the [indiscernible] the field software product revenue or contribution within the mix, so I know Pure Fusion is new, but [indiscernible] has been around [indiscernible]
Well, Simon, as. As you probably know, especially on new products as they grow, not to break them out I find that new products go through their own cycles. They tend to be they tend to be lumpy. And then you have too much focus on the new on the total revenue line. But what I would say is that, we gave color last quarter, on Portworx as well as Pure as-a-Service. In the three digit percentage range on a year-over-year, I would say, in terms of a breakup [Technical Difficulty] in the future.
Yeah, that's right, Simon. [indiscernible] Solutions that we're delivering [indiscernible] you with our software that's part of that, and that's reflected in the gross margins we're seeing both on subscription and out on subscription ARR year-over-year, so pleased with [indiscernible] the software is [indiscernible] as we look at our growth numbers.
Thanks. So just as a follow-up, I wanted to see if maybe you could unpack a bit about the use case for this hyperscaler and what I'm really trying to get at in this question is an understanding of if this is a repeatable opportunity, a repeatable opportunity, either with this customer or other customers. I'm looking for an undertaking [indiscernible] we should think of this as a new to make it grow for…
You're right. Thanks, Simon. So I mean I think also Erin might have referred to this early on, and
Right. Thanks, Simon. I think also Aaron might have referred to this early on I – and we didn't respond to it specifically. So I just want to start off where with this particular hyperscaler, we do believe it's repeatable. No reason for us not to believe that it's repeatable and conversations continue. But let me let Rob weigh in on the general use case.
Yeah. So as far as the use case, this is part of their production environment. It's an environment that and they're using this environment to essentially do analysis and an understanding of how to better deliver the hyperscaler service. So it is part of the production environment.
I think as far as repeatability and understanding, it’s just the broad applicability of the use case. I think what's notable is the overall size and capacities that we're talking about here, the performance requirement. And the fact that this, is a very sophisticated customer evaluated all the options available to them. Obviously, cost was a part of the equation. And so obviously with a disk, but pretty quickly came to the conclusion that FlashArray//C was really the only option, but that was going to solve the balance of their needs, performance, price, footprints and so forth.
And I think it's also worth noting that the overall footprint savings was a key part of winning the initial deal. But we're now also undergoing, work with this same customer to quantify the environmental savings and benefits that we're delivering to them with a FlashArray//C solution as part of their ESG analysis. The nice thing is that these are all benefits that we're able to deliver to each and every one of our customers.
Operator
Your next question comes from the line of Rod Hall with Goldman Sachs.
Hey. Thanks for taking my [indiscernible] I just want a quick clarification that this campaign from probably this year seems to indicate that there could be an extra week in fiscal Q4 but I might be wrong, but I just wanted to double check.
Spot on yeah. For this -- for Q4 as we contemplate Q4 we do have an additional week with our fiscal year and that is contemplated both from a revenue side and an OpEx side. The revenue and OpEx is about equal so I view it as a bit of a headwind for us in terms of profitability. Probably around $14 million, $15 million, both on the revenue in the OpEx side is a good way to be thinking about it in terms of the additional week.
Got you. Very helpful and then I have a follow-up. So I just want to double check on this chartered fee, hyperscale roadmap. Now [indiscernible] hyperscale of digital model is obviously but I just had one thing do you feel more potential hyperscale customers traction about going forward are we having more accommodation for the players or anyone who is actually might be evaluating asset fee any color on that roadmap there would be very helpful.
Yeah. Well, first of all, we believe very strongly that as flash continues to decline relatively to the declines in magnetic disk, that there's inevitably going to be a crossover point where every player everywhere including the hyperscalers will start switching from disk to flash. And it's just -- it's just a matter of time and their particular use case or instance before that happens.
We do have the best technology in the business. We are having multiple conversations with multiple parties. I think it's too early to -- the issue with these large environments is that they're lumpy, uncertain when they do come they're big, when they don't come you're waiting. So I think it's a little too early for us to speculate on it. But there are conversations and it is and we believe that is just a matter of time before flash is used in a more substantial way. All right. Let's say in a mainstream way in the hyperscale environment.
Thank you, Charlie. And I think [indiscernible] revenues are finally assuming any revenues in fiscal Q4 from that hyperscale?
We are not expecting revenues from that particular hyperscale in Q4. We shifted all at that point. Well, I'm sorry. Okay. There's some residual revenue for it in Q4, but for the most part, no.
Your next question comes from the line of Steve Enders with KeyBanc.
Okay. Great. Thanks for taking the question. I just want to talk a little bit more on the guide pretty strong revenue that you're expecting to see there. But just kind of wondering kind of what's built into the assumptions within that guide and how should we be thinking about kind of how the macro environment has played out over the past 90 days? That's leading to the ways [indiscernible] guide here?
Well, let me start and then I'll let Kevin go into it. It's based on what we see in the market today in the performance that we had in Q3. We're certainly not – we're not contemplating any major changes to the current direction of the world economy. So the expectation is generally more of the same in terms of macroeconomic forces. We're expecting COVID to continue probably if you've been watching the news and watching the figures, it's having a seasonal effect.
So seasonally it will get a bit worse, but we're not expecting that to make have a major change to in our expectations what business will - how business will perform this coming quarter, what we see is the strong demand and we believe that strong demand is based on fundamentals - fundamental demand, we don't think it's - we don't think that at least for our market, there's a lot of [indiscernible] demand out there and our lead times have stayed relatively low, our customers know that so they can order when they need it, not when not to gain the system.
Yeah and Steve I probably wouldn't have much more to add on that, I think as we've got good visibility in terms of how we're looking at Q4 to Charlie's point, demand still is robust in terms of what we're looking at. No, no real change in the trajectory understanding that there's a little bit more in terms of what we're seeing on a wave of COVID on the European front. But again, I don't think those will be meaningful drivers as we think about Q4.
Okay great, that's helpful, and then just on just on the hiring environment, it seems like, it might have been a little bit behind plan in the quarter. But is there kind of anything to call out there in terms of where the biggest challenges are and when you kind of see that - see that beginning to reverse?
Yeah, I would say that the - being a bit behind in hiring is across the board, there's no one - let's say, function that stands out to put some context on it, we're seeing somewhat slightly higher attrition than average years, certainly a lot more than last year, last year was very low by comparison to an average year, this this year is a bit higher I would say that recruiting, interestingly is the quality - the quality of resumes that one can bring on for interviews now lot of lots of blocks that we need to fill. But we’re confident we’ll be able to catch up?
Yeah. And I would just add on to that, that we are seeing a nice pick-up in terms of a hiring cadence. Thanks to our talent acquisition team, doing a nice job on that front. And that's been contemplated obviously in the Q4 guide as you'll see a pick-up in OpEx sequentially. And that's not only the additional week, but also contemplates the pick-up and pace that we're seeing and hiring talent as well.
Okay. Perfect. Thanks. Thanks for taking the questions.
Your next question comes from the line of Wamsi Mohan with Bank of America.
Hi. Thank you for taking my question. This is John on behalf of Wamsi. My first question. So you've mentioned about the supply chain constraint headwind face the quarter. I was just wondering if you could maybe quantify the impact from a hospital revenue standpoint…
Yes.
…as I just wanted to confirmed the guide reflects the supply chain uncertainty. Thanks.
Yeah. Maybe what I'll do is talk just more tactically in terms of the impact for the quarter and then maybe have Charlie just talk about it more from, from a holistic standpoint. Because I think the operations team and our engineering team as well as our suppliers continue to do a terrific job. And look, when I look at it for the quarter, obviously you saw a drop in product gross margins both sequentially and year-over-year.
As I mentioned, a smaller piece of that is really due to the component cost increases that we saw during the quarter. That was moderated slightly by the fact that, that our ASPs are still quite stable and were quite competitive in the marketplace. So with that, I'll turn it over to Charlie to give some more a holistic macro comments.
On the macro side, yeah, we see all, all costs associated with the supply chain. So all costs associated with the supply chain, so component transformation and logistics costs all have increased on an annual basis we think on the order of approximately 10%. So that's a significant cost increase and in what is traditionally a deflationary market for technology products. So quite significant.
Our expectation at this point is that while supply chains will remain tight we're expecting to not see the same kind of increases in costs going into next year. Now it is as Kevin said a very dynamic market on a quarter-by-quarter basis things can change dramatically because both supply and demand are a little bit difficult to predict and that causes swings in pricing. So as Kevin mentioned it's a very dynamic market and it's hard to get a complete story or it's hard to have complete confidence in exactly where it will go.
Great. Got it. Thank you. And as a quick follow-up I was just wondering how the broader IT spending environment is tracking, particularly in storage? And if you have any trends that you would call out? Thank you.
Yeah. On the enterprise side it's been quite robust. So we think quite good, a lot of demand, a lot more data processing are taking place and upgrading. So we've seen it a quite strong commercial. Wallace recovering is recovering slowly. I would say that in general that's probably still down from where it might have been without COVID. And we're looking forward to continue a recovery there. But I would think overall the demand for enterprise storage actually has been quite good.
Got it. Thank you.
Your next question comes from the line of Tim Long with Barclays.
Thank you. Maybe Charlie if you can talk a little bit or Kevin if you want to chime in, just obviously a good margin performance in the quarter. Just curious how I know you don’t want to get into too much of next year but going to be a lot of moving parts, I guess, with some of the benefits becoming offsets with return to work and things like that.
So kind of how are we thinking about leverage over the next year or two in the model? And then second, I wanted to just go back to the sort the hyperscale and FlashArray//C if I could, it looks like the pricing resulted in a much lower gross margin for that business. Just curious, how is that pricing said? Is it somewhat that you had to get close to disk? Is that kind of what the bogey is going to be for all hyperscale deals or will that be different and -- or potentially is it, maybe a tougher margin up front and then on repeat business, it's a little bit better. So if you can just talk about kind of the dynamics around pricing and potential movements there. Thank you.
Yeah. I don't want to get too far ahead of next year and we'll certainly have a better view of this as we -- when we get into our Q4 earnings call and projection for next year. What I would say is we're planning that we'll still be under COVID rules through certainly Q1 and probably most of Q2 and then as we get into the summer that's when we think we will start seeing customers being open to visits and therefore open up more travel and normal expense type category in-person meetings for some of the things we do as well.
So that's -- we'll see about a half a year of a return to more investment and so I think what you're going to see is a gradual gradual easing into those additional expenses, at the same time, we expect there to be, as you saw during this, even the Coventry or more didn't really change all that all that much. But we have been improving our execution in terms of productivity. Certainly in our sales and marketing organization and we think increasingly over time in our engineering organization and so we’re expecting to see more leverage really on a continuous basis as we go forward based on - based on greater productivity in the organization and that's largely based on scale.
Yeah and I'll just chime in a little bit more on that and then we can move to the hyperscaler topic. But the when we think about the full fiscal year with our guide for Q4 which puts us around 10% non-GAAP operating margin, we're thinking about two to three points of that is tailwind from some COVID related aspects, whether that's less travel, whether that's less physical events from a marketing standpoint or from a hiring standpoint and obviously we're seeing a nice pace, an uptick on hiring.
We expect that to continue and so when I think about next year and it's still too early to get too specific. But I would expect this to continue to gain more leverage, when you kind of exclude the tailwinds we're seeing from COVID [indiscernible] some nice roadmap in terms of how we're thinking about that.
Right on fee, I’ll go back to that. On fee, we expect that a large portion of C sales to this hyperscaler, but also potentially others will be replacing if not replacing, usually it goes into new builds, but the new builds would be for them to look at flash rather than disk and so they'll be comparing the price to their existing disk design And as such, the early wins will probably be, lower margin but will improve over time both as flash costs improve, but frankly as they gain more experience with Pure as a provider.
Your last question comes from the line of Karl Ackerman with Cowen.
Yes. Thank you. Good afternoon, gentlemen. Kevin, I – two questions, please. First one for Kevin. Mostly upside this quarter came from product revenue. That's quite impressive given the ongoing supply chain constraints you’ve mentioned. I'm curious whether the upper the revised outlook for January is also driven primarily by product revenue, particularly given your planned expansion of your FlashArray platform that you highlighted in your prepared remarks. If you could comment on that would be helpful?
Yeah. And I guess my view on this, and I'll let Charlie and Rob add some, some commentary as well, as yeah, absolutely. We've gotten great momentum fueled by high demand across our portfolio, which is that translates to the growth rates you're seeing in product revenue. But obviously, we're also seeing good traction with our subscription business, 30% growth in our subscription ARR and obviously that's going to have a lag before that works its way to the P&L.
But this comes back to how balanced the demand and strength is that we're seeing across the board, whether that's specific to our subscription business or whether that's specific to sales of our solution. So that that's really the storyline here is the balance strength that we're seeing across the board. Charlie or Rob any other points you'd add on that front.
I think that answers that. Kevin, I think what you're seeing is strong demand for our products regardless of strong demand for our products, regardless of capital and/or subscription base. Of course, we always want to allow the customer to buy in the way in which they want to provide or want to buy rather. But we're expecting – I would say we're expecting this quarter and this Q4 to be balanced as well.
So we are seeing just to be clear, we're seeing good growth in terms of service and obviously the way that works from given that’s ratable, that starts off slow. So you don't see it, quite as readily. But again, I expect it to be balanced going into this quarter.
That's helpful. Thank you. I guess as my follow up, do you want to touch on margins a little bit. It seems that the entire upside in your revenue outlook for January is falling directly to operating income, which is quite impressive. Now that is quite impressive in now operating margins are in line with your long term outlook.
On one hand, it seems you're benefiting from volume leverage and the other release offsetting these rising input costs through pricing actions. So in that vein, could you discuss the ability to perhaps further pass on rising input costs as they happen? And secondarily, how you see margins improving or may improve as subscription revenue becomes a larger piece of revenue next year? Thank you.
Yeah. Well, as we've said in the past, we don't specifically – we don't price on a cost plus basis. We price based on competition in the market. One of the unique things about this market is that nearly every new opportunity, even in an existing customer is newly negotiated with other with competitors. And as such, we're responding primarily to the pricing of our competitors rather than let's say a standardized discount for that customer.
Many of our competitors do operate on a cost plus basis. And so with the rising costs that exists in the market that finds its way into the price negotiation. So because of that we do expect that for the most part ASPs and costs we expect relatively stable margins. It'll vary based on mix obviously the hyperscaler deal. But for the most part we think it'll stay relatively stable regardless of costs.
Now part of the mix as well is in fact as you point out the subscription offerings. We expect long-term that those subscription offerings because they will have higher value we’ll be providing more services in the subscription offerings than we do in the straightforward capital sale. And as such we expect those margins to be significantly over time to be above ours are reported our standard reported margins.
Yeah. And just to be clear Karl D. here our view on the subscription margins it really hasn't changed since our Analyst Day and our communication and expectations on that. But to the Charlie's point with the growth of Portworx and then as we scale our Pure as-a-Service offering with cloud block store that clearly is going to give us some tailwinds as we think about it longer term for a subscription at our gross margins.
Shorter term to your point – yeah we are very much pleased with what we're seeing in terms of increased profitability even considering the tailwind from COVID. So we like what we're seeing we'll definitely still trade and prioritize growth but we very much of have the belief that we can drive that growth and increase the operating leverage as well.
This concludes the question-and-answer session. At this time, I'll turn the call back over to Charlie Giancarlo for closing remarks.
Thank you, operator. Pure has been preparing for this next phase of our growth for several years, building breadth in our product line, developing operational excellence in our functions, industry partnerships and vendor relationships, and most importantly, building trust and excitement with our customers.
I want to thank our investors and our employees for their trust and their patience. I'm grateful for all the effort and creativity of our Pure team. And as I sit down to my own family's meal on Thursday, I'll certainly offer gratitude and thanks for everyone past and present that is nature what it is today. Thank you all for your attention and your questions, and I wish you all a happy Thanksgiving.
This concludes today's conference call. You may now disconnect.