Mark Gritter (markgritter) wrote,
Mark Gritter

Speaking of comparables

Pure Storage filed their form S-1 in preparation for an IPO. It contains a few surprises.

The one most remarked upon is that Pure's market share is not quite what it was believed to be. Gartner estimated calendar year 2014 revenue of $276 million, while Pure reported fiscal year 2014 (offset by one month) revenue of $155m. The difference for 2013 was also large, on the order of $75m.

The Gartner analyst has apologized for his company's error. Pure, having entered their quiet period, cannot explain why they decided to let Gartner's mistake pass (they, like other companies Gartner covers, are given an opportunity to correct factual errors.) I haven't worked in analyst relations--- perhaps letting Gartner make errors is standard practice. Certainly I can understand if Pure decided keeping revenue numbers private outweighed getting an accurate representation in Gartner's market share breakdown.

Pure is proposing a dual class stock structure in which existing investors keep control of the company (their class B shares will have 10x the voting rights of the new class A common stock.) Opinions vary on the wisdom of this. I think it's something the market doesn't care about if your company is successful, and cares a lot about if things don't look bright. It's a little arrogant to assume that Pure is in the former category, but that has been Pure's marketing image from day one. :)

Something I *haven't* seen discussed elsewhere is the large payouts to the executive team (and early investors) in the form of stock repurchases.

In November 2013, we repurchased an aggregate of 3,045,634 shares of our outstanding Class B common stock at a purchase price of $6.9315 per share for an aggregate purchase price of $21.1 million, of which 557,842 shares of common stock were repurchased from David Hatfield, our President, for an aggregate price of $3.9 million. Mr. Hatfield was the only executive officer to participate in this tender offer.

In July 2014, we repurchased an aggregate of 3,803,336 shares of our outstanding Class B common stock at a purchase price of $15.7259 per share for an aggregate purchase price of $59.8 million. The following table summarizes our repurchases of common stock from our directors and executive officers in this tender offer.

Name Shares of Common Stock Purchase Price

Scott Dietzen(1) 192,051 $ 3,020,174

John Colgrove(2) 200,000 3,145,180

David Hatfield(3) 1,000,000 15,725,900

(1) Dr. Dietzen is our Chief Executive Officer and a member of our board of directors.
(2) Mr. Colgrove is our Chief Technology Officer and a member of our board of directors.
(3) Mr. Hatfield is our President.

In April 2014, Pure raised $225m. But $60m of that went right back out the door to existing stockholders. (In August 2013, Pure raised $150m, with $21m flowing back out.) Some of this outflow is mitigated by the exercise of stock options.

I can't speak to these individuals' financial situation and whether it made sense from a personal position for them to cash out. But from a company position, this seems excessive compensation for a company that hasn't yet proved itself. Together the three executives took $25.8m in cash out of the company (not counting any salary or bonuses) In all three cases, they were also loaned money by the company in order to purchase stock or exercise options, and these loans have been repaid, presumably with the proceeds from the stock buyback.

Finally, Pure is growing its revenue rapidly (although, as noted, not as rapidly as had been previously believed--- and EMC is all over it.) But it's losing a lot of money too. Net cash flow from operations in the most recent quarter was -$14m, and an extra -$6.7 in investment cash flow (including capital investment). That's not too bad, although the reported loss was more than $49m. Somebody more versed in accounting than me can probably explain out how they managed to pay that much operational cost without a corresponding drop in cash? (It's in there, depreciation and stock-based compensation and such.) For the fiscal year ending January 2015 they burned through $196m.

In fiscal 2015, Pure spent about $1 in sales and marketing for every $1 in product revenue: $154,836,000 in product sales (not counting support) and $152,320,000 sales and marketing (not counting any G&A or R&D.) EMC will hammer them for this too. It's a "get big fast" strategy which spends a lot of money every quarter trying to make the next quarter's sales even bigger. You can see this when you slice the data quarter by quarter:

4Q2015 sales and marketing: $42,533K
1Q2016 revenue: $74,077K

3Q2015 sales and marketing: $38,224K
4Q2015 revenue: $65,850K

2Q2015 sales and marketing: $46,448K
3Q2015 revenue: $49,189K

1Q2015 sales and marketing: $25,115K
2Q2015 revenue: $34,764K

This may be correct, but it's an expensive strategy and one that doesn't leave a lot of room for error. The return they're getting on a sales and marketing dollar is not consistently high.
Tags: finance, startup
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