SentinelOne Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 31, 2023

There are 15 speakers on the call.

Operator

Good afternoon. Thank you for attending today's SentinelOne Q2 Fiscal Year 'twenty four Earnings Conference Call. My name is Cole, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad.

Operator

I would now like to turn the conference over to our host, Doug Clark. Please go ahead.

Speaker 1

Good afternoon, everyone, and welcome to SentinelOne's earnings call for the Q2 Fiscal year 'twenty four ended July 31. With us today are Tomer Weingarten, CEO and Dave Bernhardt, CFO. Our press release and a shareholder letter were issued earlier today and are posted on the Investor Relations section of our website. This call is being broadcast live via webcast and an audio replay will be available on our website after the call concludes. Before we begin, I would like to remind you that during today's Call, we'll be making forward looking statements about future events and financial performance, including our guidance for the 3rd fiscal quarter and full fiscal year 'twenty four as well as long term financial targets.

Speaker 1

We caution you that such statements reflect our best judgment based on factors currently known to us and that our actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, in particular, our annual report on Form 10 ks and our quarterly reports on Form 10 Q. These documents contain and identify important risk factors and other information that may cause our actual results to differ materially from those contained in our forward looking statements. Any forward looking statements made during this call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information.

Speaker 1

Except as required by law, we assume no obligation to update these forward looking statements publicly or to update the reasons actual results could differ materially from those anticipated in the forward looking statements even if new information becomes available in the future. During this call, we will discuss non GAAP financial measures unless otherwise stated. These non GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non GAAP results is provided in today's press release and in our shareholder letter. These non GAAP measures are not intended to be a substitute for our GAAP results.

Speaker 1

Our financial outlook excludes stock based compensation expense, employer payroll tax on employee stock transactions, Amortization expense of acquired intangible assets, acquisition related compensation costs, restructuring charges and gains on strategic investments, which cannot be determined at this time and are therefore not reconciled in today's press release. And with that, let me turn the call over to Tomer Weingarten, CEO of SentinelOne.

Speaker 2

Good afternoon, everyone, and thank you for joining our fiscal second quarter earnings call. We reported Strong second quarter results and exceeded our expectations on all key metrics, including ARR revenue, gross margin and operating margin. We're also raising our outlook for revenue and margins for the fiscal year 2024. I'm proud of the resilience, dedication and execution of our teams. Our performance also reflects the progress we're making towards enhancing business processes, operations and cost discipline.

Speaker 2

We pioneered the world's 1st purpose built AI powered cybersecurity platform to deliver autonomous defense for the enterprise. We introduced the industry to the 1st ever autonomous AI agent with a fully integrated data and security platform and self healing capabilities. We've established a novel and transformative approach to cybersecurity, a unified data and security platform across attack vectors. Once again, we're leading the industry by incorporating generative AI into cybersecurity through Purple AI, supercharging security operations. Superior technology is the foundation of how we help our partners and our customers build more resilient enterprises with streamlined operations, Less product complexity, best in class security and a leading return on investment.

Speaker 2

Our competitive success is a direct result of our innovation and technology leadership. We're in the early innings of taking market share and mind share of a massive $100,000,000,000 addressable market ripe for disruption. As always, please read our shareholder letter published on the Investor Relations website, which provides more detail. Let's review the details of our 2nd quarter performance, which exceeded our top and bottom line expectations. Our ARR grew by 47% year over year to $612,000,000 reflecting net new ARR of $49,000,000 in the quarter.

Speaker 2

Our gross margin reached a new record of 77%. Since our IPO just 2 years ago, we've expanded our gross margin by more than 20 percentage points. We're now operating within our long term gross margin target range. This important achievement reflects the scalability of our business model driven by our strong unit economics and price discipline. We're making significant progress in improving our operating and free cash flow margins.

Speaker 2

We proactively streamlined our cost structure to ensure our path to profitability. Our operating margin expanded by 34 percentage points driven by higher scale and cost discipline. We've delivered margin improvement at a staggering pace. Q2 marked our 8th consecutive quarter of more than 25 percentage points of year over year operating margin expansion. Let me also highlight the remarkable improvement we've made to our free cash flow profile, delivering 55 percentage points of expansion compared to just a year ago.

Speaker 2

The level of margin improvement we're delivering is a rarity among public companies. With strong liquidity of more than $1,000,000,000 in cash and equivalents, We will build on this progress. We're confident in achieving positive free cash flow in the second half of our next fiscal year. Looking beyond key financial metrics, our competitive differentiation and superior platform value is resonating with customers. We continue to win in a significant majority of competitive evaluations.

Speaker 2

Our win rates remain strong, including against large next gen competitors. Our single platform architecture helps enterprises consolidate spend for products and consoles. We're addressing the most important needs to enterprises, Reducing complexity, streamlining operating efficiency and delivering better security all through AI and automation. I'm especially pleased with the positive feedback from our customers. As captured by Gartner Peer Insights, hundreds of customers provided favorable feedback on the Singularity platform.

Speaker 2

We achieved top tier ranking not only in EDR, but also in MDR and cloud workload protection categories, outperforming even the largest vendors in the space. As evidenced by these results, our technology delivers on our promise to our customers. In Q2, we added about 700 new customers and our total customer base now exceeds 11,000. Remember that this number does not include the customers served by our MSP partners. So it is understated, especially as more enterprises turn to MSPs for managed security services.

Speaker 2

Customers with more than $100,000 in ARR grew 37% year over year, much faster than our total customer growth. And customers with more than $1,000,000 in ARR grew even faster. Our momentum with large enterprises and platform adoption continues to drive Higher ARR per customer. In Q2, we secured many large customer wins across U. S.

Speaker 2

Federal agencies to global healthcare companies and technology pioneers, spending both endpoint and cloud footprints. Our singular key platform helps enterprises simplify cybersecurity by consolidating multiple vendors In this jointed platforms, let me highlight 2 examples. 1st, a large enterprise selected our unified platform to replace a total 7 different security vendors, including the 2 largest endpoint vendors. The security team at this enterprise was grappling with the challenge of managing multiple solutions and consoles. Following hands on experience, the customer selected our Singularity platform for EDR with 5 additional modules.

Speaker 2

Through autonomous protection in a single console, we deliver better security and superior customer experience. In another multimillion dollar win from the quarter, the global healthcare enterprise selected SentinelOne's unified platform to integrate multiple security ecosystem products and bring them together replacing the closed garden approach of their incumbent vendor. The customer valued Central One's open platform that unites security data and actions future proofing their enterprise security posture. Our platform approach continues to be a source of growth through expansion driving a net retention rate of more than 115%. As a reminder, our NRR now includes legacy products from the acquisition of Ativo Networks a year ago.

Speaker 2

The inclusion of Ativo and macro driven budgetary constraints are impacting our near term expansion rate. We believe this is temporary. Over the long term, we see significant platform expansion potential based on high customer retention rates, expanding product categories and early stage adoption from our installed base. Our NRR expansion was driven by continued license and module adoption. Singularity Cloud remained our fastest growing solution in Q2 followed by strong contributions from Singularity Data Lake, vigilance MDR and Ranger.

Speaker 2

Overall, module adoption remains a meaningful opportunity for growth and we're beginning to see opportunities for large security data deals Another massive market opportunity that is ripe for disruption. Our platform solutions beyond endpoint continue to drive more than a third of our quarterly bookings in Q2 illustrating the diversity of our business mix onto our partner ecosystem. We achieved another quarter of standout growth with our MSSP partners in Q2. Businesses are increasingly turning to managed security to elevate protection, address cybersecurity talent shortages and better align cost structures. Despite recent macro related industry headwinds, the demand for managed security remains strong.

Speaker 2

Our large partners continue to expand their business with SentinelOne through additional licenses and modules. In a multimillion dollar deal from the quarter, We quadrupled our business with a fast growing MSSP partner compared to just a year ago. From the beginning, we've built our business by enabling our partners instead of competing with them. Our differentiated platform capabilities such as multi tenancy, automation and remote management makes SentinelOne a foundational platform for MSSPs who are building their practices on top of our technology. 1 of our strategic partners, Pax8, recently recognized SentinelOne's significant impact with its PAX8 Most Valuable Vendor Award.

Speaker 2

We're still in the early innings of a massive business expansion opportunity with our MSP partners. Overall, our quarterly performance reflects strong execution by our teams. Our proactive efforts to enhance operational efficiencies are showing measurable improvements. We've expedited our deal closed processes and cash collections, all while growing the average deal size. Over the last few years, our product portfolio has evolved from endpoint to a broad security platform covering endpoint, cloud identity and data.

Speaker 2

Similarly, our go to market framework is evolving towards the full enterprise wide security platform. The actions we've undertaken are yielding positive results that there's always more work to be done. As we continue our journey towards surpassing $1,000,000,000 in ARR and achieving profitability, Our focus remains on continuously sharpening our execution from training and enablement to support and services. We're in a terrific position to disrupt the $100,000,000,000 And we're raising our full year growth and margin guidance to reflect a stronger outlook and better execution. Let's turn the discussion to the market environment and the wave of secular tailwinds behind cybersecurity.

Speaker 2

Global macroeconomic conditions and the broader demand environment remained consistent with the trends we discussed last quarter. Enterprises continue to right size their security investments based on near term budget constraints. We've seen a proliferation of cyber incidents, new software vulnerabilities and an uptick in the use of AI based attack methods. The evolving cyber threat landscape and sophistication of modern attacks have exposed the shortcomings of key cybersecurity vendors and reinforced the structural importance with AI powered autonomous scalable security. In a recent cyber incident linked to China, attackers gained access to user authentications, opening the door to a range of Microsoft applications and services.

Speaker 2

In addition to the vulnerability Microsoft Defender couldn't defend, The hackers were able to use the stolen keys to access government and corporate accounts. It's no surprise. Microsoft solutions are known to be riddled with vulnerabilities, which are accompanied by cybersecurity that has been repeatedly breached. Lawmakers and security experts are questioning the significant shortcomings of Microsoft cybersecurity and are asking for an investigation into the company's security practices. Numerous incidents such as this underscore that inadequate and legacy security solutions are exposing enterprises to enormous costs, business disruptions and brand reputation concerns.

Speaker 2

Increasingly, Cybersecurity is an executive and board level priority as governments begin to require high level of oversight and disclosure. The U. S. Securities and Exchange Commission established new rules to require public companies to regularly disclose matters related to cybersecurity risk and to report material cybersecurity incidents. All of this once again shines a spotlight on the structural importance We're blazing fast and AI driven cybersecurity platform as well as the collection and retention of all enterprise log data.

Speaker 2

In today's evolving threat landscape, point solutions are falling out of favor. Security vendors that focus on a narrow set of data sources or attack vectors are unable to furnish comprehensive and cost effective protection. Customers are seeking to consolidate not only their security vendors, but also the security consoles and data in order to gain a unified view of the enterprise security landscape. Enterprises need a specialized security approach centered on all enterprise data to prevent attacks. Our autonomous technology brings this vision to life with a unified AI based security analytics platform that seamlessly aggregates and connects data from all security products to deliver enterprise wide visibility in a single streamlined technology and interface.

Speaker 2

We eliminate the need to operate disjointed platforms. As attacks move beyond a single surface, it's imperative to tie together telemetry and logs from key security products. Singularity Data Lake is the only unified platform on the market that is able to bring together full fidelity logs and visibility from all key sources for enterprise security like email security, identity access management, firewalls, SaaS C providers and others. Frost and Sullivan recently ranked Central 1 as the XDR growth index leader ahead of all the security vendors evaluated. I'm proud of our leading AI based technology and the innovations we're bringing to customers.

Speaker 2

Our newly launched vulnerability management solution, Ranger Insights is another example of how we're helping customers eliminate disparate tools in a single platform. Ranger Insights connects 2 closely tied elements of cybersecurity, application vulnerability identification and endpoint mitigation, which were disconnected until now. CRN ranked Ranger Insights as the number 1 in their list of coolest security products unveiled in Black Hat 2023. We also introduced a new cloud data security product line, which offers threat detection for customers using cloud storage vendors like Amazon S3 and network storage providers Such as NetApp. On top of delivering industry leading workload protection, we're expanding our cloud security product suite to include capabilities like cloud vulnerability management to asset discovery and visibility, making Singularity Cloud 1 of the broadest CNET platforms to have end to end functionality from runtime protection to data security.

Speaker 2

Last but not least, building upon our success in delivering best in class autonomous security, We're extending our lead by bringing generative AI to security professionals. Purple AI transforms security operations by supercharging users to control all aspects of enterprise security from visibility to response with unmatched speed and efficiency. This is much more than a sidecar system. It can upgrade any security analyst to superhuman levels. We expect this to be a significant source of expansion and growth in the future.

Speaker 2

At the Black Hat conference earlier this month, thousands of visitors eagerly discovered the capabilities of Corporal AI and engaged in immersive interactive end zone The best way for companies to prevent cyber attacks is to leverage the best security since Central 1 delivers it. Our innovations and holistic approach to cybersecurity puts us in a strong position for long term growth across multiple large addressable markets, including endpoint cloud identity and data. In closing, I extend my gratitude to our incredible team. Despite a persistently challenging macro environment, Sentinels across the world rose to the occasion, addressing critical enterprise needs with the most disruptive technology of the market. I also thank our valued customers, partners and shareholders for their support and trust.

Speaker 2

We remain focused on the long term opportunity and maximizing our With that, I will turn the call over to Dave Bernhardt, our Chief Financial Officer.

Speaker 3

Thank you, Tomer. Today, I'll discuss our quarterly financials and provide additional context about our guidance for Q3 fiscal year 'twenty four. As a reminder, all comparisons are year over year and all margins discussed are non GAAP unless otherwise noted. Our second quarter results exceeded our expectations across the board. We delivered high top line growth and substantial margin expansion.

Speaker 3

Revenue grew 46% in the 2nd quarter and our ARR grew 47% to 612,000,000 We added net new ARR of $49,000,000 in the quarter, achieving strong sequential growth of 17%. Our growth was also balanced across geographies with higher growth in Europe and Asia. Revenue from international markets grew 57%, representing 36% of revenue. We continue to achieve a healthy mix of new customers and existing customer expansion. In addition, our momentum with large enterprises, SMBs and MSSP partners remain strong, which continues to fuel a solid base of long term growth.

Speaker 3

As a result, Our ARR per customer increased both sequentially and year over year, reflecting strong momentum with large enterprises and broader platform adoption. We're taking market share from incumbent and next gen vendors, and our 2nd quarter performance signifies our competitive strength and enterprise demand for best in class cybersecurity. Before turning to our costs and margins, I'd like to provide an update related to the ARR adjustment we announced in Q1. After conducting a comprehensive review, we implemented robust controls, improved processes and enhanced our ARR reporting structure. In addition, we partnered with a big four accounting firm to objectively validate our processes and controls.

Speaker 3

Our systems are fully remediated and we're glad this issue is behind us. Looking beyond the top line growth, our gross margin reached a new record of 77% in Q2, reflecting a year over year increase of 5 percentage points. Just 2 years after setting our long term gross margin target of 75% to 80% at the IPO, we're already operating well within that range. We're seeing continued benefits from economies of scale, data processing efficiencies and cross sell from adjacent solutions, and our pricing remains healthy. We have taken a highly differentiated approach to unifying our security and data architecture into a single platform, which delivers real value for us and our customers.

Speaker 3

Our record gross margin demonstrates the success of our land and expand strategy and platform unit economics, where we collect data once and enable more and more capabilities powered by our proprietary fully integrated security data lake. We also delivered substantial operating margin improvement, expanding over 34 percentage points year over year to negative 22%. As market conditions evolved, we became even more selective about our and took important steps to align our cost structure, including our previously announced workforce optimization. The efforts we have made are paying off. On a dollar basis, we reduced our operating losses by over 40 percentage points in Q2.

Speaker 3

We also significantly reduced our free cash outflow from $67,000,000 in Q2 of last year to just $15,000,000 this quarter, which reflects an outstanding free cash flow margin improvement of 55 percentage points. This is a result of our proactive efforts to improve working capital and effective cost management. To further demonstrate this, Our total cash and equivalents and investments balance reduced by only $2,000,000 in Q2 and only $5,000,000 year to date in fiscal 'twenty four. In short, our losses and cash burn have rapidly narrowed and we are steadily marching towards positive free cash flow and profitability. Moving to our guidance for Q3 and the full fiscal year 2024.

Speaker 3

We expect global economic conditions and a broader demand to remain consistent with the trends we discussed last quarter as enterprises continue to right size their security investments based on near term budget constraints. Even with this as the market backdrop, we're raising our revenue and margin expectations for fiscal year 2024. Our teams are executing well, Our win rates remain strong and we are delivering operating leverage. In Q3, we expect revenue of about 150 $6,000,000 reflecting growth of 35% year over year. Based on this view, we expect Q3 net new ARR to be comparable to Q2 levels, which is consistent with the typical seasonality and still comes on top of our Q2 outperformance.

Speaker 3

For the full year, we expect revenue of about $605,000,000 reflecting growth of 43% in fiscal year 2024, a $10,000,000 increase compared to the prior midpoint of 595,000,000 Based on this view, we expect full year ARR to grow in the high 30% range, adding about $195,000,000 in net new ARR in fiscal year 2024. This is a higher ARR growth rate compared to our prior expectation of mid-thirty percent. Based on our go to market We feel confident in our ability to deliver against our Q3 and our stronger full year growth targets. Importantly, we're seeing durability in new business generation and of growth rates. We're encouraged by increasing platform adoption and competitive position, offering diverse and meaningful growth opportunities for years to come.

Speaker 3

Turning to the outlook for margins. We expect Q3 gross margin of about 76%, implying a year over year increase of more than 4 percentage points. On a constant currency basis, our Q3 gross margin expectation is consistent with Q2. Also for the full year, we are raising our gross margin guidance to 76%, up about 4 percentage points year over year and up 150 basis points when compared to our prior guided midpoint of 74.5%. We've taken a major step forward as a company by achieving our long term gross margin target range and expect continued benefits from increasing scale and data efficiencies inherent in our business model to drive higher gross margins over time.

Speaker 3

Finally, for operating margin, we expect negative 22% in Q3, implying an improvement of more than 20 percentage points year over year. For the full year, we are raising our guidance for operating margin to about negative 25%, up 2 percentage points compared to the prior midpoint and at the better end of our previous annual guidance. This implies a notable improvement of more than 24 percentage points compared to fiscal year 'twenty three. We've made significant investments in innovation and talent development over the past few years. This gives us ample runway to deliver against our product roadmap and growth targets.

Speaker 3

We also expect continued benefits from cost management initiatives and operating leverage of our business. We have a very strong balance sheet with more than $1,000,000,000 in cash, cash equivalents and investments and no debt. This provides durability, flexibility and an independent path generating positive cash flows. Our goal is to optimize top line growth with consistent margin improvement. On our journey to achieving profitability, we don't intend to sacrifice growth or market share.

Speaker 3

Our investment approach will remain highly selective and focused on key areas of competitive strength. We're delivering industry leading margin improvement and steadily approaching positive free cash flow generation. We remain steadfast on our path to achieving profitability in fiscal year 'twenty Thank you all for joining today. We will now take questions. Operator, please open up the line.

Operator

We will now begin the Q and A session. Our first question is from Ray McDonough with Guggenheim Securities. Your line is now open.

Speaker 4

Great. Thanks for taking the question. Tomer, congratulations on a good quarter here and what seems to be an improvement. But I think the question on a lot of investors' minds here is the reports that SentinelOne is seeking or at least evaluating strategic alternatives. Can you comment on that process?

Speaker 4

And then separately, can you comment on the partnership or the termination of the partnership with Wizz? When that was first announced, I think there was some excitement not only from investors, but also from your field partners and the channel. So Just curious how you're thinking about those two things and how you're thinking about your own roadmap in cloud security now that you've terminated that partnership?

Speaker 2

We don't comment on rumors or speculations, but let me be clear. I mean, our focus is on building an independent company for the long term. We're delivering substantial growth and margin improvement. And most importantly, we have the best technology and a clear strategic roadmap to disrupt $100,000,000,000 market with a potential to multiply our current market share in the coming years. I think most of our teams Executing well.

Speaker 2

Competitor positioning remains incredibly strong. Do we deliver excellent results? All in all, I think you're just seeing us being laser focused on delivering the best innovation we can, the best protection we can for our customers, Maximizing our business potential, we believe we can do that the best as possible as a public, independent, transparent company. And I think that is as clear as I can be. On the Wizz thing, If you kind of bundle it on the acquisition rumors and all that stuff, I mean, again, not going to comment on that, but it's all pure speculation On their part and far from facts.

Speaker 2

So it's again a head scratcher to me. If we kind of pivot to the partnership, We did not terminate the partnership. I think that's again misconstrued. We actually canceled a reseller agreement, a reselling agreement. We still partner with Wizz.

Speaker 2

We still work with them on the field level. We still think there's some form of complementary technology there. We're focused on delivering customer outcomes. So when customers want to use Wizz, we'll support that. The technical integration is still there.

Speaker 2

Wizz is a nice little start up. We like working with them. But again, in terms of the reselling agreement, we didn't see any contribution from that. We didn't feel like that's something that is fulfilled on their end, so we decided to terminate that. Our cloud native application platform is growing, I think, in a stellar pace.

Speaker 2

We're definitely ahead of our targets. We just Announced cloud data security, that's a major expansion to our workload protection platform that's part of that overall CNET envelope. And we want ourselves to be focused on our own capabilities, and I think that's natural. We're also seeing tremendous traction in that market. Obviously, Triple digit growth for our cloud business year over year for a few good quarters now and a couple of years now is obviously Giving us a lot of confidence that we can continue and grow that and we'll continue to develop our own native capabilities alongside that.

Operator

Our next question is from Rob Owens with Piper Sandler. Your line is now open.

Speaker 5

Great. Thanks for taking my question. I want to drill down a little bit into retention rates. And I know there was Commentary on the shareholder letter, excuse me, around the OTIVO legacy products. So if you could just kind of Clarify what exactly those are and do we still expect the $120,000,000 level to be a floor as we move forward or could you see additional pressure?

Speaker 5

Thanks.

Speaker 2

Yes. I think what you're seeing with the net retention rate is something that's industry wide. I don't think So unique to us. I think we do see our own, call it, natural retention rates still being incredibly high even in light of macro factors Generally causing customers to be much more prudent about their spend and their timing also of expansion. Ativo, Legacy's product, as you can imagine with any acquisition, there's some degree of customer churn and that happens typically for the Kind of older product lines, identity security obviously is the shining spot.

Speaker 2

I mean, we continuously grow that. It's a big contributor to all revenue outside of endpoint. But things like deception, which is very, very interesting industry specific, I think that sometimes we don't put all the focus on. We continue to support the specific customers that use these legacy products, But we're much more focused on identity security, active directory assessment, all these more forward looking products

Operator

Our next question is from Ryan Essex with JPMorgan. Your line is now open.

Speaker 6

Hi, great. Thank you. Good afternoon and thank you for taking the question and congrats on a much better result this quarter. Tomer, I was wondering if you could talk about a little bit digging a little bit more in the competitive environment. I think you previously talked about or at least have commented on win rates Relative to both Microsoft and CrowdStrike, is any changes in the competitive environment?

Speaker 6

And then kind of adjacent to that question, How do you think about growth of sales and marketing expense as you have this kind of tremendous market opportunity ahead of you and you're Obviously balancing investment in sales and marketing, market penetration, but also you're delivering some pretty impressive margin expansion and process. Those two segments would be really helpful to better understand.

Speaker 2

Our competitive Position, I think, is improving. I mean, we're seeing now meaningful differentiation on the technology front. Everybody likes to Make all sorts of statements about how unified your platform is or isn't. We're the only platform out there that actually delivers on that promise. I think that to us that becomes more and more meaningful as customers are looking to gain enterprise wide visibility And they want to do it.

Speaker 2

They want to do it with 1 console. They want to do it with 1 language. They want to do it with 1 interface. That is not what our competitors Are selling into the market. I think if you want to talk about competitors, let's also talk about the blatant misrepresentations they had Well, their earnings call made so clearly.

Speaker 2

I think it's unbelievable that you see them calling out or implying that We are a coin product company when it's plain to see that we're the broadest platform out there. When they call themselves a unified platform, But actually, you have 2 distinctively different platforms, 2 consoles, 2 languages, 2 product lines. That's an overt misrepresentation and that confuses customers. I think it's just shocking to see that. When they say that the only generative AI company to demo generative AI at conference shows, that's also a blatant lie.

Speaker 2

I mean, obviously, we've been the first to demo that. There are other vendors that have demoed that. Everybody is giving live demos. We actually gave Hands on live demos. So as we talk about the competition, I think it's important to separate facts from So these rumors and speculations and misrepresentations and our competitive positioning, our technology is true.

Speaker 2

I think that's what customers are getting into their hands. That's the reason we win. That's the reason we continue to grow market share.

Speaker 6

Got it. Very helpful. Thank you.

Operator

Our next question is from Alex Henderson with Needham. Your line is now open. Great.

Speaker 5

Thank you so much. And nice rebound in the quarter. Clearly,

Speaker 7

if you'd listen, and

Speaker 5

I'm sure you did, to the CrowdStrike presentation, they Delineated the scale and some of the growth rates around some of their products. And I was hoping maybe you could Take a page out of their book and give us some of the some granularity around some of these key products that you call out, whether it be The cloud product, vigilance, the Ranger, pick your category? Thanks.

Speaker 2

I think at our scale, I mean, we're not at the point that we're ready to disclose that. I think we're giving you good indications as to what part Of our portfolio is growing. We're giving you an indication that more than 30% of our revenue contribution is coming from outside of endpoint. We'll give you an indication we gave last quarter that cloud is growing incredibly fast triple digits year over year represents well over 20% of quarterly ACVs on average, if you kind of look at the rearview mirror last 12 months. So all in all, I think that can give you some sense.

Speaker 2

I also think that for us, data analytics and security data lake, the Singularity data lake, These capabilities are just coming online, and they're coming online pretty fast. So hopefully, as we gain a little bit more scale, I think we'll be able to disclose much more on how we look at our business. But right now, obviously, we're just focused on growing as fast as we can Between these core TAMs that we identified are strategic to our growth.

Operator

Our next question is from Andrew Nowinski with Wells Fargo. Your line is

Speaker 6

now open.

Speaker 8

Great. Thank you. Congrats on a nice quarter, nice rebound. So I wanted to ask about Net new ARR, maybe particularly the guidance for Q3. I understand the year over year decline in Q2 given the tough comp you had from last year.

Speaker 8

But if you think about all the positive trends you guys described here today, why wouldn't You expect maybe more growth out of net new ARR in Q3 given that the macro really hasn't changed. It hasn't gotten worse or better, I guess, for that matter. Thank you.

Speaker 3

Sir, we just exceeded our Q2 net new ARR expectation by double digits. We raised our Q3 net new ARR outlook and we raised the full ARR growth to the high 30s. So I think the way to think about it is we're just being thoughtful about macro stabilization, which is still evolving. And I think we just believe that being prudent is the right approach in our view.

Operator

Our next question is from Gabriela Borges with Goldman Sachs. Your line is now open.

Speaker 9

Good afternoon. Thank you. Tomer, I wanted to ask a question on some of the feedback you're getting from customers that are trying The new purple product, what are the 1 or 2 asks that are coming out of those trials in terms of The next one or two features that customers want in the product and how are you thinking about the pricing model over the medium term? Thank you.

Speaker 2

Yes. The first question is always what's the pricing. I think that's consistently what we're doing for them. And we're starting to share And I most likely would say we're testing pricing with these customers. So I don't have kind of a flushed out pricing model to give you just yet, But it's definitely something that we're kind of processing right now.

Speaker 2

I think in terms of the request and that is key Is that we continue in Push Purple to be an overarching enterprise wide algorithm Versus being focused just on endpoint data or just on cloud data. And that once again comes back to the level of differentiation that you See with our platform today, when you think about some of these AI capabilities, when you think about the scale you can achieve with AI, You obviously want to start stitching together all these disparate products, all these siloed ecosystem vendors into one cohesive fabric That can also allow you to, in some cases, consolidate away some of these products. But in some other cases, these products are still going to be there, But you want to make sure that something more intelligent is driving them and that you can orchestrate action. So people want us to do it on an enterprise scale. People want us to do it in a highly autonomous manner and in a highly actionable manner.

Speaker 2

They don't want more suggestions. They don't want more chatbots. They want predictive algorithms that can allow them in real time to react to what they're seeing enterprise wide. And I think that's exactly how we're developing Purple. That's exactly the first iterations of this product.

Speaker 2

And all in all, it looks just very promising.

Operator

Our next question is from Shaul Eyal with TD Cowen. Your line is now open.

Speaker 10

Thank you. Good afternoon, guys. Good to see the bounce back. Dave, a question for you. Can you discuss Gross margin, the improvement actually visibly, what are you seeing in terms of ASP pressures?

Speaker 3

Obviously, there's not ASP pressures or we wouldn't be setting record gross margins. So I guess I'll start with that. We had record gross margin this quarter of 77%. I think that's a benefit of our increasing scale, the data processing efficiencies and the module cross sell, which we also expect will continue over time. So I think we're proud of the gain we've had in gross margin.

Speaker 3

It just don't seem to Seeing the ASP issues that other competitors may be seeing.

Operator

Our next question is from Patrick Colville with Scotiabank. Your line is now open.

Speaker 11

All right. Thank you so much for taking my question. So I mean this quarter The operating margin improvement was really impressive. In my model, so you beat this quarter, you lifted fiscal 2020 Margin by 2 points. But that means in my model, if I'm calculating it correctly, that my actually 4Q number comes down properly margin.

Speaker 11

So like why would that be is probably one question. And then how should we think about your kind of like long term guidance for Fiscal 2025 and your goal to reach operating margin profitability next year?

Speaker 3

So we raised our full year EBIT margin, like you said, by 2 points at the midpoint. It's the better end of our annual guidance. Now we've focused on that. Instead of 25% to 29% loss, we're focused on the 25%. We believe that's meaningful.

Speaker 3

We're on track for 25 points about 25 points of operating margin improvement this year. I think one of the things we're seeing coming off a strong Q2 is also should we be investing into some things where we're seeing benefits. So our second half is expecting some of that. We're able to do all of that and improve the guidance for the year to the better end of anything we were expecting for the year at the start. We're proud of this guidance.

Speaker 3

We're always going to balance our investments in growth with our commitment to achieving profitability and our goal remains unchanged for next year. But we'll be guiding that in the future.

Operator

Our next question is from Adam Tindle with Raymond James. Your line is now open.

Speaker 12

Okay, thanks. Hope to get a 2 parter in, Dave. First a clarification on NRR with the Ativo piece. Is there any way that you could potentially help us quantify so that we could strip that piece out. I'm just curious what the underlying trends would have looked like for the help of the business ex that?

Speaker 12

And then, Tomer, as a follow-up, I know we kind of touched on the Wizz subject, but curious, cloud security is obviously one of your fastest growing areas. It sounds like you're still committed to that partnership, but honestly, why? That piece of the business is growing so rapidly. You've got a broad platform. Where do they fit in?

Speaker 12

What do you honestly, what do you need them for? Thanks.

Speaker 3

I'll start. Our NRR on an organic basis would have been 120%. So it's still at the expectations that we've set forth in prior earnings calls. So the 5% decrement It was purely Ativo. I'll let Thelma answer the other question.

Speaker 2

Yes. One way is I thought I kind of said it. It's really What the customer wants? And obviously, they got a nice set of customers kind of in the Fortune 100. We want to make sure that we support them.

Speaker 2

Some of them are our customers too. We want to make sure we deliver the best experience. So when a customer wants to use Wizz, By all means, and we will be there to support it. When a customer wants something more holistic, obviously, We will serve our own. I think there's also a big difference between what they can serve, which is highly limited to public cloud, where if you look at our platform and our workload protection, we cater to folks from on prem environments in Server and workload environments that might be on premise all the way to private cloud and then to public cloud.

Speaker 2

So it's also a slightly different use case. But I think what you can Kind of gather about SentinelOne is that we're very partner friendly. No matter who the partner is, we are guided by what customers want to do, We will always stand by that and we will always support customers. So in that, we Wizz is another great partner of ours from many other partners that we have. So there's no reason for us not to partner with them.

Operator

Our next question is from Joshua Tilton with Wolfe Research. Your line is now open.

Speaker 6

Hey, this is Patrick on for Josh. So you mentioned last quarter after the adjustments to ARR that revenue that the revenue to ARR correlation should be tighter moving forward. If you look at that historical delta, it actually ticked up a bit here in 2Q from 1Q and is a little closer to what we saw last year. So curious, did you see some strength come back in that consumption part of the business? And then has anything changed from last quarter with how you factor that consumption part Yes.

Speaker 6

Thanks.

Speaker 3

I'd say we're still very closely aligned. I think revenue increase year over year was 47% and the ARR was 46%. Yes, I'd say that's pretty close. So we expect that to continue to be aligned for the rest of the year.

Speaker 6

I guess I meant.

Operator

Our next question is from Saket Kalia with Barclays. Your line is now open.

Speaker 7

Okay, great. Hey, guys. Thanks for having me on the call. Tomer, I kind of have a 2 part question for you, if I may. The first one is on the competitive environment.

Speaker 7

I know we talked about the other endpoint player out there. But I want to ask specifically on Microsoft, one of the things that came out on another conference call was maybe you're starting to see customers Question, the real price, the real underlying price of Microsoft Defender, do you agree with that? Are you hearing that from customers? That's the first part. The second part of the question is more of an industry question on CNAP.

Speaker 7

There are endpoint players that have CNAP, there are Firewall players that have seen that and then there are individual vendors that have seen that. What do you hear from customers on their preference to buy from one category versus another? Is there a natural, I don't know, tendency to buy from an endpoint or from a firewall vendor? Or Is that still something that's being determined?

Speaker 2

So on Microsoft, We definitely see more customers starting to understand that the lack of price transparency is causing them to actually overpay for what they would actually get from another vendor at a lower price point. I mean, if you bundle together The workload pricing, the log in pricing, the service pricing, all of that together comes up to a pretty hefty price tag if you're going with Microsoft. And I think we can all agree not to best of breed security. So we're definitely seeing more of that. I think there is a slight dynamic change there.

Speaker 2

I wouldn't call any of that right now transformative or TSYS changing. I think it's just starting to trickle. I think if you couple that with the fact that Not only Microsoft is not the cheapest solution, Microsoft also doesn't really care as much about customers, Just under sheer scale, right? I mean, we're talking about a complete different level of support if you're going with a stand Cybersecurity provider like us and some of our peers, I think you're just getting a completely different level of service. And that It's something that is also starting to resonate with customers out there.

Speaker 2

And lastly, I think it's just the complexity. Microsoft has a lot of different ingredients in what they call security. It's not one platform. It's a bundle of solutions and I think that also matters significantly. If we want to touch on CNAP, I think your observation is 100% correct.

Speaker 2

And I think that a lot of folks Gravitated towards the standalone CNAP vendors on the back of just great UI. I think there's no deep IP In CNAP, inventory, the tag graph visualization, like all these things, that's not AI, that's not deep IP. I think that's where you're seeing this commoditization where everybody is coming up with their own capabilities to achieve that. And I think it really is What flavor that the customer wants to go with? And once again, we're flexible.

Speaker 2

I mean, if you want to get that out of us, No, we will definitely build the best platform that we can, but if you rather have a different flavor, that's fine too. We're focusing where there's deep technology. And workload protection, runtime protection, this is where you can actually and meaningfully Differentiate. This is non commoditized. This is where our years of research supporting Linux environments, containerized environments, Bringing Vesterbreed Telemetry, Vesterbreed Performance, that's where it matters and that's where we win the most and that's why that remains our focus as we build these other capabilities to get to this holistic approach to cloud security.

Speaker 2

But once again, You'll get different flavors of customers. You're going to get fewer public cloud customers. You're going to get private cloud customers. You're going to get on prem workload customers. It's not one size fits all.

Speaker 2

In some of these standalone offerings, they're not really relevant in any other setting other than a public cloud setting.

Operator

Our next question is from Trevor Walsh with JMP Securities. Your line is now open.

Speaker 6

Great. Thanks for taking my question. Tomer, on the subject of the Ranger Insights that you announced earlier in the month. Can you just walk us through maybe what the kind of IAS 1.0 or first type of how the opportunity looks initially visavis kind of other players in that vulnerability management space and then kind of where you're looking to maybe go with that Kind of what the opportunity looks like kind of in 6, 12 months? Thanks.

Speaker 2

Yes. I mean, Great traction already. I think it's something that we kind of vetted and built with customers and it's focused on identifying vulnerabilities, prioritizing vulnerabilities In allowing you to gain full context on vulnerabilities together with endpoint data in one same place. Given that most vulnerabilities actually lie on endpoints and servers, it really is a very, very natural place for it to live together. And now we're working on adding more and more remediation capabilities that can inform you once you get informed on a vulnerability, you can automatically Remediated.

Speaker 2

So I think for a lot of these vendors right now in that space, using all kinds of scanning tools and you need to deploy another agent and sometimes You need an incumbent vendor that adds just another overhead on the machine with us. I mean, if you're an existing customer, You're just getting it. It's already there. And I think the most important part of it is that it's also done in a complete continuous manner. So this is not a one time scan type of a thing.

Speaker 2

It's a continuous profiling of your environment and we can highlight all these vulnerabilities The moment that they pop up and we can offer up remediation the moment that something pops up. So to me, it's a very natural expansion. It's a great little TAM that we can now also serve between $5,000,000,000 to $7,000,000,000 And it's just, again, something that we believe will streamline operations significantly for a lot of customers out there. The one last thing I want to say about this is that it's also highly strategic for our MSSP segment. The MSP partners are always looking for ways to get to better hygiene, to patch customer machines And by allowing them to use the same remote management platform that they're using today, our SentinelOne Singularity platform, to now also cover vulnerabilities, We're aligned for extreme cost efficiency for them and obviously an avenue for expansion.

Speaker 2

So strategic on both fronts and We're very, very proud of launching vulnerability management into our endpoint management suite.

Operator

Our next question is from Jonathan Ho with William Blair. Your line is now open. Hi, good afternoon. Just wanted to understand a little bit better, if you could give us some more Detail around the significant improvement around your sales execution and performance. I guess my question is, what's made the most difference and where are we in terms of those improvements?

Operator

Is there sort of further opportunities ahead as well? Thank you.

Speaker 2

We're always working to improve. To us, this never ends. I think just better scrutiny, Better training, better enablement, better pipeline sourcing, better interaction with our channel, all of that I think funneled To just better execution, some technical elements like contract execution, all of that has been streamlined, Better systems in place. I mean, we've done a lot in the course of 90 days to elevate our performance and still a lot remains to be done. I think we're only going to get better from here.

Speaker 2

The important part is that we got great seller DNA in our sales force. We have worked to diversify our sales force. We're now selling into 4 different distinct TAMs. We wanted sellers with Cloud DNA. We wanted sellers with Data DNA without building those disciplines and that obviously allows us to Treat all these adjacent growth opportunities in such a tailored manner and that creates, I think just better execution, better win rates, better conversion rates, on our pipeline.

Speaker 2

So all in all, again, continued work, but I think we're doing all the right things.

Operator

Our next question is from Mike Walkley with Canaccord Genuity. Your line is now open.

Speaker 13

Hey, guys. Good afternoon. It's Daniel on for Mike. Thanks for taking my question. So you called out another standout quarter with your MSSP partners.

Speaker 13

Just wanted to see if you could provide some Color on sort of what's resonating in this part of your business, especially as it pertains to some of your newer emerging modules you guys highlighted?

Speaker 2

Absolutely. I think 1st and foremost, there's still the core elements of our platform, the ability To manage multiple, sometimes thousands of customers in one single click console is still a very unique capability In this space. So as our MSP partners kind of look to grow, look to add more customers, they can do it with ease, they can do it with confidence. And obviously, they're well trained on our platform to date. So the elements of automation and manageability Our first and foremost, I think, while we have that strong footprint in the MSSP realm.

Speaker 2

The other elements of what we do like MDR, which they're adopting now and reselling to their customer base is also a nice expansion opportunity for us where a lot of our industry partners Want even more tailored security for their customers and they're leveraging our own MDR services as a resell to their partner base. Cloud Security is coming online for some of these partners, again covering server environments. We've actually tapped through a lot of server environments And they tapped those so far with endpoint licenses. We're now converting those into server licenses. If you kind of think about the Ranger and Ranger Insights module, they've already been onboarded on Ranger, which allows them for asset discovery.

Speaker 2

We're seeing traction with that. Ranger Insight will catapult that even further. Again, vulnerability management is a very natural expansion to what they do. So all in all, with the MSSP environment, I would say the opportunity is twofold. It's the modules.

Speaker 2

There's no question that we're still underpenetrated. But at the same time, we're also under penetrated on licenses, seat counts and number of endpoints. A lot of our MSP partners still have a Huge potential in their estate and we're working with them every day to expand our footprint and to make sure that they're as competitive as they can be.

Operator

Our last question is from Eric Heath with KeyBanc. Your line is now

Speaker 14

open. Great. Thanks for taking the question and squeezing me in. So I did enjoy seeing the Purple dotai demo at RSA back in April. That was impressive.

Speaker 14

So I wanted to ask you what your thoughts are on timing for that to become available. And then coming back to the CNAP question, just curious if there's any change in the way you're thinking about either adding or not adding CSPM or Application security capabilities to that platform. Thanks.

Speaker 2

Yes. Glad you enjoyed Purple dotai. We're not Sharing right now the exact launch date. It will be next year. We're definitely beta ing this with customers.

Speaker 2

So stay tuned. We will share more as time progresses. But on the CNAP stuff, We haven't really changed the way we think about it. We always wanted to have and always we're always working on broad based CNAV capabilities that include CSPM as well. And that hasn't changed.

Speaker 2

I think the only thing that changed is that we're actually a bit more advanced in our road map than we initially expected and that's a good sign. Once again, we launched data security, which is another part of that CNAV spectrum And it's a very unique capability. It's an AI driven approach to detect threats on storage like S3 and even on prem storage like NetApp. There's nobody else in the market doing that. So all in all, I mean, we're always focusing first on the more differentiated parts Over the platform versus going to the commodity.

Speaker 2

But at some point, I think we'll have the full spectrum of capabilities. And right now, again, given our traction, we're not in a rush to do any of that. It sounds like there's any mandatory requirement to have All of these components baked in together, is evidenced by our success in the market.

Operator

We are out of time, and I will now pass the call back to the management team for any closing remarks.

Speaker 2

Thank you, everybody. Appreciate your time today. And I want to again congratulate all Sentinels for their performance this quarter.

Speaker 11

That concludes

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Earnings Conference Call
SentinelOne Q2 2024
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