Q3 2023 SentinelOne Inc Earnings Call
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Yeah.
Good afternoon, and thank you for attending today's since no. One earnings conference call. My name is Jason and I'll be the moderator for todays 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'd like to ask a question. Please press star one on your telephone keypad.
Now ill pass the conference over to our host Doug Clark.
Okay.
Good afternoon, everyone and welcome to <unk> earnings call for the third quarter of fiscal year 2023 ended October 31.
With us today are Tom Obrien Garden, CEO , and Dave Bernhardt, CFO , our press release and a shareholder letter issued earlier today and are posted on our website. This call is being broadcast live via webcast and following the call an audio replay will be available on the Investor Relations section of our website I would like to remind you that during today's.
Call, we will be making forward looking statements regarding future events and financial performance, including our guidance for the fourth fiscal quarter and full fiscal year 2023, as well as certain long term financial targets.
I'll show you that such statements reflect our best judgment based on factors currently known to us and that the actual events or results could differ materially.
Please refer to the documents that we file from time to time with the SEC in particular, our annual report on Form 10-K, and our quarterly reports on Form 10-Q, including our filing for Q3.
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.
This call is replayed or reviewed after today the information presented during the call may not contain current or accurate information.
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 unless otherwise stated we will discuss non-GAAP financial measures.
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 and with that let me turn the call over to Tomer Weingarten CEO of central one.
Good afternoon, everyone and thank you for joining our fiscal third quarter earnings call.
We reported another quarter of triple digit revenue growth combined with significant margin expansion meaningfully ahead of our guidance.
Once again, we achieved <unk> 60, you were raising our full year revenue and margin expectations.
While the impact of the macro challenges has become more pronounced cyber security remains mission critical most importantly autonomous technology is best in class. Our platform is purpose built for leading efficacy cost efficiency scalability and ease of use.
We remain well positioned group enterprises, they predicted and realize superior return under cyber security spend.
On today's call I'll focus on three key areas.
Details of our quarterly performance, including customer growth and expansion.
The broader demand and macro dynamics.
The actions, we're taking to enable our path to profitability and execute in todays environment.
Financially, we've taken a more prudent approach to investments like moderating new head count growth.
Operationally, we're streamlining our teams to unlock higher productivity and performance.
Let's first turn to discussion to our quarterly performance.
We once again delivered triple digit revenue in there our growth fueled by the adoption of our singularity zero platform across endpoint cloud and identity.
We're taking market share and we achieved the rule of 60 again in the third quarter.
We've consistently combined rapid growth with meaningful margin improvement showcasing strong unit economics, and scalability of our business model.
We've expanded operating margins by over 25 percentage points year over year for five consecutive quarters, we expect that to continue in Q4.
Let me highlight the key strengths of our business during the quarter.
Around the world were predicting more enterprises than ever before we added over 600, new customers in the quarter, our customer base now exceeds 9215, that's well over 3000 more businesses added in just the last 12 months.
Our customers, where they are over $100000 grew nearly 100%, reflecting continued traction with larger enterprises.
For example, an iconic media brands chose simpler one for our superior performance across endpoint cloud and data retention and another example, a global consumer brand consolidated incentives will once cloud native platform, replacing several legacy and Nextgen competitors, we continued to secure wins across a significant.
Majority of competitive situations baked in our platform performance and technical capabilities building on our partnership with Cisco. We also extended our success in the federal arena like securing three new agencies during the quarter.
Our land and expand strategy is working with existing customers. Our net retention rate remains extremely strong and to 134%. This was driven by footprint expansion and rapid adoption of our adjacent solutions by our 9000 plus customers Q.
Q3 was a record quarter for singularity cloud, which once again remained our fastest growing solution in Q3.
We're seeing strong adoption of cloud security, among new and existing customers reinforcing the ease of deployment and superior protection from our cloud workload security solution.
A leading software company selected singularity club, despite having deployed a competitive nextgen edr solution on their endpoints.
Currently and large existing customer expanded coverage for the third quarter in a row.
The continuation of these trends over the past few quarters highlights increasing demand for our cloud workload protection.
Given the breadth of our platform and expanding customer base. We believe we're still in year Union very large expansion opportunity.
<unk> is proving to be resilient, regardless of macro conditions are.
Our customer retention remains extremely high we expect <unk> to continue to drive some growth.
Our momentum with channel partners continues to shine.
Especially with our strategic partner ecosystem, including MSP and incidence response providers are partners and customers once automated solutions that reduce reliance on human intensive processes, we're offering best in class protection.
Many small and medium sized businesses are increasingly turning to managed security service providers. It helps them address cyber talent shortages gain cost efficiencies and also potential economic challenges.
Designed our platform to support multi tenancy fully customizable role based access control and a full set of open and documented Apis.
These product driven differentiators few ease of deployment scaled management and unprecedented integration capability, we do.
Don't compete with our partners, but enabled them. This mixed sentiment one partner of choice for emphasis across the globe.
We're partnering with most of the leading them to speed our emphasis be exposure continues to drive meaningful and resilient growth as this can be shift to more flexible security models.
Let's turn to discussion to the demand environment and the trends, we're seeing in our markets.
Insistent with many other software companies and even our competitors, we're seeing higher cost consciousness and prudent surround icke budgets.
That's leading to elongated sales cycles and limited budget availability.
These factors are most pronounced in larger deals and they require a higher level of evaluations and approvals cut.
Customers are more focused on the most critical and immediate security need we're taking it spend later approach for other areas.
Finally, foreign exchange presented an incremental headwind in EMEA, while repricing dollars foreign exchange impact the purchasing power of international organizations.
Together these factors contributed to a softer net new IRR than we had expected and decelerating growth.
Still we are growing at a very healthy pace with AOR growth over 100%.
There are clear signs of demand and our competitive positioning remains strong.
While we are not experiencing buke installations, we are seeing elongated deal cycles and budget adjustments. We continued to successfully close these deals for instance, several large deals that pushed beyond Q3 have already closed in Q4 with some clothing just days after the quarter ended that.
With several million dollars of secured deals that simply didn't close in time.
Also pricing remains healthy and our technical win rates remain extremely strong.
We believe these macro factors are temporary and there is no change to the long term opportunity for our leading next generation security.
Our pipeline once again grew to a new high giving us confidence in the opportunity in front of us.
We're also encouraged by extremely strong customer retention and the extension from our installed base.
Net retention north of 130%.
And newer solutions like cloud and identity are opening even more opportunities in some of the largest enterprises in the world.
Shifting gears to the second keep topic the steps, we're taking to increase productivity and to enable our path to profitability.
We're streamlining our teams elevating executive leaders and ramping our sales groups. We believe we can elevate our execution further regardless of market conditions.
Moved quickly to hire a lot of terrific talent over the past year nearly half of our sales reps are newer and still ramping.
As these reps ramp up the maturity curve this should deliver meaningful productivity gains and improve our execution further.
We're putting more focus on performance management across all functions as we scale and efficiency companywide.
As a routine part of growing and optimizing the business our employee retention remains better than industry average as a result of our dynamic an inclusive culture that is highly valued by all sentinels.
Next to further accelerate our new customer growth and shorten sales cycles, we've combined sales and solution engineering under one organization to improve velocity of execution and customer engagement in every region.
Finally, a more tactical change, replacing a higher emphasis on the largest account opportunities in our pipeline.
We've made significant progress in the past few years, when a fortune 500, and global 2000 accounts over two thirds of our IRR from some large enterprises and customers where they are over $1 million grew by more than 100% year over year in Q3.
This is the right next step to drive further success with the largest enterprises.
It is clear there is a slowdown going on and no one can fully predict the extent of the impact.
Based on what we're seeing and the steps were taking to adjust to evolving conditions, we are well positioned to deliver seasonally strong growth in Q4.
Our growing pipeline demonstrates the customer intent is there and enterprises need security.
We are gaining share across multiple large market segment endpoint cloud and identity.
We remain confident in our long term growth potential in our early innings of a large and expanding addressable market.
Repairing that growth with a commitment to profitability, we're increasing our focus on cost management and productivity and calibrating our investments with the pace of growth.
Our investments are largely elective, which allow us to be flexible.
Over the last two quarters, we've adapted to evolving market conditions, taking a more prudent approach to investments as a result, we've delivered significant margin upside for two consecutive quarters with over 25 percentage points of improvement in Q3.
As we saw the early signs of macroeconomic challenges, we started to adjust investments accordingly, such as moderating the pace of hiring.
Going forward, our focus as a team is to ensure that our assignments and profitability does not deviate across different economic or growth scenarios.
Our third quarter results and reach full year margin expectations demonstrate our ability to balance compelling top line growth with consistent margin improvement.
We will continue to calibrate the investments to support our growth and reached profitability in FY 'twenty five.
Taking a step back over the past few years, we've built a truly disruptive technically superior security platform with.
Challenge the status quo of legacy and next Gen security vendor delight in the pursuit of Enterprise Trust collaboration and protection and we're succeeding our singularity platform truly stands out from all other solutions in the market customer.
Customers overwhelmingly choose our technology whenever they evaluate or use it in.
In addition to best of breed security customers can optimize their total cost of ownership by consolidating when our singularity platform. We design singularity can be a cost effective solution with leading performance. This value proposition is compelling, especially in the higher cost conscious environment.
We're the only company with leading result in all three micro valuation equals endpoint identity, and managed services, which demonstrates platform superiority of our product and services.
Cyber security is mission critical and remains a must buy for all enterprises.
We're committed to innovation listening to our customers and empowering businesses with the best security resources.
Today's market requires a relentless focus on optimizing and efficient execution as evidenced by our improving margin profile and strong magic number we.
We believe the opportunity in front of us across endpoint cloud and identity security is larger than ever before we're taking market share every quarter and we can do even better we are sharpening our focus on cost discipline and driving productivity throughout our organization.
I want to thank all center nodes for delivering leading technology and strong growth even in today's macroeconomic environment.
So I want to thank our customers for their <unk>.
Trust and centered on one is there a security partner.
Before concluding I'd like to recognize in the quarter.
<unk> leadership and dedication to center on one after more than five years of building the business. Nick has made a decision to transition from president of security to an advisory role I am pleased that sneak will continue to support center to one and our customers and look forward to continuing to work together with them.
With that I will turn the call over to Dave Bernhardt, Our Chief Financial Officer.
<unk>. Thank you I will discuss our quarterly financial highlights and provide additional context around our guidance for Q4 and fiscal year 2023.
As a reminder, all margins discussed are non-GAAP unless otherwise stated.
We once again delivered high growth combined with meaningful margin expansion showcasing the efficiency of our business model and strong unit economics.
We are raising our full year revenue and margin expectations again.
In the third quarter, we achieved year over year revenue growth of 106% and a grid of $487 million.
We added net new IRR of $49 million in the quarter, driven by a combination of new and existing customers.
Compared to our expectations the lower net new <unk> was largely due to macroeconomic conditions impacting the timing and size of new enterprise deals.
In general these are not lost opportunities in many cases, we have either closed the deals in our fourth quarter, our secured technical wins and are awaiting deal closure.
We saw similar dynamics across geographies with international markets facing incremental FX related pressure.
Nonetheless, we are still delivering significant growth, we achieved a healthy mix of new customer additions and existing customer renewals and upsell our customers with IRR over 100000 grew nearly 100% year over year to 827, much faster than the total customer count.
And there are some customers where they are at over $1 million per annum faster. One reminder, on customer count that we count each MSP at a single customer therefore, with some direct SMB customers facing budgetary pressures much of.
That impact was offset by the strength and shifts to our MSP ecosystem.
Our <unk> per customer increased sequentially, reflecting the strength of our business among large enterprises and the adoption of more of a singularity ER platform in spite of recessionary concerns.
There were no outsized large deals in Q3, our net retention rate around north of 130% driven by strong subscription expansion and cross sell vessels installations across from our installed base has proven to be quite durable and should continue to fuel our solid base of growth regardless of broader conditions.
Turning to our costs and margins.
Our gross margin in Q3 was 71, 5% an increase of five percentage points year over year I can't overstate. The progress we've made on gross margins improving nearly 20 percentage points since the beginning of last year.
We're benefiting from our land and expand strategy and platform unit economics, where we collect data once and enable more and more capabilities.
<unk> continued benefits from economies of scale data processing efficiencies now, including a dataset backend and module cross sell looking at the rest of our P&L, we delivered substantial operating margin improvement expanding 26 percentage points year over year to negative 43%.
As market conditions evolve throughout the quarter, we became more selective with our investments.
As a result, we outperformed our EBIT margin guidance by 14 percentage points.
On a dollar basis, we also reduced our operating losses compared to the prior quarters of fiscal 2023.
We're achieving scale leveraging our channel on globalizing, our talent pool, our magic number was over one <unk>. These results signify our ability to maintain a balance between compelling top line growth and progress towards our profitability targets.
Moving to our guidance in Q4, we expect revenue of about $125 million, reflecting growth of 90% year over year.
For the full year, we're raising our revenue outlook to $420 million to $421 million, reflecting 105% club. This is up over $4 million at the midpoint versus our prior guidance.
While we don't specifically guide for being a subscription business our year over year revenue in total IRR growth track closely.
That relationship to hold in Q4 to be clear, we expect Q4, net new IRR to increase by at least 20% sequentially compared to the third quarter. We believe this is a prudent view on risk.
Flex a continuation of the macro headwinds we experienced in Q3, yes, we are in a position to deliver a seasonally strong end of the year.
Supplemental lowest no lack of demand for the singularity platform our pipeline reached a record high as we exited Q3 at the same time, we want to be mindful as enterprises prioritizing cash preservation cyber security remains a top priority.
Priority and our AI based autonomous singularity platform is optimally positioned to deliver superior enterprise value.
Turning to the outlook for margins, we've taken a major step forward as a company operating about 71% gross margin and moving closer to the long term gross margin target of 75% to 80% or higher.
Benefiting from platform data efficiencies inherent in our business model and our platform approach we.
Q4 gross margin to be about 17% and we're increasing our full year gross margin guidance of 71 to 71, 5%. This is up from prior fiscal 'twenty three guidance of $75 to 71 and up about eight points year over year.
Finally for operating margin.
We expect Q4 operating margin of negative, 39% up 27 point year over year, and implying a rule of 50 for the quarter.
At the same time, we're improving our full year margin outlook to negative <unk> 51 to negative 50%.
Our updated operating margin guidance with a six percentage point improvement at the midpoint from our prior range. It is also an improvement of 35 percentage points compared to last year.
Our long term margin targets remain intact.
Our goal is to reach operating breakeven for fiscal year, 2025, which is primarily calendar year 2024, we're making excellent progress.
Thinking longer term, let me shed some light on our growth drivers and our path to profitability.
Over the past several quarters, we've demonstrated the ability to remain dynamic and deliver significant margin outperformance even as growth moderates.
We're confident in our timeline to profitability across different economic scenarios.
While growth is slowing because of macro conditions in the near term we remain confident in our ability to deliver high levels of growth next year and beyond.
We expect to continue to win market share and outgrow the competition.
Based on a prudent view of the current economic environment and expectations of further macro deceleration. We believe we will deliver at least 50% total IRR growth in fiscal year 'twenty four.
This is also based on our growing pipeline strong win rate high retention and expansion rates and the enterprise needs for security.
From a bottoms up perspective expansion from our installed base of over 9250 customers remains terrible.
On top of that pace of growth, we're securing hundreds of new customers every quarter, we see tremendous potential in endpoint cloud and identity and expect to continue to take market share and expand with our existing customers and our strategic channel partners like MSP. It gives us a unique exposure to fast growing portions of the market as we cross hatch.
$1 billion.
A milestone for any company our focus is on continued growth and profitability.
Indeed, we are looking carefully at our cost and parts of the business that can be more operationally efficient.
We're increasing our focus on profitability and cash flow, we don't intend to sacrifice growth, but we are moderating the pace of our investments and focusing on the most strategic areas.
Increasing performance accountability and aligning several teams to improve velocity and execution.
We have a very strong balance sheet with $1 2 billion in cash cash equivalents and investments with no debt.
<unk> it provides longevity flexibility and ample runway to achieve positive cash flow generation.
When thinking about our path to profitability from here consider our Q4 margin guidance. We're on track to exit fiscal year 'twenty three with two quarters of about 25 percentage points of year over year operating margin improvement.
Can you on the progress forward, we expect another two five points of operating margin improvement in fiscal year 'twenty four and our goal is to achieve profitability in fiscal year 'twenty five.
Our focus on execution to stay ahead of evolving economic conditions, our strategy is to dynamically invest in our technology and business, while enhancing our path to profitability.
In summary, Q3 was another strong quarter, despite the near term turbulence.
Demand for cyber security remains intact, we expect a secular headwind supporting our business to continue and we believe we have the best technology to protect the modern enterprise.
Thank you all for attending our earnings call, we're now ready for questions opt.
Operator can you. Please open up the line. Thank you.
If you would like to ask a question star one on your telephone keypad.
Anything you'd like to that question it start to.
Once again to ask a question star one.
Our first question is from Ken Calia with Barclays. Your line is now open.
Okay, Hey, good afternoon, guys. Thanks for taking my questions here.
Tumor maybe maybe just for you.
A lot of helpful commentary around around the macro and clearly it's hitting everyone. So probably not much of a surprise either but I was wondering if you could just talk a little bit about the competitive landscape a bit.
In particular, Microsoft I am wondering if you see them more in customer evaluations and how you think customers are viewing Microsoft defender option.
Versus a specialist tool like singularity or like other next Gen solutions out there any thoughts.
Yes, I think that by and large they are competitive dynamics phase two are relatively the same as we've seen it in the past few quarter past couple of years.
All in all folks look at best of breed security pretty much in the same token as they've had.
It's also worth mentioning that while Microsoft toll free as it pertains to the software piece might be included in perceived as free if you look at the integration cost management cost.
And then Dr services or any affiliated service that actually bumped up the price and a pretty significant manner. So if you look at the overall key CEO it stays relatively comparable with best of breed offerings. The second dynamic I want to highlight is that we've seen more and more Microsoft displacements customers rebounded.
<unk> from a Microsoft offering some citing it as eventually an eventual cost terms. The most expensive solution. They had to manage over the years. So we feel the competitive environment versus Microsoft.
It was relatively sustained we haven't seen any any major shift in again, if at all we're seeing more displacements.
And we feel that the REIT security, even in an environment, where people focus on cost will still prevail and a lot of the cases.
Got it got it that's really helpful. I was going to direct this next question to Nick I'm not sure if he's on the call, but my congrats to him on his next.
This next phase, so Tom or maybe maybe I'll make the follow up for you as well.
A lot of good stuff to talk about there with the MSP channel could you. Just can you just talk about to what extent are they selling some of your newer emerging products and what kind of revenue opportunity could that be.
Of course.
Wish Nick all debate is not on the call.
Mississippi for US again, it's a highly strategic go to market motion.
We haven't even started to look at the other revenue line possibilities, we have with you on speaker system.
First time, we've actually enabled them to sell.
New modules that happened last quarter for the first time. So it's just in the first innings of that opportunity right under still laser focused on addressing core security needs like Edr and ETP.
We're now extending it to Ranger and MBR as well as the resell. So all in all we feel thats going to be a sustained and resilient part of our business, especially as you see SMB trying to avoid.
The technology is software at close but really the overhead in recruiting more and more head count into their security team and are looking to offset that by procuring direct services scaled services from the <unk> system will see that bodes well for us we have a complete multi tenanted solution for that emesis buccal system that actually allows.
And to be more productive in what they do so again, even in this environment MSP is definitely a shining point for us.
Very helpful guys. Thanks very much.
Our next question comes from Alex Henderson with Needham. Your line is now open.
Great. Thank you so much.
Dave.
Hey, guys.
Preliminary guide I guess is there any way to say it for FY 'twenty four.
2% ADR growth.
The question I have for you it's really.
Without.
Giving you a forecast can you give us some sense of the way youre thinking about the opex spend.
In that environment.
Will you still produce at <unk>.
50% type growth rate.
The same or a similar degree of leverage or do you think the leverage.
So it becomes a little bit more muted.
Muted as a result, the slower growth before.
Reacceleration.
We think that the anr.
Call. It 10 tentative guidance for next year.
Really a floor.
When I think about it.
We believe it's conservative we're looking at it as something we can build from.
In terms of Opex spend we've always said and you've definitely seen this over the past couple of quarters, where we beat by 17% and 14% in terms of operating margins.
Lot of our spend is highly elective and we'll invest when it makes sense and we'll pull back when it doesn't.
We're always going to map towards our long term projections in terms of profitability. So if you look we've made great strides in the years past.
We basically cut down our losses by about half every year and I would anticipate that to continue into next year.
Our long term.
<unk> and our path to that is unchanged no matter what the growth is.
Okay.
Second question I would like to ask is can you talk a little bit about the linearity of demand over the course of the quarter.
It seems like business is really.
Decelerating very sharply from September to October and then October into November .
Is that consistent with what youre seeing or is the re signing.
Giving you some variance from that.
Thanks.
What we're seeing is that a lot of the linearity.
Generally linearity is something that is also under our control. So when we look at our daily inspections, when we dive deep into what we see in the pipeline, we reckon that at the end of the day load of the ability to progressing the RFP lies within our hand, it's something that we can to an extent mitigate but just.
Forming bidder and it's something that as we kind of enter Q4.
We see it as something that is much much healthier than what we've seen in previous quarters. Some of it is also our changes what we are doing to actually make sure. We can achieve linearity, even under decelerating macro conditions. So to US right now we feel pretty confident in the guide that we gave for Q.
For to us it embodies every a factor that we have seen in the past couple of quarters and once again, we feel given our seasonality given our linearity is something that we can we can stand behind.
Great. Thanks, so much for taking my question.
Okay.
Our next question comes from Hamzah <unk> with Morgan Stanley . Your line is now.
Hi, guys. Thanks for taking my question.
Couple of questions.
Tom I think you alluded to some deals that slipped out of Q3, but.
Closed in fiscal Q4, and these were some pretty large deals can you help us quantify.
How much those contributed or would have contributed to Q3.
And then secondly.
Dave.
You mentioned.
Operating profitability in fiscal 'twenty four I just want to be clear is that for the full year of fiscal 'twenty four and would you expect free cash flow breakeven to proceed that by about four quarters. Thank you very much.
When we look at the deals that slipped several million dollars closed in the days that follow.
To us we kind of saw two different dynamics one of these deals that slip they contribute somewhat to the next quarter, but I think what safe to assume that now we're seeing this is more of a.
Part of our business and not just slipped views the secondary re seeing an oddly enough, we've actually added more and more large deals this quarter than ever before more large logos than ever before.
But at the same time deal sizes have changed in nature given to the through the pressure is on budget. So all in all we kind of feel like we're recalibrating around the new realities in our <unk>.
Market, but once again, we feel highly confident that we can continue to operate in this environment.
And Hamzah to answer your second question.
We've talked about.
Timing of free cash flow.
Creating free positive cash flow, we're still expecting that to happen at the end of next fiscal year and then what we're hoping for and really working to achieve is how to get breakeven in fiscal year 2005. So the following year. So we do expect free cash flow to hit before profitability and then Doug.
<unk>.
Much more map together.
Thank you.
Our next question comes from Jonathan Ho with William Blair. Your line is now open.
Hi, good afternoon.
Just wanted to start out with maybe a little bit of additional color on how you think about driving more productivity out of your existing sales teams, while also driving additional cost savings.
Just want to understand how do you think about sort of balancing that that effort and your confidence around.
Around being able to achieve both.
I think we've mentioned.
We just recruited a ton of great talent in the US here and a lot of these folks, especially on the sales side are actually ramping and still ramping.
We're now working to enable them faster, we're working to get them productive sooner and naturally as they progress down the line as you can imagine people that have been in the company.
Less than a year are not as productive as people that are in the company for year and a half two so naturally we expect more productivity with that we've also combined the solution engineering in sales engineering to create a mood and sorry, <unk> organization to create a more curated experience for our customers, we put a new leader.
In North America, and we're putting more and more emphasis on how we sell to the highest enterprises to the largest global that we have.
Our pipeline all of those have already started to show great signs of success and we'll continue doing that as more and more of our business is moving upstream that to us remains against strategic go to market element an avenue that we feel is just getting stronger and stronger for us.
Again, there are many other initiatives that we're taking but all in all the ramp enablement and eventually the changes we've made in our go to market organization are already yielding results for us and we're continuing to drive that into the future.
Got it got it and then just in terms of a follow up can you talk a little bit more about the deal sizes that youre seeing out there like are these deals typically more being phased in or they are being reduced in size and scope or are you actually seeing anything in terms of renewables durations changing at all as well.
Thank you.
The most prevented dynamic we're seeing out there is really just right sizing by customers.
Just want to procure for now versus.
Any aspirational north counts that they might have.
Planned for for the future and that to me is the prevailing dynamic I mean, we're not seeing multi phased deployments people buy for what they need and they come back for expansion.
To me once again is the main thing we're seeing out there.
We're also seeing is really a more of a future upsell opportunity I mean these customers are now choosing the core components of our platform and later on as they progressed with time, we have the ability to go back and upsell them on adjacent models more seed cones, and really stay true to what customers need.
In this environment versus just trying to sell them more and more that's our entire philosophy.
Great. Thank you.
Our next question comes from Fatima <unk> with Citi. Your line is now open.
Good afternoon. Thank you very much for taking my question.
I will start just with respect to one of the items.
Itemized around the go to market and sales operation changing so the first one.
Curious about a potential co promotion plan.
Next transition and how we should think about.
This transition in terms of overseeing broader operations at the sales organization.
About <unk> execution on the top line guidance, and then Gabe, bringing kind of building off the last question you talked about cash conservation.
Cash management.
And your customers.
When I look at your deferred revenue performance, but with a little bit lighter than we were looking for thank you can.
Maybe shed light on what you're seeing from a contractual and invoicing behavior standpoint, as it relates to that cash management activity.
Thank you.
Yes, so when Nixon succession.
You might recall about six months ago, we've added bucks revert as soon as our CFO and by no largely we moved a lot of these functions that were under Nick under vets as well the second part of that obviously I'm, taking a more active role in the go to market organization is.
As a whole we've put more emphasis on executive sponsorship throughout the entire process. So we're putting go to market front and center the topmost priority for the company right now and for myself. So we kind of worked through that succession. Both in terms of continuing to transition that we started about six months ago, but.
At the same time, we also remain opportunistic and if we feel like we can inject and under highly.
Highly tenured sales executive we might opt to do so in the future.
And talking about answering your second question in regards to free cash flow well I think youre seeing two dynamics youre seeing one of our customers just arent prepaying for multi years, which is more prevalent in the past and then Youre also seeing the shift to MSP, where they tend to be paying.
Orderly versus larger upfront deals that dynamic we expect to continue for a while.
Okay.
Yes.
Our next question comes from Brad Zelnick with Deutsche Bank.
It is now open.
Great. Thank you so much and it's good to see the strong execution.
And this kind of environment I've got one maybe for Tom or in a quick follow up for you David Tom or I was intrigued by the customer when you mentioned that shows singularity cloud despite running a competitor on their endpoints can you maybe mentioned who the competitor is what was the circumstance and is this something that we can expect might be more common in the future.
Absolutely.
We've seen that dynamic play for a few good quarters.
Strategic go to market that when you get to another one for us where we go in and unlock accounts that otherwise had been running somebody else on the endpoint side and as you can imagine we've got two main competitors.
Can pick each one of them that you wish for the purpose of illustration, but at the end of the day. It allows us to come in with a truly unique offering right now for cloud workload protection that is far superior to what any other endpoint vendor can provide on the cloud side and windows Meredith we come in.
Security's cloud environment. So the first one.
You had quite a few of those in the past couple of quarters and it remains.
Again, a competitive advantage that we have not only in our own existing accounts not only is now a wider platform wide offering that spins endpoint and cloud and serves as another differentiator with once again any standalone situations youre, sometimes looking at footprints that are in the cloud are actually be.
Bigger than the footprint on the endpoint side, so for us more cloud deals and the more cloud deals that we can do.
It's incredibly serving to our go to market motion cloud was again, our number one fastest growing module and we just invest more and more in the.
Offering right now is it above what anybody else can offer in this space.
It's really helpful. David just to follow up for you I. Appreciate the color you gave for Q4 and IRR for at least 20% sequential growth others in the broader market or calling for no seasonal budget flush no Christmas this year, even sequential declines in Q4.
And I know you have the number of benefits, including the deals that pushed from Q3 strong net retention trends ramping sales productivity and a really strong value prop, but is there any way to maybe further frame.
And characterize the confidence that you have that underpins your view into Q4, thanks very much.
While we are assuming that the macro conditions continue and persist into Q4.
No.
We are still expecting to grow sequentially, 20% is due to a few things one we have a higher concentration of larger deals historically in Q4, two we have a record pipeline.
We just need to go out and close deals.
Yes.
We're highly confident in the 20% sequential growth and we are hoping to outperform that we believe this is historic.
It is much better.
Are much more conservative versus our historical guidance. If you look traditionally we were about 40% sequential growth. We're assuming it's about half that and I think that's what we're that's how we're looking at this to reflect more conservative guidance around Q4, and we're hoping to build off of that.
To add to that I mean, we feel like we've got all the raw materials to get there and right now we're just kind of re rating on our IRR so to us it feels like we're taking the rights to <unk>.
To make sure that we're guiding towards what we feel is absolutely doable.
Thats the right thing to do and with that as Dave mentioned record pipelines entering into the quarter better linearity in the last quarter that I mentioned, just a few moments ago. All of those gives us increased confidence that we can hit the Q4 number potentially even do better.
I think another thing to consider is that we've never been benefits of a budget flush and I think we've just traditionally seen deals that close we've never.
<unk> been a company I think that company has just come to us and say, Hey, I've got a bunch of budget I need to spend it.
When customers work with US we're trying to do what's best for the customer and we're trying to make sure that we provide a solution for them.
So the idea of a budget flush this isn't something that we're expecting will affect us I concur by the way we've never seen that phenomenon.
Good okay. Thanks.
Makes total sense. Thank you so much guys.
Our next question comes from Gray Powell with <unk> Your line's now open.
Okay.
Hi, Greg are you are you on the line you might be on mute.
Oh, there we go.
Tech analyst.
Learn how to hit the mute button.
So thanks for thanks for taking the questions.
A lot of good detail in here so far.
So when we think through.
Your outlook for 50% AOR growth next year.
How do you think linearity plays out relative to this year and prior years should we expect that.
The net adds next year as you need to be more backend loaded.
Okay.
I think generally I mean, it will be typical to our business I mean, I wouldn't I wouldn't expect any major departure from where we've been operating in the past couple of years it might be a bit more smoothed out but again at large.
I would say it remains relatively the same.
Okay, Great and then just my other question would be I know you are not breaking out the chemo anymore, but just how is growth there been relative to your original expectations and as you get that product more into your sales motion do you see an opportunity to accelerate growth in the product from that.
The original 50% growth rate, but we were talking about at the beginning of the year.
As we look into next year, we believe thats going to going to be one of our stronger proposition I mean to us.
Being still in the early days of our integration, we believe we havent fully unlock the potential.
Indoor acquisition and identity security in general.
We generated record pipeline for identity security this past quarter, So we feel better about.
Overall prospectus of what this could look like in the years to come with that obviously macro impacts everything and identity is no different.
We expect highly and we maybe expected more but generally speaking as we go into next year with a fully integrated offering we feel that's the best way to look D identity prospectus of both in terms of the go to market and our sellers being able to sell identity as a holistic part of the platform.
Also technologically speaking the product will be completely integrated.
Into our endpoint technology, so it wouldn't require any additional configuration and that would again unlock and remove more friction.
Understood. Okay. Thank you very much.
Our next question comes from Joseph Gallo with Jefferies. Your line is now open.
Hey, guys really appreciate the question.
How should we think about macro impact at the lower end of the market. I know you said that large deals is where it is more pronounced.
Is the lower end of the market seen strength or is that partially being masked by the MSP channel.
Okay.
It could be it's a bit hard to tell I mean, just given that dynamic.
MSP to an extent masks some of these things from us, but as we look at our own direct contribution in SMB. It remained relatively in line with past trends. So we haven't seen anything too dramatic going in SMB, but what we've definitely seen is MSS beyond arise MSP picking.
More customers from the direct business. So even if you could kind of our customer account as an example.
A lot of these customers that we've added in the quarter are actually masked by one master MSP service provider that basically on boards all of these customers. So all in all we feel that between <unk> and our direct strength in SMB, we've seen largely consistent execution and we feel that should should continue.
New.
Into the future as well.
Awesome I appreciate those comments and then.
One the congo's, we've had with cyber professionals has just been around in the next frontier is Iot, which remains the wild West can you just give an update on ranger and is that viewed as a must have or a nice to have and an intensifying macro environment. Thanks guys.
Sure. If you ask me, it's a must have I don't know that thats the same <unk>.
As of customers just yet I think there's still a lot to still work on in terms of security fundamentals and Edr at ETP are still north prevailing enough indifferent appeared to reaffirm to you.
Filled with Edr and EVP.
With that we are seeing good traction with Ranger, we have been seeing traditionally good traction would ranger.
Think new market education always lags a tiny bit.
The threat landscape, but we believe that as you kind of go into more and more.
This needs to actually map out your entire exit environment, all your devices and get aggressive when your entire network range area is one of these imperatives that can help customers.
Fast to map out their environment, and then provide for better prediction better hygiene.
So it remains again, leading module for us and one that I hope, we'll see even more contribution in the next couple of years.
Thank you.
Our next question comes from Roger Boyd with UBS Securities. Your line is now open.
Great. Thank you so much for taking the question tumor lots going on with macro but I'd love an update on what youre seeing in terms of customer interest around the broader xdr strategy in the data set product and as we look to calendar 'twenty three where do you think those kind of security analytics project stack up in terms of CSO priorities. Thanks.
Sure.
Absolutely.
One of the topmost priority.
For a lot of enterprises out there just on the account the DS xdr projects when they deal with two data ingestion like the proposition that we have with singularity xdr are actually means to offset close to way from legacy data processing solutions. So we have a lot of conversations out there to leverage <unk>.
Already preexisting platform that they own and singularity xdr and into a full log ingestion mechanism that all fixed cost away from traditional Sim providers, so, especially in this macro environment for true xdr data down solution and especially if it's one that already exists in your environment. If you are used.
Her for singularity xdr or for our Edr or for ETP, you can start ingesting data into it and save costs. We're now building more and more into a holistic business value proposition that ranges from endpoint protection and consolidating away. The endpoint security controls that you have now and all.
The way to cost saving on the logo side for security analytics. So expect more of that to happen still very very early in that cycle still applicable to just a narrow band of use cases, but as we go and execute towards next year, we're adding more and more use cases for customers to be able.
To enjoy.
The cost benefit, but now also make sure that there is a business outcome that's associated with it.
Most security and all the way to finance and business operations.
Great color. Thanks again.
Our next question comes from Andrew <unk> with Wells Fargo. Your line is now.
Okay. Thanks, So I have a question on the.
FY 'twenty four guidance. So you talked about gaining market share seeing more Microsoft displacements Youre pipeline is at an all time high your preliminary outlook for AAR suggests that net new <unk>.
<unk> is only going to grow about 8%.
Can you just talk about the factors that you think are going to get worse next year than they were this year towards that net new only grows 8%.
Yes.
We are really really looking to put some form of a conservative prediction at a time, where we don't believe we can predict anything really we don't have a crystal ball, we don't have a way to know how the economy would look like our assumption is that things are not going to get better anytime soon and just on the account of debt we will.
To make sure that we don't put two aspirational targets out there for our growth and as Dave mentioned.
To us we've always been incredibly nimble incredibly agile in how we spend and how we extract growth and we'll continue keeping an eye as to when we can maybe perhaps more on the gas pedal and maybe accelerate growth versus taking a more prudent and conservative approach to our growth. So all in all this just to us means.
We want to make sure that.
We're being.
Responsible custodians and are giving the conservative view of the most that we can see and right now to be perfectly honest. There is not much that we can predict it to next year. So we're taking that view.
Okay Fair enough and then.
On the fed side you said.
Secured three new agencies I'm just wondering.
Are those agencies exclusively using Sentinel won for endpoint protection or might they be using other vendors as well I'm just trying to understand the magnitude of those those three deals in the fed you mentioned thanks.
Of course, each one of them is slightly different some of them do use another vendor out there some of them use us exclusively.
All of those I mean this is an initial land I mean, obviously these agencies are sometimes.
Just incredibly sizeable.
For us I mean, even the initial land is a massive deal but all of them are just initial and it will grow over time for some theres another vendor out there.
But to us, it's just a massive massive when and.
And we continue to see traction in the federal which is the most important part.
That's great. Thanks Tomer.
Our last question comes from <unk> <unk> with D. A Davidson your line is now.
Hey, guys. Thanks for squeezing me in really just one for me.
Asks about customers kind of right sized deal sizes have been taking.
The number of endpoints that really need today as opposed to kind of buying more endpoint coverage based on some prediction of what they need in the future, but I guess I'm curious if you're also seeing.
Customers may be taking singularity core control as opposed to complete and then as you look at the emerging products that certainly it sounds like cloud security remains very hot but if you just have to look at cloud identity range.
The range of Iot data protection, just kind of rank order, which projects are still seeing the most demand versus which have seen maybe a bigger impact due to the macro and are getting pushed to the side.
Singularity control is still the number one package, we haven't we haven't seen people shift away to singularity core.
So similar to complete is the number one.
We haven't really seen anybody moving to singularity core or control.
To us it really is about the adjacent modules 12 books singularity complete, but sometimes folks would choose to not spend on right now this could be adjacent capabilities like remote script execution.
Endpoint firewall controls that are not always the bare necessities, but when you look at the core needs, obviously, EVP and Edr remain front and center in the second part there is obviously anybody that has transitioned or have started transitioning to the cloud and is now using the cloud of the production environment much deploy.
Workload protection runtime prediction into those so it does become a must have so across these two functions as well as a more demand for <unk> services and managed services.
Those are kind of the.
The code of the bread and butter of what we sell on to date data retention is one that I highlight as well again, that's actually a cost saver too many folks out there where they can retain data with the singularity platform versus maybe putting it in another costly data lake.
So those to us have seen the most success and continue to grow I think for some of the other offerings that we've had especially if you kind of look at two into endpoint management, that's where sometimes people choose to pause and really focus on the ones that matters most.
Got it great. Thanks for taking my question.
And our final question.
Okay.
Hi, Liana <unk> with Bank of America. Your line is now.
Hi, guys.
I have two questions. Thanks, very much by the way for squeezing me in.
The first one is.
If I look at prior down cycles.
There was always an issue for smaller companies to maintain the pace because some customers are looking at balance sheet strength and are looking at.
Cash flow cash burn losses, and our shifting business to companies who are more financially stable.
New York case is a little bit different because we are a leader in your space and I'm wondering if you had this kind of discussion with your customers or if you had this kind of consent. How you address them if it's a consideration at all.
That's my first question. My second question is about large customers, we're seeing across the board that companies are talking about slowdown from smaller customers or push out push outs is always the first step before slowdown.
And the question is are you concerned that what youre seeing today is only the short term, meaning smaller companies just to react really quickly to what's happening in the market, that's slowing spending and we could see larger customers doing the same thing at the beginning of the year so that means.
We havent hit the bottom yet in terms of spending so the question is as much as you can say in.
Qualitative quantitative question, it's more qualitative as much as you could see how do you. What's your view of larger companies those who are working of annual budget, what kind of discussions you have with them. When it comes to how we will next year look like.
Okay.
First on the first question honestly, we haven't seen that in our cash balance is incredibly strong.
But I think any degree so we haven't heard that from customers at all.
I think customers to look at us as a very cost effective solution and one that on the TCR perspective helps them more than almost any other vendor out there and that comes again on the back of a public company with transparent financials and that has been I think just a stellar for us in cyber security through the second question.
I think we are seeing.
Large enterprises react and they react by really right sizing I think if you coupled the pipeline you really understand that the customer intent is still there cyber security is not something they can push or fund.
Actually want to buy it but they want to optimize on cost at the same time. So if you couple the pipeline strength. When you couple the trends in deal right sizing I think thats, the right dynamic that youre going to see and it's something that we've seen I think even starting a little bit last quarter.
It did show up this quarter, even in a more pronounced way and now we're kind of factoring it in so all in all I don't feel like you're going to see large enterprises thing I don't want to spend our security they have to spend on security, whether it's with the incumbent that they currently have with a new vendor can supply better security probably right around the <unk>.
Same cost structure, they're going to have to spend it so I don't foresee.
Any further.
Tapering or any further slowdown in how they're thinking about purchasing I think we will see a continued trend to right size deal and I think that central one is very well positioned to deal with that we've always been the most the more cost optimized solution in the market it bodes incredibly well with our business model that's why.
You see even in this macro environment improving on gross margin, but couldn't have happened if we hadn't had really robust and healthy pricing to two coupled with debt.
Great. Thank you.
There are no more questions. So I'll pass the call back over to the management team for closing remarks.
Thank you everybody really appreciate your time today.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.
Okay.