Q1 2024 SentinelOne Inc Earnings Call
is provided in today's press release and in our shareholder letter. These non- GAAP measures are not intended to be a substitute for gap results. Our financial outlook excludes stock-based compensation expense, employer payroll tax on employee stock transactions, ammarization expense of acquired intangible assets.
and acquisition related compensation costs, 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 Wine Garden, CEO of Sentinel-1.
Good afternoon everyone and thank you for joining our fiscal first quarter earnings school.
We delivered another quarter of significant revenue growth and margin improvement. Customer retention and expansion remains strong and above our long-term targets.
We continue to achieve high wind rates with stable pricing. The most discerning enterprises are consolidating their security on our best-to-breed platform, which now includes half of the Fortune 10 companies.
We continued our progress towards profitability in the first quarter, making a seventh consecutive quarter of more than 25% of operating margin improvement. Despite many underlying business trends, our first quarter top line growth was lowered and we expected global macroeconomic pressures continue to persist.
Seceding in this environment requires a sharpening focus on go-to-market execution. Furthermore, we're taking actions to fortify our business by improving our cost structure and ensuring our path to profitability.
We believe these measures will go at growth efficiencies across our business.
Cybersecurity is mission critical and it must have for all enterprises, especially with the world going to a digital transformation.
We're leading the charge in security AI innovation and building the enterprise security platform for the future.
On today's call, I'll focus on two key areas. One, details of our quarterly performance and external market dynamics. Two, how we're continuously optimizing our business and ensuring progress towards profitability, which includes our recent cost saving measures. Before we move on, let me briefly address the one-time adjustment we made to our ARR through our fiscal year.
of this one time adjustment, they will provide more detail on this.
Now let's dive into the details of our Q1 performance and demand environment. We delivered revenue growth of 70% as strong growth rate in any economic environment. We added net new ARR of $42 million driven by continued adoption of our singularity platform across endpoint cloud and adjacent solutions.
Reachive the record high gross margin of 75% supported by data efficiency and strong unit economics. Our operating margin expanded by 35% at points in Q1. Let me double click on that. We're making rapid progress toward our profitability targets. We also significantly improved our free cash flow margin.
showing a year over year improvement of 46% of its points. In absolute dollar terms, we reduced our operating losses and free cash flow outflows significantly.
With that said, RQ1 revenue and error growth fell short of our internal expectations.
Let me address the two key factors head on that impacted our Q1 results.
First, macroeconomic conditions are further impacting both deal sizes and sales cycles. Incrementally, budgetary scrutiny is leading to deal size adjustments for new customers and renewal contracts.
We see customers evaluate usage and write size on renewals. Some enterprises are taking a wait and see approach by deferring purchase decisions. While not entirely new, the impact from these conditions was more pronounced this quarter.
Second, operating in this environment raises the bar for execution. We were disappointed with some late stage contract execution challenges on large deals that cause a few deals to slip to next quarter. For example, a multimillion dollar deal with a customer who had already fully deployed our solution could not close in Q1 due to contract delays.
At our scale, we have the opportunity to adapt quickly. We're focused on further enhancing our execution, including streamlining our closing process, and up leveling our enterprise platform goes to market approach.
In particular, we've incorporated factors like deal right sizing and lower pipeline conversion, as well as a higher emphasis on efficient growth into our outlook.
There is no fundamental change in the business or opportunity and our win rates remain strong, but the selling environment is more difficult.
We're assuming a worsening macro environment. We now expect fully revenue to grow 41% at the midpoint. To be clear, we're still adding significant new business and expanding with existing customers. These assumptions recalibrate our growth outlook and give us a solid foundation for the future. We're operating at record growth margins and winning significant majority of competitive opportunities.
Please remain holding as we reconnect our speaker.
Ms. Njons, thank you for your patience. Our speakers have been reconnected.
business toward a billion dollar in ARR and beyond, we believe our business will continue to become even more durable and resilient. We continue our expansion into adjacent domains such as security analytics and cloud security. We're early in this journey and we remain focused on the long-term opportunity.
We're bringing innovative technology to a $100 billion dressable market composed of legacy solutions and ripe for disruption.
The only way for companies to stay protected from cyber attacks is to have the best security. At SentinelOne, we leverage AI to deliver leading protection and value to enterprises of all sizes.
Digging deeper into our Q1 results, we are encouraged by several important strengths across our business.
Customers of all sizes and geographies continue to choose SentinelOne for industry-leading technology and superior platform value. We added more than 700 new customers in the quarter, and total customer count grew about 43% year-over-year, exceeding 10,680. As you know, our customer count does not include the customers served by our MSSP partners here at SAP.
So the number is dramatically understated. Customers with over 100,000 in ARR grew 61% year over year, much faster than our total customer growth. Customers above the million dollar mark grew even faster.
In Q1, we added a new Fortune 10 customer and we're now the cybersecurity platform of choice for half of the Fortune 10s.
Our singularly platform scales with the world's largest enterprises and outperforms in the most stringent security requirements from detection, too many ability to privacy and controls.
Other prominent customer wins, spend endpoint and cloud footprints ranging from global financial institutions to iconic retail brands.
Our momentum across mid-market enterprises remain particularly strong in Q1. Even with budgetary pressure and some downsizing, our ARR per customer increased by more than 20 percentage points year over year, demonstrating our success with large enterprises as well as increasing adoption of broader platform offerings.
Our land and expense strategy is working as customer retention and expansion remains resilient. Our NRR exceeded 125%. This expansion was driven by footprint expansion and module adoption. Our emerging capabilities represented more than one third of quarterly bookings in Q1, demonstrating strong momentum of our adjacent solutions.
Singularity Cloud remained our fastest growing solution followed by meaningful contributions from other adjacent capabilities, such as Vigilance MDR in Rangers. Our customer state remains under penetrated in terms of module adoption. There is clear opportunity to increase our platform expansion and improve our business durability.
Our Partly Supported Go-to-Market Model continues to unlock scale and enhance our market position.
We achieved another quarter of resilient growth from our MSSP partners in Q1, as businesses increasingly turn to managed security protection.
Beyond endpoint license extensions, our MSSP partners have started to adopt broader platform modules such as Vigilance MDR, Ranger, and many others.
We expect continued MSSP share gains, install-based replacements, and modules attached to drive meaningful growth going forward.
Our autonomous security, multi-tenancy, and fully customizable access control makes SentinelOne a critical partner for large MSSPs.
Together, we're providing enterprise grade protection to customers of all sizes. We're providing enterprise grade protection to customers of all sizes.
Expanding upon our cloud security partnership with WIS, we've enhanced the customer experience to deeper technology integration. Now, our integrated cloud security platform provides enterprises with complete visibility into their cloud-hosted infrastructures and allows them to protect against cloud-based threats at machine speed.
Our recently launched cloud security marketing campaign is creating strong momentum, increasing customer and partner interest in Singularity Cloud.
Looking at the competitive landscape, we continue to maintain strong win rates without having to compromise on pricing. This hasn't changed, and our disciplined pricing and value is reflected in our record gross margins. Our ASPE remains stable, and we continue to win against legacy and next-gen vendors in significant majority of competitive evaluations.
And we expect these trends to continue. Customers value center wants cultural trust in transparency, which is a philosophy we bring to every relationship.
We're focused on expanding our pipeline, leveraging our channel ecosystem, and refining our execution. We network our plugin to be a description of all the great exciting things.
Sentinel-1's platform is purpose-built to help customers optimize security and cost with coverage across diverse operating systems and cloud environments. We're helping enterprises consolidate multiple point solutions enabling them to realize better security and business outcomes using fewer resources. Let me share how we're balancing our investments and.
regardless of current economic scenarios as demonstrated by our Q1 margin improvement and over achievement. As a result, we're adjusting our costs as needed to drive more efficient growth in hands resiliency and ensure our path to profitability. Let me provide a few specific examples.
First, we're implementing a plan to optimize our workforce that is expected to impact about 5% of our current employees in pace or future headcount growth plans.
We also see opportunities to leverage AI tools to make our teams more productive and help drive operational efficiencies for the company.
Second, we're sharpening our focus on cost discipline. This includes reducing variable spend to business critical needs, as well as optimizing talent locations and facilities.
We are prioritizing core products that offer the greatest potential for delivering substantial business and customer value. We believe these initiatives more closely align our cost structure with our current outlook without sacrificing long-term growth potential and market opportunities.
These are the right steps to streamline our business. We are continuing to maintain a balance between growth and profitability.
Reflecting upon the last few years, Sentinel-1 has evolved from an endpoint security solution to a comprehensive enterprise security platform. Our endpoint solution has been a source of tremendous growth, and we expect this to continue in the coming years.
Beyond our endpoint market success, growth of our emerging solutions have diversified our business mix across endpoint cloud identity and data.
Our leading innovations and holistic approach to cybersecurity put us in a strong position for long-term growth across multiple large addressable markets.
When the mental breakdown shift among enterprise security and operations, technological advancements are changing what was once imagined possible for cybersecurity. Artificial intelligence is among the most disruptive technologies of our time, and is the potential to scale cybersecurity in a completely new way. And we are leading the charge through innovation.
From early on, we developed a fully automated AI-based security platform integrating neural networks to serve a specific use case, combating cyber attacks and protecting our digital way of life as a force for good.
Our Singularity Platform is powered by a single proprietary security data lake to protect multiple attack surfaces. Our AI-based approach delivers best-in-class autonomous protection, where we've consistently led in third-party evaluations and Gartner critical capabilities.
Our success is also proven in real-world experiences. Where did that be? The global scale sunburst attack a few years ago when we had zero customers impacted, or more recently, the smooth operator global supply chain impact.
Here again, our Singularity Platform successfully prevented the attack from executing well before the threat was discovered and identified by other security vendors.
This is the true potential of Center One's leading security, real-time AI-based autonomous protection.
And once again, we're leading the industry by incorporating generative AI into cybersecurity. We recently launched Purple AI, a one-of-a-kind innovation in cybersecurity that supercharges users to control all aspects of enterprise security, from visibility to response with unmatched speed and efficiency.
This is much more than a sidecar assistant. It can upgrade any security analyst to superhuman levels. Customers and prospects were given hands-on access to a live demo of Purple AI at RSA, the world's largest cybersecurity event and feedback was extremely positive. The whole three journal called Das Out is an AI innovator.
CRN put us on the top of the list of 10 cool new cybersecurity tools announced at RSA 2023 in CSO magazine named as one of the most interesting products to see at RSA conference 2023.
We are well positioned to bring more AI to customers.
Sentinel-1's AI-based detection engine has always been a differentiator. Now with purple, we're taking a big step in bringing generative AI to security professionals, making security operations easier, faster, and efficient across petabytes of data from any source.
Importantly, we are committed to ensuring our cutting-edge technologies are used ethically, safely and responsibly. Our Singularity platform allows customers to maintain complete control of their data, reinforcing our dedication to keeping sensitive information in the hands of its rightful owners.
Before concluding my remarks, let me mention an exciting development. Sally Jenkins joined Sentinel-1 in April as our new Chief Marketing Officer.
Sally's marketing leadership will help further define our value propositions, expand our brand presence, and solidify our leading growth across multiple market segments.
She brings over 30 years of experience, amplifying brands at high growth and scaled companies.
We welcome Sally to the Center One leadership team.
In conclusion, we believe today's macro challenges are not permanent and that enterprise transformation is in its infancy.
We're well positioned to address critical enterprise needs leading next-generation security across endpoint, cloud, and security data analytics.
We also believe the market will continue to converge towards enterprise-wide cybersecurity platform driven by AI and approach we pioneered and lead.
We're committed to innovation, improving our operating performance, and empowering customers with the best enterprise security resources.
Ultimately, companies win when they continue to adapt, innovate and deliver value for all stakeholders and this is our North Star.
I thank you and all stakeholders, especially our Sentinel's customers, partners, and shareholders for your continued support and commitment. With that, let me turn the call over to Dave Bernhardt, our chief financial officer.
Toma, thank you. I'll discuss our quarterly financials and provide additional context about our guidance for Q2 and fiscal year 24. As a reminder, all comparisons made are year over year and all margins discussed are non-gap, unless otherwise stated. Thank you.
Before digging into the Q1 results, I will discuss the details of a one-time adjustment we made to our ARR for fiscal year 23.
First, some context. In the past few years, we had seen steadily increasing usage and consumption patterns by our large customers, which we accounted for real-time and quarterly ARR. However, as the first quarter progressed, we experienced a notable decline in usage, which continued in May.
In light of the current macro environment, we expect these lower usage and consumption trends to persist.
Due to this new dynamic, we elected to tighten the methodology for calculating ARR for consumption and usage-based agreements to reflect committed contract values. This provides a cleaner view of growth for fiscal 24 and beyond.
By making this change now, we expect ARR and revenue to be more closely aligned. It should also reduce volatility in ARR compared to the prior methodology, where usage and consumption changes could have a magnified impact on ARR.
As we reviewed the methodology, we also discovered historical upsell and renewal recording inaccuracies relating to ARR on certain subscription and consumption contracts, which are now corrected.
After considering these factors, this adjustment resulted in a one-time ARR reduction of 27 million or approximately 5% of ARR resulting in Q4 fiscal 23 ending ARR of 522 million.
We are applying a comparable estimated adjustment to the remaining quarters in fiscal year 23, which we believe is a reasonable approximation of the impact in those periods. Importantly, this adjustment did not impact historical revenue or bookings. We wanted to be transparent to address this up front and move forward on a clearer path.
Now, moving on to our Q1 results.
Revenue grew 70 percent to 133 million, with international revenue growing 84 percent year over year and representing 35 percent of total revenue. Last month British Navy
We added net new ARR of 42 million and ended the quarter with total ARR of 564 million.
This did not meet our expectations.
Customers continue to tighten budgets and deal sizes. While these factors are not entirely new, they were more pronounced in Q1, and we have the opportunity to execute better. Looking beyond the top line growth, our Q1 performance showcased many areas of strength across the business.
We continue to see a healthy mix of new customers and expanding business from existing customers.
Our dollar-based net retention rate remains north of 125%. Also, our ARR per customer increased more than 20% compared to last year, reflecting strong business momentum among large enterprises and growing adoption of our Singularity platform.
We achieved another quarter of resilient growth from our MSSP partners in Q1 as businesses increasingly turned to managed security protection.
Our broader platform adoption by our existing customers and partners remains durable and resilient, fueling a solid base for growth regardless of broader conditions.
Turning to our costs and margins.
In the quarter, we achieved better growth and operating margin and narrowed our operating loss and free cash flows, all despite lower top line growth. We delivered a record gross margin of 75%, an increase of 7% points year over year. Construction
Just two years after setting our long-term gross margin target, we're already operating within the range of 75 to 80%. This demonstrates great progress.
We're seeing continued benefits from economies of scale, data processing efficiencies, and cross-cell from adjacent solutions. Special material.
This also underscores the importance and benefits of our fully integrated security data analytics backend where we collect data once to enable more and more capabilities.
We also delivered substantial operating margin improvement, expanding 35 percentage points year over year to negative 38%.
As market conditions have evolved, we have become more selective about investments.
We've taken important steps to align our cost structure with our updated growth outlook.
We've also improved our cash conversion in the first quarter. On a dollar basis, we reduced our operating losses year over year in Q1.
We also reduced our free cash outflow from $55 million in Q1 of last year to $31 million this quarter, reflecting a free cash flow margin improvement of 46 percentage points.
Moving to our guidance for Q2 and the full fiscal year 24. We are maintaining strong competitive win rates, stable pricing, and we're generating strong pipeline momentum. At the same time, we expect macro conditions to worsen, impacting enterprise budgets and sales cycles.
It's a more difficult selling environment. We are assuming lower pipeline conversion for the remainder of the year, as well as further deal downsizing.
We strongly believe this does not change our competitive position or our long-term opportunity.
The only way for companies to stay protected from cyber attacks is with the best security protection, and Sentinel One offers that, leading security and platform value. For the second quarter, we expect revenue of about $141 million, up 38% year-over-year, and we expect net new ARR in the low $40 million range.
consistent with Q1. We expect second half net new ARR to be higher than the first half, consistent with typical seasonality. For the full year, we expect revenue of $590 to $600 million.
growing 41% at the midpoint. We now expect full year ARR to grow in the mid 30% range from the adjusted fiscal year 23, ending ARR of $522 million.
While lower than our previous expectations, we expect continued growth and rapid progress towards our profitability targets.
Turning to the Outlook for margins.
In Q2, we expect gross margin to be about 74.5%, an improvement of 10 percentage points year over year. We expect gross margin to remain relatively consistent in the remainder of the year.
As a result, we are increasing our full year gross margin guidance to 74 to 75%, up over two percentage points year over year at the midpoint.
We expect our increasing scale and improving data processing efficiencies to continue benefiting our results.
Finally, we expect our Q2 operating margin to be negative 36%, implying an improvement of more than 20 percentage points year over year.
Despite a lower growth expectation for the year, we are reiterating our operating margin guidance of between negative 29 and negative 25 percent, an improvement of about 22 points at the midpoint compared to fiscal year 23. We're focused on improving our execution and operating the business efficiently through evolving economic conditions.
We must adapt, execute better, and we'll emerge as a stronger company in the years ahead. Every dollar we invest must generate a positive return.
To that end, we are taking measured steps to align our cost structure with the pace of growth this year, including decreases in variable spend and cloud hosting costs, optimizing talent and facility locations, lower forward hiring, and approximately a 5% total headcount reduction.
These efforts will increase performance accountability and operating efficiency, driving expected cost savings of about $40 million once fully executed.
We believe these are the right steps to optimize our long-term market and growth potential while remaining on track to achieve break-even profitability in fiscal year 25.
We have a very strong balance sheet with $1.1 billion in cash, cash equivalents, and investments, and no debt. This is a substantial war chest.
It provides longevity, flexibility, and ample runway to achieve our profitability targets. Before we open for Q&A, I want to take a minute to summarize everything we covered here today, which has been a lot.
We achieved many positive results, 70% revenue growth, and delivered upside to margins with significant free cash flow improvements.
Demand in our pipeline remain healthy.
On the other hand, customers are heavily scrutinizing deals, and we have the opportunity to elevate our execution.
We also experienced a slowdown in consumption and usage among certain customers, which led us to adjust our ARR to better align with revenue and mitigate further fluctuations.
Finally, we're executing workforce reduction and cost optimization actions to ensure we meet our fiscal year 24 margin targets and continue to deliver disciplined growth. Thank you all for joining us today. We will now take questions. Operator, please open up the line.
press star 1.
As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question.
We do ask that you please limit yourself to one question.
We will pause here briefly as questions are registered.
The first question comes from the line of Brian Essex with JP Morgan. The line is now open.
Hi, good afternoon guys and thank you for taking the question. I just want to address this adjustment and get a little bit of clarity there. You just alluded to the slowdown in consumption usage. Is this for storage and query? Maybe you can explain.
Um, you know, the underlying product that's related to this consumption based revenue. And then as we look in our models and try to forecast out the revenue generated from is this going to be.
Does this basically remain out of the ARR equation now so it's kind of an extra layer of revenue we need to consider that's more variable in nature? Maybe a little bit of color there will help.
Yeah, happy to discuss this. So what's happened is we had a $27 million one-time adjustment. It's about 5% of the ending ARR that we decided to be more conservative on and restate as of Q4 of last year. It's two parts. One, we've changed the methodology of calculating the ARR and consumption.
digit of our total ARR, but what we had been seeing historically was we were seeing customers that were signing up for contracts.
using the data in excess of what they were committed to, renewing early, and we were reflecting that in the ARR balance.
you know, as
something that we'd seen going into late Q4 and early Q1 and then throughout Q1, even into May and likely into June , we're seeing a decrease in that and customers right-sizing their spend to get back to committed total. So we were seeing an outside swing.
to the opposite end that we had seen prior. So what had happened was by doing this, we're trying to tighten the definition of ARR to eliminate these swings to our favor or to our detriment and basically lock it to the committed contract. So we believe that this going forward, it's gonna reduce the quarterly ARR fluctuations, it's gonna more correlate ARR and revenue.
that included a renewal. And we were adding that to the historical ARR versus adding just the upsell component of it. This was an error in our CRM. We have fixed this and should not have that error going forward. That's why it didn't affect revenue, didn't affect overall total bookings.
should be going forward, both externally and internally. That's why we made this adjustment now. Okay, and maybe to follow up, how should we, is there a way we can understand a practical use case around how an enterprise might...
be managing their security posture and choose to maybe ingest and store less data. What is the thought process that goes along with that and what is the risk award kind of trade off of their decision to ingest less data to save costs when your security posture is at risk?
We're seeing this in two different areas. I think that one, that's something that you see I think with a lot of consumption-based companies. I mean when people look at log analytics and generally trying to ingest data, they now take a more prudent approach to what they want to store.
So you see them filtering out a lot of the data that they don't feel is useful. To us, that's one thing that we saw through the data set user base happening where they downsized, right-sized some of the logs that they wanted to keep. I think a lot of companies are kind of going through that same exercise now, whether with us or other vendors, which was really why.
we elected to just remove that consumption part from our ARR to prevent that from kind of being something we consider into the future and obviously if something kind of aligns to the better, obviously that becomes upside. The other side of it is when you look at security data, it's much of the same story.
Some log sources are not as useful for customers and they're now scrutinizing what they put into the platform. Generally very healthy, it's just when it comes after two years of putting everything they could into the platform, I think now we're seeing obviously the inverse behavior which we felt, again, something prudent to do here is just...
remove that volatility from ARR and that's the result. Operator, next question, please. Pollville with Scotiabank. Your line is now open.
Hi, thanks for taking my question. This is Lori Luang for Patrick. I just have a quick question on the cloud security. Patrick Colville, you may proceed.
Hi, can you hear me?
Hi, can you hear me? We can hear you, yes.
The next question comes from the line of Tal Liyani with Bank of America. Your line is now open.
Great, don't hang up on me please. I hope you can hear me.
We're here and you're in mutual worth something. I know, I know, it's not you. I know. Hopefully she can hear us.
I want to ask a question about certain things you said.
On one hand, you're saying that this is a slippage of contracts from Q1 on to the next few quarters.
On the one hand, you're saying that this is a slippage of contracts from Q1 onto the next few quarters. On the other hand, you're saying that this is a slippage of contracts from Q1 onto the next few quarters.
if this is just slippage, why are you reducing second quarter guidance and full year guidance? And then why are you reducing workforce and other expenses? It seems to me, just from your actions into the guidance and into the expenses, that it's more than just slippage. That's something in the environment and...
is worse, and the question I have is, first about quarterly narrative. I think in April you said that things are fine, so does it mean that it deteriorated right after?
And I want to ask you something about competition. The question is, is it more related to competition? Did you have greater loss rate of contracts or things that impacted the lower guidance? Or is it really strictly about spending? It's hard for me just to see the same spending comments from other-
So some of it was known and I think that generally we factored some of that into how we convert pipelines. I think we have had a couple of execution hiccups where some deals that just were not supposed to slip, this is not specifically macro related.
we just weren't able to execute these contracts in time. And that was unfortunate, and that's something that we need to do better. So to me, this is not deal slippage, it's our own execution. The other factor, and why we're taking a more cautious approach, is just generally, we feel this environment, customers are not really,
at the end of the contract reflecting what their intent to buy was in the beginning of entry to the pipeline. So if we take a more cautious look into our pipeline, which are very healthy, it's just you don't always are able to predict what that deal size is going to be at the end of it all. So to us, I mean, we're just taking a more prudent approach to the pipeline.
obviously forces us to also take the guide down and really not consider consumption as part of our go-forward, but only as as upside as I mentioned. So these are the three factors that go into it. The competitive environment remains you know pretty much the same. Our win rates have been you know stabilized over the past few quarters and even before. I don't think we're seeing anything you know out of you
that we just don't do and will not do. But outside of that, which I would kind of call on the outline or kind of the outskirts of things, things are pretty normalized on the competition front.
And Tal, to build on that further and talk about some of the cost initiatives we've put in place, with these lowered expectations for revenue and ARR leading into the latter part of this year, we said from the beginning our goal was to get to break even or better for fiscal 25.
These are things we have to do to enable that to happen. So we've said we were going to sharpen our pencils. We've said that everything we were going to do was focused on achieving those bottom line results, no matter what the growth was. Everything we're doing in this action and what we've been doing earlier in the year when we've made similar actions that were smaller and kind of cuts around the...
comes from the line of Sacket Calio with Bar Clays. Your line is now open.
Just like everybody else.
Hey, it's Zach at SARA, can you hear me?
Hey, it's it's sorry. Can you hear me? Yeah.
Hey, I'm so sorry. I was just hopping between calls here a little bit. Tomer, very helpful response on the last question. Maybe just to dig into the competitive part of that response a little bit. I was wondering if you could just double click on Microsoft specifically. I mean, a lot of times, you know, there have been questions around, you know, just how competitive or how, how, uh,
effective the product is, but it's obviously very easy to buy. I mean, any views on just how you're referring specifically versus them competitively.
Sure. Look, Microsoft is a formidable competitor. I mean, this is not a legacy signature-based solution. Obviously, they have a fairly expanded security portfolio. With that said, I think that for customers that are looking for the security capabilities and the coverage that a pure play vendor can provide.
Microsoft just doesn't cut it. So I think in certain parts of the market, you can see them a bit more palatable for security teams, but as a whole, I think that doesn't really translate into these more discerning customers. Moreover, I think that when you look at what capabilities customers are hoping.
still there we see you know time and time again that when people eventually do go with Microsoft you know that's a CFO type led decision and I think that more and more people are kind of shying away from that approach. The last thing I'll say there is you know we're targeting now between all the different offerings we have in our portfolio about a hundred billion dollars
pretty good about our ability to compete with Microsoft, especially with security savvy professionals, especially with MSSPs that are looking for more automated, more OPAC driven solutions. So we feel well positioned, but obviously Microsoft, they're a formidable vendor out there.
Thank you. Our next question comes from the line of Adam Tindall with Raymond James. Your line is now open. Okay, thanks. Good afternoon. Tomar, I just wanted to start to understand, you know, a lot of the concentration of the negative surprise here is in the data ingestion piece and... Uh huh.
I know it's a smaller part of the business, but if we think about that, the narrative would be that there's perhaps concerns that that could be a leading indicator for broader challenges coming in the business with the logic saying, hey, it's easier to shut off consumption quickly and we'll get to the contractual stuff later and ultimately start shutting that off. Just wondering, you know, with that kind of, you know, a narrative or potential bear case, how you're thinking about preventing that or what you would say to investors that would be concerned.
I mean, that looks very sane to us. I mean, these are just getting aligned to the workforce that they have. So I don't think there's anything material with what's happening with licensing for us. Consumption in its nature is just more volatile. And I think that for companies out there, when they're under the gun to save...
Obviously something as intangible as data is something that they can start thinking twice about. That's not the same for their core security posture and that is something that we've seen very, very stable over time. Even if we imply some factor of right sizing into it, that doesn't create that same volatility that an ad hoc consumption model.
volatility, we remove that from our ARR projections.
Okay, and Dave, maybe just a quick follow up. I'm sorry if I missed it, but did you size the consumption business? I know, scaler years ago, you talked about $10 million for that piece of it. What's the size that we're looking at and any changes that you're looking at from a contractual basis or anything like that moving forward?
It's single digit percentage of total ARR. A single digit percentage of total ARR.
We shouldn't expect these fluctuations going forward as we've moved to contractual.
Everything we're doing is anchoring around having this be as conservative a number and removing the fluctuations either side going forward.
Thank you. The next question comes from the line of Patrick Colville with Scotiabank. Your line is now open.
Thanks for taking my questions. This is Laurie again, on for Patrick. Can you guys all hear me?
Yes, hi, Lori. Hi. So just want to ask...
the cloud security products. Last quarter you have a very good traction, you mentioned, and how's this quarter? Can you share with us any updates, partnership with WIT? Of course, it's been great growth for us on the cloud side, and this quarter once again remained that same.
but we've tightened up the technical integration part of it. We're kind of after phase one and all in all, I mean it shows great signs of progression. Generally speaking, we're not dependent on that partnership whatsoever to continue to grow our cloud business and we're generating more and more cloud pipeline.
in cloud is obviously the tip of the spear for us.
Thank you. The next question comes from Hamza Fadarwala with Morgan Stanley . Your line is now open.
I'm seeing maybe I mute.
Sorry about that, guys. Hey, good evening. Thank you for taking my question. Dave, just a quick one for you. You talked about the $40 million in cost savings from the 5% workforce reduction. Is that reflected in the full year guidance? Would you be willing to reaffirm the expectation for free cash flow?
provided earlier and then reiterated again today. You know, specifically, you know, from the RIF, it's about $15 million in annualized savings. You know, I think about $5 million or say $3 to $5 million in severance costs. There's inventory write-offs. We're also looking at facilities and other things.
that we will have that will continue this savings going forward. That's all contemplated in this guidance.
And then in terms of free cash flow, you know, I think in light of the reduced, you know, top line expectations for the year, I think the target for this year where we said we could potentially hit it in the latter part of this year, say Q4, I think that's probably better off thinking of that as a fiscal 25 activity just because of the amount of cash flow forecast that we would see a lot of cash flow implications advantages are going to be in action toillinks.
Yeah.
So a lot of the feedback that I'm getting from investors is just that it seems like you guys came across pretty bullish during the quarter. And clearly the tone is changing here on this call. So I apologize if I missed this, but I'm just trying to understand when exactly did you notice the slow down in the business really pick up?
and maybe even like when did you guys notice the issues with the historical ARR disclosure?
I think generally when we look at it, we see kind of the end of the quarter as the point where we started noticing more and more pronounced consumption changes. So to us, that was a point where couples that with a couple of deals sleeps and suddenly you're looking at a very different outcome.
for the quarter. So I think generally, if you just look at our new and upsell target for the quarter, it was pretty much in line with what we expected, but when you couple that with that downsizing of consumption, then you just arrive at a very, very different result. And to us, I mean, once again,
win rates sustained, revenue still growing about 70%. I think if you take out that consumption element, I mean, things would have looked very, very different. So that I think is kind of the reason where, you know, parts of the business here are really humming. And, you know, suddenly we saw this, which frankly we were surprised by.
as a shortfall. So it started out and we did a deep dive into revenue and obviously you would assume that about a quarter of ARR goes into revenue, absent some churn, absent some slower deployments, things like that that are typical. But I still obviously, based on our Q1 results, had a shortfall. So to understand that, we did a deeper dive by scrubbing everything in ARR.
without removing the previous renewal.
This was an error in our CRM. We fixed it. But that's where that came up. And that was, obviously, later on in the quarter and actually post quarter end when we really had fully identified it and been able to scrub all the customers.
Thank you. The next question comes from the line of Gray Powell with BTIG. Your line is now open. Your line is now open.
Great. Thanks for taking the question, and I just want to make sure. Can you hear me OK?
All right, great. Thanks. All right, this might be a tough one, but I feel like I do have to ask it. And to some extent, you may have already answered it, but I'm just going to give it a shot anyway. So I guess, like, how should we think about, like, what was the main driver of just you missing the Q1 revenue guidance?
at 137 million. I mean you guided on March 14th and revenue is mostly ratable and I know we've talked about the consumption components but I just want to make sure that I fully understand that dynamic and then can you just reiterate like why this won't happen again.
I'll try and iterate for Dave because it's going to be the third time. Basically the ARR adjustment that we've done was realizing that both we've had consumption as kind of an ad hoc element to our ARR, which basically drives up ARR as consumption goes up but...
settled when he started kind of figuring out, hey, why aren't we seeing that revenue? A big part of it was the ARR was reflecting consumption that was now going down and that impacted what we should have seen in revenue and coupled that with again some CRM inaccuracies that Dave mentioned as well and that was mainly the reason...
for the revenue missed. Outside of that, the ARR for the quarter was roughly in line with what we expected minus again that consumption downsizing. So all in all, a lot of it was cleaned and will never happen again given that rebasing of ARR and the removal of consumption.
from the base. Thank you. The next question comes from the line of Brad Zelnick with Deutsche Bank. Your line is now open.
Great. Thank you so much. Can you guys hear me?
Great. Thank you so much. Can you guys hear me? We can. Hello.
Awesome. Thank you very much. You know, the ARR statement is very unfortunate. The environment is very tough. I think you guys have said it yourselves.
You're being asked a lot of tough questions, so I mean, as long as we're in this forum, I'm going to add to those, which I guess for you, Tomer, most appropriately, what is your strategic endgame? You know, you're facing an increasingly hostile macro and competitive end market. You're still burning a good amount of cash. I mean, it just seems like in a recession, you're in a bit of a tough spot. And you yourself, I think, said in many different ways that conditions are worsening. So…
It's $100 billion TAM. We got the most cutting edge technology in the market, and we're improving our margins to the point that next year, we hope to be profitable. So all in all, I don't see anybody else in the market making such incredible improvements on the margin front. I mean, our progression, I think, have been.
Fairly impressive. Obviously this is not the best market to operate in for a growth company. And I think what you're seeing is our real time adjustment for a full on growth from a full on growth company and into a more balanced approach, a disciplined growth company. We want to become more efficient. What you're seeing us do in the public eye is making the company more efficient.
we're here, we're going to continue and build our platform. We're adding customers in a pretty rapid clip, even in this environment. So all in all, I mean, Ken says it's a lot of fun right now, but at the end of the day, we keep on growing. We got very promising technology. We're a leader in AI. AI in itself is going to disrupt.
the cybersecurity infrastructure landscape significantly in the next couple of years, all of that translates to an opportunity and hopefully our shareholders will see that too. I think if you look at us on a three to five year horizon, let's play this out. If we're a profitable company still growing at reasonable growth rates, this is a far more valuable company than it is today.
And we're not relaxing on technology. We're continuing to advance that. We've been a technological leader and we're gonna continue to do that. So we look at this as, it's still early innings in cybersecurity for us. We have a long runway to execute, to execute better and to grow this company to be a more sizable company than we are today.
Thank you. Our final question comes from the line of Ray McDonough with Guggenheim. Your line is now open. Your line is now open.
Great. Thanks for taking the questions. Can you hear me okay? Yes, we can.
Great. Maybe for you, Dave, and just to finish off, you guys mentioned a couple of times that customers are right sizing on renewals, but also mentioned that gross retention rates remain stable. Last quarter, I actually think that you mentioned they ticked up. Just to be clear, dollar gross retention.
remains stable despite those comments and I guess I'm on the flip side of that. I'm trying to decipher the commentary that new and upsell was also in line with expectations and that renewals were stable. Is that consumption business that's kind of the headwind here?
or a lot of the headwind, is that not accounted for in the gross renewal rate? How should we think about where the headwinds showed up the most between renewals, expansion, and new logos?
If you think about it on a pure NRR rate, we've gone from the 130s into approximately north of 125. So we're still seeing our customers continue to increase their spend with us year over year. We expect that to persist. We're expecting 120 plus percent as a floor for us, and we see that for the foreseeable future.
In terms of how this affects GRR, our GRRs have essentially been flat for past eight quarters or so. I don't think it's deviated more than a point. So one of the things that Tomer had talked about is when customers use us, they don't tend to leave us. So you're not absolutely
In terms of the right sizing of deals, historically we'd seen customers that may have signed multi-year deals and they would have stepped up employee counts for end point and say, hey, I'm going to buy this much minimum and I'll step up for a better price for the following year and a better price for the following year based on volume.
we're seeing customers now just flatten that out based on the employee counts now, and then they come back to us at renewal if they're purchasing a more sizable amount. So we're just not seeing that forward projections from our customers that we were historically seeing. Maybe just something to add to that, and maybe that can help you piece it all together.
GRR is stable and it's what we call plenGRR. And I think the one dynamic that we did see is that traditionally we didn't even get to the plenGRR. GRR was even lower than that. And that is something that we started almost taking for granted. And I think in this environment, that is something that you can't take for granted anymore. But once again, I mean, we still are one of the industry that has been GRR.
That concludes today's call. Thank you for your participation. You may now disconnect your lines.