Q3 2024 SentinelOne Inc Earnings Call
Okay.
Good afternoon. Thank you for attending to sit more one Q3 FY 'twenty 'twenty four earnings conference call. My name is Victoria and I'll be your moderator today, all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the.
And I would now like to pass the conference over to your host Doug Clark Vice President Investor Relations. Thank you you May proceed Doug.
Good afternoon, everyone and welcome to the Central one's earnings call for the third quarter of fiscal year 'twenty. Four ended October 31, with US today, our total wine garden, CEO and Dave Bernhardt CFO.
Our press release in the shareholder letter were issued earlier today and are posted on the Investor Relations section of our website.
This call is being broadcast live via webcast and an audio replay will be available on our website. After the call concludes.
Before we begin I would like to remind you that during today's call, we'll be making forward looking statements about future events and financial performance, including our guidance for the fourth fiscal quarter and our full fiscal year 'twenty four as well as long term financial targets.
We caution you that such statements reflect our best judgment based on factors currently known to us and that our actual events or results could differ materially.
Please refer to the documents we file from time to time with the SEC in particular, our annual report on Form 10-K, and our quarterly reports on Form 10-Q. These.
These documents contain and identify important risk factors and other information that may cause our actual results to differ materially from those contained in our forward looking statements.
Any forward looking statements made during this call are being made as of today.
This call is replayed or reviewed after today the information presented during the call may not contain current or accurate information.
Except as required by law, we assume no obligation to update these forward looking statements publicly or to update the reasons actual results could differ materially from those anticipated in the forward looking statements, even if new information becomes available in the future.
During this call we will discuss non-GAAP financial measures unless otherwise stated please.
These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles.
A reconciliation of the GAAP and non-GAAP results is provided in today's press release and in our shareholder letter. These non-GAAP measures are not intended to be a substitute for our GAAP results, our financial outlook excludes stock based compensation expense employer payroll tax on employee stock transactions.
Amortization expense of acquired intangible assets.
Acquisition related compensation costs restructuring charges and gain on strategic investments, which cannot be determined at this time and are therefore, not reconciled in today's press release and with that let me turn the call over to Tomer Weingarten CEO of sensible one.
Good afternoon, everyone and thank you for joining our fiscal third quarter earnings call. We delivered strong third quarter results, which exceeded our expectations on all key matrix and once again, we are raising both our topline and bottom line guidance for fiscal year 2024.
This was another quarter of solid execution demanding macro environment enterprises continue to modernize their endpoint security with a singularity platform. In addition, we're seeing strong demand for our cloud security and data Lake solution, which combined grew triple digits in.
And I'm pleased to announce that we've begun delivering purple AI to enterprises.
We also solidified our lead with mid market enterprises, and expanded our business with leading MSP partners grew larger and longer term commitments.
Finally, we continued making significant progress towards profitability with our net income margin improving to negative 5%.
Our pace of innovation and technology leadership continue to fuel growth.
For the fourth consecutive year Central one led the Mitre attack evaluation with 100% real time protection driven by autonomous security, which is critical in the mortal threat landscape and Gartner peer insights. We've received a score of four eight out of five for outstanding customer experience and product capabilities.
We're leading the industry with breakthrough innovations across endpoint cloud data and AI delivering a fully unified platform experienced the organization once again setting central one far apart from other security vendors where.
We are addressing critical enterprise security needs remaining at a Edgar series now and into the future.
As always please read our shareholder letter published in the Investor Relations website, which provides a lot more detail.
On today's call I'll cover three key areas.
Details of our strong quarterly performance to the broader demand environment in the state of cyber security.
<unk> innovations that magnify, our technology leadership and drive future growth across multiple markets.
Let's double click into our third quarter performance, which exceeded our top and bottom line expectations.
Revenue grew 42% and total <unk> grew 43% year over year.
Net new IRR growth accelerated to 11% year over year, driven by a combination of new customers and existing customer expansion. Despite persistent macro challenges and escalation of geopolitical tension the combination of superior technology and solid execution is driving positive business momentum.
Our progress towards profitability remains a bright spot we delivered a record high gross margin was 79% and we posted a ninth consecutive quarter with more than 25 points of operating margin expansion in parallel our free cash flow margin improved by 40 percentage points year over year, and our net income margin approached only negative five.
5%.
This tremendous progress reflects the scalability and power of our business model.
We remain committed to building on this progress in achieving positive free cash flow in the second half of next fiscal year.
We are succeeding and the input market from larger enterprises to mid market and smaller businesses, where we're already a proven leader through our embassies deep partnerships.
Beyond the endpoint the momentum of our platform expansion into adjacent market is picking up.
Our total customer base now exceeds 11500 recall this number is dramatically understated as it does not include the customers served by our MSP partners. We are increasingly protecting more customers through the channel as enterprises are turning to <unk> for a minute security services, which is a highly scalable way to address the mid market.
Same time customers with more than $100000 in AOR grew 33% and customers with more than $1 million of our grew even faster.
Our success with large enterprises and platform adoption continues to drive higher IRR per customer, which increased about 15% year over year in Q3, we generated strong momentum in the federal arena and secured several new agencies. Similarly, many large enterprises across global healthcare provider technology plan.
Corporation continued to choose the singularity platform.
These engagements include multiple aspects of the singularity platform, such as endpoint cloud identity and our data Lake.
In Q3, singularity cloud and similarity data Lake were our fastest growing solutions combined they represented over 20% with quarterly bookings and grew triple digits. We've seen a notable uptick in demand for our unified singularity data Lake solution.
Illustrates the growing diversity of our business and our expanding platform horizon.
The cloud and data Lake are so much more than into modules. These are highly differentiated and enterprise critical technologies with massive Tam and long term growth opportunities.
Our dollar based net retention rate remain north of a 150% is our existing customer base continues to deploy additional platform technologies.
We see significant long term potential based on high customer retention and satisfaction expanding product categories and early stage adoption from our installed base.
Onto our partner ecosystem.
We achieved another quarter of turned our growth with our MSP partners in Q3, and our momentum in the mid market enterprises remains strong.
<unk> represent the fastest growing channel category in the security market and the preeminent way to predict Smbs are platform architecture is purpose built to help service providers minute security at scale and drive meaningful growth.
Multi tenancy automation and remote management make singularity the platform of choice for MSP.
In Q3, we continued to solidify our leadership position with emphasis.
On the competitive front, we continued to win a significant majority of competitive evaluations against both Nextgen and legacy endpoint providers. When you look beyond endpoint security the competitive landscape to further in favor of central one our unified data security platform architecture helps enterprises consolidate spend point pro.
And consoles, resulting in better value efficiency and user experience.
This jointed platforms do not result in better protection bigger brands do not mean better security.
As proven by the string of massive breaches. These solutions are frequently breached just think about the many high profile February techs in the last few months and the shortcomings should be obvious.
We introduced a novel approach with you real time superior protection delivers fully autonomous cyber security and unified enterprise data in one place we.
With the migration to cloud based architectures and the adoption of AI based technologies digital infrastructures are rapidly evolving more important now than ever before our unified security data Lake architecture enables organizations to move at the pace of AI, while also modernizing enterprise wide visibility and protection in many cases.
Our competitors can't even offer a cloud security or security data link we have distinct technology advantages in these areas, including resource efficient worker protection and an actual unified data architecture capable of ingesting enterprise wide data.
We are engaging with enterprises and winning deals with singularity cloud and data lake regardless of the stalled endpoint vendor, helping enterprises managed complete security data at scale with better cost and performance is a strategic conversation that is different from focusing on point solutions over time, we believe these opportunities will open the door.
For further consolidation with the singularity platform, resulting in greater platform adoption.
Let me highlight two examples.
First after 15 years of using Splunk and large enterprises replace it with singularity data right alongside our endpoint and cloud security.
We're consolidating multiple security needs on the singularity platform. This enterprise is also deployed purple AI to get it fully integrated autonomous experienced like many others the customer valued central one unified platform that fuses security data and actions future proofing their enterprise security posture.
And.
Among many federal wins in the quarter one of the agencies. Similarly selected central want to consolidate security gross endpoint cloud and data. This federal agency completely replace the legacy Sim solution with singularity data Lake showcasing that Tim is the past and singular data Lake is the future.
Our competitive wins demonstrate how AI based technologies are fueling both new customer wins and significant expansion across multiple end markets.
Let's turn to the discussion to the broader demand environment in cyber security landscape.
The demand environment remains relatively consistent with last quarter from a macro perspective global economic challenges persist and are further typified by rising geopolitical tension yet.
Yet the threat landscape remains unrelenting.
<unk> and complexity of attacks have dramatically increased.
As an example, dwell times have shrunk from months to days, presenting new challenges for corporate defenses and putting more emphasis on the need for real time protection.
Recent high profile breaches showcase the enormous consequences for enterprises, a singular tack and cost hundreds of millions of dollars north business and disrupted operations events. Like these are constant reminders of our cyber security must be the top priority for <unk> around the world demonstrate nerving part of these attacks is that they.
<unk> to circumvent so called large platform vendors.
I mean again point product an endless list of module mesh together in this joined their platforms are consistently failing to protect enterprises.
Vectors of attack are forever evolving a constant moving target and the age of AI.
Cyber warfare has also taken a new turn towards online disinformation and manipulation geopolitical tensions are spilling into cyber space is stabilizing and undermining normal business operations and even parts of society.
At Central one where ushering in a new age of enterprise security one that can outpace it landscape by taking a holistic approach to managing risk through AI based real time operation.
Beyond security software there is a clear need to assess quantified articulate risks from security executive to the CEO and board of directors.
Shift in risk management as needed to prepare and protect against fast acting complex February attacks.
In Q3, we launched Pinnacle, one strategic advisory practice to help enterprises and governments build world class Cyber security programs.
Thrilled to have Chris Krebs, and Alex Stamos joined Central one both a renowned industry experts, who lead with integrity, combining their talents and central North technology leadership makes clinical won a highly valuable and unique resource to enterprises and governments across the world.
One we have management teams and boards understand who the attackers are what thereafter and how to fortify the security framework beyond just deploying any single product.
It will also help public and corporate leaders to better assess cyber risks and liabilities. So they can develop effective strategies and mitigate potential impacts.
Let me also share an update on our leading innovation across multiple growth areas. We recently hosted our first customer and partner conference and showcased our commitment to four key areas data and AI cloud and as always endpoint as.
As I've said before cyber security is a data problem.
Are the first company to introduce a full unified data and security platform legacy Siem solutions are falling behind and security vendors are clamoring to keep up.
Central loans unified data and security platform delivers cost efficiency and high performance at scale.
In Q3, we secured large data deals, which reinforces the demand from large enterprises looking to modernize away from legacy Siem solution.
Recent news of the leading some vendor being acquired is further boosting enterprise interest in our singularity data Lake.
We're taking singularity to the next level through a.
We're disrupting the Sim and security markets by fusing purple AI with our unified data.
<unk> is fully integrated across the entire singularity platform and user interface. It enhances investigations simplified threat hunting makes recommendations and automate action in essence, Supercharging every sac and data analyst unlocking efficiency and accelerating response time.
As I mentioned earlier, we've already started selling peripheral AI to select customers. We expect general availability in Q1 of next year.
The combination of unified data and peripheral AI puts us in a strong position to deliver enterprise wide security and disrupt the legacy data analytics market niche.
Nick we're expanding our cloud security offerings.
We are already leading in cloud workload protection cloud data security.
In the coming year singularity cloud will become a full featured seen up with agent based and agent less capabilities.
Have more to share in the next couple of quarters.
And as always we will continue to maintain our technology leadership and input.
We achieved a fourth consecutive year of leadership in the Mitre and Genuity attack evaluation.
Our approach to this year's wider evaluation reflect our philosophy on protection that speed and autonomous security of critical.
Unlike most participants in this day, you will see zero delays or configuration modifiers in central wind results. In contrast, our closest nextgen competitor at over 20 delays and configuration changes.
Achieving 100% detection and protection without any do overs is the difference between a stimulation in the real world.
<unk> don't offer extra time or a chance to make configuration changes.
Singularity is built to be real time, AI, driven an autonomous critical to combat against modern threats.
Before concluding my remarks, I'd like to mention some exciting update we've.
We've made some terrific additions to our leadership team to bring unrivaled industry expertise, Michael Kremen joined Central one in November as our new Chief revenue Officer.
Michael joins us as CRO from elastic where he was instrumental in scaling the business to $1 billion and beyond it.
He has experienced unite security and data in a way that ideally matches our mission. This.
This transition has been thoughtfully planned over the past several quarters.
I want to thank and congratulate mark their anello, our former CFO for his contributions and well deserved retirement, Mark will remain a central one until the end of this fiscal year to ensure a smooth transition as I mentioned earlier I'm also excited to welcome Chris Krebs and Alex Stamos to the central one team. They are renowned for their cyber security thought leadership.
With deep experienced growth, both public and private sector, including homeland security.
Global Tech Giants like Facebook and others.
In closing, our technology and talent are stronger than ever leading to another quarter of outperformance together, we remain focused on the long term opportunity in maximizing our business potential. Most importantly, we're focused on helping enterprises advanced their infrastructure and security now and for the future.
I want to thank all of central as well as our valued customers partners and shareholders with that I will turn the call over to Dave Bernhardt, Our Chief Financial Officer.
Thank you Tomer. This afternoon, I'll discuss our quarterly financial performance and provide additional context around our guidance for Q4 and fiscal year 'twenty four as.
As a reminder, all comparisons are year over year, and our margins discussed are non-GAAP unless otherwise noted.
Our third quarter results exceeded our expectations across the board, we delivered high topline growth and substantial margin expansion revenue grew 42% to $164 million and IRR grew 43% to $664 million, reflecting a net new IRR of $52 million in the quarter.
Our net new IRR exceeded our typical third quarter seasonality and accelerated to 11% year over year growth.
Our growth has accelerated despite persistent macro challenges.
We delivered strength across all geographies.
Revenue from international markets grew 46% and represented 37% of revenue.
Q3 revenue also benefited from a stronger contribution of our professional services driven by elevated breach activity across legacy and competing platforms as tomer mentioned deploying software alone doesn't solve all security challenges. This is why we acquired <unk> and launched expert advisory practice clinical one.
We continue to drive a healthy mix of new customers and existing customer expansion across businesses of all sizes.
<unk> per customer rose, 15% year over year to approximately $60000 per customer and.
In addition, our momentum with MSP partners and by extension Smbs was particularly strong as it continues to fuel our solid base of long term growth.
We continue to take market share from incumbents in next Gen vendors and our third quarter performance signifies our strong competitive position and enterprise demand for Sentinel one's best in class Cyber security.
Looking beyond topline growth our progress towards profitability remains a bright spot evidenced by significant margin improvements.
Our gross margin reached a new record of 79% showing an 8% year over year improvement and comfortably within our long term target range of 75% to 80% or higher.
This important achievement reflects the benefit of our increasing scale and platform unit economics, our margin improvement is indicative of healthy pricing and the value and innovation, we deliver to customers. It also demonstrates the success of our land and expand strategy, our unified security and data architecture in a single platform is delivering meaningful value for Sentinel won as well.
As our customers.
Q3 marked our ninth consecutive quarter of more than 25 percentage points of year over year operating margin expansion, our increasing scale and cost discipline are driving substantial operating margin improvement Q.
Q3, operating margin expanded 32 percentage points to negative 11%.
And we're not just improving our margins we have also significantly reduced our operating losses by more than 60% to negative $18 million in Q3 from negative $50 million in the year ago quarter.
Similarly, we improved our free cash outflow by about 60%. This is tremendous progress and reflects the continuing success of our proactive efforts to enhance working capital and thoughtfully manage our costs.
We are committed to building on this progress and achieving positive free cash flow in the second half of next fiscal year.
Moving to our guidance for Q4, and the full fiscal year 'twenty four.
The demand environment remains consistent with the trends we discussed last quarter.
Indeed customers are still facing higher cost of capital and additional approval layers.
These dynamics can impact visibility into the timing or size of potential deals. It's prudent to be mindful of these dynamics as we enter Q4, our seasonally largest quarter of the year.
Despite operating in a challenging macro and geopolitical environment, we're raising our revenue and margin expectations for fiscal year 'twenty for our teams are executing well our win rates remain strong and we are delivering operating leverage and.
In Q4, we expect revenue of about $169 million, reflecting growth of 34% year over year.
For the full year, we expect revenue of about $616 million, reflecting growth of 46% in fiscal year 'twenty. Four this is an $11 million increase compared to the prior outlook of $605 million above and beyond our Q3 beat.
Based on this view, we are on track to deliver about $200 million and net new IRR for the year up from our prior expectation of $195 million.
Based on our go to market momentum and strong competitive position, we feel confident in our ability to deliver against these higher full year growth targets importantly.
Importantly, we're seeing durability in our new business generation and the trajectory of growth rates.
And the endpoint security, we are encouraged by increasing platform adoption of our adjacent solutions like cloud data identity, and AI to drive diverse growth opportunities for years to come.
Turning to the outlook for margins, we expect our Q4 gross margin of about 77, 5%, implying a year over year increase of about two five percentage points on a constant currency basis, we expect our Q4 gross margin to be relatively consistent with Q3.
Also for the full year, we are raising our gross margin guidance to 77% up about five percentage points year over year, and up 100 basis points when compared to our prior guide of 76%.
We expect continued benefits from increasing scale and data efficiencies inherent in our business model.
Finally, we expect operating margin to be negative 14% in Q4, implying an improvement of 23 percentage points year over year and is stronger than our prior expectation.
For the full year, we are raising our guidance for operating margin to about negative 20% up 5% compared to our prior annual guide of negative 25%.
This implies a significant improvement of more than 29 percentage points compared to fiscal year 'twenty three.
We expect Q4 free cash flow margin to improve sequentially based on the seasonality of cash collections and payments and our improved operating margin outlook.
We have a very strong balance sheet with $1 $1 billion in cash cash equivalents and investments and zero debt.
This provides a durability and flexibility to optimize top line growth and margin improvement.
We are delivering industry, leading margin improvement and moving closer to achieving positive free cash flow generation.
As I've said before we will continue to grow market share and capitalize on large tam with disruptive technologies.
Our investment approach remains selective and focused on key areas of competitive strength, notably data AI cloud and as always endpoint. This is evident by our strong topline growth and industry leading margin improvement.
Thank you all for joining US today, we will now take questions. Operator, Please open up the line.
Thank you.
If you would like to ask a question. Please press star followed by one telephone keypad. If for any reason you would like to remove a question. Please press star followed by Tim again to ask a question. Please press star one as a reminder, if you are using a speakerphone. Please pick up your handset before asking your question.
Pause here briefly ask questions are at stake.
Our first question comes from the line of Joshua Tilton with Wolfe Research. Please go ahead.
Hey, guys. Thanks for taking my questions and congrats on a pretty solid quarter.
Tyler just clarifications here, but customer additions came in a bit lower than we were expecting anything to highlight there.
And just you called out offering a broader <unk> platform in the next 12 months is that going to be developed in house or are you guys looking to make some acquisitions in that space.
The customer count is rounded down.
Moreover, I think the amount of additions that we see.
Generally is very significant and that spans mid size enterprises, all the way to smbs.
To us inventory is a very strong quarter of customer addition, Moreover, AOR for customers it will be something that we optimize and reinvest in.
And that obviously is another impactful and just total customer count.
Having seen our <unk> go up per customer, 50% year over year, we see the exact trajectory that we that we want to see so all of that kind of goes into the customer account, but all in all very soon.
From a net new quarter for us.
<unk>.
We've been focused.
Developing internally.
Quite a few quarters, we already have.
Thank you Lord subsystem capabilities already available in the market.
With that we always kind of.
Look out there to see if there was any interesting technologies, we never preclude an acquisition, but we're very disciplined.
I think in how we approach acquisitions, especially these days.
All in all I think we're getting more and more confident about our ability.
To provide a full C&I portfolio in the near future.
Super helpful guys. Thank you.
Thank you.
Our next question comes from the line of Brian Essex with J P. Morgan. Please go ahead.
Hi, good afternoon, and thank you for taking the question and great to see the margin expansion it's really.
Really nice to see I guess, Tom or just one question for you really interesting development with Pinnacle one.
Could you maybe unpack a little bit what your intentions are with that part of the business is this going to be.
More of the.
Lead Gen innovation type consulting business or is it more incident response and how might that.
Impact how might we expect that to impact revenue and margins going forward.
Okay.
Definitely north initiatives response.
The firm, we actually have already.
There is so much capabilities within vigilance, we've had about three years now.
When we look at vehicle one.
Look at what's happening in the threat landscape for the past couple of years, we've seen an incredible shift I think in talking with <unk> and we're also we've also seen is seeing.
Just a failure.
Product methodologies people, obviously have security products yet.
<unk> reached in what you are seeing more and more of those will need to shift and liability.
To the board to the CEO to the executive level, but also the need to actually come up with security strategy to assess risk and to understand risks quantified inconvenient.
Better way clinical one comes to address exactly that.
It is a highly strategic advisory service.
Again with some of the best mines in cyber security, which comes to help our customers and new prospects.
Signed their security posture.
Regardless of the product. Obviously this is completely vendor neutral obviously, if you couple that with our technology leadership, coupled with the level of threat intelligence that we see and overall geopolitical mapping that we do.
You get into <unk>.
<unk> unique service.
And the entire landscape and one that should provide for it.
Ample risk reduction for customers out there above and beyond the Corona extra data pool.
And maybe Dave could expand on the size of that business and margin impact given that it's more kind of a head count focused business.
Yes for Q4.
Immaterial I think it's under $1 million of total impact to the quarter. So really no effect on revenue or margins for the current quarter for next year. We're obviously working on the plan for next year.
Well, we'll give you guys more visibility on that when we announce Q4 earnings.
Got it that's helpful. Thank you.
Thank you.
Our next question comes from the line of <unk> Kalia with Barclays. Please go ahead.
Okay, great, So where hey, Dave Thanks for taking my questions here nicely done.
Tom or maybe maybe for you.
I wanted to dig into the competitive environment, a little bit in endpoint not the usual suspects but.
I think theres some public reports out there that that carbon black may change hands again may not stay with Vmware as part of that sort of broader deal.
Maybe maybe a question for you is can you just talk about that a little bit as a competitor and whether you think that could be a significant share gain opportunity for central one.
Sure.
We don't put all spoken rumors as you can imagine but at the same time.
Definitely been one of the most preeminent share donors out there for the past couple of years.
<unk> largely stagnated and we've seen.
A pretty decent amount of carbon black displacements throughout the last couple of years.
I think the size of the business.
So material so it can really change or impact things, India input market in a significant way.
With that again.
It's a relatively easy target for displacement carbon black was mainly on the Edr side, while most prominent vendors right now an endpoint actually cover both improved prediction and Edr. Most customers are looking for one solution one platform to cover both aspects so that doesn't bode well for carbon black.
So I don't know where they are finally going to find a place where we're not.
Phil it's relatively incremental.
Got it got it that's helpful. Dave maybe for my follow up for you.
Echo the prior comments just great to see the continued improvement in operating loss.
Can you.
Can you just maybe talk about the restructuring program that we implemented earlier this year and whether we've seen most of the benefits of that yet whether there is still some more benefit to come how do you think about that sort of restructuring having played into into this improvement and how much more is left.
Thanks, Doug.
Yes, the impact of the restructuring that's been included in our annual and quarterly guidance since we announced it in Q1.
So no real incremental pickup from that.
Being said, we're continuing to analyze the yield from our expense investments for growth and expanding market share.
You see it is evident in our continued operating margin expansion I think we're nine straight quarters of 25% or more year over year improvement in our Q3 results show margin improvement well above any benefit we would have gotten from restructuring so.
We implemented that we operate in is essentially fully I think on June 1st and we've been off and running from that point on.
Makes sense thanks, guys.
Thanks.
Thank you.
Our next question comes from the line of Tom.
Zack <unk> with Morgan Stanley. Please go ahead.
Thank you for taking my question and good evening.
Tomer, you talked a lot about.
Singularity data like in your prepared remarks, I was wondering if you could.
Maybe just rough sense to help us.
Size that business and.
What youre seeing in terms of the opportunity for Sim replacements in light of recent M&A in the space. Thank you.
Sure.
Don't disclose obviously the exact size of the business.
It grew more than triple digit on a standalone basis, it's definitely one of our fastest growing modules right now it's a complete product line. It consists of really pricing by data ingestion. So it's a very different motion than to seat based motion that we see.
The Tam the original Tim for security analytics is about $20 billion. If you bundle that with data analytics it becomes about $40 billion.
The target opportunity.
The dominant vendors in that market you mentioned.
Doug competitor getting acquired and a bunch of others. These are technologies that have been developed probably about 15 years ago. So if you can kind of think today about the data scale that most enterprises need to deal with OCC cost for something new if we can which singularity data lakes.
<unk> something to customers that is twice the speed and half the cost obviously thats, a very comfortable offering for them and obviously, if you coupled that with unique capabilities like generative AI appropriately on top of an enterprise wide data Lake Danny start to realize that you get compounded value.
All right switching into an all inclusive platform that is not focused just on endpoint and maybe some generative AI and jet boats for endpoint, but really a broad base capability, where you can ingest any type of data both structured and unstructured no need to index up and running admitted this is a river.
Solution in data analytics, and Thats, why we believe that the disruption for the Sim market for security analytics.
It's really pending we foresee in the next 24 months or so no major shift in the market and it stood about replacing the statements about coming with it.
Whole, new offering with a modernized platform that can do much beyond the assume was ever designed to do industrial we're incredibly excited by that opportunity.
Thank you.
Thank you.
Okay.
Our next question comes from the line of Alex Henderson with Needham. Please go ahead.
Great. Thanks, actually I wanted to do two follow up questions. Two questions that were already asked the first one being on the data Lake structure.
So.
It's pretty clear that you guys get a lot of telemetry data also your endpoints, but if I think about.
The merger between Splunk and Cisco their.
Primary value there is adding not just the.
Traditional sim data, but adding it to the.
Data networking.
Content and telemetry information.
That historically has been and titration and the like as well as the observe ability functionality. That's been an app dynamics. So I guess the question is to what extent you need to reach out to.
Third parties to add some some of those type of incremental data to your.
Data Lake to get beyond just indications of attack and indications to compromise that are captured in the initial.
Data Lake architecture.
Yes.
Our data Lake is built on being totally open and that is the key to all of it we don't lean on any one specific vendor.
And actually in many cases, and even with deals that we've done.
Last quarter, we ingest data, even when we're not the endpoint provider so to us, it's really about being fully open and having the ability to ingest data directly so minute work provider from the email provider from and into indications reminder, much like slop, Scott did not own any one of these assets they were leaning on integration into their platform we.
Do it with all CSF, it's a complete open format with one of the founding members.
And that allows us complete flexibility in ingesting data from any ecosystem product that you have in your enterprise with that said typically within a classic Sim environment, 60% to 70% of the data that you find it assume exactly generated strong edr.
So I've been saying that for years, which was really one of the reasons why we thought it makes a whole lot of sense to actually start embedding the other components and enterprise into that same data lake infusing it with the endpoint data. Moreover, we're not talking just about threat indicators, we're talking about fully.
<unk> flitch low analytics, what we ingest into data Lake is all pieces of data, we will just curated towards indicators, but Andy Logue line any event can be adjusted I think thats one of the keys in an era, where keeping logs becomes.
<unk> requirement.
That is becoming more and more important keeping logs for longer if you need to retain your log score a year awards of time doing it with any one of these incumbents platforms is going to be highly cost prohibitive practice. That's why when we look at the potential for security data Lake It's nordics Dr. It's noticed.
Build to be a fast petabyte scale Logan just should mechanism to port all logs.
We don't discriminate logs, we want all of them in and that's what we believe can also allow for better AI utilization.
We're able to feed all the data and exposure to algorithms, you'll be able to get to much more accurate result.
Just putting threat events into these into these different different data stores.
If I could just throw one last question and it's really.
Play off of what has already been set.
The.
Clinical one.
Opportunity. It strikes me that this is very much like the managed services environment, where once you have a customer.
In that pipeline.
And working with Pinnacle, one that ultimately that generate significant potential downstream revenues. After the fact is is it reasonable to think that for every dollar of critical one revenue that there is five or $6 worth of IRR that will accrue from it in the following periods.
We definitely hope so even though look arnaud start just to help customers and obviously.
<unk> group comes with their own customer base.
Obviously to us it's about putting the best.
Security consulting business that we can.
And data device into hands of customers, where did not result in further revenue and more productive.
Obviously, we hope so.
But to US we just feel like there is a dire need in a big gap in actually designing security beyond just deploying sporadic products into environments.
That's what we're trying to solve here so its customers first and Dennis if you can help with technology will receive that will fuel into that.
Great. Thanks.
Answering my questions.
Thank you.
Our next question comes from the line of Paul Liana <unk> with Bank of America. Please go ahead.
Hi, guys.
I've been asking the same question as all the other security names and it looks like its throughout the industry, we're seeing it but.
If I look at the sequential trends of billings.
In 'twenty two it was up 54% in <unk> 20 to <unk> 23.
Up 42, 43% and now it's only up 2%.
Can you discuss why is billings on a sequential basis, we don't see the same seasonality that we're seeing and again. This is industry wide does it mean that.
Contract duration is going down does it mean that pricing is going down.
The implications for the business. Thanks.
Thanks, Paul Billings grew 2% quarter over quarter, but they were up 33% year over year.
The quarterly billings can vary based on customer mix, especially with MSP. So we focus on IRR.
As a better metric.
Just try and overall contract standpoint average contract duration is up but we're seeing less frequent upfront payments, which the entire industry is saying we're not in a zero dollar or is there a percent interest environment and that obviously impacts customers' willingness to put a full year upfront or multi years.
Upfront for larger enterprise customers, so that dynamic has changed really over the past year.
And with MSR speeds, we see a lot of monthly and quarterly payments. So that's always going to be the dynamic with us.
Got it and is there is there any difference in linearity of deal flow during the quarter this quarter versus previous quarters.
No linearity was fairly consistent.
Consistent okay perfect. Thank you.
Thank you.
Our next question comes from the line of Trevor Ross with JMP Securities. Please go ahead.
Great. Thanks for taking my question I appreciate it.
And I also appreciate the updates around purple AI, maybe tomer just a quick one for you on that of your customer conversations what's been kind of the primary pushback if any around.
The adoption of that new product and then how does that maybe translate into what youre seeing.
And from just kind of an initial attach rate of what you're expecting around with purpose as we move into kind of the beginning of next year and if that tracks similar to maybe singularity cloud or the security data Lake. If you expect that type of uptick or if there may be other kind of puts and takes there. Thanks.
Sure.
We're not seeing I think any any type of pushback per se.
Some of the questions that we've been we've been asked.
Moved around potentially training more and more do more models more AI models that are tailored to the customer environment and how we plan to address that.
So I think they're largely a lot of excitement towards the capability.
In terms of how we're thinking about it obviously it takes some time to scale a whole new technology.
Obviously, we're doing it responsibly.
To make sure there is.
The right safeguards and we want to make sure that privacy is kept all of these things are incredibly important for a company like like ours. I mean, we're not just an average consumer company with deal with security and we need to make sure that these things are in place.
In terms of the magnitude I mean perfectly definitely almost another product line for US right. I mean, it's not just a module. So how we're treating it how restructuring our go to market, what we anticipate peripheral will.
We contribute into call. It. The next 24 months is definitely in the magnitude of something like cloud something like data.
But again I mean, it's early days it looks very very promising.
So I think the fact that it's an enterprise wide capability. So once again.
Proceed to towards something that just for one footprint.
The application of it can be virtually endless India enterprise environment, I think that puts us in a legal of its own in terms of the under all screens that were seeing in the security space.
That's fantastic really appreciate the color and congrats again on the quarter.
Thank you.
Thank you.
The next question comes from the line of Rudy Kessinger with D. A Davidson. Please go ahead.
Hey, great. Thanks had my questions.
Dave I guess, just just on the net new <unk>.
The implied net new <unk> for Q4.
And probably about half the growth versus Q3 as you saw last year. So just what are your assumptions.
On close rates budget flush et cetera relative to I guess Q3, but also Q4 of last year.
Yeah.
Yes, so obviously, we've increased our guidance to about $200 million and net new IRR for the full year up from 195. So we're seeing clear signs of stabilization. We're expecting Q4, net new IRR to be essentially flat to what it was in Q4 of last year.
<unk>.
We don't expect the budget flush we had never really benefits at the end of that although I wouldn't mind. It if it were to come.
Really the way we're thinking about this is that Q4 is seasonally our largest quarter of the year. We don't expect Q4 to this year to be any different than that historically, we delivered upside to Q3, and we outperformed typical seasonality and we're expecting that to carry into Q4.
And I think one of the things to be concerned about it's just there is still macro uncertainty. There's geopolitical uncertainties. Those are continuing to persist we want to be mindful of.
Balding macro dynamics, but.
I think overall, we're pleased with the outlook. We're seeing we're pleased with the performance we had in Q3 and we're pleased with the execution of our team. So the stabilization we're seeing and.
And the visibility we have for Q4 makes us optimistic that.
I think theyre getting better.
Okay, and then just a quick follow up the margin improvement, but very very nice to see just on gross margins any onetime items to call out that drove that 79% in Q3 and why the step back down about 150 basis points in Q4.
There is about 150 basis points of FX gain obviously, we have a fair amount of support people across Europe.
Favorable U S dollar too.
Especially to the shekel over the end of Q3.
Some of that has has flipped thus far in Q4, but on a constant currency basis, we're assuming.
We have been roughly the same at about 77, 5%, which is what we're guiding for Q4.
Okay.
Thank you.
Our next question is from the line.
Gabriela Borges.
<unk> with Goldman Sachs. Please go ahead.
Hi, Yes. This is Max on for Gabriela, Thanks for taking our question.
As a follow up to a prior question. We have a question for you as you think about your fiscal year 2025 planning assumptions would be great to get your observation on what has incrementally changing priorities headed into next year, especially with your new CIO in place. Thank you.
We will provide an outlook next quarter it feels prudent to get through the largest quarter of the year before turning to a new calendar year and budget expectations.
Our market position is strong and we execute well I think we have multiple growth drivers. Our goal remains the same it's to maximize growth and improve margins.
Obviously at the same time as Dave mentioned, the economic challenges are still very very present.
And we're not assuming any.
Any better conditions significantly next year.
We're very encouraged by our new Sierra all very excited to have Michael with US obviously, he brings a wealth of experience.
Currently is something that we plan for quite a few quarters. We also want to wish Mark the best in his retirement.
And we look forward to really scaling the business in the next couple of years.
One 1 billion.
Yeah. That's helpful. Thank you.
Thank you.
Our next question comes from the line of Ray Mcdonough Mcdonald with Guggenheim. Please go ahead.
Great. Thanks for taking my questions Tom over the past couple of quarters, we've talked about some downsizing on renewals.
Understand the commentary around the macro in general has been that trends are relatively stable, but.
That area, specifically around renewals are those trends starting to change at all or are you still seeing similar customer behavior and.
Maybe just continuing to zoom out as you look at kind of what transpired in November and as you talk to customers about heading into the next calendar year, how how are those budget conversations around security spend shaping up do you feel.
Those rates May improve next next year as the threat environment seems to get more intense just any commentary on broader level spend and youre feeling going into next year it would be helpful.
Yes.
I can say is that Sigma has remained pretty consistent I don't think thats anybody feels they can.
By forward licenses for something that would be doing so.
Sizing.
Understanding what you need to use.
Dynamic is here to stay.
I don't think anything changes would not cyber.
Cyber security has been top of mind for years now I don't think Theres anything new in duct. So all in all I think.
Theres really no change that I can call out at this point in time.
That makes sense and Dave as the data Lake solutions continues to scale can you talk about the patterns of overages on consumption that youre seeing and assuming that's where the majority of consumption revenue comes from and and maybe to what extent <unk> been successful in capturing incremental commitments, which would otherwise have been overages.
And how should we think about that potentially being a tailwind to <unk> growth next year.
As the data Lake solution scales.
Yes, we really didn't have any changes or unexpected impacts from consumption during the quarter at all one of the things that we're seeing and we're encouraged by is that customers that did have overages when they do commit to us are committing at the level that they were spending so if a customer is moving from consumption into subscription.
Being not at the levels that they were spending as Thomas said theyre not theyre not putting a lot of elevated spend in that.
They're essentially carrying it forward at the rates that have been doing so we just we really havent seen anything except for stabilization.
Got it thanks for taking the questions.
Thanks.
Thank you.
Our next question comes from the line of Gray Powell with B T. I D. Please go ahead.
Alright, great. Thanks for thanks for taking the question and congratulations on the strong results.
So I really appreciate it.
That you gave on the macro environment.
In the prepared remarks, I guess I just wanted to follow up there.
So we've been in a weak macro for like 18 months now.
How do you feel about your visibility on customer behavior patterns, and just like customer behavior patterns today, and your ability to predict your business today versus this time a year ago.
I mean, obviously, we know more but once again I feel like.
We're still in a bad macro we remain in a bag micro macro and we expect a bad macro to continue.
Think even within the bad macro obviously, you still see us grow 40% plus so at the end of the day.
I think we've adjusted at the beginning of this year to what we believe we can extract and I think that we're seeing practice.
Practically stabilization.
Across customer behavior, I think customer expectations remain roughly the same as what they were.
A few quarters ago, so all in all.
Once again I wouldn't assume anything is trending better, but it's also not trending worse.
Macro.
And to Dave's point, I think our team's execution and our ability to adapt.
And really I think convey the value in our platform.
As hoped us kind of navigate through it.
That's really helpful. And then one more if I may.
So when you acquired <unk> back in early.
2020 to.
That business is growing at about a 50% annual pace.
Just with the tax.
More recently, we are increasingly targeting identity systems.
How should we think about the growth potential on that business has there been any incremental tailwind.
I think it's for US it's just another module.
Pretty large large list of capabilities that we have.
We're targeting bigger market opportunities and I think our attention goes towards.
Designing our go to market around where we feel the most traction and the biggest opportunity is.
Entity.
Just one more modules that we have I also think that in.
In cyber security in general a lot of these capabilities are very much.
I would call them temporary and their ability to actually alleviate.
The trick the trick Victor so its identity today tomorrow is going to be something goes a year ago. It was explanation.
These are constantly moving targets and identity is obviously growing with our business.
A great capability to have.
But again, we're focused on cloud focus on data focused on AI.
<unk> really tie breakers for defenders Indian enterprise.
Understood. Thank you very much.
Thank you.
Our last question comes from the line of Eric <unk> with Keybanc capital markets. Please go ahead.
Great. Thanks for taking my question just a housekeeping question I know before you had.
Some targets out there for our EBIT profitability for fiscal 'twenty.
Free cash flow profitability second half just curious if that stands and then the second question, which for tomo.
It sounds like you are taking a different approach to your pricing around Gen. II. So just curious what the pricing mechanism is.
Our customers are all of the feedback from customers on that pricing strategy.
Sure I can start thank you for the question.
We're committed to optimizing growth and margin improvement and we remain on track to achieving positive free cash flow in the second half of fiscal year 'twenty five.
We are delivering margin improvement and an incredibly strong pace more than 25 points of operating margin improvement for nine consecutive quarters, It's our entire history as a public company and we're going to continue with that.
Free cash flow margin of 40% year over year, our net income margin was negative 5%. So we've been very proactive with our cost structure, we've shown measurable progress to achieving profitability and we've also raised our full year operating margin guidance from negative 25% to negative 20%. This last quarter. So we're well on our way to achieving our.
Profitability targets.
We expect Q4 free cash flow margin of the <unk> and the.
A negative single digits, so youre going to see improvement there too so really what we're doing is we are aligning our investment plans with the pace of growth.
We will continue to selectively invest in key growth areas, such as cloud and data unlocking significant Tam, where we have distinct competitive advantages and that's the path that we're progressing to obviously we'll be guiding.
At the end of Q4.
So look out for that but everything we're doing as a company and a lot of the improvements Youre seeing right now are setting us up on the pace to make sure that.
What we want to achieve in fiscal 'twenty five becomes achievable. So right now we're focused on free cash flow creation.
<unk> out in the second half of next year and.
We're working towards that.
As for peripheral pricing.
As I mentioned given that it took to an enterprise wide capability.
Still obviously experimenting with it still obviously not fully baked.
But to US I mean, just attaching it to the data and just to I think is something that we see.
Just a very straightforward way to go about it.
That said, obviously for a platform capability set so why you'd like the one that we have today you.
You also see us doing more and more elas type structured views. So you can imagine peripheral can be part of that so all in all a lot of opportunity for more uplift.
I'll just once again mentioned to us it's about customer value and we want to make sure that customers see the value from portfolio I think the pricing structure is secondary to the amount of value that you continually show to the customer and Thats the focus with the portfolio.
Thank you.
Thank you.
I would now like to pass the conference back to tumor Weingarten.
Oh for any closing remarks.
Thank you all for joining us today from a collective standpoint, the ongoing conflicts in geopolitical tensions impact with people around the globe are disheartening I'm humbled by the perseverance and commitment of centers globally, and especially our own people in Israel the window with some of the worst atrocities in recent history.
Cyber warfare plays an important role in this as well.
Liberty tax espionage disinformation in influenced operations are attempting to destabilize. So many aspects of society. The award in cyber space is now fully embedded into all of our lives.
The concept of truth is eroding generative AI capabilities are a significant contributing factor to the severity of the situation and this is only generation one.
Central one our mission is to be a force for good using AI technology to create a safer world and safeguard our customers. We hope for a peaceful tomorrow. Once again I want to single center, one of our customers and our partners for helping US drive this submission. Thank you.
That concludes today's conference call I Hope you all enjoy the rest of your day you may now disconnect your lines.
Yeah.