Q3 2025 SentinelOne Inc Earnings Call
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Jayla: Good afternoon. Thank you for attending today's Sentinel-1 Q3 Fiscal Year 2025 Earnings Conference Call. My name is Jayla and I'll be a moderator for today. Phone lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I'd now like to turn the conference over to our host, Doug Clark. Doug, you may proceed.
Doug Clark: Good afternoon, everyone, and welcome to Sentinel-1's earnings call for the third quarter of fiscal year 25, which ended October 31st, 2024. With us today are Tomer Weingarten, CEO, and Barbara Larson, CFO.
Doug Clark: Our press release and a shareholder letter were issued earlier today and are posted on the investor relations section of our website. This call is being broadcast live via webcast and an audio replay will be available on our website after the call concludes.
Speaker Change: 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 full fiscal year 25, as well as long-term financial targets.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Any forward-looking statements made during this call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information.
Speaker Change: 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.
Speaker Change: During this call, we will discuss non-GAAP financial measures unless otherwise stated. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles.
Speaker Change: A reconciliation of the GAAP and non-GAAP results, other than with respect to our non-GAAP financial outlook, is provided in today's press release and in our shareholder letter.
Speaker Change: These non-GAAP measures are not intended to be a substitute for our GAAP results.
Speaker Change: Our financial outlook excludes stock-based compensation expense, employer payroll tax, and employee stock transactions.
Speaker Change: amortization expense of acquired intangible assets, acquisition related compensation costs, restructuring charges, and gains on strategic investments, which cannot be determined at this time and are therefore not reconciled in today's press release.
Speaker Change: And with that, let me turn the call over to Tomer Weingarten, CEO of Sentinel-1.
Speaker Change: Good afternoon, everyone, and thank you for joining our Fiscal Third Quarter Earnings School.
Our Q3 results demonstrate strong execution and business momentum.
Speaker Change: We exceeded our top-line growth expectations and continue to deliver year-over-year margin improvement. Importantly, our net new ARR growth re-accelerated back to positive territory, driven by solid execution and a record number of customers with ARR of $100,000 or more.
Speaker Change: This momentum reflects a stronger competitive position and notable rise in customer interest for Sentinel-1.
Speaker Change: We continue to bolster our position as a technology leader through constant innovation. Today, Singularity is a comprehensive cybersecurity platform that delivers best-in-class security and operational resilience.
Speaker Change: Singularity unifies data capabilities and AI-powered security across endpoint cloud identity as well as third-party integrations all in one single user interface.
Speaker Change: Enterprises are increasingly selecting Sentinel-1 for our ability to provide real-time autonomous security that adapts to the modern threat landscape while simplifying operations. In a world where cyber threats evolve rapidly, our platform's proactive approach is designed to safeguard enterprises today and into the future.
Speaker Change: This singularity platform empowers customers to bring advanced AI capabilities into their entire security stack, from data to operations.
Speaker Change: This ability not only sets a new standard in the market, but also establishes what we believe is a foundational pillar for the future of cybersecurity,
Speaker Change: streaming enterprise-wide security data to be processed and analyzed by advanced AI algorithms and agents that drive real-time autonomous outcomes.
Speaker Change: It is clearly a more effective and efficient way to do cybersecurity. The rapid adoption of our Purple AI Suite, now our fastest-growing solution, further highlights the value and innovation we bring to our customers.
Speaker Change: Looking ahead, we're raising our full-year revenue guidance. For fiscal year 25, we now expect to deliver revenue growth of 32% compared to last year, up from our prior guidance of 31% growth.
Speaker Change: I want to thank our customers and partners for their trust and collaboration, and all Sentinels who work tirelessly to protect our ways of life from cyber threats and disruption. As always, please read our shareholder letter published on the Investor Relations website, which provides more details.
Let's review the details of our quarterly performance.
Speaker Change: In Q3, total ARR grew 29% and revenue grew 28% year-over-year.
Speaker Change: Net new ARR of 54 million increased over 20% sequentially, well above our historical third quarter seasonality. Importantly, our net new ARR growth accelerated to 4% year-over-year.
Speaker Change: This return to positive growth is a strong indication of our business momentum and improving market position. While we continue to operate in a challenging macroeconomic landscape, the strength of our Q3 performance was brought based across geographies and platform solutions.
Speaker Change: Once again, we delivered best-in-class gross margin of 80%. Operating margin improved by more than 6 percentage points compared to last year. And for a second consecutive quarter, we delivered positive net income.
Speaker Change: With an improving margin profile and a solid balance sheet, we have the opportunity to be dynamic and flexible, positioning ourselves for long-term share gains across diverse growth opportunities.
Speaker Change: As I mentioned in our last earnings call, the increasing sophistication and intensity of modern cyber threats are exposing the growing shortcomings of incumbent security solutions.
Speaker Change: Even so-called modern technologies are aging faster than ever. As a result, customer awareness and interest in our platform and AI-based security have risen. We're beginning to see notable strength with new and large customer additions.
Speaker Change: In Q3, we added a record number of $100,000 plus ARR customers, which grew 24% year over year. Our customers with more than $1 million in ARR grew even faster.
Speaker Change: Overall, our success with large enterprises and platform adoption continues to drive higher ARR per customer, which reached a new record in Q3 as well.
Speaker Change: In parallel, we continue to maintain healthy expansion rates with our existing customer base. We continue to see substantial growth potential with our installed base over the long term.
Speaker Change: In October, we hosted our first Investor Day at our OneCon customer conference. It was a terrific event with record attendance, plenty of excitement, and great customer conversations.
Speaker Change: A central point of the discussion was the evolution and expansion of singularity, from an endpoint-centric solution to now one of the broadest, most performant, and reliable enterprise security platforms in the market.
Speaker Change: Regardless of the size or industry, our customers benefit from our modern data analytics architecture, cutting-edge AI security models, and broad coverage across endpoint, cloud, identity, and more.
Speaker Change: The Singularity platform has earned prominent recognitions across the industry, including being named a leader in Gartner's Magic Quadrant for Endpoint Protection for a fourth consecutive year, leading MITRE evaluations also for four years in a row, a clear demonstration of Singularity's undisputed security efficacy.
Speaker Change: CyberSecOps Innovation Award for PurpleAI, receiving SCMedia's Top Honors for Best Enterprise Security Solution and Best Endpoint Security Solution, and just yesterday, Singularity Cloud Security was recognized as the overall winner for CRM's Cloud Security Product of the Year.
Speaker Change: These recognitions are a testament to our innovation leadership and platform differentiation.
Speaker Change: We're delivering larger platform wins and expansions among both new and existing customers.
Speaker Change: These are powerful security and data capabilities. Each of our platform solutions delivers functionality equivalent to deploying multiple modules from competing vendors.
Speaker Change: We sell solutions, not an endless list of modules and point features. Our platform coverage positions Sentinel-1 as a strategic cybersecurity partner for enterprises.
Speaker Change: Among many platform wins in Q3, a major international retailer adopted endpoint cloud and identity security, PurpleAI, and threat hunting services.
Speaker Change: This gold platform deal was a multi-million dollar expansion that doubled the ERR of the customer.
Speaker Change: In another example, a leading technology provider selected endpoint and cloud security, network visibility, and AI SEM for a multi-year and multi-million dollar deal. Purple AI was a quote, must have.
Speaker Change: With the Singularity platform, we help enterprises seamlessly aggregate data and leverage industry-leading AI.
Speaker Change: We continue to see outsized growth from our cloud, data, and AI solutions. At OneCon, we detailed the rising scale and opportunity with cloud and data, exceeding $100 million and $70 million in ARR, respectively.
Speaker Change: These solutions continue to drive premium growth for our business and represent unbounded opportunities in massive target markets.
Speaker Change: As one of our newer capabilities, PurpleAI remains a true source of platform differentiation and growth.
Speaker Change: The market response and interest in PRPL has been extremely positive. In Q3, the attach rate of PRPL-AI across all eligible endpoints doubled compared to Q2.
Speaker Change: PRPL is one of the fastest growing solutions in Sentinel-1's history and will continue to drive meaningful growth into the future.
Speaker Change: Gen AI for security use cases is a force multiplier for security analysts.
Speaker Change: Customers using PurpleAI enjoy real gains in productivity through streamlined workflows and more automation.
and Purple is continuously getting better.
Speaker Change: We recently announced auto alert triage, threat hunting, and investigation capabilities. We're giving security analysts the tools they need to manage hundreds and thousands of alerts in just minutes, giving them the upper hand against threats.
Speaker Change: Importantly, we are committed to ensuring that our AI capabilities are used ethically, safely, and securely. Our AI models provide transparency and ensure that customers maintain complete control of their data within our platform, keeping sensitive information in the hands of its rightful owners.
Speaker Change: Also at OneCon, we introduced AISEM, a foundation for real-time autonomous cybersecurity for the future.
Speaker Change: AISM is so much more than just next-gen SIEM. By ingesting and synthesizing data from across the security ecosystem, our AISM provides full visibility, real-time detection of streaming data, accelerating investigation, and autonomous responses.
Speaker Change: We're empowering enterprises to supercharge security operations and fight AI with AI. Our technology and vision are resonating with customers and partners.
Speaker Change: As an example, a major federal agency selected both Endpoint and AISM for unified threat visibility in a single platform, proactive threat hunting, and automated rollback capabilities.
Speaker Change: We're also seeing MSSPs expand their platform adoption with emerging solutions like PurpleAI and Singularity Data Lake to reduce costs and improve visibility and security for their customer base.
Speaker Change: In addition to PurpleAI, we're pairing AI.Sim with our recently announced hyper-automation capabilities. Sentinel-1 is bringing more automation use cases with next-gen SOAR, and making it faster and easier to use, all without code.
Speaker Change: It's unlike any other data or SIEM solution on the market and will further unlock the legacy SIEM opportunity.
Speaker Change: In cloud security, we continue to see strong adoption of our leading cloud workload protection solution, and the combination of agent-based and agentless capabilities offers a comprehensive approach to securing the cloud.
Speaker Change: Building on our industry-leading CNAP capabilities, we recently announced AI security posture management to protect and secure the use of Gen-AI services in the workplace.
Speaker Change: Singularity AI SPM gives enterprises visibility into AI services, detecting misconfigurations and vulnerabilities in AI applications, and determining potential attack paths.
Speaker Change: AISPM was designed from the ground up to safeguard AI models and pipelines deployed on managed AI services such as Amazon SageMaker, Amazon Bedrock, Azure OpenAI, and Google Vertex AI.
We're enabling enterprises to securely adopt modern AI technologies.
Speaker Change: CenterOne customers can confidently embrace AI transformative benefits and competitive advantages while protecting and securing AI data and applications.
Speaker Change: Rounding out the discussion of our platform, Endpoint remains a cornerstone of enterprise security and a key driver of our business.
Speaker Change: In light of the unprecedented IT outage on July 19th, enterprises are distinctly more focused on the combination of security performance and reliability. We're engaging with an increasing number of large enterprises.
Speaker Change: Many of them are getting a chance to evaluate and experience our technology and platform breadth for the first time, and they're pleased with what they're seeing. As a result, we achieved a record number of customer wins against our closest competitor in Q3, more opportunities equating to more wins.
Speaker Change: In one example, a Fortune 50 company switched to Sentinel-1 due to the superior platform architecture and efficacy, integration capabilities, and productivity enhancements with PurpleAI.
Speaker Change: We also had a number of federal and local government entities switch to Sentinel-1 after testing our platform against their existing solution. In all of those evaluations, they found the Singularity platform was easier to use and improved their security posture.
Speaker Change: Many of these customers are already considering enhancing the performance and experience with Singularity Data Lake and PurpleAI, which are unique capabilities absent from other alternatives.
Speaker Change: Taking a step back, the shortcomings of incumbent solutions are becoming more apparent than ever before. Siloed solutions, closed-platform architectures, and human-dependent security solutions simply cannot keep pace with modern threats.
Speaker Change: We had one customer that utilized Sentinel-1 to protect servers in Microsoft for endpoints.
Speaker Change: After endpoints covered by Microsoft Defender were breached twice in just the past 12 months, this customer turned to Sentinel-1 for incidence response and recovery, and ultimately decided to secure their endpoint footprint with Sentinel-1 as well.
Speaker Change: Overall, there is more awareness, consideration, and interest in Sentinel-1 than ever before. We're now engaging in opportunities that weren't available to us in the past. This includes some of the largest financial institutions in the world and other strategic opportunities, as well as more channel engagements.
Speaker Change: This will play out in quarters and years to come, as enterprises evaluate, test, and come to renew their incumbent solutions over time. The road is open.
Speaker Change: To maximize our long-term success and scale, we're strategically expanding our market presence. Let me provide a few examples.
Speaker Change: First, we partnered with Lenovo, the world's largest PC manufacturer. Together, Lenovo will bundle the Singularity platform and Purple AI on new enterprise PC shipments to enhance security and autonomous protection to millions of endpoints across the world in the coming years.
Speaker Change: The agreement showcases how Sentinel-1 can truly partner and not compete with other industry participants.
Speaker Change: We believe partnering with OEMs like Lenovo can drastically increase the reach and scale of Singularity.
Speaker Change: Second, we're expanding our presence in the federal arena and we recently achieved FedRAMP high for both endpoint security and AISM.
Speaker Change: Going through rigorous testing over multiple years, this designation is a testament of our performance and ability to meet the most demanding security requirements.
Speaker Change: Third, we've expanded our partnership with AWS. AWS customers that choose SentinelOne can now run PurpleAI on Amazon Bedrock.
Speaker Change: We will continue to deepen our relationship with Amazon, enabling customers to choose and deploy Singularity to one of the largest cloud providers in the world.
Speaker Change: Finally, as I mentioned earlier, we're enabling our MSSP partners to adopt more of the Singularity platform, like Singularity Data Lake and PurpleAI.
Speaker Change: This helps them improve efficiency, enhance security, and expand their business potential. We also recently launched our suite of agentless CNAP solutions for MSSPs, including CSPM, CIM, and more.
Speaker Change: All in all, our improving execution, expanding market presence, and leading platform capabilities are driving more customer engagement and interest in Sentinel-1 than ever before. It's on us to execute well and convert these tailwinds into customer wins over time.
Speaker Change: We're working hand-in-hand with customers and partners to test, trial, and deploy the Singularity platform. We're focused on building long-lasting relationships and enduring security infrastructure, helping organizations stay ahead of the evolving threat landscape.
Security solutions are strategic and mission-critical for enterprises.
Speaker Change: We're constantly innovating and building intelligent, autonomous cybersecurity for the future.
Speaker Change: Just this week, we were named to Fortune's Future 50 list, recognized as a company most likely to adapt, thrive, and grow.
We have the right strategy, people, and technology.
Speaker Change: I'm encouraged by the growth and momentum we delivered in Q3. While early, the investments we're making in expanding our market presence in MindShare are fueling one of the highest growth rates in all of software.
Speaker Change: In this quarter alone, we achieved record contributions across platform solutions, returned to positive new business growth, and continued expanding margins.
Speaker Change: We are positioning the company for long-term share gains across diverse growth opportunities.
Speaker Change: With that, I would like to welcome and turn the call over to Barbara Larson, our Chief Financial Officer.
Barbara Larson: Thank you, Tomer, and thanks to everyone for joining us today. I'm thrilled to be here. Stepping into this role has been an exciting journey, and it's a privilege to work alongside an incredible team dedicated to transforming cybersecurity.
Barbara Larson: Over the past couple of months, I've focused my time on listening, learning, and exploring Sentinel-1's unique strengths and opportunities.
Barbara Larson: Our mission is to secure the future through cutting edge technology. From a financial perspective, we're committed to delivering consistent value and building on the strong foundation already in place. I see clear potential for long-term growth, scale, and operating leverage.
Barbara Larson: Now, let's review the details of our third quarter financial performance and our guidance for Q4 and FY25.
Barbara Larson: As a reminder, all comparisons are year-over-year and financial measures discussed here are non-GAAP unless otherwise noted.
Barbara Larson: We exceeded our third quarter revenue and ARR growth expectations. Revenue increased 28% to $211 million in the quarter, with strong momentum across all geographies.
Barbara Larson: Revenue from international markets also grew 28% and represented 37% of our quarterly revenue.
In Q3, our total ARR grew 29% to $860 million.
Barbara Larson: Net new ARR of 54 million exceeded our expectations and grew 22% sequentially, significantly outpacing our historical Q3 seasonality.
Barbara Larson: Our Q3 net new ARR increased by 4% year-over-year, reflecting a 14 percentage point improvement from the growth rate in Q2.
Barbara Larson: This re-acceleration of new business growth marks a return to positive growth and Demonstrates that we are well positioned to deliver stronger net new ARR growth in the second half of the year compared to the first half
Barbara Larson: This quarter, we added a record number of customers with ARR of $100,000 or more.
Barbara Larson: This reflects our team's strong execution, an improved competitive position, and broad adoption of our platform solutions.
Barbara Larson: The growth of our emerging solutions and success with large enterprises continues to drive higher ARR per customer, which increased by a double-digit percentage year-over-year and to a new high in Q3.
Barbara Larson: Consistent with prior quarters, we continue to maintain healthy expansion rates across our existing customer base.
Barbara Larson: Beyond top-line growth, our Q3 growth margin of 80% highlights the strong unit economics of our singularity platform and discipline pricing.
Barbara Larson: In Q3, we incurred one-time legal settlement costs and legal fees that are included in our non-GAAP financials. Excluding these one-time expenses, our operating margin would have been approximately negative 3%, consistent with our Q3 guidance.
For the second consecutive quarter, we delivered positive net income.
Barbara Larson: We also achieved positive free cash flow on a trailing 12-month basis for the first time in company history.
Barbara Larson: Importantly, we're on track to achieve positive free cash flow for fiscal year 25.
Barbara Larson: Our steady progress toward sustained profitability is driven by increasing scale, improved operational efficiencies, and disciplined cost management.
Barbara Larson: Overall, we've significantly improved our margin and cashflow profile. At the same time, we are strategically investing to expand our market presence and position ourselves for durable growth.
Barbara Larson: These investments are already yielding early results, including increased adoption of our new platform solutions.
Barbara Larson: Record wins against our closest competitor and re-acceleration of new business growth. Our unit economics and financial position remain strong, with more than a billion dollars in cash, cash equivalents and investments, and no debt.
Moving to our guidance for Q4 and fiscal year 25. .
Barbara Larson: Given strong Net New ARR in Q3 and solid business momentum, we're raising our full-year revenue guidance. We now expect full-year revenue of approximately $818 million and growth of 32%, an increase from our prior guidance of $815 million and 31% growth.
Barbara Larson: For Q4, we expect revenue of approximately $222 million, reflecting a year-over-year increase of 27 percent.
Barbara Larson: We continue to expect stronger net new ARR growth in the second half of fiscal 25 compared to the first half.
Barbara Larson: This outlook is supported by positive trends and new customer acquisition, a healthy pipeline, a solid competitive position, and increasing momentum with our data, cloud, and AI solutions.
Barbara Larson: It's also important to note that we're still navigating a challenging macroeconomic environment.
Barbara Larson: Organizations continue to focus on cost and efficiency, and we expect these dynamics to continue. At the same time, the threat landscape remains intense.
with frequent headlines about new breaches and evolving cyber threats.
Barbara Larson: Now, turning to the outlook for margins. For the full year, we continue to expect gross margin of approximately 79%, reflecting an improvement of over 150 basis points compared to last year.
Barbara Larson: In Q4, growth margin is also expected to be approximately 79%, an increase of about 100 basis points year-over-year.
Barbara Larson: For fiscal year 25, we expect operating margin of approximately negative 4%, consistent with the midpoint of our prior guidance and reflecting an improvement of about 15 percentage points compared to fiscal year 24.
Barbara Larson: In Q4, we expect operating margin to be about negative 3%, an improvement of approximately 6 percentage points year-over-year, and an increase of 2 percentage points sequentially.
Barbara Larson: Reflecting on my past few months, it's clear we built a solid foundation to take Sentinel-1 to new heights.
from an industry-leading AI security platform.
Barbara Larson: to a diverse customer base and robust partner ecosystem. I'm constantly impressed by our talented teams and their dedication to SentinelOne's success.
Barbara Larson: We're nearing the milestone of crossing $1 billion in ARR, a significant achievement for any company.
Barbara Larson: We remain committed to delivering ongoing leverage in the business as we execute our growth strategy.
Barbara Larson: Our investment approach strikes a thoughtful balance between maximizing long-term growth opportunities and maintaining a strong, responsible, and profitable financial profile, a strategy that's key to scaling Sentinel-1 to a multi-billion dollar business.
Barbara Larson: At the same time, we're instilling operational discipline by identifying ways to enhance efficiency and productivity. Ultimately, our goal is sustainable growth while progressing toward our long-term target of achieving a 20% operating margin over time.
Barbara Larson: One thing remains certain, our unwavering focus on customers, partners, and security has always been, and will continue to be, the backbone of our success.
Barbara Larson: I'm incredibly proud of the dedication shown by our team and the progress we've made so far. While we've already accomplished a great deal, I'm confident that even greater opportunities lie ahead.
Barbara Larson: Thank you for joining us today. I look forward to connecting with our analysts, shareholders, and the broader investment community in the days and months to come.
Speaker Change: With that, we'll now take questions. Operator, please open up the line.
Speaker Change: At this time, if you would like to ask a question, it is star followed by 1 or your telephone keypad. If for any reason you would like to remove that question, it is star followed by 2. Again, if you would like to ask a question, it is star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question. We'll pause briefly here as questions are registered.
Speaker Change: Our first question comes from Brad Zelnick with the company Deutsche Bank. Brad, your line is now open.
Brad Zelnick: Great, thanks very much and good to see the ARR momentum.
Brad Zelnick: continue to build. Tomer, over the last few months you've been very clear that the benefits you're seeing from market disruption and many of the newer growth levers and execution improvements wouldn't all show up immediately in your financials and the trend is clearly positive from what we can see in Q3 results but what is it that you see in terms of pipeline and the visibility that you have ahead?
Brad Zelnick: That gives you confidence in acceleration and then for Barbara, how does that inform how you might be thinking about next year at this point? Thank you.
Speaker Change: And we're still maintaining the same strong win rate, so that will translate over time.
Speaker Change: In Q3 alone, we've had a record number of wins against our closest competitor.
Speaker Change: We've added a record number of 100k plus dollars customers. Our endpoint growth actually accelerated in Q3. So it really indicates the opportunity is improving not only across our growth lever with emerging products but really within our core market of endpoint. I mean the momentum on all these fronts.
Speaker Change: You know, drove some incremental upside to the NTRR in the quarter, and we believe that's going to continue.
Speaker Change: Broadly, enterprise is paying more attention to security performance and operational resilience. So I think, you know, Sentinel-1 is proving to be the superior platform offering. It is resulting in more consideration for Sentinel-1. It is resulting in bigger deals in the pipeline. It is resulting.
Speaker Change: And just more engagement, and it's on us to translate these engagements. It's very encouraging, the type of customers that we're seeing, the industries that we're serving, the ability to have these conversations, as we mentioned with the prepared remarks. These are conversations we have not had before, so this will be positive for us. It continues to be something we unlock, and it's going to translate in the quarters and years to come.
Speaker Change: And then Brad, just in terms of FY26, it's too early to discuss next year's forecast right now. Our focus is really on executing, innovating, and maximizing the opportunity that we have in front of us. But clearly, we are pleased to see the net new ARR re-accelerate in Q3 and deliver stronger year-over-year growth in the second half compared to it.
The first half.
Okay, thanks for taking my questions.
Speaker Change: Our next question comes from Gray Powell with the company BTIG. Gray, your line is now open.
Oh, great. Thanks for taking the questions.
Speaker Change: And yeah, I'll echo Brad's comments. It's great to see the net new ARR get back into positive territory. Just in terms of seasonality, maybe I missed this, but what was it that actually drove the stronger quarter-over-quarter growth in Q3 this year that was different than prior years? And then just like, how should we think about...
Speaker Change: It's a combination of two main factors I'd say. One is just the leverage we're seeing with our emerging products. So I think you're seeing
Speaker Change: More capabilities for us come online whether it's purple AI with double the attach rate, you know from past quarter So that's significant cloud continues to grow data is coming up online. These are all relatively new capabilities for us So as they come online, we expect bigger lens We expect bigger deals and we see that evidence evidence in our pipeline It was the case going into q3 And obviously the other factor is just you know, the July 19 outage Some of the upside that you're seeing is definitely coming
Speaker Change: It's sustainable, we will need to translate that, I will repeat that, but in terms of the pipeline, it's there and it's for us to work.
Operator, go to the next question, please.
Speaker Change: Absolutely. Our next question comes from Rob Owens with the company Piper Sandler. Rob, your line is now open.
Yeah, great. Thank you for taking my question.
Speaker Change: Curious about what you're seeing upmarket and the success with larger customers and larger deals, just from, I guess, a macro perspective, number one. And then the motion is you're selling multiple elements of the platform and where you're seeing the most success there. Thanks.
Speaker Change: Our playbook is definitely evolving. We're lending more with the entire platform or more components of the platform than a single capability than ever before and I think that is something that is relatively new for us. I think we've always had that motion of upselling and cross selling and attaching more but now it's really clear we're just lending with more, we're covering more and that's incredibly important.
Speaker Change: You see that with the record number of $100K and $1M customers.
Speaker Change: So our ability to now cater to that higher end of the enterprise, which I believe is gradually being unlocked away from some of these incumbents that were relatively dominant in that part of the market in the past.
Speaker Change: It is going to translate to more presence for Sentinel-1 in the Fortune 500, in the Fortune 100.
Speaker Change: The other capability that we have, which is AI-SEM or the data analytics capability we have, is one that is actually, you know, a capability that thrives.
when the macro is what the macro is.
Speaker Change: And I would not say that customers have stopped scrutinizing, I would not say that customers are not very budget-oriented, but that actually translates into a very good fit to what our data analytics and data solutions can provide, given the immense cost savings that we can create for some of these customers. And obviously, you know, cyber threats are not going away, so the need for best-of-breed security is structurally there. So those two things combined, even in this macro, which I still think is relatively on par with what we've seen in the past couple of years, you know, it bodes well to our market motion.
Speaker Change: Our next question comes from Saket Kalia with the company Barclays. Saket, you're allowed to start open.
Okay, great. Hey guys, thanks for taking my questions here.
Speaker Change: Tomer talked about broadening the market presence with the Lenovo partnership, and it sounds really interesting. Maybe the question is, how do you think about Lenovo contributing to net new ARR? Specifically, when does that sort of kick in? And is this going to be something that ebbs and flows with Lenovo shipments sort of on a quarterly basis? Or talk to us about sort of how that layers into the model going forward.
Speaker Change: Sure, thanks so much for the question. In terms of Lenovo, it is a multi-year agreement. We're in the early innings. We're really excited about its long-term potential.
Speaker Change: This is a strategic partnership. It's designed to evolve over time. We're working closely with Lenovo to activate multiple routes to market. That includes pre-installations.
as well as managed security offerings.
Speaker Change: It also builds on the fact that we have an existing reseller agreement today. So we're really extending, deepening our collaboration.
Speaker Change: And we expect the contributions to pick up in the latter part of next year in terms of revenue as Lenovo starts to ship pre-installed units and as we ramp up CoSell through all of our regions.
Speaker Change: Talk to specifics on DEEL and ARR, but that's how we're thinking about it in terms of the contribution to revenue, latter half of next year.
How long was that again?
Speaker Change: Our next question comes from Shaw Eyal with the company TD Coward. Shaw, your line is now open.
Tomer, Barbara, I know you slightly raised your annual guidance.
Speaker Change: I know you guys do not guide or discuss RPO metrics. It was up, I believe, 24% year-over-year, which I think would imply maybe a deceleration from last year and I think just a 4% sequential growth. Can you talk to us about, you know, RPO trends, maybe your thoughts on pricing and contract duration? Thank you.
Speaker Change: Great, I'll take that. So for RPO in Q3, we delivered strong year-over-year growth of 25%, so that's relatively in line with our total ARR growth.
Speaker Change: Just to keep in mind, in Q3 of last year, we signed several large, long-term contracts, including with several of our MSSPs, making this a more difficult year-over-year comparison. So our preferred metric is ARR, as RPO can be impacted by contract duration, and ARR removes that variability.
Speaker Change: And just in terms of pricing, I think, you know, the ability to sell a full platform right now really changes.
Speaker Change: How do you think about pricing? There's no longer a specific price point in the market.
You know, our prices have held.
and Tomer Weingarten.
Speaker Change: You know, just go heavy on discounts. So I don't think there's anything too out of the ordinary in the way that this market has evolved over the years. I don't think there's anything too different right now. There's definitely more discounting by vendors who are maybe, you know, a bit more mindful of the need to preserve their customers and be using deep discounts in order to do that. We on the other hand have always been flexible, transparent with our pricing, and we continue to be that way. It doesn't stop us from making deals, and in many cases...
Speaker Change: especially in the markets that we play in, price is not the dominant factor and we always are incredibly focused on the value that we bring and the cost savings that we can extract. So all in all, you know, we're focused on maintaining our pricing. It hadn't changed. Gross margin is very high and it's just the realities of the cybersecurity market when it comes down to the different discounting by different vendors.
Thank you. Thank you.
Speaker Change: Our next question comes from Tal Leoni with the company Bank of America. Tal, your line is now open.
Tal Leoni: Yes, hi. How important is vendor financing in the market now? I'm asking it because we've seen Palo Alto doing it very aggressively, now we're seeing CrowdStrike starting it.
Tal Leoni: Is this something that is required, or do you see higher requirements by customers? And the second question is just clarification. You noted a few times that you expect a strong net new ARR for 4Q. Is there any number that you have in mind or any growth you have in mind for a net new ARR for 4Q?
This is for financing.
We don't think that it's something that is...
Tal Leoni: is showing any outside demand right now. Financing has been always very apparent in this space, typically done by channel partners. A lot of our channel partners are helping financing customers. We do it every now and then. I do believe that the focus for every cybersecurity vendor needs to be on the current capabilities that customers need today.
Tal Leoni: of capabilities that may or may not happen. For Sentinel-1, you know, we're very focused on giving customers what they need right now. If customers require any sort of financing, which I've not seen any uptick of, we typically work with a set of partners that can facilitate that. So all in all, as long as you're flexible, as long as you're working with the customer-desired RAMP,
Tal Leoni: I think there is no need to do anything out of the ordinary. As for Net New ARR, you know, we still maintain that we have great momentum. We still maintain that for the second half of the year, we are going to be, you know, growth positive. So all in all, you know, that's what I can share on Net New ARR for Q4.
Speaker Change: Our next question comes from Brian Essex with the company J.P. Morgan. Brian, your line is now open.
Speaker Change: Hi, good afternoon, and thank you for taking the question, and great to see the re-acceleration on ARR. I have two questions. I guess the first one for Tomer, you've talked previously about
Speaker Change: a focus on new logo ads over expansion within the install base, but maybe if you could help us understand where are you keeping your foot off the gas, so to speak, with regard to
Speaker Change: investing in, you know, expansion within the install base, whether it's cross-sell, up-sell, and how you think about prioritization or what you're holding back on as you invest in new logos. And maybe the follow-up for Barbara, with regard to just the one-time legal settlement costs in the non-GAAP financials, maybe expand on that a little bit, help us understand what they're for, and maybe why those points back out of the non-GAAP. Thank you.
Speaker Change: You know, kind of come online at their own natural time. Obviously, we still want the majority of our sellers focused.
Speaker Change: So, if there is one piece where we're, I would say, less focused on driving right now, is that upsell and cross-sell within the customer base in, I would say, adjacent footprints. And that, to us, is something that will gradually start to unlock itself as we put more and more playbooks and frameworks into next year.
Speaker Change: with our adjacent solutions, especially if you look at our core endpoint estate. And that represents an opportunity, it represents an opportunity not only for end customers but also for MSSP partners, OEM partners, many partners that resell our software will have the ability to expand into new markets. But with that, as I mentioned, the focus of our sellers is going after new accounts, it's going after competitive accounts with any capability.
Speaker Change: So we don't really discriminate, I'd say, between endpoint or cloud or, you know, or data analytics, whatever the customer needs and whatever the account would prescribe is where we go in and where we try to usher more value. So that to us, and you see that evident in the quarter as well, has been the motion. The dominant part of ARR is coming from new accounts. It's what we want to see, but we are gradually starting to balance that with our desire to also become more efficient with our go-to-market motion and obviously selling into your own customer estate.
Speaker Change: is a more efficient go-to-market, so those two things will start showing more impact in the next couple of years.
Speaker Change: And with regards to Q3 operating margin, as I noted in my prepared remarks, this was impacted by one-time legal settlement costs and legal fees of a few million dollars. Excluding these, our margin would have been negative 3%, so in line with our Q3 guidance.
Speaker Change: These legal costs were associated with past M&A activity, and during the quarter, we proactively made the decision to settle in order to avoid lengthy litigation and also minimize the overall legal costs going forward.
Speaker Change: Our next question comes from Joe Gallo with the company Jeffries Joe. Your line is now open.
Joe Gallo: Hey guys, thanks for the question. Barbara, I know you're not giving guidance for next year yet, but can you just walk us through any changes to process you've brought to Sentinel-1 or just your guidance methodology as a whole as we start to fine-tune our models for next year? And then as a part of that, Tomer, how are customers thinking about their calendar 25 budgets? Thanks.
Barbara Larson: Yeah sure in terms of our guidance philosophy I would just say overall it's to set clear and reasonable expectations that reflect the potential we see in the business and we base that guidance on what we have line of sight to and what's in our control things like pipeline activity, contributions from new products and anticipated conversion and win rates.
Barbara Larson: When we look at budgets, I think what customers are currently focused on is still very much cost savings, and I think that if you look at
You know, prominent cybersecurity platform providers.
Barbara Larson: It's also about expanding their presence. It's also about creating co-synergies. Customers are looking for capabilities to fend off AI-based threats, which is a complete new threat vector from the past couple of years. Those capabilities are becoming mandatory, so customers are looking to invest.
Barbara Larson: into solutions that can not only fend off these threats but really modernize infrastructure as they think about the speed of response and the need to become more resilient, more robust and fend off any type of disruption. So all in all, I would say customers are looking at, you know, spending much like they've looked at it in the past couple of years. I think there's more emphasis on the ability for certain vendors and certain technologies
Barbara Larson: And that's where we're also focused, where we believe a cloud-native solution set can create significant synergies versus some of the incumbent solutions that you have today, whether on-premise or converted into the cloud, they cannot perform as well as cloud-native capabilities.
Speaker Change: Our next question comes from Matt Desert with the company Needleman Co. Matt, your line is now open.
Matt Desert: All right, thanks for taking the question and congrats on the results.
Matt Desert: Tomer, for you, I think you talked about more enterprise displacements than ever in the past this quarter. Can you talk about...
Matt Desert: into the enterprise market. There's no question that some of the dialogue that we're having
Matt Desert: are of a different magnitude of, you know, the dialogues you've been having in the past.
Matt Desert: I think that pricing for us has always been our strong suit. I think we were always able to play almost at any price point.
and specifically around endpoint protection.
Matt Desert: be on the rise. I mean, for us, that has been, and we've talked about it, that has been a point of focus.
Matt Desert: We mentioned the prepared remarks, some of the largest financial institutions, some of the largest companies in the world are looking for ways to address some of the shortcomings that they see with other platforms.
Matt Desert: especially as it pertains to AI capabilities and see that evidence both in the acceleration with endpoint protection market share and both with the attach with PurpleAI, these are obviously pointing you in a certain direction of where we're seeing the most traction.
Our next question comes from Shin Week.
Kothari with the company Baird. The line is now open.
Speaker Change: Great, thanks for taking my question. Again, great execution on the net new ARR.
Speaker Change: Tomer, as well as Barbara, mentioned AR upper customer, of course, hit a new high.
Speaker Change: This quarter, driven, of course, by success in large enterprise and highlighted cross-sell, up-sell. Could you help unpack how perhaps macro factors like the constraint IT budgets and also the outage dynamic that influences sales cycle?
Speaker Change: I think largely the macro factors are relatively similar. I don't think there's any meaningful or material change.
Speaker Change: I mean the macro factors or how customers are thinking about those
for Sentinel-1. Sentinel-1's momentum is what's driving the business.
Speaker Change: More, you know, just more consideration that that results in. The conversations we're having are ones that allow us to showcase our technology, first and foremost. And I think that's the most important part. And as customers see what we can bring to the table, I think this is where they're starting to feel more at ease.
Speaker Change: to move away from their incumbent solutions. Now, to your point,
Larger deals do mean larger and longer sales cycles.
Speaker Change: One of the most strategic elements of our plan going into next year is obviously it accelerates and catapults our position in the large enterprise market.
Speaker Change: Our next question comes from John Dufucci with the company Guggenheim. John, your line is now open.
Thank you. Tomer, on that point, yes.
Speaker Change: it does take time, right? There's sales cycles, and especially for the enterprise. But for the S&B and the mid-market, and you've talked a lot about the enterprise, those sales cycles are a lot shorter. Now, the results this quarter indicate improving momentum for the business. Obviously, there's some investors, I guess, might have expected a little more, but it does indicate that. Can you comment on how the S&B slash mid-market performed this quarter?
Speaker Change: Yeah, it's performing well. I mean, I think that we're definitely seeing even increased momentum there. I think we're seeing our MSSP partners continue to grow, you know, in a very strong way. So, I think it does contribute all across the board. I can't, I would say, pinpoint exactly what is, you know, outage driven versus, you know, our own innate momentum. But at the end of the day, you know, we are seeing benefits pretty much everywhere. I mean, both geographically and across the different verticals in the market. You know, whether, you know, we want to see less or more, I think we always want to see more. But as I mentioned, our focus is really on
Contracting more in the enterprise.
Speaker Change: The MSSP ecosystem for us is one that's more self-driven, same goes for kind of the SMB dynamics that we're seeing, but even there I think we're just seeing better win rates.
Speaker Change: very, I would say, core established markets. So when you see an acceleration in that market specifically 10 years into this journey, I mean, that's very, very encouraging.
Speaker Change: Our next question comes from Trevor Walsh with the company Citizens JMP. Trevor, your line is now open.
Speaker Change: Great. Hi, team. Thanks for taking my questions. Maybe, Tomer, just following up a little bit on the MSSP portion or comments that you made just a second ago. In the shareholder letter, you talked about kind of expanding the potential of products within the MSSP, specifically around CNAP.
Speaker Change: Is there a reason or kind of can you help us understand maybe a little bit more detail as to kind of why it's a more gradual release of products within that space if it's more just
Speaker Change: not wanting those partners to get too over their skis in terms of the technical requirements and enablement or some other kind of limiting factor and why not just, I guess, let them go kind of more just broadly all at once on the platform. Just help us kind of understand those dynamics. That'd be great. Thanks.
Speaker Change: It's honestly, I mean, more in our hands. We just need to enable them more. We also need to make sure that
Speaker Change: These products adhere to that multi-tenanted approach that we've had over years.
Speaker Change: prevalent in that segment of the market as endpoint was and is.
Speaker Change: So, it's really about making sure that we give customers, the end customers, and obviously the partners themselves.
Speaker Change: the capabilities that they need, but it's on us to enable them, it's on us to help them articulate the value proposition for these types of customers, and it will happen over time. We have expanded our MSSP team just this past quarter in a pretty significant way, and we're now working to extract more, both from our data lake technology in the MSSP market, as well as Purple AI. Both of those, we believe, are the best fit for that part of the market, even above and beyond, let's say, CNAP capabilities.
Speaker Change: So it's really about what you feel is going to generate, you know, the most traction in that segment of the market, which is obviously a bit different than selling to a large enterprise. Obviously, the amount of workloads they have is different, the amount of staff they have is different, the amount of automation they require is different. So all of those we're adjusting, we're making sure that we have the best fit possible in these markets, and then we'll continue to enable these partners.
Speaker Change: At this time, I would like to pass the conference back over to our hosting team for closing remarks.
Speaker Change: That will conclude today's conference call. Thank you for your participation and enjoy the rest of your day.