SentinelOne, Inc. (S) Q4 2023 Earnings Report, Transcript and Summary

Good afternoon and thank you for attending today’s SentinelOne Q4 FY 2023 Earnings Conference Call. My name is Timea and I will be your moderator for today. [Operator Instructions] It is now my pleasure to pass the conference over to your host, Doug Clark, Vice President, Investor Relations. You may proceed.

Good afternoon, everyone and welcome to SentinelOne’s earnings call for the fourth quarter and fiscal year 2023 ended January 31. With us today are Tomer Weingarten, CEO; and Dave Bernhardt, CFO. Our press release and the shareholder letter were issued earlier today and are posted on our website. This call is being broadcast live via webcast. And following the call, an audio replay will be available on the Investor Relations section of our website. Before we begin, I would like to remind you that during today’s call, we will be making forward-looking statements regarding future events and financial performance, including our guidance for the first fiscal quarter and full fiscal year ‘24 as well as certain long-term financial targets. We caution you that such statements reflect our best judgment based on factors currently known to us and that the actual events or results could differ materially. Please refer to the documents 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 documents contain and identify important risk factors and other information that may cause our actual results to differ materially from those contained in our forward-looking statements. Any forward-looking statements made during this call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. 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, unless otherwise stated, we will discuss non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the GAAP and non-GAAP results is provided in today’s press release and in our shareholder letter. These non-GAAP measures are not intended to be a substitute for GAAP results. The financial outlook that we have provided today excludes stock-based compensation expense, employer payroll tax and employee stock transactions, amortization expense of acquired intangible assets and acquisition-related compensation costs, which cannot be determined at this time and are therefore, not reconciled in today’s press release. And with that, let me turn it over to Tomer Weingarten, CEO of SentinelOne.

Good afternoon, everyone and thank you for joining our fiscal fourth quarter earnings call. We reported a strong close to the year and exceeded expectations across all key metrics, including ARR, revenue, gross margin and operating margin. We are delivering high growth with substantial margin improvement. Macroeconomic headwinds remain consistent, yet we achieved two significant milestones. We crossed $0.5 billion in ARR and our global customer base now exceeds the 10,000 mark. This is tremendous progress in terms of the scale and speed in which we achieved it. Our sites are much higher. These results reflect strong execution and competitive position across both endpoint and cloud security markets. We are a proven technology leader in all three major industry valuations, MITRE, Gartner Magic Quadrant and the top ranking in each Gartner critical capabilities for endpoint protection, signifying that SentinelOne is a top choice for businesses of all sizes and complexities. Our technology is helping enterprises consolidate point solutions, realize better business outcomes and modernize their security stack to the power of machine speed automation. Our singularity platform is designed to be cost efficient in ways that incumbent solutions can’t match. Our platform breadth across endpoint, cloud, identity and data delivers best-in-class security and value for our customers and diverse growth opportunities for our business across multiple large TAMs. As always, please read our shareholder letter published on the Investor Relations website, which provides a lot more detail. On today’s call, I’ll cover three key areas: one, details of our quarterly performance showing outperformance on all key metrics, better execution and stronger competitive position; two, we are focusing our investments and roadmap in areas of key technology differentiation, large addressable markets and critical enterprise needs; three, I will discuss the broader demand environment. We are committed to delivering high growth with continued margin improvement and long-term profitability. Let’s first turn the discussion to our quarterly performance. We delivered strong revenue and ARR growth driven by continued adoption of our singularity platform across endpoint cloud identity and adjacent solutions. For the full year, we achieved 106% revenue growth. Our teams executed beyond my expectations to close the year. We are taking market share and we significantly exceeded the Rule of 50 again in the fourth quarter. We have consistently combined rapid growth with meaningful margin improvement, showcasing strong unit economics and scalability of our business model. Our gross margin reached a new record and our operating margin expanded over 30 percentage points in Q4. Overall, we have expanded operating margin by more than 25 percentage points year-over-year for six consecutive quarters. These are great results. I am proud of the dedication and hard work of Sentinels around the world, who make this sale possible. Q4 was one of our strongest quarters of win rates and new customer additions, including enterprises with ARR of over $1 million. We added nearly 750 new customers in the quarter and our total customer count grew about 50% year-over-year, exceeding 10,000. Keep in mind this is dramatically understated as we don’t count the customer service by our MSSP partners. Our customers with ARR over $100,000 grew 74% year-over-year. We added a record number of Global 2000 enterprises in the quarter, spanning major U.S. federal agencies, global financial institutions and technology pioneers for both endpoint and cloud footprints. Putting this altogether, our ARR per customer continued to increase, showing our success with large enterprises and increasing adoption of our platform solutions. Existing customers are doubling down on their commitment and consolidating on our singularity platform. Our gross retention rate improved sequentially and net retention rate remained above 130%, driven by footprint expansion and module adoption. Singularity cloud is hitting exit velocity. We once again remained our fastest growing solution in Q4, followed by strong contributions from other adjacent capabilities like data retention, vigilance MDR and identity security. For the full year, our emerging capabilities represented over one-third of bookings demonstrating strong growth from both endpoint and adjacent solutions, providing another growth vector for the future. Our partners supported go-to-market model continues to unlock meaningful scale and enhance our market position. We achieved another quarter of standout growth from our MSSP partners whose businesses are increasingly turning to managed security protection. Many of the leading MSSP providers have built successful practices on top of our singularity platform. We are also starting to see the early adoption of modules to the MSSP channel, adding another growth driver in this channel. Together, we are providing enterprise-grade protection to customers of all sizes. Let’s turn to the cloud security market and our success. Cloud Workload Protection is a critical enterprise need with a potentially unbounded greenfield market opportunity. The number of cloud workloads can easily surpass the number of employees at any enterprise. The cloud security market has the potential to become even larger than the endpoint market over time. As enterprises are rapidly shifting workers to the cloud, rising cloud-based attacks are bringing awareness to this critical enterprise need. Q4 was our strongest ever quarter for cloud security. It contributed about 15% of our quarterly ACV and more than doubled quarter-over-quarter. The growth of our cloud work or protection solution is being propelled by rising customer adoption, multiple million dollar wins and critical competitive replacements. In the fourth quarter, the global Internet platform ripped out a competitive cloud security solution and replaced it with SentinelOne in a multimillion dollar one-to-one takeout. There were clear architectural shortcomings in the competitive solution. It was breaking production services in Linux environments and was cost prohibitive due to their agents’ resource over consumption. The enterprise turned to SentinelOne for superior technology and experience. Singularity cloud has distinct security performance benefits and operational stability compared to our endpoint peers. In general, cloud is opening new customer opportunities for us regardless of endpoint incumbency. The growth potential is substantial. And I am excited to share that our partnership with Wiz, the leader in CSPM, will allow customers to get more comprehensive cloud protection through the addition of cloud security posture management. This combination creates a far superior cloud security offering more than any other single vendor on the market. Let’s look at the broader competitive landscape. Q4 was one of our strongest quarters. Our overall win rates improved, including against large next-gen vendors. We are winning in a significant majority of competitive situations and our ASPs remained stable and we expect this trend to continue. We are focused on expanding our pipeline, leveraging our channel, and generating more at-bats. Let me share an example of a large financial institution that moved away from Microsoft to SentinelOne, a solid platform win where we help the customer consolidate point solutions across endpoint cloud and many other adjacent modules. After an unpleasant experience with technological limitations and high total cost of ownership, the customer realized the huge difference between expectations and outcomes. After years of security gaps and difficult operability, the customer replaced Microsoft with SentinelOne. We were able to deliver broader coverage from a single platform. We see this time and time again. Customers most commonly select SentinelOne for leading security performance and breadth, ease of use and better platform value. Our AI-based security and unified data architecture provides performance benefits and a cost structure that allows us to remain highly competitive, enabling us to increase deal sizes and expand our gross margins, while consolidating costs and reducing complexity for our customers. Our competitive advantages also extend to our partner ecosystem. For years, we have taken a partner-friendly go-to-market approach, where we enable their business instead of competing against them. This is especially important for strategic partnerships like MSSPs. We have architecturally designed capabilities that enhance these relationships like multi-tenancy, automation and role-based access control. We have cultivated an extensive and diverse network of channel partners that’s very hard to replicate. It’s not just a package design, but a true competitive technology moat. We are enabling our partners through thousands of accreditations and technical training and these initiatives drive more channel engagement, more deal registrations, larger pipeline and continue to expand the SentinelOne brand and platform. I want to be clear this is a large and competitive market, like many areas of security and software. It always has been. We continue to succeed with win rates and share gains. We are addressing multiple large TAMs and opportunities for growth. Our customers value SentinelOne’s culture of trust and transparency, a philosophy we bring to every potential relationship. Positive customer experience and feedback cuts through any marketing noise and speaks for itself. We lead in Gartner peer reviews for both endpoint and cloud security, where we are recognized for capabilities, platform value and superior business outcomes. Let’s turn the discussion to our innovation and product roadmap. Superior technology is the foundation of how we help our partners and our customers build more resilient enterprises. The platform is only as good as the sum of its parts and we intend to remain best of breed in all aspects of our platform. We are pursuing the most focused roadmap we have had as a company. It ensures alignment amongst customer needs, product development and go-to-market. In the new fiscal year, we are focusing on three core areas of innovation and product development: one, advancing our leadership in endpoint security; two, strengthening our cloud security advantage; three, expanding our platform capabilities and market opportunity. Why these? Each one represents a core area of technology differentiation, significant market expansion potential and addresses critical enterprise security needs. Our platform extends across endpoint, cloud, identity and data. This cuts across multiple growing TAMs that are likely to exceed $100 billion in the coming years. Our top priority is to ensure enterprises are secure and protected today and for the future. Building upon 3 consecutive years of leading in the MITRE ATT&CK evaluations, we are committed to staying ahead of the threat landscape, adversaries and our competitors. Once again, Gartner recognized SentinelOne is a leader in the Magic Quadrant for Endpoint Protection Platforms. Our placement in the Magic Quadrant validates our go-to-market execution and vision of AI-based modern cybersecurity. More importantly, we are ranked the highest across all 3 customer use cases in the Gartner Critical Capabilities for Endpoint Protection Platforms. These top rankings emphasize our superior platform depth, breadth and relevance for organizations of every size, maturity and industry. We are delivering on our mission to be a force for good, fortifying customer defenses against the most sophisticated threats at machine speed. Our second area of focus is to extend our cloud security advantage. As I discussed, we achieved new highs in cloud security growth and large customer wins in Q4. These are sizable deals, including several multimillion dollar wins and can easily match or exceed the size of the endpoint deployment for these customers. Singularity cloud architecture, operational stability, resource efficiency and leading protection stand out clearly from the competition. We are in an excellent position to address the critical and rapidly growing greenfield opportunity. We are extending our cloud security advantage by combining forces with Wiz, the leader in cloud security posture management. Through this exclusive go-to-market partnership, we are combining two of the leading cloud security assets in the market and creating an unbeatable choice for enterprises delivering full coverage with end-to-end cloud security. Our joint customer base and new prospects will benefit from having both singularity clouds, leading workload protection for real-time, runtime protection and Wiz’s leading posture management capabilities to detect and remediate misconfigurations across diverse cloud environments. And lastly, we will continue to expand the breadth of our platform capabilities, specifically around security data lake, identity security, and vulnerability management. Our platform approach helps enterprises consolidate point solutions and gain favorable total cost of ownership. These innovations will magnify our competitive advantage in the coming years. As one innovation example, we are the first and only security platform protecting multiple effect surfaces with a unified and fully integrated security data lake. The ability to integrate all enterprise data in one place with a single pane of glass is critical for securing a modern enterprise parameter. This is the true evolution of XDR driven by superior cost performance and scale. Our fully integrated data architecture eliminates the need for multiple query languages and outsource SAM for logging solutions. This provides for superior outcomes and meaningful advantage over incumbent data analytics solutions. The impact is material, faster speeds, lower cost and easier to deploy and to use. Being first to market gives us an edge of our peers. We are just scratching the surface of a massive security data market opportunity ripe for disruption. Finally, let’s shift gears to the demand environment. We are committed to delivering high growth with continued margin improvement and long-term profitability. Global economic conditions remain similar to last quarter. We continue to see customer cost consciousness and prudence around IT budgets, which has led to longer sales cycles and deal rightsizing. We expect these dynamics to continue. Customers are evaluating deals to ensure they are getting the best product and value at a rationale price. Fundamentally, the enterprise need for cybersecurity remains mission-critical. Our platform solutions, including endpoint cloud identity and security data are among the top IT spending priorities. Our AI-based security and platform approach allows us to be flexible in meeting diverse budgetary needs and deliver our customers a favorable cost of ownership, especially important in today’s environment. I am incredibly encouraged by our pipeline entering the year as well as our record pipeline generation so far in Q1. Our pipeline has nearly doubled year-over-year. Most importantly, our win rates increased. We are seeing high retention and expansion from customers and our teams are executing well. We are focused on maintaining high growth and we expect to deliver 51% revenue growth this year. This puts us in the rare category of high-growth security companies, substantially outgrowing our industry and peers. We have also made tremendous progress on margin improvement in a short period of time. In Q4, we delivered record gross margin driven by increasing scale and data-enabled efficiencies. We completed the migration of our entire back end into dataset a couple of quarters ago. This gives us more control into our forward cost structure as we continue to scale and improve gross margins. In addition, our significant operating margin improvement in Q4 clearly shows our agility and sharp focus on cost management. Looking ahead, we will remain dynamic by strategically investing in key growth areas and ensuring that our path to profitability does not deviate across different economic scenarios. We expect to deliver another year of significant operating margin improvement and continue our progress towards achieving profitability in fiscal year ‘25. Before handing the call over to Dave to discuss the details of our financials and outlook, I’d like to share progress on our recent initiatives undertaken to elevate execution and enhance team structures. As discussed last quarter, our focus as a team has been to elevate our execution and performance management. These are important ingredients to scale the business. I am extremely pleased with improving execution of Sentinels, which is clearly demonstrated by our fourth quarter outperformance across all aspects. Our total employee retention is about 10% better than the industry average. This is also true if you just look at the sales organization at a subgroup level. This is no trivial during a time when our key competitors are instituting multiple rounds of layoffs. We have intentionally made enhancements and incorporated performance management into our operations and it’s already having a positive impact on our delivery, innovation roadmap and financial performance. Two quarters ago, we decided to unify the product and engineering organizations, consolidating the CPO and CTO roles under a single leader, Ric Smith. This allows us to achieve better alignment and higher velocity. We strengthened our leadership in the past few quarters with several executive additions that bring scale, experience and technology expertise that spend beyond the endpoint market that are important for the future of SentinelOne. These are the right moves as we evolve from endpoint to a broader security platform, covering endpoint cloud identity and data. We strive to foster a productive and rewarding culture and our efforts to show results. Our Glassdoor ratings are near perfect at 4.9 and easily the highest among peers. I’m proud of SentinelOne being named as the best workplace and technology on Fortune’s U.S. ranking for 2022. Our people are some of the best in the business and are highly motivated. In closing, the world is going to see change on geopolitical, economic and technological funds. Just think about the evolution of AI in the past few months. Right before our eyes, we’ve seen AI go significantly, unlocking massive opportunities across endless applications. AI is a tremendous disruptor, but all of us should be mindful of the benefits and risks of innovation. This puts massive power and influence in the hands of certain technology companies but also in the hands of those that seek to inflect harm. How that power is used is a choice. Left unchallenged, there can be serious and potentially dangerous externalities. Responsibility, good business practices and safeguarding operations are essential. We should also be mindful of the deep societal impact and widening gap in the evolution of the human mind, especially in an AI-assisted reality. Coupled with the fragility of trustworthy information in the age of global social media, disinformation and deep rate technologies, AI can be used to undermine world order and shape false narrative that can severely disrupt our way of life. Inversely, AI can also be harnessed to help with cybersecurity and safety. This is why we’re using AI in a directed, structured and targeted way. From early on, we developed a fully automated AI-based security platform, integrating neural networks to serve a specific use case and function, combating cyber attacks and protecting our digital way of life is the force for good. We continuously work to evolve our models and provide cutting-edge capabilities to customers around the world while responsibly ensuring safety and ethics. Our growth and innovation journey continues. I want to thank all Sentinels, our customers, partners and shareholders for their contributions and support. With that, I will turn the call over to Dave Bernhardt, our Chief Financial Officer.

Tomer, thank you. I’ll discuss our quarterly financials and provide additional context around our guidance for Q1 and fiscal year ‘24. As a reminder, all comparisons are year-over-year and all margins discussed are non-GAAP, unless otherwise stated. Our fourth quarter results exceeded expectations across the board. We delivered high growth and substantial margin expansion. Revenue grew 92% in the fourth quarter and 106% for the full year. Our ARR grew 88% to $549 million, crossing $0.5 billion, a significant milestone. Once again, we meaningfully exceeded the Rule of 50 in the quarter, indicating the strength of our competitive position and unit economics. Revenue from international markets grew 125% and represented 35% of revenue. We are just beginning to tap into our global growth potential. Macro headwinds remained, yet we added net new ARR of $61 million in the quarter, reflecting sequential growth of 25%. Our ARR per customer increased sequentially, reflecting the continued momentum from large enterprises and a higher customer adoption of our platform, notably in cloud security. We continue to see a healthy mix of new customers and existing customer expansion. Existing customers are doubling down with SentinelOne as our gross retention rate improved sequentially. Plus our net retention rate remained north of 130%, well above our target of 120%, driven by strong subscription expansion and cross-sell of adjacent solutions. Expansion of our platform with existing customers and MSSP partners has proven to be durable and resilient, fueling a solid base of growth regardless of broader conditions. Turning to our costs and margins. Our gross margin reached a new record of 75% in Q4, reflecting an increase of 9% versus last year. This demonstrates our tremendous progress within the past 12 months. It shows the success of our land-and-expand strategy and platform unit economics where we collect data once and enable more and more capabilities. It also underscores the importance and benefit from our fully integrated data analytics back end. Adjusted for certain non-recurring benefits, our Q4 margin was about 73.5%, up about 2 percentage points sequentially and above our guidance. These items included reconciliations and benefits of outstanding credits under a prior cloud hosting agreement. We recently signed a new agreement with one of our cloud hosting partners as a result of our increasing scale. Going forward, we expect this new agreement to enhance cost efficiency and support further margin improvement in fiscal ‘24 and beyond. Looking at the rest of our P&L, we delivered 31 percentage points of operating margin improvement year-over-year to negative 35% in Q4. This marks the sixth consecutive quarter of over 25 points of margin improvement. On a dollar basis, we also reduced our operating losses sequentially in Q4. For the full year, we achieved 36 percentage points of operating margin improvement. Our focus on cost discipline continues to show meaningful progress towards our profitability targets. Moving to our guidance for Q1 and the full fiscal year ‘24. In Q1, we expect revenue of about $137 million, reflecting growth of 75% year-over-year. For the full year, we expect revenue to be between $631 million and $640 million, reflecting annual growth of 51% at the midpoint. We expect the macro-related uncertainties to persist for the full year and a conservative view on revenue and ARR expectations is prudent in today’s environment. We have the raw materials to deliver against Q1 and our full year targets. Our pipeline has nearly doubled year-over-year, and throughout Q1, we’ve continued to build pipeline at a record pace while elevating our brand. We are winning with new customers and our existing customers continue to adopt more licenses and broader platform capabilities. We’re encouraged by the diverse and large growth opportunities in front of us. Turning to the outlook for margins. We’ve taken a major step forward as a company, moving closer to our long-term gross margin target of 75% to 80% or higher. We’re benefiting from data efficiencies inherent in our business model and our platform approach. We expect Q1 gross margin to be about 73.5%, a slight increase compared to steady-state Q4 levels and over 5 percentage points of year-over-year expansion. For the full year, we expect gross margin to be between 73.5% and 74.5%, up about 2 percentage points year-over-year at the midpoint. We expect benefits from our increasing scale and improving data processing efficiencies to continue. Finally, for operating margin, we expect negative 41% in Q1, implying an improvement of over 30 percentage points year-over-year. For the full year, we expect operating margin to be between negative 29% and negative 25%, an improvement of about 22 points at the midpoint compared to fiscal year ‘23. We’ve made significant investments in innovation and talent over the past few years. This gives us ample runway to deliver against our product road map and growth targets. We expect to benefit from operating leverage as we moderate headcount growth and continue to unlock more productivity in fiscal year ‘24 and progress towards profitability. We don’t intend to sacrifice growth or market share. Our investment approach will remain highly selective and focused on key areas of competitive strength. We will remain dynamic and are committed to delivering on our margin improvement regardless of how the broader macro environment unfolds. We have and will continue to pace our investments with our growth. We have a very strong balance sheet with $1.2 billion in cash, cash equivalents and investments and no debt. That’s substantial. As a note, our exposure to Silicon Valley Bank’s insolvency was immaterial, and we have no financial risks associated with them. Our balance sheet provides us with the durability, flexibility and the path to generating positive cash flow. Our goal remains to deliver positive free cash flow by the end of the year, subject to global economic conditions. And we remain committed to balancing compelling top line growth with consistent margin improvement and to our goal of achieving profitability in fiscal year ‘25. In summary, our Q4 performance was a strong end to a strong fiscal year ‘23. We expect to continue to outgrow the market in fiscal year ‘24 while progressing towards profitability. We’re addressing multiple large markets, providing multiple vectors for future growth and success. Thank you all for joining us today. We can now take questions. Operator, can you please open up the line? Thank you.

[Operator Instructions] The first question comes from Brian Essex with JPMorgan. You may proceed.

Hi, good afternoon. Thank you for taking the question. Dave, I was wondering if you could dig in a little bit into the gross margins. I caught you that there were some adjustments there. I think investors this quarter were a little bit concerned about what they heard was increased pricing competition or competitiveness on a pricing front. Could you maybe unpack that a little bit? How much of this gross margin is credit? It looks like even backing out adjustments? It was still pretty robust, which would kind of refute any kind of pricing pressure commentary out there? And then how do we think about that from a – I guess, from a scale over data migration efficiency perspective with regard to your guidance for next year? Thank you.

I don’t know where the narrative about the pricing pressure. We hear it a lot, but we’re really not seeing it. We had stable average selling prices during the quarter. And in terms of the percentage, I guess, of – if we want to call it a reconciliation at the end of the existing – or end of the prior contract as we signed the new one, we had to reconcile some usage against the credits that we earned under the existing contract. That was a little less than about 1.5 points. Obviously, that would have put us around 73.5% margin on a steady-state basis, which is the low end of what we’re guiding for Q1 and the low end of what we’re guiding for next year. So we’re looking at this as the ability to continue our expansion of gross margin. 73% to 74.5% is getting a lot closer to the 75% that we’ve given everyone is a long-term forecast.

Thank you. The next question comes from Trevor Walsh with JMP Securities. Your line is open.

Great. Thank you for taking my question. Appreciate it. Tom, regarding the partnership with Wiz, can you give us a little color around – you mentioned kind of some go-to-market partnership or kind of strategies there in both kind of new logo and current customers. Can you give us a sense of the current overlap between the two customer bases and is the kind of initial low-hanging fruit to basically sell into your respective kind of non-overlapping accounts and then go after new logos? Just maybe just give us some color on how you see that playing out. And then maybe for Dave, as a follow-up, is that baked into the guidance at all around kind of how you guys are looking at that partnership and heading into FY ‘24? Thanks.

Of course. It’s a great partnership. It’s something that allows us to deliver end-to-end cloud security from the security posture management, which obviously Wiz is one of the best companies out there and for us on the workload protection side, where we deliver on-time protection for workloads of any kind. So it’s a great complementary capability set. In terms of the go-to-market element of it, obviously, there is a high degree of non-overlapping customers, which is why we’re very excited about the partnership. It’s a two-way partnership, which means that Wiz can resell and take our best of breed worker protection to their customer base, and we can take their leading CSPM capability set into our customer base, which I think on both ends is highly penetrated on each other’s offerings. I mean obviously, we’re seeing great success with our workload protection platform. They are enjoying massive success with their CSPM product and solution. So to us, I mean, this is just a great marriage of two adjacent capabilities that both customer sets are looking for. And again, it’s completely reciprocal.

And in terms of how this is considered within our guidance, this is very early in the partnership. I’d say we currently view it mostly as upside potential, just how nascent the partnership is. It has the potential to be transformative, but it’s so early to tell right now that we would update you guys if we saw an immediate change in that.

Thank you. The following question comes from Saket Kalia with Barclays. You may proceed.

Okay, great. Hey, guys. Thanks for taking my question here. Dave, maybe two housekeeping questions for you if I may here. Just to clarify things. So the first one is – apologies if I missed it, but did we comment at all just on the ARR guide for this year? And then secondly, I think the margin guide for this year, great to see the operating loss narrowing. I think you were targeting about 25 points of expansion as we talked about in the past. I think you talked about this speaking about ’22, I think to note there just from a timing of expenses or maybe should we just think about that as maybe a good starting point at this early point in the year?

In terms of where we are at and conservatism, I think that I think that 22% is roughly where we think it is early in the year. Obviously, we always look to improve that. In terms of the ARR growth, we guide the revenue. Our guidance is for revenue to grow 51% at the midpoint and obviously, revenue and ARR track closely. This is really just us taking a prudent and conservative approach based on the current macro environment. We expect these conditions to continue throughout the year. We are expecting relatively flat net new ARR for the year. That would imply about 47% ARR growth and 50% ARR growth is still achievable and we are working towards that, but want to be prudent in terms of our guidance.

Very helpful. Thanks, guys.

Thank you. The next question comes from Gabriela Borges with Goldman Sachs. Excuse me, the next question comes from Josh Tilton with Wolfe Research. You may proceed.

Hey, guys. Can you hear me?

Yes. We can.

Just a pretty high level one for me actually. As you guys start to sell maybe into some of these 2023 security budgets, are they better or worse than what you thought they were going to be headed into the year? And maybe how does endpoint security as a priority within this budget changed, if at all, when compared to last year? And just a quick follow-up. Did you just confirm that you’re still guiding that 50% ARR growth for this year?

Officially, I think it’s 47%. 50% is clearly a target for us and is achievable. We just have a lot of work to do to get there. That’s certainly our upward trajectory in terms of the goal.

Yes. In terms of endpoint budgets, I think it’s an incredibly durable TAM. It’s still a priority spend item for most enterprises out there. I think what’s also interesting to note is that we’re seeing it more and more cases where we’re able to come in with a fully modernized platform and really almost show into their current budget and spend with legacy providers. So in essence, we’re able to provide customers today with a better value platform, but without expanding their budget too much. Obviously, if they are opting for more capabilities, that’s where budget expansion could happen. But as far as it pertains to the actual core endpoint market, we feel really good about the budgeting. We feel really good about our price point and our ability to come in, completely displace, consolidate the way some incumbent solutions out there with added capabilities that we kind of mentioned on the call earlier, like vulnerability management, MDR. I mean these are just increased capabilities that you can now get from a single vendor. I mean, all of these, again, provide for just superior cost consolidation. So we feel we are well positioned to not only continue to grow within the endpoint market, but really do it in a fashion that is a bit more macro resilient. It’s actually something that talks to the existing budget, to the existing spend that they have with their incumbent vendors but only now they can get a modernized platform and obviously reduce the huge amount of risk versus using a legacy vendor. So all these trends they play favorably towards a platform like ours. And I think from there, the routes to expand through the years, the lifetime value we get from these customers kind of with our leading gross retention rate obviously, for us, it’s again creating a dynamic where we can continue and grow.

Thank you. The next question comes from Jonathan Ho with William Blair. You may proceed.

Hi, can you hear me, okay? Hello.

Yes.

Okay. So just wanted to, I guess, ask about net retention rates as we start to contemplate the ARR guidance for next year. How should we think about where those will head over time? Thank you.

Largely, we expect them to stay right around the level that they are at. We do factor into our own internal plans even lower rates of net retention rate. But generally speaking, we’ve seen them be incredibly resilient, very consistent for quite a few quarters now. It’s very clear that customers are opting for more of our modules and capabilities. It’s very clear that node expansion is still out there even though customers are rightsizing to what they need, when they grow, when they need more coverage, when they discover more endpoints, that’s obviously something that results in growth. So we’re quite confident that we can stay at these levels. And as you can imagine, that can contribute or will contribute about 50% of the overall net new ARR that we need for next year. So, when you factor all of that in, we feel this is a relatively conservative guidance for next year. It’s really built on what we have done this year. We are just looking for a confident way to guide forward in highly uncertain times. And we have chosen to go with that guide. As Dave mentioned, we are pushing as much as we can. We believe we can overachieve that. But right now, we want to provide I think something that we can just go forward with confidence.

Great. Thank you.

Thank you. The next question comes from Gray Powell with BTIG. You may proceed.

Great. Thanks for taking the question. So, yes, congratulations on the solid results. And I was just wondering, given macro headwinds, can you talk about the linearity you saw throughout the quarter? And is there anything you can say just on trends that you have seen so far in February and through early March?

Linearity has been much better than Q3. That’s the one thing I can say. I think part of it is also our elevated execution and our ability to really adapt quickly to how sales cycles are managed. So all-in-all, we have seen pretty normal linearity, much in line with what we see in typical seasonality. And same goes for Q1 thus far. I think we are looking at really just seasonal linearity right now. Again, a lot of what we can control, we are now doing a better job in controlling and that results in just in line performance to what we expect. Predictability is higher, and we feel pretty good about linearity quarterly and also through the year.

Okay. Thank you very much.

Thank you. The following question comes from Hamza Fodderwala with Morgan Stanley. You may proceed.

Good evening. Thank you for taking my question. Tomer, you touched on this earlier, but I just wanted to put a finer point on it. So, there have been some management departures in the last six months or so. Has that had any at all sort of affect downstream within the sales organization? And can you just comment on overall sales force attrition rates relative to, let’s say, one or two quarters ago? Thank you.

Sure. And I believe we have had. I think in our – earlier on the call, we touched exactly on the retention rates that we have for employees. I mean it’s still some of the best in the business, including the sales organization. We have also mentioned two quarters ago that we will be embarking on performance management as a way to hone in on our sales organization specifically. And that’s what we have done. The sales organization is actually executing better right now. We have seen no undesired attrition in the sales organization. I think if you look at our executive team as well, and we again repeated that on the earlier remarks, we have consolidated our product organization into the technology organization. We have eliminated the CPO role. So, a lot of what we have been doing has been completely deliberate. I think if you look at the marketing organization, obviously, for us right now, it’s all about improving and getting better. If you looked at the Gartner Magic Quadrant for endpoint protection, Gartner cites different challenges for different vendors. The only challenge that they cited for us was actually on our marketing and our brand presence. So, to me, when I look at this, maybe this is a blessing in disguise, but we typically treat these things as just an opportunity to improve, an opportunity to be better. And again, we feel like we are already executing better. We are already making significant strides with the latent of securing a new CMO for the company. So all-in-all, this had minimal effect on us and again, room for improvement.

Thank you.

Thank you. The next question comes from Roger Boyd with UBS. Your line is open.

Great. Thank you for taking my questions. Just a quick high level one for me. As you continue to expand the functionality of the Singular Platform, what’s your perspective on a build by partner decisions? And has that framework shifted to any direction in the current environment?

It’s a great question, and it has many factors into it. I think we are still out there looking at potential opportunities. I mean obviously, this market is not so great of some of the private companies out there that might have some really, really interesting capabilities for the years to come. And on the flip side, obviously, as we were striving towards profitability, we also want to be very mindful as to how much we invest in building new capabilities. We feel we have a fairly substantial portfolio of capabilities truly today. So for us right now, a lot of it is about putting into market and continuing our growth in areas like cloud security, the security data lake capability, which today, it’s a first and only in the market for unified security data lake that can consolidate more data from other adjacent components in the enterprise. So, for us, it’s the capability to really hone in on what we have been doing today before we run into more capabilities. But at the same time, we are going to be looking into more capabilities that’s going to underscore what we do into the future. Last point about that, if you again go back and look at the Gartner Magic Quadrant and the Gartner Critical Capabilities research paper, SentinelOne was highlighted number one in the amount, breadth and depth of capabilities it has and its relevance to each and every customer type out there from the smallest customers to the biggest customers. We are today the broadest, most relevant platform out there according to Gartner. So, to us, a lot of what we do now is really look into the future into the next 3 years, and what else do we want to have in our portfolio to really complete the image of what we feel enterprise security should look like.

Thank you. The following question comes from Brad Zelnick with Deutsche Bank. You may proceed.

Great. Thank you so much. Tomer, in your remarks, you said that win rates had increased in Q4, which is great to hear. What exactly is driving that? Is it in any particular area of the market or against any particular competitors that you would call?

It’s been across all competitors, and it’s been more evident in the high end of the market. And a lot of it is just the work that we have done internally to hone in on our processes, put new discipline, new methodology as to how we go about enterprise sales. I think shifting our messaging has also helped significantly. All-in-all, I am very, very encouraged by the performance of the sales team specifically. As we mentioned, we have a new leader for the Americas. That’s been just a great progression on how we go about that segment of the market, specifically, the enterprise. So all-in-all, we definitely think this is a trend that’s here to stay. Our win rates have always been high, that’s something to remember and seeing them go even up, up and above in Q4, has again been just a testament to the changes that we have been leading in the past couple of quarters. So, all-in-all, very encouraging across all competitors, we have seen some competitive displacements. I think more than ever before, seen more displacements of Microsoft. So all-in-all, I feel like our technology is really starting to shine and customers are starting to understand better and better that they can just get superior value out of SentinelOne versus anybody else in the market.

Great to hear. And if I could just follow-up, Tomer, I have got a couple of investors pinging me on a question that I figure will just ask out in the open. I think people are just trying to reconcile your comments from last quarter talking about 50% ARR for the year as a floor, the bullish comments about Q4, the great pipeline in Q1, stable ASP, good linearity, but now you are talking about an ARR guide that’s a little bit below the floor. Just what is it that’s changed from 90 days ago that you would point our attention to, to just think about the delta? Thank you.

Yes. I think that nothing really changed as it pertains to us. I think the world looks a bit more uncertain, and we are just trying to find the way to give people complete certainty in what we do. I think pointing to the same ARR addition that we have had this year, gives us a great baseline to work off of, and it’s not a major adjustment from where we were. Lastly, as Dave mentioned, I mean we are guiding to revenue and revenue is really where we point our sights. So all-in-all, we still have all the ingredients in the business, all the capacity in the business to really achieve everything we said and everything we intend to achieve. But with that said, you can’t ignore there was literally a bank run three days ago that could have bode incredibly worse to the economy than it had been playing out. So, all of that just funnels into a very uncertain macro, and we just want to try and base what we do on pure factual evidence as to what we can achieve versus giving you any type of futuristic guidance. We feel comfortable with this. We feel this is something that we can do with not much fanfare and I think we can push it higher. I think we can overachieve. And I think that’s exactly what Dave was also saying earlier.

That’s very fair, very clear, and it’s good to see you growing stronger than others in the market. So, keep up the good work. Thank you.

Thank you. Our next question comes from Ray McDonough with Guggenheim. You may proceed.

Great. Thanks for taking the question. Tomer, we have heard of momentum with some of your partners in EMEA. And as Dave mentioned, it seems you are early on in your penetration in international markets and recognizing some of those partnerships are relatively early. Can you talk about the performance abroad, specifically in EMEA? And if there is anything that you are doing to either enable the channel there or accelerate growth in that region in general?

Absolutely. It’s definitely a place where we are putting more and more focus. We are seeing great success with our partner ecosystem, definitely in EMEA, but also outside of it. These partners have been through the years building capabilities on top of our platform. So, they are completely standardized on the SentinelOne platform. Now for us, having this horizontal reach across many different partner ecosystems, we want to go deeper. We want to go more vertically into these different partner ecosystems. And that’s what we are doing right now. We are putting more and more programs to build more commitment throughout our customer and partner base. In EMEA, having exclusive networks is one of our biggest distributors has been just a great partnership for us over the years. But we are just in the beginnings of that partnership. We are now going through and enabling more and more of their resellers to get that wider reach throughout the continent. About 30% of our revenue comes from EMEA, very, very healthy. And that trend is something that we are seeing elsewhere in terms of deepening the relationship with the channel ecosystem, becoming more lucrative with the channel ecosystem enabling more module cells through the channel ecosystem. Today, any given channel partner can actually sell so much more out of SentinelOne and that increases their ASPs, their average deal sizes in a manner where they can cover more parts of the enterprise, consolidate the way some of these other incumbent solutions, but obviously, that becomes a better outcome for them. So, for us, it’s an opportunity. We keep on growing. It’s a critical part of our go-to-market, and we are absolutely doubling down our relationships from MSSPs and all the way to VARs and VADs across the world.

Great. Thanks for the color.

Thank you. The following question comes from Andrew Nowinski with Wells Fargo. You may proceed.

Okay, great. Thanks for taking the question. So, I want to ask about cloud security. You have always had a best-in-class cloud security solution, and this was announcement, I think makes it even stronger. And I know you said it accounted for 15% of ACV, but is that a good proxy for the contribution to net new ARR? And I asked because net new ARRs decelerated now for two straight quarters down to 10%. I am just wondering maybe what was the driver of that?

I am not sure if that’s the case. But in general, cloud security does contribute fairly into net new ARR. It’s definitely something that we are going to be seeing more and more next year. We have said on many occasions that we feel like the opportunity in cloud security could be as big or even bigger than endpoint security. And we are definitely designing our go-to-market to enjoy and work through that opportunity in the years to come. Our technical advantage is one thing. Our ability now to strike, I think a more comprehensive go-to-market around cloud is highly unique in the space, already seeing a ton of customer interest. But it doesn’t come in place over endpoint. I think in many cases, we see this as one native complete sales from the endpoint and all the way to the cloud. But with that said, and as we mentioned earlier on, cloud standalone deals actually opened a new avenue for us and unlock many accounts that otherwise might have already an endpoint incumbent. So, it’s a strategic go-to-market motion for us, not only in its cloud regard, but also in its ability to position us better in endpoint. And across all these different vectors, we will continue to see it grow side-by-side with our endpoint business, with our data business, and we treat all of those as competitive advantages.

Thank you. The next question comes from Patrick Colville with Scotiabank. You may proceed.

Hi. This is Joe Vandrick on the line for Patrick. Can you expand on the differentiating factors that are pulling people towards Singularity Cloud over some of the other workload protection products out there? And then at what point in an organization’s journey to the cloud, are they typically purchasing the product? Thanks.

For us, there are two main advantages. Overall, the solution is incredibly easy to deploy and it’s very non-invasive. It’s one that doesn’t need any type of deep kernel act [ph] into this environment. So, this is a market advantage that we have overall direct competitor. The other very interesting element in what we do for runtime protection is that we have infused our same AI-based behavioral detection modules into these runtime models for securing the cloud. So, now we are talking about a highly performant, natively-integrated cloud worker protection into every type of an environment from containerized Kubernetes environment, but all the way to just virtual servers hosted into the cloud. Coverage is for all of the above, runtime protection for all of the above. No need to deploy into the kernel level or any type of cumbersome deployment and having the ability to have complete performance controls that then allow customers to constrain exactly what they want to have for security versus having a rampage agent running wild in their production environment. So, these are some of the most sensitive environments out there, which is not a surprise to see what we mentioned on the earlier remarks, having a multimillion-dollar displacement one-to-one from some of these other offerings that I think have promised front time protection, but at the expense of performance and the expense of flexibility and that is just something that you can’t allow for a production environment. So, coupling all these different factors together, right now, many organizations, especially the cloud native ones, are leaning towards an architecture they can control, an architecture they can trust and an architecture that truly provides for superior security by infusing AI models into one-time protection, not just waiting for detection, not just identifying vulnerabilities, but truly deflecting attacks from some of these workloads.

Awesome. Thank you.

Thank you. And our final question is from Joseph Gallo with Jefferies. You may proceed.

Hey guys. Really appreciate the question, and great to hear your pipeline doubled. Can you just speak to the quality there? And have you seen any cycle benefits from your customers having finally set their calendar ‘23 budgets? And then maybe if I could, to ask Brad’s question even more bluntly, should we consider fiscal ‘24 ARR guide more or less risky than 90 days ago? Thanks.

I will let Dave answer the latter part of the question. When we look at pipeline, I think we are seeing just incredible growth throughout every segment of the market. And that to me, is the part that’s most encouraging. We are seeing the ability to sell into the high end of the enterprise. We are seeing the ability to grow with mid-enterprise, which I would say is the long tail of the endpoint security market. And obviously, we are generating more and more whether MSP ecosystem as well. So all-in-all, when you look at pipeline today, still predominantly endpoint oriented, but we are seeing also a lot of pipeline starting to build specifically for cloud security opportunities. This is a change that we have made a quarter ago when we started putting more emphasis on cloud-only pipeline or cloud-mainly pipeline, and that contributes to the overall pipeline that we can generate. So, this year is going to be the first year where we actually treat pipeline generation by discipline, just an overall pipeline for endpoint security. As you can imagine, that opens up a host of new opportunities. It cuts through a different TAM in earnest, and it creates a much bigger opportunity size for the company as a whole. That’s why we are encouraged. That’s why we feel we are now on a different pace in pipeline generation. We are now tapping different markets. We are not just talking in endpoint sense.

And as far as comparing versus the last 90 days, I think what I would ask you to do is to focus on the revenue guide, which we believe is strong and achievable. And in terms of just the ARR in the current environment, we are just being prudent around it. And I think that’s what we are trying to get out within this guidance.

Thanks guys.

Thank you. I will now pass it back to the management team for closing remarks.

Thanks everybody. Appreciate your time today and looking forward for a great year. Thank you.

This concludes today’s conference call. Thank you for your participation. You may now disconnect your lines.