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SentinelOne, Inc. (S) Q1 2024 Earnings Call Transcript

SentinelOne, Inc. (S)

Q1 2024 Earnings Conference Call

Company Participants

Douglas Clark - Vice President, Investor Relations

Tomer Weingarten - Chief Executive Officer

David Bernhardt - Chief Financial Officer

Conference Call Participants

Brian Essex - JPMorgan

Lory Luo - Scotiabank

Tal Liani - Bank of America

Saket Kalia - Barclays

Adam Tindle - Raymond James

Hamza Fodderwala - Morgan Stanley

Joshua Tilton - Wolfe Research

Gray Powell - BTIG

Brad Zelnick - Deutsche Bank

Raymond McDonough - Guggenheim

Presentation

Operator

Good afternoon, and thank you for joining the SentinelOne First Quarter Fiscal Year 2024 Earnings Conference Call. My name is Elissa, and I will be your moderator for today's call. [Operator Instructions]. I would now like to pass the conference over to your host, Doug Clark, Head of Investor Relations. Mr. Clark, you may proceed.

Douglas Clark

Good afternoon, everyone, and welcome to SentinelOne's Earnings Call for the First Quarter and Fiscal Year '24 ended April 30. 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 Investor Relations section of our website.

This call is being broadcast live via webcast, and an audio replay will be made available on our website after the call concludes. Before we begin, I would like to remind you that during today's call, we will be making forward-looking statements about future events and financial performance, including our guidance for the second quarter and full fiscal year '24 as well as long-term financial targets.

We caution you that such statements reflect our best judgment based on the factors currently known to us and that our actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, in particular, our annual report on Form 10-K and our quarterly report 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 the information presented during the call may not contain current or accurate information. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in the forward-looking statements, even if new information becomes available in the future.

During this call, we will discuss non-GAAP financial measures, unless otherwise stated. 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.

Our financial outlook excludes stock-based compensation expense, employer payroll tax on 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 the call over to Tomer Weingarten, CEO of SentinelOne.

Tomer Weingarten

Good afternoon, everyone, and thank you for joining our fiscal first quarter earnings call. We delivered another quarter of significant revenue growth and margin improvement. Customer retention and expansion remains strong and above our long-term targets. We continue to achieve high win rates with stable pricing. The most discerning enterprises are consolidating their security on our best-of-breed platform, which now includes half of the Fortune 10 companies.

We continued our progress towards profitability in the first quarter, making a seventh consecutive quarter of more than 25 percentage points of operating margin improvement. Despite many underlying business trends, our first quarter top line growth was lower than we expected as global macroeconomic pressures continue to persist.

Succeeding in this environment requires a sharpened focus on go-to-market execution. Furthermore, we're taking actions to fortify our business by improving our cost structure and ensuring our path to profitability. We believe these measures will drive growth efficiencies across our business.

Cybersecurity is mission-critical and a must-have for all enterprises, especially with the world going through a digital transformation. We're leading the charge in security AI innovation and building the enterprise security platform for the future. On today's call, I'll focus on two key areas: one, details of our quarterly performance and external market dynamics; two, how we're continuously optimizing our business and ensuring progress towards profitability, which includes our recent cost saving measures.

Before we move on, let me briefly address the onetime adjustment we made to our ARR throughout fiscal year '23. We believe making this change will reduce ARR volatility and better align growth with revenue. This adjustment did not impact our historical revenue or bookings. All of our Q1 reported ARR-related metrics and forward-looking statements include the impact of this onetime adjustment.

Dave will provide more detail on this. Now let's dive into the details of our Q1 performance and demand environment. We delivered revenue growth of 70%, a strong growth rate in any economic environment. We added net new ARR of $42 million, driven by continued adoption of our Singularity platform across endpoint, cloud and adjacent solutions. We achieved a record high gross margin of 75% supported by data efficiency and strong unit economics.

Our operating margin expanded by 35 percentage points in Q1. Let me double-click on that. We're making rapid progress towards our profitability targets. We also significantly improved our free cash flow margin, showing a year-over-year improvement of 46 percentage points. In absolute dollar terms, we reduced our operating losses and free cash flow outflows significantly.

With that said, our Q1 revenue and ARR growth fell short of our internal expectations. Let me address the two key factors head on that impacted our Q1 results. First, macroeconomic conditions are further impacting both deal sizes and sales cycles. Incrementally, budgetary scrutiny is leading to deal size adjustments for new customers and renewal contracts.

We're seeing customers evaluate usage and rightsize on renewals. Some enterprises are taking a wait-and-see approach by deferring purchase decisions. While not entirely new, the impact from these conditions was more pronounced this quarter. Second, operating in this environment raises the bar for execution. We were disappointed with some late-stage contract execution challenges on large deals that caused a few deals to slip to next quarter.

For example, a multimillion dollar deal with a customer who had already fully deployed our solution could not close in Q1 due to contract delays. At our scale, we have the opportunity to adapt quickly. We're focused on further enhancing our execution, including streamlining our closing process and up-leveling our enterprise platform go-to-market approach.

In particular, we've incorporated factors like deal rightsizing, lower pipeline conversion as well as a higher emphasis on efficient growth into our outlook. There is no fundamental change in the business or opportunity, and our win rates remain strong, but the selling environment is more difficult. We're assuming a worsening macro environment. We now expect full year revenue to grow 41% at the midpoint.

To be clear, we are still adding significant new business and expanding with existing customers. With these assumptions we calibrate our growth outlook and give us a solid foundation for the future. We're operating at record gross margins and winning significant majority of competitive opportunities. As we scale our...

Operator

Please hold as we reconnect our speaker. Ladies and gentlemen, again, thank you for your patience. Please remain holding as we reconnect our speaker. Ladies and gentlemen, thank you for your patience. Our speakers have been reconnected.

Tomer Weingarten

Business toward $1 billion in ARR and beyond, we believe our business will continue to become even more durable and resilient. We continue our expansion into adjacent domains such as security analytics and cloud security. We're early in this journey, and we remain focused on the long-term opportunity.

We're bringing innovative technology to a $100 billion addressable market composed of legacy solutions and ripe for disruption. The only way for companies to stay protected from cyber attacks is to have the best security. At SentinelOne, we leverage AI to deliver leading protection and value to enterprises of all sizes.

Digging deeper into our Q1 results, we are encouraged by several important strengths across our business. Customers of all sizes and geographies continue to treat SentinelOne for industry-leading technology and superior platform value. We added more than 700 new customers in the quarter, and total customer count grew about 43% year-over-year, exceeding 10,680.

As you know, our customer account does not include the customers served by our MSSP partners so the number is dramatically understated. Customers with over $100,000 in ARR grew 61% year-over-year, much faster than our total customer growth. Customers above the $1 million mark grew even faster. In Q1, we added a new Fortune 10 customer, and we're now the cyber security platform of choice for half of the Fortune 10.

Our Singularity platform scales with the world's largest enterprises and outperforms in the most stringent security requirements from detection to manageability to privacy and controls, other prominent customer wins, spend endpoint and cloud footprints, ranging from global financial institutions to iconic retail brands. Our momentum across mid-market enterprises remained particularly strong in Q1, even with budgetary pressure and some downsizing, our ARR per customer increased by more than 20 percentage points year-over-year demonstrating our success with large enterprises as well as increasing adoption of broader platform offerings.

Our land and expand strategy is working as customer retention and expansion remains resilient. Our NRR exceeded 125%. This expansion was driven by footprint expansion and module adoption. Our emerging capabilities represented more than one third of quarterly bookings in Q1, demonstrating strong momentum of our adjacent solutions. Singularity cloud remained our fastest-growing solution followed by meaningful contributions from other adjacent capabilities such as Vigilance, MDR and Ranger.

Our customers state remains underpenetrated in terms of module adoption. There is clear opportunity to increase our platform expansion and improve our business durability. Our partner-supported go-to-market model continues to unlock scale and enhance our market position. We achieved another quarter of resilient growth from our MSSP partners in one as businesses increasingly turned to managed security protection.

Beyond endpoint license expansions, our MSSP partners have started to adopt broader platform modules such as Vigilance, MDR, Ranger and many others. We expect continued MSSP share gains, installed base replacement and module attach to drive meaningful growth going forward. Our autonomous security, multi-tenancy and fully customizable access control makes SentinelOne a critical partner for large MSSPs.

Together, we're providing enterprise-grade protection to customers of all sizes. Expanding upon our cloud security partnership with Wiz, we've enhanced the customer experience through deeper technology integration. Now our integrated cloud security form provides enterprises with complete visibility into their cloud-hosted infrastructure and allows them to protect against cloud-based threats at machine speed.

Our recently launched cloud security marketing campaign is creating strong momentum, increasing customer and partner interest in Singularity cloud. Looking at the competitive landscape, we continue to maintain strong win rates without having to compromise on pricing. This hasn't changed, and our disciplined pricing and value is reflected in our record gross margins.

Our ASPs remain stable, and we continue to win against legacy and next-gen vendors in significant majority of competitive evaluations, and we expect these trends to continue. Customers value SentinelOne's culture of trust and transparency, which is a philosophy we bring to every relationship. We're focused on expanding our pipeline, leveraging our channel ecosystem and refining our execution.

SentinelOne's platform is purpose-built to help customers optimize security and cost with coverage across diverse operating systems and cloud environments. We're helping enterprises consolidate multiple point solutions, enabling them to realize better security and business outcomes using fewer resources. Let me share how we're balancing our investments and taking specific actions to ensure our path towards profitability.

In the current economic landscape, it is vital that we adapt and optimize our resources accordingly. By acting swiftly, we can enhance our execution and drive operational improvements. We're reiterating our commitment to delivering margin expansion regardless of current economic scenarios as demonstrated by our Q1 margin improvement and overachievement.

As a result, we're adjusting our cost as needed to drive more efficient growth, enhance resiliency and ensure our path to profitability. Let me provide a few specific examples. First, we're implementing a plan to optimize our workforce that is expected to impact about 5% of our current employees and pace our future headcount growth plans.

We also see opportunities to leverage AI tools to make our teams more productive and help drive operational efficiencies for the company. Second, we're sharpening our focus on cost discipline. This includes reducing variable spend to business-critical needs as well as optimizing talent locations and facilities. We're prioritizing core products that hold the greatest potential for delivering substantial business and customer value....

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