SentinelOne, Inc. (S) Earnings Call Transcript & Summary

Thank you very much. The rooms are still full. That's great. First day of the conference. Wait until the third day, and we're going to speak to empty rooms. So thank you very much for joining us. I have Tomer Weingarten here hosting -- hosted. And I want to talk about the space and about SentinelOne. I will just say, I always start my sessions with just stating our views, and one thing we don't have any doubt of that this is the endpoint and it started -- starting with endpoint, but endpoint and vicinity is one of the most strategic places on the network. And we heard in the morning, we heard Nikesh from Palo Alto talking about that 85% of the information in the network, you can find it either in the endpoint or a firewall. So it's extremely strategic. And then you look at who are the players in the space, and there are really only 2 legitimate players like people -- companies that are really having next-generation solution with the bells and whistles. Yes, you can have endpoint and a sort of kind of lower version of it or something that is just to check the box. But if you're looking for something in the high end, there are really only 2 companies in the space. So with that, that's kind of framing -- this is why we like SentinelOne despite the pressure on the stock. And we think yesterday I -- we hosted a dinner and I said that if you focus on cybersecurity, you have to look at SentinelOne. It's not about timing. I don't care about timing. I don't care about whether it happens this quarter, next quarter. I care about the next 3 years. And I'm sure that one of the leading companies in the space that is in one of the most attractive spaces will eventually get to the right place. So we're going to talk about the struggles and the journey and how you get to where you want to be, and that's why I'm hosting Tomer today, and thank you very much for joining us.

Thanks for having me.

So Tomer, I want to -- I'm going to start with -- it's great to have you here right after your reported numbers. And I want to start with the kind of high-level question about the numbers. What did you like in your quarter? And what are the things that you think you need to work on, just at a high level?

Sure. I think we obviously showed very, very powerful revenue growth. So lending at 40% in this environment is quite significant, really like the forward motion. And to me, forward motion is kind of the new and upsell business that we bring in. I think these 2 were glaring positive, really like the free cash flow generation. So, obviously, the ability to jump in a single year from, I think, it was negative 40% last year, Q1 to positive 18%. This is not like a couple of million dollars. This is a significant margin. That was obviously a big moment for us, not just in terms of showing it, I think, to all of you -- but for us, internally, knowing that the work that we've been doing for the past year has resulted in tremendous efficiencies and have generated a very -- what I believe is a very compelling business model at the end of the day. So those are the positives. I think that negatives for me were just our execution on renewals, on enablement, on our work with the channel, on process ordering, quoting, like a lot of the system works that we talked about also on the public call, we just need to get better. I mean we achieved pretty significant scale in a pretty short amount of time. And a lot of that work, I think, was not happening as fast as we wanted it to happen. So it was a pretty big conservated effort, even within this quarter, this past quarter, to revamp our systems, to put a more seamless process in place, remove the friction. And I think that's going to already start showing better signs into the next couple of quarters and the second half of the year, I think it's just robust pipelines. Our conversion has been very, very stable. Our win rates have been very, very stable despite, I think, all the smoke and mirrors around us and what people feel sometimes what people think sometimes and the odds that they described that we have or don't have to continue and expand, none of that has really, I think, impacted our ability to continue and convert business, granted the pipelines. And maybe one more point on that. I think that we also need to expand significantly what we do with marketing, but I can talk more about that like later on.

Yes. If I can just ask the -- just to put the clock ticking. So we know when to end this. Thank you. So in this quarter, we saw, as you said, some very positive drivers, like growth in cash flow generation, et cetera. What needs to be done in order to fix the things that you highlighted, that you want to fix? Meaning, is it something that you need to do internally, such as systems and processes, et cetera? Or is it something that you need to do with the channel, go-to-market, finding distributors? Or where do I put my finger on things that should be done.

Yes. I would say 95% of it is internal. It's just supporting everything we do in a much better way. And I just mentioned, everything from renewals to enablement, to onboarding, to training, like all of that just needs to be better. By the way, I fully treat that as an opportunity. We can now really scale the company in these areas inherently with AI, which is pretty amazing. I mean you're -- I think you're going to see a lot of companies trying to transition what they do and infuse AI. Me, I now have the opportunity to do it at the foundational level, and that's amazing. I mean getting AI into your operations is a massive superscaler. So I'm actually very encouraged about that effect exponentially into the out years. But a lot of it is just a question of execution. And I think that we know exactly what needs to be done. And now, it's just a question of going through it, and we'll do it extremely fast. And I think you'll see how that translates, I think, not only in the second half of the year, but also into growth next year. Inflicting into free cash flow positivity also gives us the ability to reinvest back in the business. And if there's one thing, and truly if there's one thing, that constrains our growth, it's not the competition, it's not the distribution, it's the amount of marketing that we can do. And it's basically how many eyeballs we can capture. And we've been very, very constrained given that we wanted to achieve a certain envelope, my competitors are not constrained by anything. I mean whether it's Nikesh reinvesting all the firewall profitability dollars into marketing next-generation software or my other peer just growing in a 0-interest environment to the point that they have massive amounts of cash that they infinitely put into their marketing machine. We didn't have that ability this year up until now. I think inflicting -- and we talk about 18 points of margin, that's $20 million, $30 million that I can now take and invest into a business that was largely very effective. I'm doing a fraction of the marketing that they're doing, still growing 40%, still winning market share in an incredibly competitive market. So now that we're, I think, a bit freer to invest back into the business, just make things, I think, just much more scalable top of funnel for us.

You're expecting a recovery in the second half, you're expecting growth resumption -- or not growth, growth acceleration in the second half. Do you think it's going to translate that quickly to the place where you want to be? Or is there a risk that second half may -- what -- the factors that impacted your first half can also impact second half?

Most of it was internal execution. So unless we're unable to fix our processes, which I would say is the thing that is most under our control, I think that's, I mean, there's risk in everything, but I think that's fairly low risk.

All right. I want to talk about your offerings. What makes you grow 40%? What makes you grow, meaning what is the differentiating factor that you bring to the market that -- I'm not talking about CrowdStrike, I'm talking about everyone else, Cisco and Fortinet and Palo Alto and the other players, what is your differentiating factor versus the other players in the market?

All of it. I mean we got the best-of-breed offering in endpoint protection, the most autonomous product out there. We're a leader in AI, above and beyond, I think anybody else in this market. We have a data solution and data analytics backend security data lake, SIM, whatever you want to call it, an AI SIM that is more performant, more effective, more flexible than any other offering in the market. So we just have superior technology in every part of our business, which is really what allows us to lend first with these adjacent offerings. So when you look at that 40% contribution for emerging products, it didn't come from our existing customers. It came from new logos. So we're lending net new with our data lake. We're landing net new with cloud. That opens up the door later on to expand into other areas, but it also prevents the incumbent vendors on the other footprints from expanding into these footprints. So to me, it's a double win that we're able to and with our adjacent offerings. And with all that said, 40% of emerging products also means 60% coming from endpoints. So there's still out of growth in endpoint. And again, predominantly, that's net new growth. So all in all, I mean, we, I think, have a really good tap into both the endpoint markets, the up-and-coming markets. Obviously, data, SIM, however you want to call it, it's a huge TAM. I mean we're talking about like a $40 billion opportunity. It's not something that's going to happen overnight, not for us, not for anybody else. And I think our scale there is already quite significant and probably in much less disparity than maybe our endpoint scale versus some of the others. So I'm, again, very encouraged by how strategic our offerings are in just, again, using AI. I mean, if you've seen Purple AI versus any other AI offering in the space, whether it's copilot or other chat bots or whatnot, there's nothing to compare. So that alone, I think, creates a differentiation that is quite visible, which has been missing, it has been missing in cybersecurity for a while, like everybody talks the same thing. Everybody says the same thing. Every presentation here will have AI-driven data, some place for sure. I'm sure you've seen that like 100 times today. But at the end of the day, if you're looking at these products, like what can they actually do, like what's the big promise. And beyond that big promise, can the stuff that you see on the video really exist in real life. Is somebody really using it? Is it really delivering that? Can we do it in production environments? You'll find that 99% of what's out there is really great marketing with really bad outcomes. And I think this is where Purple AI, which we launched a year ago at RSA, this RSA, we still -- other server security vendors showing presentations and videos, we launched that a year ago. So the advantage we have there, I feel, is it's robust. I wouldn't call anything a huge moat in any market at this point in time. But I think it's substantial and it ties the entire platform together. You can really, I think, start to see the power of all the different parts weaved together by AI, and that's a story that not many others can tell if anybody.

Do you -- can you tell us about how you typically land with customers? Do you typically land with XDR and then upsell? Or do you also land, first landing, with other solutions?

Yes. It really depends, and it's all of the above. The one thing I want to highlight is that we -- we don't try to stick to like it's XDR, it's SIM, it's EDR, it's this, it's that. It's what problem do you have? We have solutions pretty much to everything that you can think of. We got EDR for the cloud plus a CNAPP platform, how do you call that? Is that CDR, like I don't even care at this point. Like XDR, is it XDR or is it EDR or is it really SIM or is it a data lake, I don't really care. It's just about you need data ingestion. You want to create one control plane for your entire enterprise, you can do that. Call it whatever you want to call it. So we typically either go after endpoint opportunities. So basically, somebody, you've got an incumbent there, whether it would be a next-gen provider. Could it be falling from grace, next-gen provider, it could be an incumbent, and those are very clear projects and we win the vast majority of opportunities that we see in that market. But then we land with cloud. I mean we go after accounts that might not be or account on the endpoint, and they have a substantial cloud environment. and they need AI protection for their cloud workloads, the private vendors that claim to be the best in cloud security don't provide that type of functionality. So they don't have real workload protection. They basically give you good visibility. They don't give you any type of protection. So we see a lot of the production call it big production, mission-critical services, the stuff that you all use on a daily basis, whether it's your cell phone or your ride sharing or whatever it is, I mean, means that our stuff is working if you're getting your stuff. And I think that's where people just gravitate towards the best solution they can find. They can't compromise. They can't compromise even on the performance aspect of these solutions. Forget about security, if this stuff doesn't work in a highly seamless way, you're just not going to be considered. And that's why when you see us deployed on half of the Fortune 10. You see us deployed in some of the most critical infrastructure companies out there, whether it's on the cloud or on the endpoint, people just recognize that what we do is a leg above anybody else, except for our marketing, that part is not there yet.

In your last quarter, when you give us NRR, we can actually calculate how much revenues came from existing clients versus new clients. And although you grow ARR at the same level of CrowdStrike, it's a very different picture. You are 70% to 75% of your growth is coming from new customers. And for them, it's only 33%, give or take, big numbers. Talk about your strategy of maximizing upsell to a customer versus getting new customer. You have limited resources. How do you look at what you focus on, like what to focus on?

Yes. I mean, honestly, we're focused on net new business. I mean -- and it's something that we do in a very deliberate way. there's more market share to be had. There's more accounts to be had. We're still relatively a young company. We've got about 12,000 customers. I want more accounts and to have more accounts, you need to have a focus in your sales force that is about winning new business. No matter how we land, again, whether it's cloud or endpoint, I don't really care. I want the account. And obviously if we got a given seller with a $1 million quota or x quota, let's say, you want most of that quota exhausted on getting after new business versus going back to your estate which also means that, relatively speaking, our estate is very underpenetrated. We're not making a ton of concentrated effort to go after in cross-sell and upsell. And that's a growth lever that we can pull, and we will pull once we believe the time is right that we have enough investment, that we can shift some of the focus that we have on winning new business into monetizing the current customer estate. The most interesting thing about that dynamic is that growing this much net new accounts and generating 40% of growth is really hard. It's much more expensive typically to do it in grabbing net new accounts. Obviously, when you already have the customer, nurturing it and upselling and cross-selling, that's a much easier sales motion than going after a net new account, especially when they're entrenched already with one of your competitor. I mean imagine going after one of Nikesh's customers and trying to sell them anything that we have on the truck, right? I mean that's obviously harder, but we're very, very successful in it. And I think that's something that's kind of a very underlooked property of our business and does create, I think, maybe kind of a harder, more stringent go-to-market that we have to execute. But that's something that we are strategically doing and we'll continue to do. Yes.

Maybe I want to switch gear to go-to-market. There is the enterprise segment. There is the SMB segment, and then there is also channels to the market, such as MSSPs, et cetera. Can you talk about the dynamics in each of these markets? Do you see, for example, one side of the market growing better than the other side? Or do you see weakness in one side versus the others? And then, separately, can you talk about your go-to-market strategy through partners?

Yes. I think, generally, things remain pretty much the same as it were, like I would say, in the past couple of years or so. It's still a very choppy environment. I mean you get all kinds of jittery behavior sometimes from customers, and that transcends any specific part of the market. Like the MSSP ecosystem, I think, has been very, very healthy for us. It's a great promotion for us because it's low touch, low friction. We basically just license our platform for these partners, and they conduct everything on kind on behalf of the customers that they onboard. The other parts of the market, I think, kind of more of the same, the VAR ecosystem for us, whether it's [ Optiv ] or GuidePoint or SHI. I mean, again, good traction there. I think we can do much more with them just to give you some rough sense, like someone like Palo Alto Networks would have 5 account -- channel account managers for each one of these partners, we maybe have 1 for 5. So, obviously, now that we're able to invest a little bit more and we're reaching more critical scale, I think you also see us kind of doubling down with the channel. So I think the main message for me is we're just underpenetrated in so many regards. We can do so much better. and we got tremendous technology. And I think now we got the -- we gave ourselves the license back to invest. I mean we're trying to be good custodians of capital, and I think you've seen some of that by the fact that we still have all of our cash from 3 years ago still on the balance sheet, basically. So the company is becoming much more efficient. And I think now for us is just going after all these opportunities, accelerating. And I think, all in all, we got the reach now we need the coverage as well.

You spoke about the fact that you're trying to move some of your smaller customers to different channels. Can you talk about it and the implications on your financials?

Yes. It's a question of scale. I mean, we're sometimes addressing so many customers on the long tail that we're just not doing an efficient enough job. So just moving some of those into our channel partners, routing those, allowing them to be managed by our channel partners is -- should be a favorable dynamic for us and just reduce a lot of load from our own operations. So nothing super critical, but differently, I think, a favorable dynamic for us.

So I want to ask you about competition. I know that you said the competition is less of a factor, but what -- how did the competitive landscape change, given that so many new companies enter the space or provide an agent? And is competition is a consideration in your competitive bids, meaning you lose or you win versus competition? Do you see a change from a year ago, 2 years ago?

No, not entirely. I think that -- I wouldn't say competition is not a factor. I think it's a constant factor. And it's not -- I mean, not in a material way, right? I mean, the 2 things to remember is that it's a very, very big market. And look, you guys -- you like CrowdStrike. CrowdStrike is a great machine, right? I can think differently about the technology, but generally, you can't argue with their business success. Even if you don't argue with that, you're going to say they're going to be very successful, they're going to be a $10 billion company by 2030. The opportunity in the market is $100 billion. If anybody thinks that I'm not going to have a significant share of this market, we're already one of the biggest cybersecurity providers out there, and we're going to be some of the biggest cybersecurity providers in the years to come. We got exceptional technology that almost nobody else in this market has. So to me, yes, I'm a competitor, too. We're also a competitor in this market. We win the fair share of the engagements that were actually included in, think our work needs to focus on being included in more of these conversations. And going back to kind of what we need to do with marketing and our ability, I think, to double down now that we've reflected into free cash flow positivity, it just opens up the door to create more awareness for what we do all across this TAM, which is you all hear about SentinelOne, but there's a ton of folks that don't know anything about SentinelOne. I mean it's a very, very, very, big market, especially if you consider data and how that's coming up online. It's a gradual thing. It doesn't happen overnight. But again, $100 billion, I mean, that's an ocean of opportunities, and we're here to stay and go after them. And I think stock valuation is like all of that. I mean that's like a point in time thing. We don't get too stressed about that. And I think that, generally, we can and we will improve our profile as a company. I think one of the things that are pressure on our stoke is just our overall profitability and EBIT profile, and that's something that I think is temporary for this year and next year. I think it's a very different story. And growth, I believe, will still be there in a very sustainable way. So not concerned about any of it. I mean I've seen this competition. I know who the competition. I know who I'm competing against. A lot of them are my ex employees. So I think I got a good vantage point into all of this.

And Microsoft have -- has Microsoft been a growing risk or a declining risk over time?

It's a growing risk for customers. That's for sure. No, truly. I think that it will attest to that. And I think it is now a question that lingers in many practitioners' minds. How do I mitigate the Microsoft risk because it does introduce risk in your environment. And I think that you can't ignore that anymore. So I do think there is some sentiment change. I wouldn't say that it is material as you want to see it, like I would want people to be more aware of the risk in Microsoft's offering. I think it's just starting to bud right now, but you are seeing a change in behavior. So time will tell. But I don't consider that Microsoft will taper away from security anytime soon. It's going to take an antitrust and a couple of other things.

So is this -- is it important for us to focus on the number of modules that you sell, meaning, the upsell opportunity? And what's your plan on that? You have about 10 modules, give or take, if I remember correctly. And the question is what -- when I when we're going to meet like 3 years from now, when we talk about the number of modules that you have, where do you want to be? Is there a number? Is there a target? Are there markets you want to go after?

Yes. I would say that I would like to have 4 product lines and 0 modules. I don't want to see modules in cybersecurity anymore. I think that, also, if I see this correctly, AI will naturally consolidate a ton of the [indiscernible] that you're seeing in the market today, all these acronyms, they have no place, they don't provide for better security. Everybody is getting breaches. Why are you even investing all that money in all these things that you can't even manage? You don't have enough people to control all of it. It has to be managed by AI. You need general intelligence for security, which is really what we're building. I think you're going to have one AI governing many, many aspects of cybersecurity. I don't think Palo building like a chatbot curve product and continuing their acronym soup, I want to break that cycle. I'm done with this. And that's kind of what we're seeing also that customers eventually, if you parse through all the indoctrination by the vendors in the space and kind of the inertia of the past 20 years in cybersecurity, you don't really want that. It's all based on just bad assumptions from decades ago. We're in a very, very different environment. And we're going to keep on pushing the envelope there. I mean I'm not in a race to build more modules. I think we got the core capabilities that we want, whether it's to your initial point, endpoint protection, protecting the devices super imperative, super sticky, super important, protecting the data, incredibly important, and that's something that we'll continue to do. And protecting the cloud, and I think no matter then how many modules you have, what you do, the micro capability, the vulnerability assessment and the vulnerability management and vulnerability patching, all of them being sold by a different SKU and who needs that stuff? It's just -- it's not the way to go. So yes, 0 modules, 4 main product lines, AI to govern all of it. Whether you buy the capability from me or not, you just connect it to my AI, I'll manage it for you or AI will manage it for you. I think that's the way for cybersecurity.

Great. We almost, almost ran out of time. Is there any question from the audience? Okay. In the sake of leaving 19 seconds to the audience, I want to just thank you. Thank you so much.

Absolutely. Appreciate the time.