SentinelOne Inc

NYSE:S

Earnings Call Analysis

Strong Quarter with Raised Guidance

The company reported a robust second quarter, with revenues surging by 46% and annual recurring revenue (ARR) climbing 47% to $612 million. Growth was balanced, particularly with a 57% revenue increase in international markets. The gross margin hit a record 77%, up 5 points year-over-year; operating margin improved by 34 points to -22%. Q3 is projected to bring in about $156 million, a 35% year-over-year increase. The full-year outlook is optimistic, with revenue expected around $605 million, indicating a 43% growth, and high 30% range ARR growth, about $195 million in net new ARR.

Broadening Horizons with Resilient Performance

SentinelOne's fiscal second quarter earnings call painted a picture of a company building on robust technologies and innovative thinking, demonstrating resilience amidst challenging global conditions. CEO Tomer Weingarten highlighted the company's aspiration to shape the future of cybersecurity with SentinelOne's AI-powered platform, reflecting a 47% year-over-year growth in Annual Recurring Revenue (ARR) to $612 million. This marks a notable progression towards their $1 billion ARR goal and profitability.

Financial Fortitude in the Face of Expansion

SentinelOne raised the bar this quarter with a record gross margin of 77%, far surpassing the 20 percentage point expansion since their IPO just two years ago, which illustrates the scalability of their business model. The company's operating margin expanded by a stunning 34 percentage points, signifying their eighth consecutive quarter of over 25 percentage point margin improvement, signaling strong unit economics and disciplined cost control.

A New Chapter in Revenue Growth

With various operational efficiencies yielding measurable improvements, SentinelOne revised its full-year revenue forecast to about $605 million, indicating a 43% growth. This upgrade comes with a promise to outperform the previously targeted mid-30% ARR growth rate by achieving a high 30% range. CFO Dave Bernhardt underscored the company's commitment to steady advancement towards positive free cash flow and an improved margin guidance of expected full-year gross margin to about 76% and operating margin of approximately negative 25%, which aligns with their journey to profitability.

Strategic Steadiness Amid Speculation

In response to market rumors of seeking strategic alternatives, Weingarten conveyed a clear focus on nurturing SentinelOne as an independent entity capitalizing on its growth trajectory and margin enhancement. The termination of a reselling agreement with Wiz was clarified as a strategic shift towards internally driven cloud security capabilities, reinforcing their roadmap without impacting customer outcomes.

Customer Retention and Sales Excellence

Despite facing industry-wide challenges that might affect the net retention rate (NRR), SentinelOne maintained solid organic customer retention at 120%. The company credits its enhanced sales execution to continuous improvement in training and operations, increasing efficiency across product lines and sales channels. Particular emphasis was placed on harnessing the MSSP (Managed security service provider) segment's untapped potential, underlining the opportunities presented by new modules like Ranger Insights for asset discovery and vulnerability management.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. Thank you for attending today's SentinelOne Q2 Fiscal Year '24 Earnings Conference Call. My name is Cole, and I'll be the moderator for today's call. [Operator Instructions]

I would now like to turn the conference over to our host, Doug Clark. Please go ahead.

[Douglas Clark, executive]

Good afternoon, everyone, and welcome to SentinelOne's earnings call for the second quarter of fiscal year '24 ended July 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 the Investor Relations section of our website. This call is being broadcast live via webcast, and an audio replay will be available on our website after the call concludes.

Before we begin, I would like to remind you that during today's call, we'll be making forward-looking statements about future events and financial performance, including our guidance for the third fiscal 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 factors currently known to us and that our actual events or results could differ materially.

Please refer to the documents we file from time to time with the SEC, in particular, our annual report on Form 10-K and our quarterly reports on Form 10-Q. These 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 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 our GAAP results.

Our financial outlook excludes stock-based compensation expense, employer payroll tax on employee stock transactions, amortization expense of acquired intangible assets, acquisition-related compensation costs, restructuring charges and gains on strategic investments, which cannot be determined at this time and are, therefore, not reconciled in today's press release. And with that, let me turn the call over to Tomer Weingarten, CEO of SentinelOne.

[Tomer Weingarten, executive]

Good afternoon, everyone, and thank you for joining our fiscal second quarter earnings call. We reported strong second quarter results and exceeded our expectations on all key metrics, including ARR, revenue, gross margin and operating margin. We're also raising our outlook for revenue and margins for the fiscal year '24.

I'm proud of the resilience, dedication and execution of our teams. Our performance also reflects the progress we are making towards enhancing business processes, operations and cost discipline. We pioneered the world's first purpose-built AI-powered cybersecurity platform to deliver autonomous defense for the enterprise.

We introduced the industry to the first-ever autonomous AI agent with a fully integrated data and security platform and self-healing capabilities. We've established a noble and transformative approach to cybersecurity, a unified data and security platform across attack vectors. Once again, we're leading the industry by incorporating generative AI into cybersecurity through Purple AI, supercharging security operations.

Superior technology is the foundation of how we help our partners and our customers build more resilient enterprises with streamlined operations, less product complexity, best-in-class security and a leading return on investment. Our competitive success is the direct result of our innovation and technology leadership.

We're in the early innings of taking market share and mind share of a massive $100 billion addressable market, ripe for disruption. As always, please read our shareholder letter published on the Investor Relations website, which provides more detail.

Let's review the details of our second quarter performance, which exceeded our top and bottom line expectations. Our ARR grew by 47% year-over-year to $612 million, reflecting net new ARR of $49 million in the quarter. Our gross margin reached a new record of 77%.

Since our IPO just 2 years ago, we've expanded our gross margin by more than 20 percentage points. We're now operating within our long-term gross margin target range. This important achievement reflects the scalability of our business model, driven by our strong unit economics and price discipline.

We're making significant progress in improving our operating and free cash flow margins. We proactively streamlined our cost structure to ensure our path to profitability. Our operating margin expanded by 34 percentage points, driven by higher scale and cost discipline. We've delivered margin improvement at a staggering pace. Q2 marked our eighth consecutive quarter of more than 25 percentage points of year-over-year operating margin expansion.

Let me also highlight the remarkable improvement we've made to our free cash flow profile, delivering 55 percentage points of expansion compared to just a year ago. The level of margin improvement we're delivering is a rarity among public companies. With strong liquidity of more than $1 billion in cash and equivalents, we will build on this progress. We're confident in achieving positive free cash flow in the second half of our next fiscal year.

Looking beyond key financial metrics, our competitive differentiation and superior platform value is resonating with customers. We continue to win in a significant majority of competitive evaluations. Our win rates remain strong, including against large next-gen competitors. Our single platform architecture helps enterprises consolidate spend, point products and consoles. We're addressing the most important needs to enterprises, reducing complexity, streamlining operating efficiency and delivering better security, all through AI and automation.

I'm especially pleased with the positive feedback from our customers. As captured by Gartner Peer Insights, hundreds of customers provided favorable feedback on the Singularity platform. We achieved top 2 ranking not only in DDR, but also in MDR and cloud workload protection categories, outperforming even the largest vendors in the space.

As evidenced by these results, our technology delivers on our promise to our customers. In Q2, we added about 700 new customers, and our total customer base now exceeds 11,000. Remember that this number does not include the customers served by our MSSP partners, so it is understated, especially as more enterprises turn to MSSPs for many security services.

Customers with more than $100,000 in ARR grew 37% year-over-year, much faster than our total customer growth, and customers with more than $1 million in ARR grew even faster. Our momentum with large enterprises and platform adoption continues to drive higher ARR per customer. In Q2, we secured many large customer wins across U.S. federal agencies to global health care companies and technology pioneers spanning both endpoint and cloud footprints.

Our Singularity platform helps enterprises simplify cybersecurity by consolidating multiple vendors in disjointed platforms. Let me highlight 2 examples. First, a large enterprise selected our unified platform to replace a total of 7 different security vendors, including the 2 largest endpoint vendors. The security team at this enterprise was grappling with the challenge of managing multiple solutions and consoles. Following hands-on experience, the customer selected our Singularity platform for EDR with 5 additional modules. Through autonomous protection in a single console, we deliver better security and superior customer experience.

In another multimillion dollar win from the quarter, a global health care enterprise selected SentinelOne unified platform to integrate multiple-security ecosystem products and bring them together, replacing the closed garden approach of their incumbent vendor. The customer valued SentinelOne's open platform that unites security data and actions, future-proofing their enterprise security posture.

Our platform approach continues to be a source of growth through expansion, driving a net retention rate of more than 115%. As a reminder, our NRR now includes legacy products from the acquisition of Ativo Networks a year ago. The inclusion of Ativo and macro-driven budgetary constraints are impacting our near-term expansion rate. We believe this is temporary.

Over the long term, we see significant platform expansion potential based on high customer retention rates, expanding product categories and early-stage adoption from our installed base. Our NRR expansion was driven by continued license and module adoption. Singularity cloud remained our fastest-growing solution in Q2, followed by strong contributions from Singularity Data Lake, Vigilance MDR and Ranger.

Overall, module adoption remains a meaningful opportunity for growth, and we're beginning to see opportunities for large security data deals and other massive market opportunity that is ripe for disruption. Our platform solutions beyond endpoint continue to drive more than 1/3 of our quarterly bookings in Q2, illustrating the diversity of our business mix.

On to our partner ecosystem. We achieved another quarter of standout growth with our MSSP partners in Q2. Businesses are increasingly turning to managed security to elevate protection, address cybersecurity talent shortages and better align cost structures. Despite recent macro-related industry headwinds, the demand for managed security remains strong.

Our large partners continue to expand their business with SentinelOne through additional licenses and modules. In a multimillion dollar deal from the quarter, we quadrupled our business with a fast-growing MSSP partner compared to just a year ago.

From the beginning, we've built our business by enabling our partners instead of competing with them. Our differentiated platform capabilities such as multi-tenancy, automation and remote management makes SentinelOne a foundational platform for MSSPs who are building their practices on top of our technology.

One of our strategic partners, Pax8, recently recognized SentinelOne's significant impact with its Pax8 Most Valuable Vendor Award. We're still in the early innings of a massive business expansion opportunity with our MSSP partners. Overall, our quarterly performance reflects strong execution by our teams. Our proactive efforts to enhance operational efficiencies are showing measurable improvements.

We've expedited our deal, closed processes and cash collections all while growing the average deal size. Over the last few years, our product portfolio has evolved from endpoint to a broad security platform covering endpoint, cloud identity and data. Similarly, our go-to-market framework is evolving towards a full enterprise-wide security platform. The actions we've undertaken are yielding positive results, but there's always more work to be done.

As we continue our journey towards surpassing $1 billion in ARR and achieving profitability, our focus remain on continuously sharpening our execution, from training and enablement to support and services. We're in a terrific position to disrupt the $100 billion security and data market opportunity, and we're raising our full year growth and margin guidance to reflect a stronger outlook and better execution.

Let's turn the discussion to the market environment and the wave of secular tailwinds behind cybersecurity. Global macroeconomic conditions and the broader demand environment remained consistent with the trends we discussed last quarter. Enterprises continue to rightsize their security investments based on near-term budget constraints.

We've seen a proliferation of cyber incidents, new software vulnerabilities and an uptick in the use of AI-based attack methods. The evolving cyber threat landscape and sophistication of modern attacks have exposed the shortcomings of key cybersecurity vendors and reinforced the structural importance of AI-powered autonomous scalable security.

In a recent cyber incident linked to China, attackers gained access to user authentications, opening the door to a range of Microsoft applications and services. In addition to the vulnerability a Microsoft Defender couldn't defend, the hackers were able to use the stolen keys to access government and corporate accounts.

It's no surprise. Microsoft Solutions are known to be riddled with vulnerabilities, which are accompanied by cybersecurity that has been repeatedly breached. Lawmakers and security experts are questioning the significant shortcomings of Microsoft's cybersecurity and are asking for an investigation into the company's security practices.

Numerous incidents such as this underscore that inadequate and legacy security solutions are exposing enterprises to enormous cost business disruptions and brand reputation concerns. Increasingly, cybersecurity is an executive and board level priority as governments begin to require high level of oversight and disclosure.

The U.S. Securities and Exchange Commission established new rules to require a public company to regularly disclose matters related to cybersecurity risk and to report material cybersecurity incidents. All of this, once again, shine the spotlight on the structural importance of a blazing-fast and AI-driven cybersecurity platform as well as the collection and retention of all enterprise log data.

In today's evolving threat landscape, point solutions are falling out of favor. Security vendors that focus on a narrow set of data sources or attack vectors are unable to furnish comprehensive and cost-effective protection. Customers are seeking to consolidate not only their security vendors, but also the security consoles and data in order to gain a unified view of the enterprise security landscape. Enterprises need a specialized security approach centered on all enterprise data to prevent attacks.

Our autonomous technology brings this vision to life with a unified AI-based security analytics platform that seamlessly aggregates and connects data from all security products to deliver enterprise-wide visibility in a single streamlined technology and interface. We eliminate the need to operate disjointed platforms. As attacks move beyond a single surface, it's imperative to tie together telemetry logs from key security products.

Singularity Data Lake is the only unified platform in the market that is able to bring together full fidelity logs and visibility from all key sources for enterprise security, like e-mail security, identity access management, firewalls, SASE providers and others. Frost & Sullivan recently ranked SentinelOne as the XDR Growth Index Leader, ahead of all the security vendors evaluated. I'm proud of our leading AI-based technology and the innovations we're bringing to customers.

Our newly launched vulnerability management solution, Ranger Insights, is another example of how we're helping customers eliminate disparate tools in a single platform. Ranger Insights connects 2 closely tied elements of cybersecurity, application vulnerability identification and endpoint mitigation, which were disconnected until now. CRN ranked Ranger Insights as the #1 in their list of Cool New Security Products Unveiled at Black Hat 2023. We also introduced a new cloud data security product line, which offers threat detection for customers using cloud storage vendors like Amazon S3 and network storage providers such as NetApp.

On top of delivering industry-leading workload protection, we're expanding our cloud security product suite to include capabilities like cloud vulnerability management to asset discovery and visibility, making Singularity Cloud one of the broadest CNA platforms to have end-to-end functionality, from runtime protection to data security.

Last but not least, building upon our success in delivering best-in-class autonomous security, we're extending our lead by bringing generative AI to security professionals. Purple AI transformed security operations by supercharging users to control all aspects of enterprise security, from visibility to response, with unmatched speed and efficiency. This is much more than a sidecar system. It can upgrade any security analyst to superhuman levels. We expect this to be a significant source of expansion and growth in the future.

At the Black Hat conference earlier this month, thousands of visitors eagerly discovered the capabilities of Purple AI and engage in immersive, interactive hands-on product demos. The best way for companies to prevent cyberattacks is to leverage the best security, and SentinelOne delivers it. Our innovations and holistic approach to cybersecurity puts us in a strong position for long-term growth across multiple large addressable markets, including endpoint, cloud, identity and data.

In closing, I extend my gratitude to our incredible team despite a persistently challenging macro environment, Sentinels across the world rose to the occasion, addressing critical enterprise needs with the most disruptive technology on the market. I also thank our valued customers, partners and shareholders for their support and trust. We remain focused on the long-term opportunity and maximizing our business potential.

With that, I will turn the call over to Dave Bernhardt, our Chief Financial Officer.

[David Bernhardt, executive]

Thank you, Tomer. Today, I'll discuss our quarterly financials and provide additional context about our guidance for Q3 and fiscal year '24. As a reminder, all comparisons are year-over-year and all margins discussed are non-GAAP, unless otherwise noted.

Our second quarter results exceeded our expectations across the board. We delivered high top line growth and substantial margin expansion. Revenue grew 46% in the second quarter, and our ARR grew 47% to $612 million. We added net new ARR of $49 million in the quarter, achieving strong sequential growth of 17%.

Our growth was also balanced across geographies, with higher growth in Europe and Asia. Revenue from international markets grew 57%, representing 36% of revenue. We continue to achieve a healthy mix of new customers and existing customer expansion. In addition, our momentum with large enterprises, SMBs and MSSP partners remain strong, which continues to fuel a solid base of long-term growth.

As a result, our ARR per customer increased both sequentially and year-over-year, reflecting strong momentum with large enterprises and broader platform adoption. We're taking market share from incumbent and next-gen vendors, and our second quarter performance signifies our competitive strength in enterprise demand for best-in-class cybersecurity.

Before turning to our costs and margins, I'd like to provide an update related to the ARR adjustment we announced in Q1. After conducting a comprehensive review, we implemented robust controls, improved processes and enhanced our ARR reporting structure. In addition, we partnered with a big 4 accounting firm to objectively validate our processes and controls. Our systems are fully remediated, and we're glad this issue is behind us.

Looking beyond the top line growth. Our gross margin reached a new record of 77% in Q2, reflecting a year-over-year increase of 5 percentage points. Just 2 years after setting our long-term gross margin target of 75% to 80% of the IPO, we're already operating well within that range. We're seeing continued benefits from economies of scale, data processing efficiencies and cross-sell from adjacent solutions, and our pricing remains healthy.

We have taken a highly differentiated approach to unifying our security and data architecture into a single platform, which delivers real value for us and our customers. Our record gross margin demonstrates the success of our land and expand strategy and platform unit economics, where we collect data once and enable more and more capabilities, powered by our proprietary fully integrated security data lake.

We also delivered substantial operating margin improvement, expanding over 34 percentage points year-over-year to negative 22%. As market conditions evolved, we became even more selective about our investments and took important steps to align our cost structure, including our previously announced workforce optimization.

The efforts we have made are paying off. On a dollar basis, we reduced our operating losses by over 40 percentage points in Q2. We also significantly reduced our free cash outflow from $67 million in Q2 of last year to just $15 million this quarter, which reflects an outstanding free cash flow margin improvement of 55 percentage points. This is the result of our proactive efforts to improve working capital and effective cost management.

To further demonstrate this, our total cash and equivalents and investments balance reduced by only $2 million in Q2 and only $5 million year-to-date in fiscal '24. In short, our losses and cash burn have rapidly narrowed, and we are steadily marching towards positive free cash flow and profitability.

Moving to our guidance for Q3 and the full fiscal year '24. We expect global economic conditions in a broader demand environment to remain consistent with the trends we discussed last quarter as enterprises continue to rightsize their security investments based on near-term budget constraints. Even with this as the market backdrop, we're raising our revenue and margin expectations for fiscal year '24.

Our teams are executing well, our win rates remain strong, and we are delivering operating leverage. In Q3, we expect revenue of about $156 million, reflecting growth of 35% year-over-year. Based on this view, we expect Q3 net new ARR to be comparable to Q2 levels, which is consistent with the typical seasonality and still comes on top of our Q2 outperformance.

For the full year, we expect revenue of about $605 million, reflecting growth of 43% in fiscal year '24, a $10 million increase compared to the prior midpoint of $595 million. Based on this view, we expect full year ARR to grow in the high 30% range, adding about $195 million in net new ARR in fiscal year '24. This is a higher ARR growth rate compared to our prior expectation of mid-30%.

Based on our go-to-market and pipeline momentum, we feel confident in our ability to deliver against our Q3 and our stronger full year growth targets. Importantly, we're seeing durability in new business generation and the trajectory of growth rates. We're encouraged by increasing platform adoption and competitive position, offering diverse and meaningful growth opportunities for years to come.

Turning to the outlook for margins. We expect Q3 gross margin of about 76%, implying a year-over-year increase of more than 4 percentage points. On a constant currency basis, our Q3 gross margin expectation is consistent with Q2. Also for the full year, we are raising our gross margin guidance to 76%, up about 4 percentage points year-over-year and up 150 basis points when compared to our prior guided midpoint of 74.5%.

We've taken a major step forward as a company by achieving our long-term gross margin target range and expect continued benefits from increasing scale and data efficiencies inherent in our business model to drive higher gross margins over time. Finally, for operating margin, we expect negative 22% in Q3, implying an improvement of more than 20 percentage points year-over-year.

For the full year, we are raising our guidance for operating margin to about negative 25%, up 2 percentage points compared to the prior midpoint and at the better end of our previous annual guidance. This implies a notable improvement of more than 24 percentage points compared to fiscal year '23.

We've made significant investments in innovation and talent development over the past few years. This gives us ample runway to deliver against our product road map and growth targets. We also expect continued benefits from cost management initiatives and operating leverage of our business.

We have a very strong balance sheet with more than $1 billion in cash, cash equivalents and investments and no debt. This provides durability, flexibility and an independent path to generating positive cash flows. Our goal is to optimize top line growth with consistent margin improvement.

On our journey to achieving 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're delivering industry-leading margin improvement and steadily approaching positive free cash flow generation. We remain steadfast on our path to achieving profitability in fiscal year '25.

Thank you all for joining today. We will now take questions. Operator, please open up the line.

[Operator]

[Operator Instructions] Our first question is from Ray McDonough with Guggenheim Securities.

[Raymond McDonough, analyst]

Tomer, congratulations on a good quarter here and what seems to be an improvement. But I think the question on a lot of investors' minds here is the reports that SentinelOne is seeking or at least evaluating strategic alternatives. Can you comment on that process?

And then separately, can you comment on the partnership or the termination of the partnership with Wiz. When that was first announced, I think there was some excitement, not only from investors, but also from your field partners and the channel. So just curious how you're thinking about those 2 things and how you're thinking about your own road map in cloud security now that you've terminated that partnership.

[Tomer Weingarten, executive]

We don't comment on rumors or speculation, but let me be clear. I mean our focus is on building an independent company for the long term. We're delivering substantial growth and margin improvement. And most importantly, we have the best technology and a clear strategic road map to disrupt a $100 billion market, with the potential to multiply our current market share in the coming years.

I think also our teams are executing well. Competitive positioning remains incredibly strong. We delivered excellent results. All in all, I think you're just seeing us being laser-focused on delivering the best innovation we can, the best protection we can for our customers, maximizing our business potential. We believe we can do that the best as possible as a public independent transparent company. And I think that is as clear as I can be.

On the Wiz thing, if you kind of bundle it on the acquisition rumors and all that stuff, I mean, again, I'm not going to comment on that, but it's all pure speculation on their part and far from fact. So it's, again, a head scratcher to me. If we kind of pivot to the partnership, we did not terminate the partnership. I think that's again misconstrued.

We actually canceled a reseller agreement, a reselling agreement. So we still partner with Wiz. We still work with them on the field level. We still think there's some form of complementary technology there, and we're focused on delivering customer outcomes.

So when customers want to use Wiz, we'll support that. The technical integration is still there. Wiz is a nice little startup. We like working with them. But again, in terms of the reselling agreement, we didn't see any contribution from that. We didn't feel like that's something that is fulfilled on their end, so we decided to terminate that.

Our cloud-native application platform is growing, I think, in a stellar pace. We're definitely ahead of our targets. We just announced cloud data security. That's a major expansion to our workload protection platform that's part of that overall [ scheme ], that envelope. And we want ourselves to be focused on our own capabilities, and I think that's natural.

We're also seeing tremendous traction in that market. Obviously, triple-digit growth for our cloud business year-over-year for a few good quarters now and a couple of years now is obviously giving us a lot of confidence that we can continue and grow that, and we'll continue to develop our own native capabilities alongside that.

[Operator]

Our next question is from Rob Owens with Piper Sandler.

[Robbie Owens, analyst]

I want to drill down a little bit into retention rates. And I know there was commentary in the shareholder letter, excuse me, around the Ativo legacy products. So if you could just kind of clarify what exactly those are? And do we still expect the 120 level to be a floor as we move forward? Or could you see additional pressure?

[Tomer Weingarten, executive]

Yes. I think what you're seeing with the net retention rate is something that's industry-wide. I don't think it's unique to us. I think we do -- we do see our own, call it, natural retention rates still being incredibly high, even in light of macro factors generally causing customers to be much more prudent about their spend and their timing also of expansion.

Ativo legacy product, as you can imagine, with any acquisition, there's some degree of customer churn. And that happens typically for the kind of older product lines. Identity security, obviously, is the shining spot. I mean, we continuously grow that. It's a big contributor to all revenue outside of endpoint.

But things like deception, which is very, very interesting, industry-specific, I think that sometimes we don't put all the focus on. We continue to support the specific customers that use these legacy products. But we're much more focused on identity security, active directory assessment, all these more forward-looking products that came with that acquisition and obviously are today integrated into our platform.

[Operator]

Our next question is from Brian Essex with JPMorgan.

[Brian Essex, analyst]

Congrats on a much better result this quarter. Tomer, I was wondering if you could talk about a little bit -- digging a little bit more on the competitive environment. I think you previously talked about, or at least have commented on, win rates relative to both Microsoft and CrowdStrike. Any changes in the competitive environment?

And then kind of adjacent to that question, how do you think about growth of sales and marketing expense as you have this kind of tremendous market opportunity ahead of you? And you're obviously balancing investment in sales and marketing, market penetration, but also you're delivering some pretty impressive margin expansion in the process. So those 2 segments would be really helpful to better understand.

[Tomer Weingarten, executive]

Our competitive position, I think, is improving. I mean, we were seeing now meaningful differentiation on the technology front. Everybody likes to make all sorts of statements about how unified your platform is or isn't. We're the only platform out there that actually delivers on that promise.

I think that, to us, that becomes more and more meaningful as customers are looking to gain enterprise-wide visibility, and they want to do it. They want to do it with 1 console. They want to do it with one language. They want to do it with one interface. That is not what our competitors are selling into the market.

I think if you want to talk about competitors, let's also talk about the blatant misrepresentations they had on their earnings call made so clearly. I think it's unbelievable that you see them calling out or implying that we are a point product company when it's plain to see that we're the broadest platform out there. When they call themselves a unified platform, but actually have 2 distinctively different platforms, 2 consoles, 2 languages, 2 product lines, that's an overt misrepresentation and that confuses customers.

I think it's just shocking to see that. When they say that the only generative AI company to demo generative AI at conference shows, that's also a blatant lie. I mean, obviously, we've been the first to demo that. There are other vendors that have demoed that. Everybody is giving live demos. We actually gave hands-on live demos.

So if we talk about the competition, I think it's important to separate fact from all these rumors and speculations and misrepresentations. And our competitive positioning, our technology is true. I think that's what customers are getting into their hands. That the reason we win. That's the reason why we continue to grow market share.

[Operator]

Our next question is from Alex Henderson with Needham.

[Alex Henderson, analyst]

Nice rebound in the quarter. Clearly, if you'd listen, and I'm sure you did, to the CrowdStrike presentation, they delineated the scale and some of the growth rates around some of their products. And I was hoping maybe you could take a page out of their book and give us some of the -- some granularity around some of these key products that you call out, whether it be the cloud product, Vigilance, to the Ranger, pick your category.

[Tomer Weingarten, executive]

I think at our scale, I mean, we're not at a point that we're ready to disclose that. I think we're giving you good indications as to what part of our portfolio is growing. We're giving you an indication that more than 30% of our revenue contribution is coming from outside of endpoint. We're giving an indication we gave last quarter that cloud is growing incredibly fast, triple digit year-over-year represents well over 20% of quarterly ACVs on average, if you kind of look at the rearview mirror in the last 12 months.

So all in all, I think that can give you some sense. I also think that, for us, data analytics and security data lake, the Singularity Data Lake, these capabilities are just coming online. And they're coming online pretty fast. So hopefully, as we gain a little bit more scale, I think we'll be able to disclose much more on how we look at our business. But right now, obviously, we're just focused on growing as fast as we can between these core TAMs that we identified are strategic to our growth.

[Operator]

Our next question is from Andrew Nowinski with Wells Fargo.

[Andrew Nowinski, analyst]

Great. Congrats on the nice quarter. Nice rebound. So I wanted to ask about net new ARR, maybe particularly the guidance for Q3. I understand the year-over-year decline in Q2 given the tough comp you had from last year. But if you think about all the positive trends you guys described here today, why wouldn't you expect maybe more growth out of net new ARR in Q3 given that the macro really hasn't changed? It hasn't gotten worse or better, I guess, is what I meant.

[David Bernhardt, executive]

Sure. We just exceeded our Q2 net new ARR expectation by double digits. We raised our Q3 net new ARR outlook, and we raised the full ARR growth to the high 30s. So I think the way to think about it is we're just being thoughtful about macro stabilization, which is still evolving. And I think we just believe that being prudent is the right approach in our view.

[Operator]

Our next question is from Gabriela Borges with Goldman Sachs.

[Gabriela Borges, analyst]

Tomer, I wanted to ask a question on some of the feedback you're getting from customers that are trying the new Purple product. What are the 1 or 2 asks that are coming out of those trials in terms of the next 1 or 2 features that customers want in a product? And how are you thinking about the pricing model over the medium term?

[Tomer Weingarten, executive]

Yes. The first question is always what's the pricing. I think that's consistently what we're hearing from them. And we're starting to share, and I most actually would say we're testing pricing with these customers. So I don't have kind of a flushed out pricing model to give you just yet. But it's definitely something that we're kind of processing right now.

I think in terms of the request, and that is key, is that we continue and push Purple to be an overarching enterprise-wide algorithm versus being focused just on endpoint data or just on cloud data. And that, once again, comes back to the level of differentiation that you see with our platform today.

When you think about some of these AI capabilities, when you think about the scale you can achieve with AI, you obviously want to start stitching together all these disparate products, all these siloed ecosystem vendors into one cohesive fabric that can also allow you to, in some cases, consolidate the waste of these products.

But in some other cases, these products are still going to be there, but you want to make sure that something more intelligent is driving them and that you can orchestrate action. So people want us to do it on an enterprise scale. People want us to do it in a highly autonomous manner and in a highly actionable manner.

They don't want more suggestions. They don't want more chatbots, they want predictive algorithms that can allow them in real time to react to what they're seeing enterprise-wide. And I think that's exactly how we're developing Purple. That's exactly the first iteration of this product. And all in all, it looks just very promising.

[Operator]

Our next question is from Shaul Eyal with TD Cowen.

[Shaul Eyal, analyst]

Good to see the bounce back. Dave, a question for you. Can you discuss gross margins the improvement actually vis-a-vis what do you see in terms of ASP pressures?

[David Bernhardt, executive]

Yes. Obviously, there's not ASP pressures, or we wouldn't be setting record gross margins. So I guess, let's start with that. We had record gross margin this quarter of 77%. I think that's a benefit of our increasing scale, the data processing efficiencies and the module cross-sell, which we also expect will continue over time. So I think we're proud of the gain we've had in gross margin and just don't seem to be seeing the ASP issues that other competitors may be seeing.

[Operator]

Our next question is from Patrick Colville with Scotiabank.

[Patrick Edwin Colville, analyst]

So I mean this quarter, the operating margin improvement was really impressive in my model. So you beat this quarter. You lifted fiscal '20 margin by 2 points. But that means in my model, if I'm counting it correctly, but my actual 4Q number comes down for operating margin. So like why would that be? It's probably one question. And then how should we think about your kind of like long-term guidance for fiscal '25 and your goal to reach operating margin profitability next year?

[David Bernhardt, executive]

So we raised our full year EBIT margin, like you said, by 2 points at the midpoint. It's the better end of our annual guidance. Now we've focused on that. Instead of 25% to 29% loss, we're focused on the 25%. We believe that's meaningful. We're on track for 25 points or about 25 points of operating margin improvement this year.

I think one of the things we're seeing coming off as strong, too, in Q2 is also should we be investing into some things where we're seeing benefits. So our second half is expecting some of that. We're able to do all of that and improve the guidance for the year to the better end of anything we were expecting for the year at the start.

So we're proud of this guidance. We're always going to balance our investments in growth with our commitment to achieving profitability. And our goal remains unchanged for next year, but we'll be guiding that in the future.

[Operator]

Our next question is from Adam Tindle with Raymond James.

[Adam Tindle, analyst]

Hope to get a 2-parter in, Dave. First, a clarification. On NRR with the Ativo piece, is there any way that you could potentially help us quantify so that we could strip that piece out? I'm just curious what the underlying trends would have looked like for the health of the business ex that.

And then Tomer, as a follow-up, I know we kind of touched on the Wiz subject. But curious, cloud security is obviously one of your fastest-growing areas. It sounds like you're still committed to that partnership. But honestly, why? That piece of the business is growing so rapidly. You've got a broad platform. Where do they fit in? What do you -- honestly, what do you need them for?

[David Bernhardt, executive]

I'll start. Our NRR on an organic basis would have been 120%. So it's still at the expectations that we've set forth in prior earnings calls. So the 5% decrement was purely Ativo. I'll let Tomer answer the other question.

[Tomer Weingarten, executive]

Yes. One way is -- I thought I kind of said it, it's really what the customer wants. And obviously, they got a nice set of customers, kind of in the Fortune 100. We want to make sure that we support them. Some of them are our customers, too. We want to make sure we deliver the best experience. So when a customer wants to use Wiz, by all means, and we will be there to support it.

When a customer wants something more holistic, obviously, we will serve our own. I think there's also a big difference between what they can serve, which is highly limited to public cloud. Where, if you look at our platform and our workload protection, we cater to folks from on-prem environments and server and workload environments that might be on-premise, all the way to private cloud and then to public cloud. So it's also a slightly different use case.

But I think what you can kind of gather about SentinelOne is that we're very partner-friendly. No matter who the partner is, we are guided by what customers want to do. And we will always stand by that, and we will always support customers. So in that, we -- Wiz is another great partner of ours from many other partners that we have. So there's no reason for us not to partner with them.

[Operator]

Our next question is from Joshua Tilton with Wolfe Research.

[Patrick O'Neill, analyst]

This is Patrick on for Josh. So you mentioned last quarter, after the adjustments to ARR, that the revenue-to-ARR correlation should be tighter moving forward. But if you look at that historical delta, it actually ticked up a bit here in 2Q from 1Q and is a little closer to what we saw last year. So curious, did you see some shrink come back in that consumption part of the business? And then has anything changed from last quarter with how you factored that consumption part into the guidance?

[David Bernhardt, executive]

I'd say we're still very closely aligned. I think revenue increase year-over-year was 47%, and the ARR was 46%. And I'd say, that's pretty close. So we expect that to continue to be aligned for the rest of the year.

[Operator]

Our next question is from Saket Kalia with Barclays.

[Saket Kalia, analyst]

Tomer, I kind of have a 2-part question for you, if I may. The first one is on the competitive environment. I know we talked about the other endpoint player out there, but I want to ask specifically on Microsoft. One of the things that came out on another conference call was maybe you're starting to see customers question the real price, the real underlying price of Microsoft Defender. Do you agree with that? Are you hearing that from customers? That's the first part.

The second part of the question is more of an industry question on CNAP. There are endpoint players that have CNAP, there are firewall players that have CNAP and then there are individual vendors that have CNAP. What are you hearing from customers on their preference to buy from one category versus another? Is there a natural, I don't know, tendency to buy from an endpoint or from a firewall vendor? Or is that still something that's being determined?

[Tomer Weingarten, executive]

So on Microsoft, we definitely see more customers starting to understand that the lack of price transparency is causing them to actually overpay for what they would actually get from another vendor at a lower price point. I mean if you bundle together the workload pricing, the login pricing, the service pricing, all of that together comes up to a pretty hefty price tag if you're going with Microsoft. And I think we can all agree not to best-of-breed security.

So we're definitely seeing more of that. I think there is a slight dynamic change there. I wouldn't call any of that right now transformative or thesis-changing. I think it's just starting to trickle. I think if you couple that with the fact that not only Microsoft is not the cheapest solution, Microsoft also doesn't really care as much about customers just under sheer scale, right? I mean, we're talking about a complete different level of support if you're going with a stand-alone cybersecurity provider like our -- like us and some of our peers.

I think you're just getting a completely different level of service, and that is something that is also starting to resonate with customers out there. And lastly, I think it's just the complexity. Microsoft has a lot of different ingredients in what they call security. It's not one platform. It's a bundle of solutions, and I think that also matters significantly.

If we want to touch on CNAP, I think your observation is 100% correct. And I think that a lot of folks gravitated towards the stand-alone CNAP vendors on the back of just great UI. I think there's no deep IP in CNAP. Inventory, attack graph visualization, like all these things, that's not AI, that's not deep IP. And I think that's where you're seeing this commoditization where everybody is coming up with their own capabilities to achieve that.

And I think it really is what flavor that the customer wants to go with. And once again, we're flexible. I mean if you want to get that out of us, we will definitely build the best platform that we can. But if you rather have a different flavor, that's fine, too. We're focusing where there's deep technology. And workload protection, run time protection, this is where you can actually and meaningfully differentiate. This is non-commoditized.

This is where our years of research, supporting Linux environments, containerized environments, bringing best-of-breed telemetry, best-of-breed performance, that's where it matters. And that's where we win the most. And that's why that remains our focus as we build these other capabilities to get to this holistic approach to cloud security.

But once again, you get different flavors of customers. You're going to get pure public cloud customers. You're going to get private cloud customers. You're going to get on-prem workload customers. It's not one size fits all. And some of these stand-alone offerings, they're not really relevant in any other setting other than a public cloud setting.

[Operator]

Our next question is from Trevor Walsh with JMP Securities.

[Trevor Walsh, analyst]

Tomer, on the subject of the Ranger Insights that you announced earlier in the month, can you just walk us through maybe what the kind of, I guess, 1.0 or first type of -- how that opportunity looks initially vis-a-vis kind of other players in that vulnerability management space and then kind of where you're looking to maybe go with that product and kind of what the opportunity looks like kind of in 6, 12 months?

[Tomer Weingarten, executive]

Yes. I mean great traction already. I think it's something that we kind of vetted and built with customers. And it's focused on identifying vulnerabilities, prioritizing vulnerabilities and allowing you to gain full context on vulnerabilities, together with endpoint data in one same place. And given that most vulnerabilities actually lie on endpoints and servers, it really is a very, very natural place for it to live together.

And now we're working on adding more and more remediation capabilities that can inform you. Once you get informed on a vulnerability, you can automatically remediate it. So I think for a lot of these vendors right now in that space using all kinds of scanning tools, and you need to deploy another agent, and sometimes you need an incumbent vendor that adds just another overhead on the machine with us. I mean, if you're an existing customer, you're just getting it. It's already there.

And I think the most important part of it is that it's also done in a complete continuous manner. So this is not a onetime skin type of a thing. It's a continuous profile of your environment. And we can highlight all these vulnerabilities the moment that they pop up, and we can offer up remediation the moment that something pops up. So to me, it's a very natural expansion. It's a great little TAM that we can now also serve between $5 billion to $7 billion. And it's just, again, something that we believe will streamline operations significantly for a lot of customers out there.

The one last thing I want to say about this is that it's also highly strategic for our MSSP segment. The MSSP partners are always looking for ways to get to better hygiene, to patch customer machines. And by allowing them to use the same remote management platform that they're using today, our SentinelOne Singularity platform, to now also cover vulnerabilities, we're lying for extreme cost efficiency for them and obviously an avenue for expansion. So strategic on both fronts, and we're very, very proud of launching vulnerability management into our endpoint management suite.

[Operator]

Our next question is from Jonathan Ho with William Blair.

[Jonathan Ho, analyst]

Just wanted to understand a little bit better, if you could give us some more detail around the significant improvement around your sales execution and performance. I guess my question is what's made the most difference? And where are we in terms of those improvements? Is there sort of further opportunities ahead as well?

[Tomer Weingarten, executive]

We're always working to improve. To us, this never ends. I think just better scrutiny, better training, better enablement, better pipeline sourcing, better interaction with our channel, all of that, I think, funnel to just better execution. Some technical elements like contract execution, all of that has been streamlined, better systems in place. I mean, we've done a lot in the course of 90 days to elevate our performance, and still a lot remains to be done.

I think we're only going to get better from here. The important part is that we got a great seller DNA in our sales force. We have worked to diversify our sales force. We're now selling into 4 different distinct TAMs. We wanted sellers with cloud DNA. We wanted sellers with data DNA.

We're now building those disciplines. And that obviously allows us to treat all these adjacent growth opportunities in such a tailored manner and that creates, I think, just better execution, better win rates, better conversion rates on our pipeline. So all in all, again, continued work, but I think we're doing all the right things.

[Operator]

Our next question is from Mike Walkley with Canaccord Genuity.

[Daniel Reagan, analyst]

It's Daniel on for Mike. So you called out another standout quarter with your MSSP partners. Just wanted to see if you could provide some color on sort of what's resonating in this part of your business, especially as it pertains to some of your newer emerging modules you guys highlighted.

[Tomer Weingarten, executive]

Absolutely. I think, first and foremost, it's still the core elements of our platform. The ability to manage multiple, sometimes thousands of customers in one single-click console is still a very unique capability in this space. So as our MSSP partners kind of look to grow, look to add more customers, they can do it with ease, they can do it with confidence. And obviously, they're well trained on our platform to date. So the elements of automation and manageability are first and foremost, I think, why we have that strong footprint in the MSSP realm.

The other elements of what we do, like MDR, which they're adopting now and reselling to their customer base, is also a nice expansion opportunity for us, where a lot of our MSSP partners want even more tailored security for their customers, and they're leveraging our own MDR services as a resell to their partner base. Cloud security is coming online for some of these partners, again, covering server environments. We've actually tapped through a lot of server environments, and they tapped those so far with endpoint licenses. We're now converting those into server licenses.

If you kind of think about the Ranger and Ranger Insights module, they've already been onboarded on Ranger, which allows them for asset discovery. We're seeing traction with that. Ranger Insights will catapult that even further. Again, vulnerability management is a very natural expansion to what they do.

So all in all, with the MSSP environment, I would say the opportunity is twofold. It's the modules. There's no question that we're still underpenetrated. But at the same time, we're also underpenetrated on licenses, seat counts in a number of endpoints. A lot of our MSSP partners still have a huge potential in their estate, and we're working with them every day to expand our footprint and to make sure that they are as competitive as they can be.

[Operator]

Our last question is from Eric Heath with KeyBanc.

[Eric Heath, analyst]

Tomer, I did enjoy seeing the Purple AI demo, I'd say, back in April. It was impressive. So I wanted to ask you what your thoughts are on timing for that to become available? And then coming back to the CNAP question, just Curious if there's any change in the way you're thinking about either adding or not adding CSPM or application security capabilities to that platform?

[Tomer Weingarten, executive]

Yes. Good. Glad you enjoyed Purple AI. We -- we're not sharing right now the exact launch date. It will be next year. We're definitely [ baiting ] this with customers. So stay tuned. We will share more as time progresses.

But on the CNAP stuff, we haven't really changed the way we think about it. We always wanted to have and always -- we're always working on broad-based CNAP capabilities that include CSPM as well. And that hasn't changed. I think the only thing that changed is that we're actually a bit more advanced in our road map than we initially expected, and that's a good sign.

Once again, we launched data security, which is another part of that CNAP spectrum. And it's a very unique capability. It's an AI-driven approach to detect threats on storage like S3 and even on-prem storage like NetApp. There's nobody else in the market doing that.

So all in all, I mean, we're always focusing first on the more differentiated parts of the platform versus going to the commodity. But at some point, I think we'll have the full spectrum of capabilities. And right now, again, given our traction, we're not in a rush to do any of that. It's not like there's any mandatory requirement to have all of these components baked in together as evidenced by our success in the market.

[Operator]

We are out of time, and I will now pass the call back to the management team for any closing remarks.

[Tomer Weingarten, executive]

Thank you, everybody. I appreciate your time today, and I want to again congratulate all Sentinels for their performance this quarter.

[Operator]

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