Here are my notes from the earnings call.
Sentinal One (S) Q1 FY24 Analyst Q/A
Tomer Weingarten, CEO
David Bernhardt, CFO
OPENING REMARKS FROM CEO AND CFO
Essentially the earnings call was a train wreck. During his initial remarks, CEO Tomer Weingarten dealt with the two reasons that revenue fell short:
- Macro caused deal cycles to increase and deal sizes to decrease
- Major deals slipped to next quarter
During Q/A, analysts were asking a lot of tough questions re: Why ARR and guidance were down so significantly from what was projected on their last quarterly earnings call on March 14, just 7 weeks ago. Questions that follow included, “explain to me why this will never happen again” and when did you first see this decline in the revenue?" The same questions were asked/phrased/worded by analysts several different ways and it did not seem they were believing the answers they were getting from Tomer Weingarten, CEO and David Bernhardt, CFO. (Me speaking here)
2 more reasons revenue fell short per CEO:
Lower consumption and usage.
Inaccuracies in ARR calculations (yes the CFO used the word “inaccuracies” at least twice during the call)
New methodologies based on usage and consumption will level out revenue in the future
NRR is +125%
Improved FCF by 43% y/y
Expect macro conditions to worsen and assume lower pipeline, deal cycles to increase and deal sizes to decrease.
GM 74 to 75% for this year
Q adjustment re: slowdown in usage.
A $27M one time adjustment (5%). Changed methodology of how to calculate ARR. It’s about data ingestion and data lake. Seeing customers right-sizing their spend. This will more carefully correlate ARR and revenue. Error in their CRM caused internal and external expectations re: what revenue would be.
Q Data ingestion
A Seeing this in two areas. With usage-based companies vs. user-based -Sentinal One removed the usage based revenue from their projections. This will remove the volatility from ARR, and this is the result.
Q On one hand you’re saying it’s a slippage of contracts from Q1. On the other hand, if this is just slippage, why are you adjusting costs and guidance. Is this more related to competition? Did you lose more deals.
A It’s not just deal slippage. They have had some execution hickups and they were not able to execute these deals in time for this quarter. In addition, taking a more cautious look into their pipeline and the 3rd factor has been the consumption dynamic. Taking consumption out of ARR does reduce their guidance.
Sentinal One has gunned for their competitors’ customers. As a result, competitors have gone to zero dollar deal size (cut their fees) to keep their larger customers.
Q Microsoft and how effective it is to buy.
A 4 customers were looking for pure play security vendors. Microsoft just doesn’t cut it re: cyber security. We’re targeting $100 Billion addressable market and a lot of it is still up for grabs. MSFT is a formidable vendor.
Q Data ingestion is a leading indicator for broader challenges to come later. How will you prevent this?
A 2 completely different things. They don’t churn customers. Customers don’t just leave Sentinel One. Consumption by it’s nature is just more volatile. User based is not even close to the volatility.
Q Quantify the usage based revenue please.
A It’s single digit % of ARR
Q Cloud security product. Last quarter was good. How’s this quarter.
A Great growth for them on the cloud side. Same % for ACV this quarter. All in all, it’s early in the process re: partnership with WIX. They’re expanding from an endpoint security company to a cloud security company.
Q $40M cost savings as a result of the 5% workforce downsizing.
A $40M based on their previous plan. It’s about $15M in savings or 5% savings and it’s all contemplated in terms of this guidance.
Targeted guidance is better thought of as a FY25 goal per CFO.
Q Bullish previously and the tone of this has changed significantly on this call.
A At the end of the quarter they noticed pronounced changes. With a few deal slips combined with the downsizing of consumption it’s a surprise to them and a surprise re: the magnitude. 10,700 customers were scrubbed by CFO, they noticed this in its entirety post quarter end.
Q What was the reason for missing guidance on March 17th. Reiterate why this won’t happen again.
A Previously over-stated ARR based on their previous methodology. It will never happen again because of the removal of consumption from their ARR calculation.
Q What is your strategic end game facing a difficult macro and conditions are worsening. How do you think about the different alternatives out there.
A Don’t see anyone else in the market making these increases in margin growth. This is not the economy to put the pedal to the metal. Can’t say it’s a lot of fun right now.
If we’re a profitable growth company in the future, there’s a lot of opportunity out there and they have an opportunity to take market share.
Q Is the NRR accounted for in the gross renewal rate?
A Still seeing revenue growth. Still seeing GRR growing. Seeing customers flatten out their revenue commitments. GRR is stable.