Good afternoon. Thank you for attending the Sentinel-1 Q3 FY 2024 Earnings Conference Call. My name is Victoria, and I'll be your moderator today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Doug Clark, Vice President, Investor Relations. Thank you. You may proceed, Doug.

Good afternoon, everyone, and welcome to Sentinel-1's Earnings Call for the third quarter of fiscal year 24 ended October 31st. 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 fourth fiscal quarter and our 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 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 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 gain 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. Good afternoon, everyone, and thank you for joining our fiscal third quarter earnings call. We delivered strong third quarter results, which exceeded our expectations on all key metrics. And once again, we're raising both our top line and bottom line guidance for fiscal year 2024. This was another quarter of solid execution in a demanding macro environment. Enterprises continue to modernize their endpoint security with the Singularity platform. In addition, we're seeing strong demand for our cloud security and data lake solutions, which combined grew triple digits. And I'm pleased to announce that we've begun delivering Purple AI to enterprises. We also solidified our lead with mid-market enterprises and expanded our business with leading MSP partners to larger and longer term commitments. Finally, we continued making significant progress towards profitability with our net income margin improving to negative 5%. Our pace of innovation and technology leadership continue to fuel growth. For the fourth consecutive year, Centrum One led the MITRE ATT&CK evaluation with 100% real-time protection driven by autonomous security, which is critical in the modern threat landscape. In Gartner Peer Insights, we received a score of 4.8 out of 5 for outstanding customer experience and product capabilities. We're leading the industry with breakthrough innovations across endpoint, cloud, data, and AI, delivering a fully unified platform experience to organizations, once again setting Centrum One far apart from other security vendors. We're addressing critical enterprise security needs, remaining ahead of adversaries now and into the future. As always, please read our shareholder letter published on the Investor Relations website, which provides a lot more detail. On today's call, I'll cover three key areas. One, details of our strong quarterly performance. Two, the broader demand environment and state of cybersecurity. Three, innovations that magnify our technology leadership and drive future growth across multiple markets. Let's double-click into our third quarter performance, which exceeded our top and bottom line expectations. Revenue grew 42% and total ARR grew 43% year-over-year. Net new ARR growth accelerated to 11% year-over-year, driven by a combination of new customers and existing customer expansion. Despite persistent macro challenges and escalation of geopolitical tensions, the combination of superior technology and solid execution is driving positive business momentum. Our progress towards profitability remains a bright spot. We delivered a record high gross margin of 79%, and we posted the ninth consecutive quarter of more than 25 points of operating margin expansion. In parallel, our free cash flow margin improved by 40 percentage points year over year, and our net income margin approached only negative 5%. This tremendous progress reflects the scalability and power of our business model. We remain committed to building on this progress and achieving positive free cash flow in the second half of next fiscal year. We're succeeding in the endpoint market from large enterprises to mid-market and smaller businesses where we're already a proven leader through our MSSP partnerships. Beyond Endpoint, the momentum of our platform expansion into adjacent markets is picking up. Our total customer base now exceeds 11,500. Recall, this number is dramatically understated as it does not include the customers served by our MSSP partners. We're increasingly protecting more customers through this channel as enterprises are turning to MSSP for many security services, which is a highly scalable way to address the mid-market. At the same time, customers with more than $100,000 in ARR grew 33%, and customers with more than $1 million of ARR grew even faster. Our success with large enterprises and platform adoption continues to drive higher ARR per customer, which increased about 15% year over year. In Q3, we generated strong momentum in the federal arena and secured several new agencies. Similarly, many large enterprises across global healthcare providers, technology pioneers, and multinational corporations continue to choose the Singularity platform. These engagements include multiple aspects of the Singularity platform, such as endpoint cloud identity and our data lake. In Q3, Singularity Cloud and Singularity Data Lake were our fastest growing solutions. Combined, they represented over 20% of quarterly bookings and grew triple digits. We've seen a notable uptick in demand for a unified Singularity Data Lake solution. This illustrates the growing diversity of our business and our expanding platform horizon. Singularity Cloud and Data Lake are so much more than add-on modules. These are highly differentiated and enterprise-critical technologies with massive TAMs and long-term growth opportunities. Our dollar-based net retention rate remained north of 150% as our existing customer base continues to deploy additional platform technologies. We see significant long-term potential based on high customer retention and satisfaction, expanding product categories and early-stage adoption from our install base. On to our partner ecosystem. We achieved another quarter of standout growth with our MSSP partners in Q3, and our momentum in mid-market enterprises remain strong. MSSPs represent the fastest-growing channel category in the security market and the preeminent way to protect SMBs. Our platform architecture is purpose-built to help service providers manage security at scale and drive meaningful growth. Multitenancy, automation, and remote management make Singularity the platform of choice for MSSPs. In Q3, we continue to solidify our leadership position with MSSPs. On the competitive front, we continue to win a significant majority of competitive evaluations against both next-gen and legacy endpoint providers. When you look beyond endpoint security, the competitive landscape tilts further in favor of Sentinel-1. Our unified data and security platform architecture helps enterprises consolidate spend on products and consoles, resulting in better value, efficiency, and user experience. Disjointed platforms do not result in better protection. Bigger brands do not mean better security. As proven by the string of massive breaches, these solutions are frequently breached. Just think about the many high-profile cyber attacks in the last few months, and the shortcomings should be obvious. We introduced a novel approach that yields real-time superior protection and delivers fully autonomous cybersecurity and unified enterprise data in one place. With the migration to cloud-based architectures and the adoption of AI-based technologies, digital infrastructures are rapidly evolving. More important now than ever before, our unified security data lake architecture enables organizations to move at the pace of AI while also modernizing enterprise-wide visibility and protection. In many cases, our competitors can't even offer a cloud security or a security data lake. We have distinct technology advantages in these areas, including resource-efficient workflow protection and an actual unified data architecture capable of ingesting enterprise-wide data. We are engaging with enterprises in winning deals with Singularity Cloud and Data Lake regardless of the installed endpoint vendor. Helping enterprises manage complete security data at scale with better cost and performance is a strategic conversation that is different from focusing on point solutions. Over time, we believe these opportunities will open the doors for further consolidation with the Singularity platform, resulting in greater platform adoption. Let me highlight two examples. First, after 15 years of using Splunk, a large enterprise replaced it with Singularity Data Lake alongside our endpoint and cloud security. After consolidating multiple security needs on the Singularity platform, this enterprise has also deployed Purple AI to get a fully integrated autonomous experience. Like many others, the customer valued Central One's unified platform that fuses security data and actions, future-proofing their enterprise security posture. Second, among many federal wins in the quarter, one of the agencies similarly selected Sentinel-1 to consolidate security across endpoint cloud and data. This federal agency completely replaced the legacy SEM solution with Singularity Data Lake, showcasing that SEM is the past and Singularity Data Lake is the future. Our competitive wins demonstrate how AI-based technologies are fueling both new customer wins and significant expansion across multiple end markets. Let's turn the discussion to the broader demand environment and cybersecurity landscape. The demand environment remains relatively consistent with last quarter. From a macro perspective, global economic challenges persist and are further typified by rising geopolitical tensions. Yet the threat landscape remains unrelenting. The velocity and complexity of attacks have dramatically increased. As an example, dwell times have shrunk from months to days, presenting new challenges for corporate defenses and putting more emphasis on the need for real-time protection. A slew of recent high-profile breaches showcase the enormous consequences for enterprises. A single attack can cost hundreds of millions of dollars, lost business, and disrupted operations. Events like these are constant reminders of how cybersecurity must be the top priority for CIOs around the world. The most unnerving part of these attacks is that they continue to circumvent so-called large-platform vendors. Time and again, point products and endless lists of modules meshed together in disjointed platforms are consistently failing to protect enterprises. Vectors of attack are forever evolving, a constant moving target in the age of AI. Cyber warfare has also taken a new turn towards online disinformation and manipulation. Geopolitical tensions are spilling into cyberspace, destabilizing and undermining normal business operations and even parts of society. At Centrum One, we're ushering a new age of enterprise security, one that can outpace the threat landscape by taking a holistic approach to managing risk through AI-based real-time operations. Beyond security software, there's a clear need to assess, quantify, and articulate risk from security executives to the CEO and board of directors. A shift in risk management is needed to prepare and protect against fast-acting, complex cyber attacks. In Q3, we launched Pinnacle One, a strategic advisory practice to help enterprises and governments build world-class cybersecurity programs. I'm thrilled to have Chris Krebs and Alex Stamos join SentinelOne. Both are renowned industry experts who lead with integrity. Combining their talents and SentinelOne's technology leadership makes Pinnacle One a highly valuable and unique resource to enterprises and governments across the world. Pinnacle One will help management teams and boards understand who the attackers are, what they're after, and how to fortify their security framework beyond just deploying any single product. This will also help public and corporate leaders to better assess cyber risks and liabilities so they can develop effective strategies and mitigate potential impacts. Let me also share an update on our leading innovations across multiple growth areas. We recently hosted our first customer and partner conference and showcased our commitment to four key areas, data and AI, cloud, and as always, endpoint. As I've said before, cybersecurity is a data problem. We are the first company to introduce a fully unified data and security platform. Legacy SIM solutions are falling behind and security vendors are clamoring to keep up. Centrum One's unified data and security platform delivers cost efficiency and high performance at scale. In Q3, we secured large data deals, which reinforces the demand from large enterprises looking to modernize a way from legacy SIEM solutions. Recent news of the leading SIEM vendor being acquired is further boosting enterprise interest in our Singularity data lake. We're taking Singularity to the next level through AI. We're disrupting the SIEM and security markets by fusing Purple AI with our unified data lake. Purple AI is fully integrated across the entire Singularity platform and user interface. It enhances investigations, simplifies threat hunting, makes recommendations, and automates

actions.

In essence, it supercharges every SOC and data analyst, unlocking efficiency and accelerating response time. As I mentioned earlier, we've already started selling Purple AI to select customers. We expect general availability in Q1 of next year. The combination of unified data and Purple AI puts us in a strong position to deliver enterprise-wide security and disrupt the legacy data analytics market. Next, we're expanding our cloud security offerings. We are already leading in cloud workload protection and cloud data security. In the coming year, Singularity Cloud will become a full-featured CNAP with agent-based and agent-less capabilities. We'll have more to share in the next couple of quarters. And, as always, we will continue to maintain our technology leadership and endpoints. We achieved a fourth consecutive year of leadership in the MITRE Ingenuity Attack Evaluation. Our approach to this year's MITRE evaluation reflects our philosophy on protection, that speed and autonomous security are critical. Unlike most participants in this test, you will see zero delays or configuration modifiers in Centrum One's results. In contrast, our closest next-gen competitor had over 20 delays and configuration changes. Achieving 100% detection and protection without any do-overs is the difference between a simulation and the real world. Attackers don't offer extra time or a chance to make configuration changes. Singularity is built to be real-time, AI-driven, and autonomous, critical to combat against modern threats. Before concluding my remarks, I'd like to mention some exciting updates. We've made some terrific additions to our leadership team that bring unrivaled industry expertise. Michael Kremen joined CenterOne in November as our new Chief Revenue Officer. Michael joins us as CRO from Elastic, where he was instrumental in scaling the business to a billion dollars and beyond. His experience unites security and data in a way that ideally matches our mission. This transition has been thoughtfully planned over the past several quarters. I want to thank and congratulate Mark Perinello, our former CRO, for his contributions and well-deserved retirement. Mark will remain at Central One until the end of this fiscal year to ensure smooth transition. As I mentioned earlier, I'm also excited to welcome Chris Krebs and Alex Tamos to the Central One team. They are renowned for their cybersecurity thought leadership with deep experience across both public and private sector, including Homeland Security, CISA, and global tech giants like facebook and others in closing our technology and talent are stronger than ever leading to another quarter of our performance together we remain focused on the long-term opportunity and maximizing our business potential most importantly we're focused on helping enterprises advance their infrastructure and security now and for the future i want to thank all sentinels as well as our valued customers partners and shareholders with that i will turn the call over to Dave Bernhardt, our Chief Financial Officer. Thank you, Tomer. This afternoon,

I'll discuss our quarterly financial performance and provide additional context around our guidance for Q4 and fiscal year 24. As a reminder, all comparisons are year over year and all margins discussed are non-GAAP unless otherwise noted. Our third quarter results exceeded our expectations across the board. We delivered high top-line growth and substantial margin expansion. Revenue grew 42% to $164 million, and ARR grew 43% to $664 million, reflecting a net new ARR of $52 million in the quarter. Our net new ARR exceeded our typical third-quarter seasonality and accelerated to 11% year-over-year Our growth has accelerated despite persistent macro challenges. We delivered strength across all geographies. Revenue from international markets grew 46% and represented 37% of revenue. Q3 revenue also benefited from a stronger contribution of our professional services, driven by elevated breach activity across legacy and competing platforms. As Tomer mentioned, deploying software alone doesn't solve all security challenges. This is why we acquired KSG and launched expert advisory practice Pinnacle One. We continue to drive a healthy mix of new customers and existing customer expansion across businesses of all sizes. Our ARR per customer rose 15% year-over-year to approximately $60,000 per customer. In addition, our momentum with MSSP partners and, by extension, SMBs was particularly strong as it continues to fuel a solid base of long-term growth. We continue to take market share from incumbents and next-gen vendors, and our third-quarter performance signifies our strong competitive position and enterprise demand for Sentinel One's best-in-class cybersecurity. security. Looking beyond top-line growth, our progress towards profitability remains a bright spot, evident by significant margin improvements. Our gross margin reached a new record of 79%, showing an 8% year-over-year improvement and comfortably within our long-term target range of 75% to 80% or higher. This important achievement reflects the benefit of our increasing scale and platform unit economics. Our margin improvement is indicative of healthy pricing and the value and innovation we deliver to customers. It also demonstrates the success of our land and expand strategy. Our unified security and data architecture in a single platform is delivering meaningful value for SentinelOne as well as our customers. Q3 marked our ninth consecutive quarter of more than 25 percentage points of year-over-year operating margin expansion. Our increasing scale and cost discipline are driving substantial operating margin improvement. Q3 operating margin expanded 32 percentage points to negative 11%. And we're not just improving our margins. We've also significantly reduced our operating losses by more than 60% to negative 18 million in Q3 from negative 50 million in the year ago quarter. Similarly, we improved our free cash outflow by about 60%. This is tremendous progress. It reflects the continuing success of our proactive efforts to enhance working capital and thoughtfully manage our costs. We are committed to building on this progress and achieving positive free cash flow in the second half of our next fiscal year. Moving to our guidance for Q4 in the full fiscal year 24. The demand environment remains consistent with the trends we discussed last quarter. Indeed, customers are still facing higher costs of capital and additional approval layers. These dynamics can impact visibility into the timing or size of potential deals. It's prudent to be mindful of these dynamics as we enter Q4, our seasonally largest quarter of the year. Despite operating in a challenging macro and geopolitical environment, 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 Q4, we expect revenue of about $169 million, reflecting growth of 34% year over year. For the full year, we expect revenue of about $616 million, reflecting growth of 46% in fiscal year 24. This is an $11 million increase compared to the prior outlook of $605 million, above and beyond our Q3 beat. Based on this view, we're on track to deliver about $200 million in net new ARR for the year, up from our prior expectation of $195 million. Based on our go-to-market momentum and strong competitive position, we feel confident in our ability to deliver against these higher full-year growth targets. Importantly, we're seeing durability in our new business generation and the trajectory of growth rates. Beyond endpoint security, we're encouraged by increasing platform adoption of our adjacent solutions like cloud, data, identity, and AI to drive diverse growth opportunities for years to come. Turning to the outlook for margins, we expect a Q4 gross margin of about 77.5%, implying a year-over-year increase of about 2.5 percentage points. On a constant currency basis, we expect our Q4 gross margin to be relatively consistent with Q3. Also, for the full year, we are raising our gross margin guidance to 77%, up about five percentage points year-over-year, and up 100 basis points when compared to our prior guide of 76%. We expect continued benefits from increasing scale and data efficiencies inherent in our business model. Finally, we expect operating margin to be negative 14% in Q4, implying an improvement of 23 percentage points year over year and is stronger than our prior expectation. For the full year, we are raising our guidance for operating margin to about negative 20%, up 5% compared to our prior annual guide of negative 25%. This implies a significant improvement of more than 29 percentage points compared to fiscal year 23. We expect Q4 free cash flow margin to improve sequentially based on the seasonality of cash collections and payments and our improved operating margin outlook. We have a very strong balance sheet with $1.1 billion in cash, cash equivalents and investments, and zero debt. This provides durability and flexibility to optimize top-line growth and margin improvement. We are delivering industry-leading margin improvement and moving closer to achieving positive free cash flow generation. As I've said before, we'll continue to grow market share and capitalize on large TAMs with disruptive technologies. Our investment approach remains selective and focused on key areas of competitive strength, notably data, AI, cloud, and as always, endpoint. This is evident by our strong top-line growth and industry-leading margin improvement. Thank you all for joining us today. We will now take questions. Operator, please open up the line. Thank you. If you would

like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, please press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from the line of Joshua Tilton with Wolf Research. Please go ahead.

Thanks for taking my questions, and congrats on a pretty solid quarter. Kind of just clarifications here, but customer additions came in a bit lower than we were expecting. Anything to highlight there? And just you called out offering a broader CNAP platform in the next 12 months. Is that going to be developed in-house, or are you guys looking to make some acquisitions in that space?

And that, you know, having that we want to see, he's already available in the market. I think it's how we approve, but all in all...

Super helpful, guys. Thank you.

Thank you. Our next question comes from the line of Brian Essex with J.P. Morgan. Please go ahead.

Hi, good afternoon. Thank you for taking the question, and great to see the margin expansion.

It's really, really nice to see.

I guess, Tomer, just one question for you. Really interesting development with Pinnacle One. Could you maybe unpack a little bit what your intentions are with that part of the business? Is this going to be more of a lead gen innovation type consulting business, or is it more incident response? And how might we expect that to impact revenue margins going forward?

we actually have already. When we look at Pinnacle, again, with some of the bid, obviously if you couple that with the mapping that we do.

And maybe, I don't know, if Dave could expand on, you know, the size of that business and margin impact, given that it's more kind of a headcount-focused business.

Yeah, for Q4, I mean, it's essentially immaterial. I think it's under $1 million of total impact in the quarter. So, you know, really no effect on revenue or margins for the current quarter. For next year, you know, we're obviously working on the plan for next year. And, you know, we'll give you guys more visibility on that when we announce Q4 earnings.

That's helpful. Thank you.

Thank you. Our next question comes from the line of Sakit Kalia with Barclays. Please go ahead.

Okay, great. Thanks for taking my questions here. Nicely done. Tomer, maybe for you, I just want to dig into the competitive environment a little bit in endpoint. Not the usual suspects, but, you know, I think there's some public reports out there that Carbon Black, you know, may change hands again, may not stay with VMware as part of that sort of broader deal. Maybe the question for you is, can you just talk about them a little bit as a competitor and whether you think that could be a significant share gain opportunity for SentinelOne?

Sure. Yeah, I don't, at the same time, you know, with that, I think the size is an easy target for displacement. Carbon Black was mainly on the EDR side for one solution, one platform.

Got it. Got it. That's helpful. Dave, maybe for my follow-up for you, you know, echo the prior comments. Just great to see the continued improvement in operating loss. Can you just maybe talk about the restructuring program that we implemented earlier this year and whether we've seen most of the benefits of that yet, whether there's still some more benefit to come? How do you think about that sort of restructuring having played into this improvement and how much more is left?

Thanks, Sogit. You know, the impact of the restructuring, it's been included in our annual and quarterly guide since we announced it in Q1. So, you know, no real incremental pickup from that. You know, with that being said, you know, we're continuing to analyze the yield from our expense investments for growth and expanding market share. You know, you see this evident in our continued operating margin expansion. I think we're nine straight quarters of 25% or more year-over-year improvement. And our Q3 results, you know, show margin improvement well and above, you know, any benefit we would have gotten from restructuring. So, you know, we implemented that. We operated it, you know, essentially fully, I think, on June 1st, and we've been off and running from that point on.

Makes sense. Thanks, guys.

Thank you. Our next question comes from the line of Hamza Fadawala, with Morgan Stanley. Please go ahead. Thank you for taking my question, and good evening.

Tomer, you talked a lot about Singularity Data Lake in your prepared remarks. I was wondering if you could maybe just rough sense, help us sort of size that business, and what you're seeing in terms of the opportunity for SIM replacements in light of recent M&A in the space. Thank you.

sure obviously the exact size of that with data analytics it becomes about 40 billion dollars of a target opportunity um the dominant vendors in that market you know you mentioned um you know that competitive these are technologies that have been developed you know probably about 15 years ago i need to deal with obviously it calls thank you our next question comes from the line of alex

Henderson with Needham. Please go ahead. The first one being on the data lake structure between Splunk and Cisco. Their primary value there is adding not just the traditional SIM data, but adding it to the data networking content and telemetry information that historically has been in titration and the like, as well as the observability functionality that's been in AppDynamics. So I guess the question is to what extent you need to reach out to third parties to add some of those type of incremental data to your data lake to get beyond just indications of attack and indications of compromise that are captured in the initial data lake architecture.

Look, our data lake email provider from an authentication provider, we're one of the founding members in that alliance. It's really a playoff of what the Pinnacle One opportunity, it strikes me that this is

very much like the managed services environment where once you have a customer in that pipeline and working with Pinnacle 1, that ultimately that generates significant potential downstream revenues. Is it possible to think that for every dollar of Pinnacle 1 revenue that there's $5 or $6 worth of ARR that will accrue from it in the following periods?

We definitely hope so, even though, look, our nodes start just to help customers. And obviously, you know, the KSG group comes with their own customer base. You know, obviously, to us, it's about putting the best security consulting business that we can, you know, in that advice in the hands of customers, whether that results in further revenue and more product sales, perhaps, obviously, we hope so. But to us, we just feel like there's a dire need and a big gap in actually designing security beyond just deploying sporadic products into environments. And that's what we're trying to solve here. So it's customers first, and then, yes, if you can help with technology, obviously that will fuel into that.

Thank you. Our next question comes from the line of Paul Liani with Bank of America. Please go ahead.

I've been asking the same questions, all the other security names, and it looks like it's throughout the industry we're seeing it. But if I look at the sequential trends of billings, in 22, it was up 54%. In 4Q22, 4Q23, up 42%, 43%, and now it's only up 2%. Can you discuss why is billing on a sequential basis? We don't see the same seasonality that we're seeing, and again, this is industry-wide. Does it mean that contract duration is going down? Does it mean that pricing is going down? What are the implications for the business?

Thanks, Tal. Well, you know, billings grew 2% quarter over quarter, but they were up 33% year over year. You know, the quarterly billings, you know, can vary based on customer mix, especially with MSSP. So we focus on ARR and, you know, as a better metric. You know, just from, you know, an overall contract is up, but we're seeing less frequent upfront payments, which, you know, the entire industry is seeing, you know, we're not in a zero percent interest environment. and that obviously impacts customers' willingness to put a full year up front or multi-years up front for larger enterprise customers. So that dynamic has changed really over the past year. But with MSSPs, we see a lot of monthly and quarterly payments. So that's always going to be the dynamic with us.

And is there any difference in linearity of deal flow during the quarter, this quarter versus previous quarters?

No, linearity was fairly consistent.

consistent. Okay, perfect. Thank you. Thank you. Our next question comes from the line of Trevor Walsh with JMP Securities. Please go ahead. Great. Thanks, team, for taking my question.

Appreciate it. And also appreciate the updates around Purple AI. Maybe, Tomer, just a quick one for you on that. Of your customer conversations, what's been kind of the primary pushback, if any, around just the adoption of that new product? And then how does that maybe translate into what you're seeing um and from just kind of an initial catch rate of what you're expecting around uh with purple ai as we move into kind of the beginning of next year and if that tracks similar to maybe you know singularity cloud or the security data lake if you expect that

type of uptick or if there may be other kind of puts and takes there thanks that we've been uh we've been asked um revolved around potentially you know training more module more models more ai models that are tailored to the customer environment and how we plan to largely a lot of excitement towards the capability um in terms of how we're thinking about it obviously it takes technology um and obviously we're doing it responsibly um you know we want to make a company like like ours i mean we're not just an average consumer company we deal with security and we need to make sure that these things are are in place i mean purple ai is definitely almost another product we're treating it how we're structuring our go-to-market what we anticipate Purple will contribute in the next 24 months in the magnitude of something like cloud, something like data. It's early days. It's looking at just for one footprint, and the application of it can be virtually endless in the enterprise environment. I think that puts us in a league of its own in terms of the other offering.

That's fantastic. Really appreciate the color, and congrats again on the quarter.

Thank you. The next question comes from the line of Rudy.

Kessinger with D.A. Davidson. Please go ahead. Hey, great. Thanks for my questions. Dave, I guess just on the net new ARR, I guess the implied net new ARR for Q4, it implies about, I guess, half the growth versus Q3 as you saw last year. So just what are your assumptions on close rates, budget flush, et cetera, relative to, I guess, Q3, but also Q4 last

year? Yeah, so, you know, obviously we've increased our guidance to about 200 million in net new ARR for the full year, you know, up from 195. So, you know, we're seeing clear signs of stabilization. We're expecting Q4 net new ARR to be essentially flat to what it was in Q4 of last year. You know, we don't expect a budget flush. We've never really been a recipient of that, although I wouldn't mind it if it were to come. But, you know, really the way we're thinking about this is that Q4 is seasonally our largest quarter of the year. We don't expect Q4 this year to be any different than historically. You know, we delivered upside to Q3. We outperformed difficult seasonality, and we're expecting that to carry into Q4. You know, and I think one of the things to be concerned about is just there's still macro uncertainty. There's geopolitical uncertainties. Those are continuing to persist. We want to be mindful of the evolving, you know, macro dynamics but um you know i think overall you know we're pleased with the performance we had in q3 and we're pleased with the execution of our teams so you know the stabilization we're seeing uh you know makes us optimistic that um you know things are getting better okay and then

just a quick follow-up the margin improvements uh very very nice to see um just on gross margins um any one-time items to call out that drove that 79 in q3 and why this step back down about 150

basis points in Q4? There's about 150 basis points of FX gain. Obviously, we have a fair amount of support people across Europe. The U.S. is not favorable. U.S. dollar, especially to the shekel, over the end of Q3, some of that has flipped thus far in Q4, but on a constant currency basis, we're assuming we'd have been roughly the same at about 77.5%, which is what we're guiding

for Q4. Thank you. Our next question is from the line of Gabriela Borges with Goldman Sachs.

Please go ahead. Hi, yes, this is Max on for Gabriela. Thanks for taking our question. As a follow-up to the prior question, we have a question for you as you think about your fiscal year 2025 planning assumptions. It would be great to get your observation on what is incrementally changing and your priorities headed into next year, especially with your new CRO in place.

We'll provide an outlook next quarter. It feels prudent to get through the largest quarter, and we look forward to really scaling beyond a billion.

Yeah, that's helpful.

Thank you. Our next question comes from the line of Ray McDonough with Guggenheim. Please go ahead.

Great. Thanks for taking my questions. Tomer, over the past couple of quarters, we've talked about some downsizing on renewals. And I understand the commentary around the macro in general has been that trends are relatively stable. But, you know, in that area specifically around renewals, are those trends starting to change at all? Are you still seeing similar customer behavior? And, you know, maybe just continuing to zoom out, as you look at kind of what transpired in November and as you talk to customers about, you know, heading into the next calendar year, How are those budget conversations around security spend shaping up? Do you feel, you know, close rates may improve next year as the threat environment seems to get more intense? Just any commentary on broader level spend and your feeling going into next year would be helpful.

Yeah, look, all I can say is that, you know, forward licenses in that.

Okay, makes sense. And, Dave, as the data lake solution continues to scale, Can you talk about the patterns of overages on consumption that you're seeing and assuming that's where the majority of consumption revenue comes from? And maybe to what extent you've been successful in capturing incremental commitments, which would otherwise have been overages. And how should we think about that potentially being a tailwind to ARR growth next year as the data lake solutions?

We really didn't have any changes or unexpected impact from consumption during the quarter at all. You know, one of the things that we're seeing and we're encouraged by is that, you know, customers that did have overages, when they do commit to us, are committing at the level that they were spending. So, you know, if a customer is moving from consumption to subscription, you know, we're seeing that at the levels that they were spending. You know, as Tomer said, they're not putting a lot of elevated spend in that. You know, they're essentially carrying it forward at the rates they've been doing. So we just, we really haven't seen anything except for stabilization.

Got it. Thanks for taking the question.

Thank you. Our next question comes from the line of Gray Powell with BTIG. Please go ahead.

All right, great. Thanks for taking the question, and congratulations on the strong results. So I really appreciated the color that you gave on the macro environment and the prepared remarks. I guess I just wanted to follow up there. So we've been in a weak macro for, like, 18 months now. uh how do you feel about your visibility on customer behavior patterns and just like customer behavior patterns today and your ability to predict your business today versus this time a year ago

i mean obviously we know more i think customer that's that's really helpful and then one more

if i may um so when you acquired tivo back in early i think is uh 2022 um that business was growing at about a 50% annual pace, just with the tax, you know, more recently, you're increasingly targeting identity systems. How should we think about the growth potential on that business?

Has there been any incremental tailwinds? I think it's, you know, for us, it's just another module out of, you know, pretty large, we're targeting big identity, you know, in cybersecurity, alleviate something else a year. Understood. Thank you very much. Thank you.

Our last question comes from the line of Eric Heath with KeyBank Capital Markets. Please go ahead.

Thanks for taking the question. Dave, just a housekeeping question. I know before you had some targets out there for EBIT profitability for fiscal 25 and free cash flow profitability for the second half of 25. So just curious if that stands. And then just I'll add the second question, which for Tomer, it sounds like you're taking a different approach to your pricing around Gen AI. So just curious what the pricing mechanism is for Purple AI and just how customers are – what the feedback is from customers on the pricing strategy.

And we remain on track to achieving positive free cash flow in the second half of fiscal year 25. We're delivering margin improvement in an incredibly strong pace, more than 25 points of operating margin improvement for nine consecutive public company, and we're going to continue with that. Free cash flow margin improved 40% year over year. our net income margin was negative five percent you know so we've been very proactive with our cost structure we've shown measurable progress to achieving profitability and you know we've also raised our full year operating margin guidance from negative 25% to negative 20% this last quarter so you know we're well on our way to achieving our profitability targets you know we expect Q4 free cash flow margin of the Nate in the negative single digits so you're going to see improvement there too you know so really what we're doing is we're aligning our investment plans with the pace of growth. You know, we'll continue to selectively invest in key growth areas such as cloud and data competitive advantages. And that's the path that we're progressing to. You know, obviously, we'll be guiding, you know, at the end of Q4. So look out for that. But, you know, everything we're doing as a company and a lot of the improvements you're seeing right now are setting us up on the pace to make sure that what we, you know, what we want to achieve in fiscal 25 becomes achievable so you know right now we're focused

on free cash flow creation you know we expect that in the second half of next year for more

thank you i would now like to pass the conference back to tomorrow wine garten the ceo for any

closing remarks thank you all for joining us today i'm humble but by the significant contribute

that concludes today's conference call i hope you all enjoy the rest of your day you may now disconnect your lines.