SentinelOne (S) Q1 2024 Earnings Call Transcript

SentinelOne (S 1.84%)
Q1 2024 Earnings Call
Jun 01, 2023, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and thank you for joining the SentinelOne first quarter fiscal year 2024 earnings conference call. My name is Alyssa, and I will be your moderator for today's call. 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, head of investor relations.

Mr. Clark, you may proceed.

Doug Clark -- Vice President, Investor Relations

Good afternoon, everyone, and welcome to SentinelOne's earnings call for the first quarter and fiscal year '24 ended April 30th. With us today are Tomer Weingarten, CEO; and Dave Bernhardt, CFO. Our press release and the shareholder letter were issued earlier today and are posted on our investor relations section of our website. This call is being broadcast live via webcast, and an audio replay will be made available on our website after the call concludes.

Before we begin, I would like to remind you that during today's call, we will be making forward-looking statements about future events and financial performance, including our guidance for the second quarter and full fiscal year '24, as well as long term financial targets. We caution you that such statements reflect our best judgment based on the factors currently known to us and that our actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, in particular, our annual report on Form 10-K and our quarterly report on Form 10-Q. These documents contain and identify important risk factors and other information that may cause our actual results to differ materially from those contained in our forward-looking statements.

Any forward-looking statements made during this call are being made as of today. If this call is replayed or reviewed after 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 GAAP results. Our financial outlook excludes stock-based compensation expense, employer payroll tax on employee stock transactions, amortization expense of acquired intangible assets, and acquisition-related compensation costs, which cannot be determined at this time and are therefore not reconciled in today's press release.

And with that, let me turn the call over to Tomer Weingarten, CEO of SentinelOne.

Tomer Weingarten -- Chief Executive Officer

Good afternoon, everyone, and thank you for joining our fiscal first quarter earnings call. We delivered another quarter of significant revenue growth and margin improvement. Customer retention and expansion remained strong and above our long-term targets. We continue to achieve high win rates with stable pricing.

The most discerning enterprises are consolidating their security on our best-of-breed platform, which now includes half of the Fortune 10 companies. We continued our progress toward profitability in the first quarter, making a seventh consecutive quarter of more than 25 percentage points of operating margin improvement. Despite many underlying business strengths, our first quarter top-line growth was lower than we expected as global macroeconomic pressures continue to persist. Succeeding in this environment requires a sharpened focus on go-to-market execution.

Furthermore, we're taking actions to fortify our business by improving our cost structure and ensuring our path to profitability. We believe these measures will drive growth efficiencies across our business. Cybersecurity is mission critical and a must have for all enterprises, especially with the world going through a digital transformation. We're leading the charge in security AI innovation and building the enterprise security platform for the future.

On today's call, I'll focus on two key areas: one, details of our quarterly performance and external market dynamics; two, how we're continuously optimizing our business and ensuring progress toward profitability, which includes our recent cost saving measures. Before we move on, let me briefly address the one-time adjustment we made to our ARR throughout fiscal year '23. We believe making this change will reduce ARR volatility and better align growth with revenue. This adjustment did not impact our historical revenue or bookings.

All of our Q1 reported ARR-related matrix and forward-looking statements include the impact of this one-time adjustment. Dave will provide more detail on this. Now, let's dive into the details of our Q1 performance and demand environments. We delivered revenue growth of 70%, a strong growth rate in any economic environment.

We added net new ARR of $42 million, driven by continued adoption of our Singularity platform across endpoint cloud and adjacent solutions. We achieved a record-high gross margin of 75%, supported by data efficiencies and strong unit economics. Our operating margin expanded by 35 percentage points in Q1. Let me double-click on that.

We're making rapid progress toward our profitability targets. We also significantly improved our free cash flow margin, showing a year-over-year improvement of 46 percentage points. In absolute dollar terms, we reduced our operating losses in free cash flow outflows significantly. With that said, our Q1 revenue and ARR growth fell short of our internal expectations.

Let me address the two key factors head on that impacted our Q1 results. First, macroeconomic conditions are further impacting both deal sizes and sale cycles. Incrementally, budgetary scrutiny is leading to deal size adjustments for new customers and renewal contracts. We're seeing customers evaluate usage and rightsize on renewals.

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

For example, a multimillion dollar deal with a customer, who had already fully deployed our solution, could not close in Q1 due to contract delays. At our scale, we have the opportunity to adapt quickly. We're focused on further enhancing our execution, including streamlining our closing process and upleveling our enterprise platform go-to-market approach. In particular, we've incorporated factors like deal rightsizing and lower pipeline conversion, as well as a higher emphasis on efficient growth into our outlook.

There is no fundamental change in the business or opportunity, and our win rates remain strong. But the selling environment is more difficult. We're assuming a worsening macro environment. We now expect full year revenue to grow 41% at the midpoint.

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

Questions & Answers:

Operator

Please hold as we reconnect our speaker. Ladies and gentlemen, again, thank you for your patience. Please remain holding as we reconnect our speaker. Thank you for your patience.

Our speakers have been reconnected.

Tomer Weingarten -- Chief Executive Officer

Business toward $1 billion in ARR and beyond, we believe our business will continue to become even more durable and resilient. We continue our expansion into adjacent domains, such as security analytics and cloud security. We're early in this journey, and we remain focused on the long-term opportunity. We're bringing innovative technology to a $100 billion addressable market composed of legacy solutions and ripe for disruption.

The only way for companies to stay protected from cyberattacks is to have the best security. At SentinelOne, we leverage AI to deliver leading protection and value to enterprises of all sizes. Digging deeper into our Q1 results, we are encouraged by several important strengths across our business. Customers of all sizes and geographies continue to choose SentinelOne for industry-leading technology and superior platform value.

We added more than 700 new customers in the quarter, and total customer count grew about 43% year over year, exceeding 10,680. As you know, our customer count does not include the customers served by our MSSP partners, so the number is dramatically understated. Customers with over 100,000 in ARR grew 61% year over year, much faster than our total customer growth. Customers above the million-dollar mark grew even faster.

In Q1, we added a new Fortune 10 customer, and we're now the cybersecurity platform of choice for half of the Fortune 10. Our Singularity platform scales with the world's largest enterprises and outperforms in the most stringent security requirements from detection to manageability to privacy and controls. Other prominent customer wins spend endpoint and cloud footprints ranging from global financial institutions to iconic retail brands. Our momentum across mid-market enterprises remain particularly strong in Q1.

Even with budgetary pressure and some downsizing, our ARR per customer increased by more than 20 percentage points year over year, demonstrating our success with large enterprises, as well as increasing adoption of broader platform offerings. Our land-and-expand strategy is working, as customer retention and expansion remains resilient. Our NRR exceeded 125%. This expansion was driven by footprint expansion and module adoption.

Our emerging capabilities represented more than one-third of quarterly bookings in Q1, demonstrating strong momentum of our adjacent solutions. Singularity Cloud remained our fastest-growing solution, followed by meaningful contributions from other adjacent capabilities, such as Vigilance MDR and Ranger. Our customer estate remains under-penetrated in terms of module adoption. There is clear opportunity to increase our platform expansion and improve our business durability.

Our partner-supported go-to-market model continues to unlock scale and enhance our market position. We achieved another quarter of resilient growth from our MSSP partners in Q1, as businesses increasingly turn to manage security protection. Beyond endpoint license expansions, our MSSP partners have started to adopt broader platform modules, such as Vigilance MDR, Ranger, and many others. We expect continued MSSP share gains, install-based replacements, and module attach to drive meaningful growth going forward.

Our autonomous security, multi-tenancy, and fully customizable access control makes SentinelOne a critical partner for large MSSPs. Together, we're providing enterprise-grade protection to customers of all sizes. Expanding upon our cloud security partnership with Wiz, we've enhanced the customer experience through deeper technology integration. Now, our integrated cloud security platform provides enterprises with complete visibility into their cloud-hosted infrastructures and allows them to protect against cloud-based threats at machine speed.

Our recently launched cloud security marketing campaign is creating strong momentum, increasing customer and partner interest in Singularity Cloud. Looking at the competitive landscape, we continue to maintain strong win rates without having to compromise on pricing. This hasn't changed, and our disciplined pricing and value is reflected in our record gross margins. Our ASPs remain stable, and we continue to win against legacy and next-gen vendors in significant majority of competitive evaluations.

And we expect these trends to continue. Customers value SentinelOne's culture of trust and transparency, which is a philosophy we bring to every relationship. We're focused on expanding our pipeline, leveraging our channel ecosystem, and refining our execution. SentinelOne's platform is purpose-built to help customers optimize security and cost with coverage across diverse operating systems and cloud environments.

We're helping enterprises consolidate multiple point solutions, enabling them to realize better security and business outcomes using fewer resources. Let me share how we're balancing our investments and taking specific actions to ensure our path toward profitability. In the current economic landscape, it is vital that we adapt and optimize our resources accordingly. By acting swiftly, we can enhance our execution and drive operational improvements.

We're reiterating our commitment to delivering margin expansion, regardless of current economic scenarios, as demonstrated by our Q1 margin improvement and overachievement. As a result, we're adjusting our costs as needed to drive more efficient growth, enhance resiliency, and ensure our path to profitability. Let me provide a few specific examples. First, we're implementing a plan to optimize our workforce that is expected to impact about 5% of our current employees and pace our future headcount growth plans.

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

We believe these initiatives more closely align our cost structure with our current outlook without sacrificing long-term growth potential and market opportunities. These are the right steps to streamline our business. We are continuing to maintain a balance between growth and profitability. Reflecting upon the last few years, SentinelOne has evolved from an endpoint security solution to a comprehensive enterprise security platform.

Our endpoint solution has been a source of tremendous growth, and we expect this to continue in the coming years. Beyond our endpoint market success, growth of our emerging solutions have diversified our business mix across endpoint cloud, identity, and data. Our leading innovations and holistic approach to cybersecurity put us in a strong position for long-term growth across multiple large addressable markets. We're in the midst of a paradigm shift among enterprise security and operations.

Technological advancements are changing what was once imagined possible for cybersecurity. Artificial intelligence is among the most disruptive technologies of our time and has the potential to scale cybersecurity in a completely new way. And we are leading the charge through innovation. From early on, we developed a fully automated AI-based security platform, integrating neural networks to serve a specific use case.

Combating cyberattacks and protecting our digital way of life is a force for good. Our Singularity platform is powered by a single proprietary security data lake to protect multiple attack surfaces. Our AI-based approach delivers best-in-class autonomous protection, where we've consistently led in third-party evaluations and Gartner-critical capabilities. Our success is also proven in real-world experiences, whether that be the global scale sunburst attack a few years ago when we had zero customers impacted, or more recently, the smooth operator global supply chain attack.

Here, again, our Singularity platform successfully prevented the attack from executing well before the threat was discovered and identified by other security vendors. This is the true potential of SentinelOne's leading security, real-time, AI-based autonomous protection. And once again, we're leading the industry by incorporating generative AI into cybersecurity. We recently launched Purple AI, a one-of-a-kind innovation in cybersecurity that supercharges 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. Customers and prospects were given hands-on access to a live demo of Purple AI at RSA, the world's largest cybersecurity event, and feedback was extremely positive. The Wall Street Journal called us out as an AI innovator, CRN put us on the top of the list of 10 cool new cybersecurity tools announced at RSA 2023, and CSO magazine named us one of the most interesting products to see at RSA conference 2023.

We are well positioned to bring more AI to customers. SentinelOne's AI-based detection engine has always been a differentiator. Now, with Purple, we're taking a big step in bringing generative AI to security professionals, making security operations easier, faster, and efficient across petabytes of data from any source. Importantly, we are committed to ensuring our cutting-edge technologies are used ethically, safely, and responsibly.

Our Singularity platform allows customers to maintain complete control of their data, reinforcing our dedication to keeping sensitive information in the hands of its rightful owners. Before concluding my remarks, let me mention an exciting development. Sally Jenkins joined SentinelOne in April as our new chief marketing officer. Sally's marketing leadership will help further define our value propositions, expand our brand presence, and solidify our leading growth across multiple market segments.

She brings over 30 years of experience, amplifying brands at high-growth and scale companies. We welcome Sally to the SentinelOne leadership team. In conclusion, we believe today's macro challenges are not permanent and that enterprise transformation is in its infancy. We're well positioned to address critical enterprise needs, leading next-generation security across endpoint cloud and security data analytics.

We also believe the market will continue to converge toward enterprisewide cybersecurity platform, driven by AI, an approach we pioneered and lead. We're committed to innovation, improving our operating performance, and empowering customers with the best enterprise security resources. Ultimately, companies win when they continue to adapt, innovate, and deliver value for all stakeholders, and this is our North Star. I thank you and all stakeholders, especially our Sentinel's customers, partners, and shareholders for your continued support and commitment.

With that, let me turn the call over to Dave Bernhardt, our chief financial officer.

Dave Bernhardt -- Chief Financial Officer

Tomer, thank you. I'll discuss our quarterly financials and provide additional context about our guidance for Q2 and fiscal year '24. As a reminder, all comparisons made are year over year and all margins discussed are non-GAAP, unless otherwise stated. Before digging into the Q1 results, I will discuss the details of a one-time adjustment we made to our ARR for fiscal year '23.

First, some context. In the past few years, we had seen steadily increasing usage and consumption patterns by our large customers, which we accounted for real time in quarterly ARR. However, as the first quarter progressed, we experienced a notable decline in usage, which continued in May. In light of the current macro environment, we expect these lower usage and consumption trends to persist.

Due to this new dynamic, we elected to tighten the methodology for calculating ARR for consumption and usage-based agreements to reflect committed contract values. This provides a cleaner view of growth for fiscal '24 and beyond. By making this change now, we expect ARR and revenue to be more closely aligned. It should also reduce volatility in ARR compared to the prior methodology, where usage and consumption changes could have a magnified impact on ARR.

As we reviewed the methodology, we also discovered historical upsell and renewal recording inaccuracies relating to ARR on certain subscription and consumption contracts, which are now corrected. After considering these factors, this adjustment resulted in a one-time ARR reduction of 27 million, or approximately 5% of ARR, resulting in Q4 fiscal '23 ending ARR of 522 million. We are applying a comparable estimated adjustment to the remaining quarters in fiscal year '23, which we believe is a reasonable approximation of the impact in those periods. Importantly, this adjustment did not impact historical revenue or bookings.

We wanted to be transparent to address this upfront and move forward on a clearer path. Now, moving on to our Q1 results. Revenue grew 70% to 133 million, with international revenue growing 84% year over year and representing 35% of total revenue. We added net new ARR of 42 million and ended the quarter with total ARR of 564 million.

This did not meet our expectations. Customers continue to tighten budgets and deal sizes. While these factors are not entirely new, they were more pronounced in Q1, and we have the opportunity to execute better. Looking beyond the top-line growth, our Q1 performance showcased many areas of strength across the business.

We continue to see a healthy mix of new customers and expanding business from existing customers. Our dollar-based net retention rate remains north of 125%. Also, our ARR per customer increased more than 20% compared to last year, reflecting strong business momentum among large enterprises and growing adoption of our Singularity platform. We achieved another quarter of resilient growth from our MSSP partners in Q1, as businesses increasingly turn to managed security protection.

Our broader platform adoption by our existing customers and partners remains durable and resilient, fueling a solid base for growth, regardless of broader conditions. Turning to our costs and margins. In the quarter, we achieved better growth and operating margin, and narrowed our operating loss and free cash flows, all despite lower top-line growth. We delivered a record gross margin of 75%, an increase of 7 percentage points year over year.

Just two years after setting our long-term gross margin target, we're already operating within the range of 75% to 80%. This demonstrates great progress. We're seeing continued benefits from economies of scale, data processing efficiencies, and cross-sell implementation solutions. This also underscores the importance and benefits of our fully integrated security data analytics backend, where we collect data once to enable more and more capabilities.

We also delivered substantial operating margin improvement, expanding 35 percentage points year over year to negative 38%. As market conditions have evolved, we have become more selective about investments. We've taken important steps to align our cost structure with our updated growth outlook. We've also improved our cash conversion in the first quarter.

On a dollar basis, we reduced our operating losses year over year in Q1. We also reduced our free cash outflow from 55 million in Q1 of last year to 31 million this quarter, reflecting a free cash flow margin improvement of 46 percentage points. Moving to our guidance for Q2 and the full fiscal year 24. We are maintaining strong competitive win rates, stable pricing, and we're generating strong pipeline momentum.

At the same time, we expect macro conditions to worsen, impacting enterprise budgets and sales cycles. It's a more difficult selling environment. We are assuming lower pipeline conversion for the remainder of the year, as well as further deal downsizing. We strongly believe this does not change our competitive position for our long-term opportunity.

The only way for companies to stay protected from cyberattacks is with the best security protection. And SentinelOne offers that, leading security and platform value. For the second quarter, we expect revenue of about 141 million, up 38% year over year. And we expect net new ARR in the low $40 million range, consistent with Q1.

We expect second half net new ARR to be higher than the first half, consistent with typical seasonality. For the full year, we expect a revenue of 590 million to 600 million, growing 41% at the midpoint. We now expect full year ARR to grow in the mid 30% range from the adjusted fiscal year '23 ending ARR of 522 million. While lower than our previous expectations, we expect continued growth and rapid progress toward our profitability targets.

Turning to the outlook for margins. In Q2, we expect gross margin to be about 74.5%, an improvement of 10 percentage points year over year. We expect gross margin to remain relatively consistent in the remainder of the year. As a result, we are increasing our full year gross margin guidance to 74% to 75%, up over 2 percentage points year over year at the midpoint.

We expect our increasing scale and improving data processing efficiencies to continue benefiting our results. Finally, we expect our Q2 operating margin to be negative 36%, implying an improvement of more than 20 percentage points year over year. Despite a lower growth expectation for the year, we are reiterating our operating margin guidance of between negative 29% and negative 25%, an improvement of about 22 points at the midpoint compared to fiscal year '23. We're focused on improving our execution and operating the business efficiently through evolving economic conditions.

We must adapt, execute better, and will emerge as a stronger company in the years ahead. Every dollar we invest must generate a positive return. To that end, we are taking measured steps to align our cost structure with the pace of growth this year, including decreases in variable spend and cloud hosting costs, optimizing talent and facility locations, lower forward hiring, and approximately a 5% total headcount reduction. These efforts will increase performance accountability and operating efficiency, driving expected cost savings of about $40 million once fully executed.

We believe these are the right steps to optimize our long-term market and growth potential, while remaining on track to achieve breakeven profitability in fiscal year '25. We have a very strong balance sheet with 1.1 billion in cash, cash equivalents, and investments, and no debt. This is a substantial war chest. It provides longevity, flexibility, and ample run rate to achieve our profitability targets.

Before we open for Q&A, I want to take a minute to summarize everything we covered here today, which has been a lot. We achieved many positive results, 70% revenue growth, and delivered upside to margins with significant free cash flow improvements. Demand in our pipeline remained healthy. On the other hand, customers are heavily scrutinizing deals, and we have the opportunity to elevate our execution.

We also experienced a slowdown in consumption and usage among certain customers, which led us to adjust our ARR to better align with revenue and mitigate further fluctuations. Finally, we're executing workforce reduction and cost optimization actions to ensure we meet our fiscal year '24 margin targets and continue to deliver disciplined growth. Thank you all for joining us today. We will now take questions.

Operator, please open up the line.

Operator

[Operator instructions] The first question comes from the line of Brian Essex with JPMorgan. Your line is now open.

Brian Essex -- JPMorgan Chase and Company -- Analyst

Hi, good afternoon, guys, and thank you for taking the question. I guess, Dave, just want to address this adjustment and get a little bit of clarity there. You just alluded to, you know, the slowdown in consumption usage. Is this for, you know, kind of storage and query? Maybe you can explain, you know, the underlying products that's related to this consumption-based revenue.

And then, as we look in our models and try to forecast out the revenue generated from ARR, is this going to be -- does this basically remain out of the ARR equation now? So, it's kind of, you know, an extra layer of revenue we need to consider that's very more variable in nature. Maybe a little bit of color there will help.

Dave Bernhardt -- Chief Financial Officer

Yeah, happy to discuss this. So, what's happened is we had a $27 million one-time adjustment. You know, it's about 5% of the ending ARR that we decided to be more conservative on and restate as of Q4 of last year. You know, it's two parts.

One, we've changed the methodology of calculating the ARR and consumption and usage-based agreements to reflect the committed contract value. You know, when you asked specifically what's that about, it's about the data ingestion and the, you know, security data lake and the dataset consumption products. So, those are approximately single digit of our total ARR. But what we had been seeing historically was we were seeing customers that were, you know, signing up for contracts, using the data in excess of what they were committed to, renewing early, and we were reflecting that in the ARR balance.

You know, as something that we'd seen going into late Q4 and early Q1 and then throughout Q1 even into May and likely into June, we're seeing a decrease in that. And customers are rightsizing their spend to get back to committed total. So, we were seeing an outsized swing to the opposite end that we had seen prior. So, what had happened was, by doing this, we're trying to tighten the definition of ARR to eliminate these swings, you know, to our favor or to our detriment and basically lock it to the committed contract.

So, we believe that this, going forward, it's going to reduce the quarterly ARR fluctuations. It's going to more correlate ARR and revenue. And that's the reason that we did this. The reason it doesn't change any historical bookings, you know, in terms of the other side of this, which was, you know, historical upsell and renewal inaccuracies, what we were seeing was we had upsell motions that included a renewal.

and we were adding that to the historical ARR versus adding just the upsell component of it. This was an error in our CRM. We have fixed this and should not have that error going forward. That's why it didn't affect revenue, didn't affect, you know, overall total bookings, didn't affect cash flows, didn't affect the income statement.

But what it did do is it set external expectations for what revenue should be going forward, you know, both externally and internally. That's why we made this adjustment now.

Brian Essex -- JPMorgan Chase and Company -- Analyst

OK, and maybe to follow up, you know, how should we -- is there a way we can understand the practical use case around how an enterprise might be managing their security posture and choose to maybe ingest and store less data? What is the thought process that goes along with that? And what is the risk award kind of trade-off of their decision to ingest less data to save costs when your kind of security posture is at risk?

Tomer Weingarten -- Chief Executive Officer

We're seeing this in two different areas. I think that, one, that's something that you see, I think, with a lot of consumption-based companies. I mean, when people look at log analytics and generally trying to ingest data, they now take a more prudent approach to what they want to store. So, you see them filtering out a lot of the data that they don't feel is useful.

To us, that's one thing that we saw through the dataset user base, you know, happening, where they downsize, rightsize some of the logs that they wanted to keep. I think a lot of companies are kind of going to that same exercise now, whether with us or other vendors, which was really why we elected to just remove that consumption part from our ARR to prevent that from kind of being something we consider into the future. And obviously, if something kind of aligns to the better, obviously, that becomes upside. The other side of it is when you look at security data, it's much of the same story.

Some log sources are not as useful for customers, and they're now scrutinizing what they put into the platform. Generally, very healthy. It's just when it comes after two years of putting everything they could into the platform, I think, now, we're seeing obviously the inverse behavior, which we felt, again, something prudent to do here is just remove that volatility from ARR. And that's the result.

Doug Clark -- Vice President, Investor Relations

Operator, next question, please.

Operator

Patrick Colville with Scotiabank, your line is now open.

Lory Luo -- Scotiabank -- Analyst

Hi, thanks for taking my question. This is Lory Luo on for Patrick. I just have a quick question on the cloud security products --

Operator

Patrick Colville, you may proceed.

Lory Luo -- Scotiabank -- Analyst

Hi, can you hear me?

Dave Bernhardt -- Chief Financial Officer

We can hear you, yes.

Operator

The next question comes from the line of Tal Liani with Bank of America. Your line is now open.

Tal Liani -- Bank of America Merrill Lynch -- Analyst

Great. Don't hang up on me, please. I hope you can hear me.

Tomer Weingarten -- Chief Executive Officer

We're here. I mean --

Tal Liani -- Bank of America Merrill Lynch -- Analyst

I know. I know. It's not you. I know.

Hopefully, she can hear us. So, I want to ask a question about certain things you said. On one hand, you're saying that this is a slippage of contracts from Q1 on to the next few quarters. On the other hand, if this is just slippage, why are you reducing second quarter guidance and full year guidance? And then, why are you reducing workforce and other expenses? It seems to me, just from your actions into the guidance and into the expenses, that it's more than just slippage.

It's something in the environment and is worse. And the question I have is, first, about quarter linearity. I think in April, you said that things are fine. So, does it mean that it deteriorated right after? And I want to ask you something about competition.

The question is, is it more related to competition? Did you have greater loss rate of contracts or things that impacted the guidance, the lower guidance? Or is it really strictly about spending? It's hard for me just to see the same spending comments from other companies. And I'm trying to triangulate kind of what the data points from other companies on the space. Thanks.

Tomer Weingarten -- Chief Executive Officer

Of course. It's not just deal slippage. I think we tried making that clear. I think deal slippage is something that obviously we witnessed, you know, as early as Q3 and Q4 of last year.

So, some of it was known. And I think that, generally, we factored some of that into how we convert pipeline. I think we have, you know, had a couple of execution hiccups where some deals that just were not supposed to slip. This is not specifically macro-related.

We just weren't able, you know, to execute these contracts in time. And that was unfortunate, and that's something that we need to do better. So, to me, this is not deal slippage, it's our own execution. The other factor in why we're taking a more cautious approach is just, generally, you know, we feel this environment, customers are not really, at the end of the contract, reflecting what they intend to buy was in the beginning of entry to the pipeline.

So, if we take a more cautious look into our pipeline, which are very healthy, it just we don't always are able to predict what that deal size is going to be at the end of it all. So, to us, I mean, we're just taking a more prudent approach. The third factor that we see in play is that consumption dynamic. I mean consumption is something that, you know, we've had in our ARR.

It's something that is part of our ongoing operations, obviously. So, taking out consumption from ARR obviously forces us to also take the guide down and really don't consider consumption as part of our go-forward but only as upside, as I mentioned. So, these are the three factors that go into it. The competitive environment remains, you know, pretty much the same.

Our win rates have been, you know, stabilized over the past few quarters and even before. I don't think we're seeing anything, you know, out of the ordinary there. We definitely see some of these providers that we compete against, I mean, become more aggressively defensive, especially when we come for their estates. I mean we're the up and comer here.

We gun for their estates. And sometimes, they become highly aggressive to the point of $0 deal types of transactions that we just don't do and will not do. But outside of that, which I would kind of call on the outline or kind of the outskirts of things, things are pretty normalized on the competition front.

Dave Bernhardt -- Chief Financial Officer

And, Tal, you know, to build on that further and talk about some of the cost initiatives we've put in place, you know, with these lowered expectations for revenue and ARR, you know, leading into the latter part of this year, we've said from the beginning, our goal was to get to breakeven or better for fiscal '25. These are things we have to do to make that -- to enable that to happen. So, you know, we said we were going to sharpen our pencils. We've said that everything we were going to do was focused on achieving those bottom-line results no matter what the growth was.

Everything we're doing in this action and what we've been doing, you know, earlier in the year when we've made similar actions that were, you know, smaller and kind of cuts around the edges, everything has been to prime us to be ready for that longer term. And that's why we made those decisions that we've, you know, made over the past week and really set forth today.

Operator

Our next question comes from the line of Saket Kalia with Barclays. Your line is now open.

Doug Clark -- Vice President, Investor Relations

Saket, you may be in mute in there.

Operator

Saket Kalia, you may proceed.

Saket Kalia -- Barclays -- Analyst

Hey. it's Saket. Sorry, can you hear me?

Dave Bernhardt -- Chief Financial Officer

Yes.

Saket Kalia -- Barclays -- Analyst

Hey, I'm so sorry. I was just hoping between calls here a little bit. Tomer, very helpful response on the last question. Maybe just to dig into the competitive part of that response a little bit, I was wondering if you could just double-click on Microsoft specifically.

I mean, a lot of times, there have been questions around just how competitive or how effective the product is, but it's obviously very easy to buy. I mean, any views on just how you're referring specifically versus them competitively?

Tomer Weingarten -- Chief Executive Officer

Sure. Look, Microsoft is a formidable competitor. I mean this is not a legacy signature-based solution. Obviously, they have a fairly expanded security portfolio.

With that said, I think that four customers that are looking for the security capabilities and the coverage that pure-play vendor can provide, Microsoft just doesn't cut it. So, I think in certain parts of, you know, the market, you can see them a bit more palatable for security teams. But as a whole, I think that doesn't really translate into more these discerning customers. Moreover, I think that when you look at what capabilities customers are opting, you know, right now for, cloud security would be one that I mentioned, you know, triple-digit growth for us year over year on cloud security.

That is something where obviously Microsoft is not as, you know, I would say prominent in their capability set. So, all in all, you know, they're still there. We see, you know, time and time again that when people eventually do go with Microsoft, you know, that's a CFO-type led decision. And I think that more and more people are kind of shying away from that approach.

The last thing I'll say there is, you know, we're targeting now between all the different offerings we have in our portfolio, about $100 billion of addressable market. Even if you look at Microsoft as, you know, one of the leading cybersecurity providers with $20 billion of revenue overall, I mean, I think you're looking at about a fifth of that market. So, a lot of it is still, you know, up and, you know, up for grabs. And we feel still pretty good about our ability to compete with Microsoft, especially, you know, with security-savvy professional, especially with MSSPs that are looking for more automated, more opex-driven solutions.

So, we feel well positioned. But obviously, Microsoft, you know, they're a formidable vendor out there.

Operator

Thank you. Our next question comes from the line of Adam Tindle with Raymond James. Your line is now open.

Adam Tindle -- Raymond James -- Analyst

OK, thanks. Good afternoon. Tomer, I just wanted to start to understand, you know, a lot of the concentration of the negative surprise here is in the data ingestion piece. And I know it's a smaller part of the business.

But if we think about that, the narrative would be that there's, perhaps, concerns that that could be a leading indicator for broader challenges coming in the business with the logic saying, hey, it's easier to shut off consumption quickly, and we'll get to the contractual stuff later and ultimately start shutting that off. Just wondering, you know, with that kind of narrative or potential bear case, how you're thinking about preventing that, or what you would say to investors that would be concerned about that.

Tomer Weingarten -- Chief Executive Officer

I think these are two, you know, completely separate things. I mean, at the end of the day, if you look at our GRR, it remained, you know, stable across many quarters. We don't churn customers. Customers don't leave SentinelOne.

At the end of the day, even when we look at the rightsizing of licenses, which I think is what you're kind of referring to, I mean that looks very same to us. I mean these are just getting aligned to the workforce that they have. So, I don't think there's anything material with what's happening with licensing for us. Consumption, in its nature, is just more volatile.

And I think that for companies out there, when they're under the gun to save, obviously, something as intangible as data is something that they can start thinking twice about. That's not the same for their core security posture. And that is something that, you know, we've seen very, very stable over time. Even if we imply some factor of rightsizing into it, that doesn't create that same volatility that an ad-hoc consumption model would have.

Obviously, these are, you know, multiyear contracts. Obviously, these are tied specifically to the amount of people you have in the organization. Even if you have some volatility in that, it is not even close to the volatility that you can have with data volumes. And that's why, once again, to kind of remove that volatility, we removed that from our ARR projections.

Adam Tindle -- Raymond James -- Analyst

OK. And Dave, maybe just a quick follow-up. I'm sorry if I missed it, but did you size that -- the consumption business? I know Scalyr, years ago, you talked about $10 million for that piece of it. What's the size that we're looking at? And any changes looking at from contractual basis or anything like that moving forward?

Dave Bernhardt -- Chief Financial Officer

It's single-digit, you know, percentage of total ARR. So -- or single-digit percentage of total ARR. You know, we shouldn't expect the fluctuations going forward as we move to contractual. What we're -- everything we're doing is anchoring around having this be as, you know, conservative a number and removing the fluctuations either side going forward.

Operator

The next question comes from the line of Patrick Colville with Scotiabank. Your line is now open.

Lory Luo -- Scotiabank -- Analyst

This is Lory again on for Patrick. Can you guys all hear me?

Dave Bernhardt -- Chief Financial Officer

Yes. Hi, Lory.

Lory Luo -- Scotiabank -- Analyst

Hi. So, I just want to ask the cloud security product. Last quarter, you had a very good traction, you mentioned. And how is this quarter? And can you share with us any update on partnership with Wiz?

Tomer Weingarten -- Chief Executive Officer

Of course. It's been, you know, great growth for us on the cloud side. And this quarter, once again, remain that same proportion of contribution for ACV, which, you know, represents, again, triple-digit growth year over year for cloud security. The Wiz partnership, I mean, we see a ton of pipeline movement from existing customers and also new shared opportunities.

All in all, it's early days with that partnership, but we've tightened up the technical integration part of it. We're kind of after phase 1. And all in all, I mean, it shows great signs of progression. Generally speaking, we're not dependent on that partnership whatsoever to continue to grow our cloud business, and we're generating more and more cloud pipeline.

With every quarter that passes, we have a dedicated campaign for cloud security. We have dedicated sales force for cloud security. So, we're also maturing our sales force to kind of expand and, you know, evolve from an endpoint company to a platform company in cloud. It's obviously the tip of the spear for us.

Operator

Thank you. The next question comes from Hamza Fodderwala with Morgan Stanley. Your line is now open.

Doug Clark -- Vice President, Investor Relations

Hamza, you may be on mute.

Hamza Fodderwala -- Morgan Stanley -- Analyst

Sorry about that. Good evening. Thanks for taking my question. Dave, just a quick one for you.

You talked about the $40 million in cost savings from the 5% workforce reduction. Is that reflected in the full year guidance? And would you be willing to sort of reaffirm the expectation for free cash flow breakeven exiting this year? Thank you.

Dave Bernhardt -- Chief Financial Officer

So, we're expecting to deliver $40 million cost savings relative to our prior plan. You know, this ensures that we remain on track to achieve our full year EBIT guidance that we provided earlier and then reiterated again today. You know, specifically, you know, from the [Inaudible] it's about $15 million in annualized savings. You know, I think about $5 million -- or sorry, say $3 million to $5 million in severance costs, there's inventory write-offs.

We're also looking at facilities and other things that we will have that will continue the savings going forward. That's all contemplated in this guidance. And then, in terms of free cash flow, you know, I think in light of the reduced, you know, top-line expectations for the year, I think the target for this year, where we said we could potentially hit it in the latter part of this year, say, Q4, I think that's probably better off thinking of that as a fiscal '25 activity just based on the lower top line.

Operator

The next question comes from the line of Joshua Tilton with Wolfe Research. Your line is now open.

Josh Tilton -- Wolfe Research -- Analyst

Hey, guys. Thanks for taking my question. Can you hear me?

Dave Bernhardt -- Chief Financial Officer

Yes.

Josh Tilton -- Wolfe Research -- Analyst

So, a lot of the feedback that I'm getting from investors is just that it seems like you guys came across pretty bullish during the quarter. And clearly, the tone is changing here on this call. So, I apologize if I missed this, but I'm just trying to understand when exactly did you notice the slowdown of the business really pick up? And maybe even like when did you guys notice the issues with the historical ARR disclosure?

Tomer Weingarten -- Chief Executive Officer

I think, generally, when we look at it, you know, we see kind of the end of the quarter is the point where we started noticing more and more pronounced consumption, you know, changes. To us, that was a point where coupled that with a couple of deals slips and, suddenly, you're looking at a very different outcome for the quarter. So, I think, generally, if you just look at our new and upsell target for the quarter, it was pretty much in line with what we expected. But when you couple that with that downsizing of consumption, then you just arrived at a very, very different result.

And to us, I mean, once again, win rates sustained, revenues still growing about 70%. I think if you take out that consumption element, I mean, things would have looked very, very different. So, that, I think, is kind of the reason where parts of the business here are really humming. And, you know, suddenly, we saw this, which, frankly, we were surprised by and we were surprised by the magnitude, and that's where we are today.

Dave Bernhardt -- Chief Financial Officer

And in terms of evaluating the ARR, I guess, rebasing restatement, you know, when we really were diving into that, it was because I was investigating why revenue was coming up as a shortfall. So, it started out, and we did a deep dive into revenue. And obviously, you know, you would assume that about a quarter of ARR goes into revenue, you know, absent some churn, absent some slower deployments, things like that, that are typical. But I still, obviously, you know, based on our Q1 results, had a shortfall.

So, to understand that, we did a deeper dive by scrubbing everything in ARR, all 10,700 customers, to evaluate why that was. And that's where we noticed that we essentially had an uplift that we expected because of renewals that had not been, you know, essentially moved out of the system because they were treated as upsell. So, I was essentially stacking an upsell on top of an existing renewal without removing the previous renewal. And this was an error in our CRM.

We fixed it. But that's where that came up, and that was obviously later on in the quarter, and, actually, post-quarter end, when we really had fully identified it and been able to scrub all the customers.

Operator

Thank you. The next question comes from the line of Gray Powell with BTIG. Your line is now open.

Gray Powell -- BTIG -- Analyst

Great. Thanks for taking the question. And I just want to make sure, can you hear me OK?

Dave Bernhardt -- Chief Financial Officer

Yes.

Gray Powell -- BTIG -- Analyst

All right, great. Thanks. This might be a tough one, but I feel like I do have to ask it. And to some extent, you may have already answered it, but I'm just going to give it a shot anyway.

So, I guess, like how should we think about -- like what was the main driver -- just you're missing the Q1 revenue guidance at 137 million. I mean, you guided on March 14th, and revenue is mostly ratable. And I know we've talked about the consumption components, but I just want to make sure that I fully understand that dynamic. And then, can you just reiterate like why this won't happen again?

Tomer Weingarten -- Chief Executive Officer

I'll try and iterate for Dave because it's going to be the third time. But, you know, basically, the ARR adjustment that we've done was realizing that both we've had consumption is kind of an ad-hoc element to our ARR, which basically drives up ARR as consumption goes up, but it drives down ARR significantly when consumption is not continuing to grow. In the past couple of years, consumption for us was always on the up and up, and it created that overstatement of ARR, so to speak, which created an expectation for revenue for us internally as well. So, when the quarter, you know, ended, the dust settled, when we started kind of figuring out, hey, why aren't we seeing that revenue? A big part of it was the ARR was reflecting consumption that was now going down.

And that impacted what we should have seen in revenue. And couple that with, again, some CRM inaccuracies that Dave mentioned as well, and that was mainly the reason for the revenue mix. Outside of that, you know, the ARR for the quarter was roughly in line with what we expected, minus, again, that consumption downsizing. So, all in all, a lot of it was cleaned and will never happen again, given that rebasing of ARR and the removal of consumption from the base.

Operator

Thank you. The next question comes from the line of Brad Zelnick with Deutsche Bank. Your line is now open.

Brad Zelnick -- Deutsche Bank -- Analyst

Great. Thank you so much. Can you guys hear me?

Tomer Weingarten -- Chief Executive Officer

We can.

Brad Zelnick -- Deutsche Bank -- Analyst

Hello? Awesome.

Dave Bernhardt -- Chief Financial Officer

Yes, Brad.

Brad Zelnick -- Deutsche Bank -- Analyst

Thank you very much. You know, the ARR statement is very unfortunate. The environment is very tough. I think you guys have said it yourselves, and you're being asked a lot of tough questions.

So, I mean, as long as we're in this forum, I'm going to add to those, which I guess for you, Tomer, most appropriately, what is your strategic end game? You know, you're facing an increasingly hostile macro and competitive end market. You're still burning a good amount of cash. I mean, it just seems like in a recession, you're in a bit of a tough spot. And you, yourself, I think, said, in too many different ways, that conditions are worsening.

So, when you think about, you know, what you envision for the business years ago coming to the public market versus where you are today and what you can see, you know, a few years out on the horizon, how do you think about the different alternatives out there? Thank you.

Tomer Weingarten -- Chief Executive Officer

Sure. Look, it's a long game. None of us expected to IPO the company and go home. I mean we're here to stay.

It's a $100 billion TAM. We've got the most cutting-edge technology in the market, and we're improving our margins to the point that next year, you know, we hope to be, you know, profitable. So, all in all, I don't see anybody else in the market making such incredible improvements on the margin front. I mean, our progression, I think, have been fairly impressive.

Obviously, this is not, you know, the best market to operate in for a growth company. And I think what you're seeing is our real-time adjustment for a full-on growth -- from a full-on growth company and into a more balanced-approach and disciplined-growth company. We want to become more efficient. What you're seeing us do the public eye is making the company more efficient.

And we're really, you know, setting the stage, I think, for efficient growth. This is not the economy to, you know, put the pedal to the metal and run fast. This is where we just want to be more efficient, you know, we want to make sure we're doing right by our customers. That's our North Star.

That's why we're here. We're going to continue to build our platform. We're, you know, adding customers at a pretty rapid clip even in this environment. So, all in all, I mean, I can't say it's a lot of fun right now.

But at the end of the day, you know, we keep on growing. We've got very promising technology. We're a leader in AI. AI in itself is going to disrupt the cybersecurity infrastructure landscape significantly in the next couple of years.

All of that translates to an opportunity. And hopefully, you know, our shareholders will see that, too.

Dave Bernhardt -- Chief Financial Officer

I think if you look at us on a three- to five-year horizon, you know, let's play this out. If we're a profitable company, still growing at a reasonable growth rates, this is a far more valuable company than it is today. And, you know, we're not relaxing on technology. We're continuing to advance that.

We've been a technological leader, and we're going to continue to do that. So, we look at this as, you know, it's still early innings in cybersecurity for us. You know, we have a long runway to execute better and to grow this company to be a more sizable company than we are today.

Operator

Thank you. Our final question comes from the line of Ray McDonough with Guggenheim. Your line is now open.

Ray McDonough -- Guggenheim Partners -- Analyst

Great. Thanks for taking the questions. Can you hear me OK?

Tomer Weingarten -- Chief Executive Officer

Yes, we can.

Ray McDonough -- Guggenheim Partners -- Analyst

Great. Maybe for you, Dave, and just to finish off, you know, you guys mentioned a couple of times that customers are rightsizing on renewals, but also mentioned that gross retention rates remained stable. And last quarter, I actually think that you mentioned they ticked up. So, just to be clear, dollar gross retention remained stable despite those comments? And I guess, I'm -- on the flip side of that, I'm trying to decipher the commentary that new and upsell was also in line with expectations and that renewals were stable.

You know, is consumption -- that consumption business that's kind of the headwind here or a lot of the headwind, is that not accounted for in the gross renewal rate? How should we think about, you know, where are the headwinds, I guess, showed up the most between renewals, expansion, and new logos?

Dave Bernhardt -- Chief Financial Officer

If you think about it on a pure NRR rate, you know, we've gone from, you know, the 130s into, you know, approximately north of 125. So, we're still seeing our customers continue to increase their spend with us year over year. We expect that to persist. We're expecting 120-plus percent, you know, kind of as a floor for us, and we see that for the foreseeable future.

In terms of, you know, how this affects GRR, our GRR has essentially been, you know, flat for past eight quarters or so. I don't think it's deviated more than a point. So, you know, one of the things that Tomer had talked about is when customers use us, they don't tend to leave us. What we -- in terms of the rightsizing of deals, you know, historically, we've seen customers that may have signed multiyear deals, and they would have stepped up, you know, employee counts for endpoint and say, hey, I'm going to buy this much minimum, and I'll step up for a better price for the following year and a better price for the following year based on volume.

We're seeing customers now just flatten that out based on the employee counts now. And then, they come back to us if -- at renewal if they're purchasing a more sizable amount. So, we're just not seeing that forward projections from our customers that we were historically seeing.

Tomer Weingarten -- Chief Executive Officer

Maybe just something, you know, to add to that and maybe that can help you kind of piece it all together. I mean, GRR is stable, and it's what we call planned GRR. And I think the one dynamic that we did see is that, traditionally, we didn't even get to the planned GRR. GRR was even lower than that.

And that is something that, you know, we started almost taking for granted. And I think in this environment, that is something that you can't take for granted anymore. But, once again, I mean, we still are, you know, one of the industry-best in GRR, definitely in NRR. And we expect that to continue.

Operator

Thank you. That concludes today's Q&A session. I would now like to pass the conference back over to Tomer for closing comments.

Tomer Weingarten -- Chief Executive Officer

Thank you, everybody, for joining. Appreciate your time.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Doug Clark -- Vice President, Investor Relations

Tomer Weingarten -- Chief Executive Officer

Dave Bernhardt -- Chief Financial Officer

Brian Essex -- JPMorgan Chase and Company -- Analyst

Lory Luo -- Scotiabank -- Analyst

Tal Liani -- Bank of America Merrill Lynch -- Analyst

Saket Kalia -- Barclays -- Analyst

Adam Tindle -- Raymond James -- Analyst

Hamza Fodderwala -- Morgan Stanley -- Analyst

Josh Tilton -- Wolfe Research -- Analyst

Gray Powell -- BTIG -- Analyst

Brad Zelnick -- Deutsche Bank -- Analyst

Ray McDonough -- Guggenheim Partners -- Analyst

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