Operator: Your next question comes from the line of Fatima Boolani from Citi.
Fatima Boolani: Corey, a question. I wanted to read the ARR or outlook and maybe ask you this question from a different angle. So when I stack up all of the goodness that you’re seeing with respect to the package momentum, the larger deal sizes, the ASP increases commensurate with that. Why would we see a deceleration and frankly, a lot in out of your net new ARR? If you can give us sort of the flip side of the coin on what are some of the conservative elements that you’re baking into your outlook here? Perhaps, there is some cannibalization and maybe some compression of existing spend. I just really like to better understand the other side of the coin on that implied conservatism, even though things are going well and you’re frankly entering year 2 of a much stronger, better equipped and enabled sales force in selling these packages.
Corey Thomas: No, it’s a very fair and good question. So I think the first thing I would just say is that we do expect the market to be noisy. And so overall — so the first thing you just say is that, look, if we actually — while Q4 was consistent and stable, we saw upward momentum in deals getting funded, and that was very healthy. Look, if the market stays very healthy, then like we have room. That’s a good thing, and we actually have upside there. That’s not a problem. It would be inappropriate from my perspective to actually assume that all market noisiness and challenges are behind. That’s just not something that I’m going to do what we’re going to do from a fundamental planning perspective. But if it is, that’s sort of like — that’s very consistent.
I would just say that’s probably one of the biggest factors that I will consider. And then to your other point, if things stay — I would just say, like, if I look at the positive signals and those stay consistent, like our conversion rates are great. We’re seeing some of the best conversion rates we’ve actually seen. I don’t assume that record high conversion rates stay record high. I’ll just be explicit about that, even though they’ve been record high for a couple of quarters. That’s great. If you look at what we’re doing from a distribution and building pipeline perspective, as we’ve actually sort of like come back from the RIF [ph], we’re really investing heavily in our partner ecosystem. I’ll just say that our assumption is that that turns out later this year and into early next year, but that actually may turn on sooner, and that’s actually a great sort of like thing that actually happens there.
And so if the positive things that we actually see in the business and outlook continue, then we’ll definitely, to your point, sort of be able to perform above. We do not factor that into sort of like the baseline exceptions to just say in a noisy market that things are going to actually be all good. I think that’s more of just the approach that we take. What we are committed to on the flip side, and this is something that we actually instituted at the end of last year coming our restructuring is we’re committed to actually delivering strong free cash flow growth and setting ourselves up to actually exceed expectations somewhere along the line in the medium-term setup. And that is sort of like a commitment that we’re going to make is like, hey, if the market is noisy, then we actually have margin expansion.
But if we’ve seen the health and consistency that we actually saw coming out of last year and that continued stably throughout this year and it goes up, then we’ll feel very good about things, and we’ll be going stronger.
Tim Adams: Corey, I would just add, we’re seeing strong demand from CISOs because they have a backlog of projects. And the CFOs have gotten in the way a little bit to slow things down to release.
Corey Thomas: The funding of the projects that are in the backlog — CISOs have a lot of stuff that they want to do. We actually saw that those get funded nicely sort of like coming out of last year. And I would love to see in our aspirations to see those keeping funded. We don’t have a demand problem. We do have like our customers have to continue to fund security, and the pace of that funding is something that we keep an eye on.
Operator: Your next question comes from the line of Gray Powell from BTIG.
Gray Powell: Yes. So that last answer was really thorough, but I did just have like one follow-up to Fatima and Adam’s question. So if I just look at like net new ARR trends, you bounced back to positive territory in Q3. Obviously, we had the Q4 results. The 2024 guidance implies that net new ARR additions is down. I’m just curious, like in terms of linearity, at some point, do you think that we get back into positive net add growth in 2024? I guess that’s something that could happen in the second half of the year, or is that really more of a 2025 event?
Corey Thomas: Well, I think similar to the last question, I think you’re asking, a, as you know more and if the market is stable and good, do you have the chance to grow higher. I say, yes. Look, we have the capacity to actually grow faster. That is not a framework that we’re going to start out with. The framework that we’re starting out with is basically the free cash flow framework. First is actually taking a definitive view that the market is completely stable. If that actually happens, and without doubt, we’ll actually grow — we’ll grow faster.
Gray Powell: Okay. Really helpful. A lot of color there. I appreciate that. And then last one on my side, just did the risk from August have any outsized impact on productivity or conversion rates or anything in Q4? Or was Q4 pretty much exactly like you expected it to be?
Corey Thomas: Q4 was pretty much exactly — I would say even Q4 was slightly better than we expected. I mean like we saw — again, we saw incredibly strong conversion rates. We saw customers funding projects. It was not budget flush to be clear. There was not like a lot of net new things like projects that customers have been waiting on spending on they actually funded those projects. Our sales team executed extraordinarily well. We liked a lot of what we saw in Q4, and we liked a lot of the momentum that we actually have here in this year.
Operator: Your next question comes from the line of Shrenik Kothari from Robert Baird.
Shrenik Kothari: Yes. So Corey, you mentioned about, of course, deepening investments in the partner ecosystem. And you also highlighted leverage marketplaces like AWS. So just as a follow-up to an earlier question about the new customer growth, looks like CSPM is a percent of your strategy. Can you talk about the traction with the AWS Marketplace and how much potential do you see that as we already offer products that are integrated into the AWS ecosystem, aimed at reducing the cloud attack surfaces and mitigating cloud growth. So yes, any color would be helpful here.
Corey Thomas: Yes, I don’t have the numbers off we probably won’t break them down. I would just say we saw good growth in AWS Marketplace traction in sales last year. We are expecting, I would just say that growth to continue. This is part of our distribution strategy in engine. And I would just say it’s continued momentum, and we have upside there, but we’ve seen healthy growth in demand through that marketplace and through our AWS partnership. We are a strategic partner for AWS. They’ve been a good partner. It’s been beneficial on the sales and to the customer side, and it’s something that we and they are investing more into.
Operator: Your next question comes from the line of Alex Henderson from Needham & Company.
Alex Henderson: A couple of comments made on the call just seemed a little difficult to analyze. And you said you plan to gain share but I don’t really know what you think the market growth rate is that you’re gaining share against. So I was wondering if you could just give us some sort of parse on what the rate of the market growth is both in the near term and say, intermediate time frame. And in that context, you do talk a lot about the new customer adds, and it seems to me that you’re still shedding some of the smaller customers and shifting mix to the larger customers. So it’s somewhat of a bimodal number. If you could give us a little bit more quantification on what the larger customer growth rates look like versus the fallout at the bottom of the pie. That would be great.
