Corey Thomas: Yes. So the way that we’ve seen the market so far, keep in mind, when we were starting cloud, we got direct access. And so we have a very healthy cloud business and a growing cloud business. We have not obviously explicit is that we are accelerating our investment in the cloud because what we’ve actually found is that the early adopters of cloud security technologies were cloud security specialist teams. They were special teams that were not the main security teams that get nothing but cloud security, and they were very focused on that. And we’ve been participating in that market. And you see people like the Wizes of the world doing quite well. So what we actually see as we go out, though, if you think about like the — when we think about the mainstream enterprise, think about that Russell 3000 and their property equivalent and all those other companies out there, those are folks that are not going to have like 5 to 10 people just for cloud security.
They actually have to actually have security as part of their core vending. It has to be integrated in. It still has to be highly functional, has the accessible, easy to use, it has to bit of keep results. But it has to be in the context of their overall security operations program. Lots of those customers have now adopted cloud security. So we look at cloud security is a massively untapped market. A similar way, Rob, the way to think about it is that when we went into the SIEM market, originally, people are just like, why that market is on around forever, and it’s a little bit tapped and we said, no, no, most SIEMs are only designed for very complex, large, complex enterprises. Most mainstream enterprises don’t have a functional SIEM because they have not been designed for that ease of use, that mass-market efficacy and efficiency.
We see the same dynamics in cloud. We view that as a largely untapped market. There’s things that we actually are doing right now and investing in to actually allow very complicated things about how you assess risk environment, how do you do detection and response in cloud environments to actually be part of a mainstream security operations and risk program. But that’s the core of what we’re actually looking at when we talk about sort of that mainstream enterprise. It’s the large majority of companies that have not purchased cloud security and are not going to do it at the traditional price tags of $0.5 million plus for those types of solutions. And so that’s where we see the big opportunity playing out over the next few years. And we think we’re all set up for that.
Again, we’re seeing early adoption of that. We’re well set up for that. And again, I think we have the opportunity to make progress this year around it. To your other question, which I think could go into, which is about the customer count, what I would just say is lots of the customer count, I think we have plenty of space to grow customer count, but I actually want to grow it strategically. I think what I’ve shared before was that our customer count volume from years past had a lot of transactional sales in it. The thing I like about 11,000 customers is we made a much more strategic base that allows us to truly achieve our TAM and allows us to truly actually get material ARR per customer, and we expect that to continue to increase. We will grow the customer base.
I’ll just say listen, sales and sales is the fact that we’re having a lot of success with the consolidation efforts. And so what it does mean is that your average sales rep needs fewer customers in order to actually hit ARR targets. Even though the sales productivity and the ARR per sales reps, we expect to continue to improve this year. Part of how we actually do that, Rob, to your point is we have a big focus on that partner ecosystem. I think you and I have talked about in the past are critical. You’ve asked a lot of questions about that. We think that we are ready and equipped. We have a compelling portfolio. I would say that that is still the — we’re seeing lots of momentum. I would say, still an upside drop for the year as we’re onboarding partners.
We’re focusing on a smaller set of partners that actually have massive distribution capabilities, and we’re tuning that in. So I think I got both of your questions there.
Operator: Your next question comes from the line of Gregg Moskowitz from Mizuho.
Unidentified Analyst: This is Mike [ph] on for Gregg. And perhaps a follow-up to Rob. You mentioned last quarter that following the restructuring, you really zeroed in — you really zeroed in on your installed base, right? Did that focus continue with the same intensity this quarter? Or have you recalibrated back to your sort of traditional approach with respect to new logo and expansion business?
Corey Thomas: Well, I would say, look, we are in noisy markets. It’s actually just, I think, more straightforward to actually tighten and focusing on your installed base. I would just say that’s generally achieving because you have existing relationships, you have existing contracts, you have existing vehicles. I don’t think that bias has actually changed. What I would say to the question in the previous question that Rob had is we are looking to expand the installed base. But because our ASPs are growing and the package consolidation is successful, instead of trying to actually force it, we’re actually really being very thoughtful about our distribution and how we drive distribution and partnerships. And so we have a strategy in the near term to actually — again, I want to be very explicit — our goal is to actually take share and drive growth and be a very strong grower in the medium term.
Our investments this year — if you ask, we’re opening our investments this year, we’re putting more investments into the partnership and distribution and growing that investment at a higher rate than the growth in our direct sales force. And that’s a very intentional thing because we actually think that that gives us scale of net new customer adds but it also allows us to actually service more customers who actually need more care.
Operator: Your next question comes from the line of Adam Tindle from Raymond James.
Adam Tindle: Okay. Tim, I just wanted to start out with the fiscal ’24 guidance, which is really impressive on profitability. If I look at it, revenue is going to be increasing about $75 million year-over-year and EBIT up over $50 million year-over-year. So call it a 75% or so contribution margin on that. If you did that same analysis during fiscal ’23, I think you’d come up with a similar contribution margin for drop-through of revenue to EBIT. So I guess the question would be, because fiscal ’23 had risk and cost control and stuff like that, how you thought about the buildup to drive similar leverage, operating leverage in fiscal ’24 as fiscal ’23 and the logistics behind it. And I’ve got a follow-up for Corey.
Tim Adams: Yes, Adam, we try to be very thoughtful when we go into the planning session as we move into 2024. And a lot of that stems from the actions that we took 6 months ago with the restructuring. And we really tried to be very deliberate at a department level where we’re going to make our investments. Corey mentioned a little bit early in the prepared remarks, about some of this investment in innovation. So I would expect R&D as we go into next year to tick up a little bit as a percentage of revenue. But when we look across the base, I think we see nice leverage across the board in sales and marketing and G&A, and we want to make sure we’re investing in the appropriate areas. And I think we can do all of that based on the way we built the plan for this year and still double that free cash flow to at least $160 million as we go into 2024.
Adam Tindle: Okay. And quickly, Corey, this obvious improved profitability is impressive, but I wonder how you would reflect on the impact on growth. You added $90 million of net new ARR this year. It looks like guidance implies around $85 million net new ARR next year, so flat to slightly down. What would it take to maybe push to a new level of net new ARR a step function above this level on growth? And do you think you could do so while holding this level of profitability?
Corey Thomas: So one, it’s a very good question. What I would say is that we have plenty of growth levers in the business, whether you look at our distribution partners or whether you look at the new products and capabilities that we actually — plan to actually bring online. When you look at the fact when we see the same market momentum and consistency that was actually in Q4 and that you see a healthier market, not just stable, but it gets even healthier. So we have, I would just say, growth drivers and catalysts in our own business. There’s market ones. There’s things that we’re doing in our partner distribution ecosystem. So we have a number of catalysts and growth drivers. Well, I’ll just say is from a guidance perspective, we just don’t think that’s material to actually put into our baseline guidance assumptions.
So we’re always going to pursue — look at pursuing higher growth. But in our model, what we’re committed to is actually delivering very strong free cash flow growth, of which I am thrilled and my focus is for that to come from higher ARR growth. But if the market is tighter or tougher, then that can just easily come from margin expansion, which Tim and our finance team has a clear room to do.
