Pleased to welcome. It's a stock I've recently upgraded, so I'm always happy. Well, let's say it the other way. It's awkward when I just downgrade and host companies. It's better to upgrade and then host companies. I'm very happy to host Tomer and Sonalee to speak about SentinelOne. I want to start before we do, like I do in any other session, I want to start with 30 seconds of our views. The space is great. When you think about cybersecurity and you think about endpoint as a domain, not as a solution, as a domain, and where you can grow from an endpoint, there are really only two companies at the high end of technology, and it's CrowdStrike and SentinelOne, and the difference is scale.
At the end of the day, what you're seeing today, what we've seen last quarter, and that's the reason why we upgraded, is because you see the signs of growth. You see that the company is translating all these efforts to go into new areas, into numbers. It's tangible now, and margins are going to grow also. This is why we thought the timing is right, and I took advantage of the fact the stock went down, and I said today is a great entry point because in my view, I hate to say I'm sure because I'm never sure, but in my view, as we progress through the year, you will see more growth and more margins. At the end of the day, if the space is good, if growth is accelerating, and if margins are going up, that's the reason to buy stocks.
That's kind of the introduction I would like to give on SentinelOne. Tomer, thank you very much for joining us.
Absolutely. We appreciate the upgrade and the kind words. Thank you.
Thank you. I want to step back and understand the drivers for growth. What are the areas that are successful? We've seen growth in multiple areas in multiple ways. Take the time to kind of take us through the story, the growth story of the company. What are the areas you've invested in and you are currently seeing the progress, and what are the areas that you're still working on and focusing on?
Look, I mean, AI obviously is something that is driving a ton of customer interest. With AI, I think what's really interesting is that there is no good idea on how you adopt AI securely. Customers are left with a myriad of different options on how they can think about it. The reality is that AI needs to run someplace. It needs a compute surface, which has an operating system, and typically is either a device, something that you use, or a workload in the cloud. In both of these situations, the only control in all of cybersecurity that is designed to produce visibility, enough visibility to see what AI is doing, is these things that we call EDR solutions or endpoint protection solutions, whether on the endpoint or in the cloud or on the workload.
In some way that I think none of us can claim to have predicted over the past decade, AI is driving complete tailwinds for endpoint security products, knowing that when you think about the new wave of agents that are going to be deployed in the enterprise, already being deployed in the enterprise, you need something alongside these agents that verifies what they're doing in any given moment. That is not identity protection. That is not network security. I'm not saying these are not needed, but they cover a very different facet of security. They allow for access management, but once an agent authenticated, identity security pretty much finished the job, and there's nothing else out there that can actually give you the view as to what is happening, how do you monitor it, and then where does that data go? Where does it go?
It goes into something that should serve as a real-time data lake, which is another capability that we've, I think, innovated into the market three years ago. You're kind of seeing two of the most critical parts of our platform naturally be in just incredible demand today. That is driving a lot of the pipeline, a lot of the growth that we're seeing. On top of that, we also made an acquisition in the form of Prompt Security that is designed specifically to secure AI. We are now sitting in three critical junctures, all being driven by the massive influx in AI usage, and all of those are providing for us, for complete platform adoption.
Now you're not just talking about the endpoint security or the workload security aspect, but you're talking about a broad-based platform that you can consume whichever part you want in your AI journey. The AI journey differs, the pace differs, what you're deploying differs, the type of frontier AI that you're deploying is different. The common theme is that you have to have broad-based security and visibility that starts with endpoint protection and workload protection, or more broadly, runtime protection.
And then ends with data visibility and actioning all that stuff that you're seeing. It's really a tremendous tailwind for all of cybersecurity, but I think more specifically, and just given your intro, for vendors that can provide modern endpoint and workload security, and there's two of those.
Yeah.
you mentioned. We're just seeing, I think, a lot of pull from the market, from our customer base. Now it's incumbent upon us, of course, to deliver that and to make sure the customers have the most streamlined way to procure these capabilities from us.
Another background question is the positioning of the company. We have Microsoft offering endpoints. We have even Palo Alto with Cortex. We have CrowdStrike, of course, a direct competitor. How do you articulate the addressable market of SentinelOne? What is the niche, or what is the area of the market you're going after?
Look, we've talked about the platform, and when we say platform, that would probably be true for all three other vendors that you mentioned. In total, there's four platforms in this market. It's us, and it's the folks that you mentioned. You got endpoint security as one leg, you got SIEM and data as another leg, you got cloud workloads and such as the third leg, and the fourth leg is now becoming AI. Endpoint, data, cloud, AI, that is the totality of a $100 billion market opportunity with no single winner in sight. That never happened in cybersecurity, it's not happening now in cybersecurity, and it will not happen in cybersecurity.
When we think about that broad-based opportunity, a true platform is the only play that can actually capture it, and that's where you're seeing all four companies succeeding in different scales, to your point.
Yeah.
That is the opportunity we're going after, much like the others. Our customer base is similar to all of the others. We secure 25%, almost 30% of Fortune 500s. People think we're an SMB company. No, we're also an SMB company. Being an SMB company in this market, a mid-market company, is not a disadvantage. The long tail of the $100 billion market sits with the mid-market. It doesn't sit with the Fortune 500 alone. Our ability to sell to every segment in the market is a strength. Our ability to give a fully self-served platform that's intuitive to use, easy to deploy, doesn't require protracted services, that gives us a lot of strength. I think that to us, every account in the street is something that we feel we're applicable to. Our go-to-market motion, I think is not as mature as some of our competitors.
Yeah.
Our motion, in general, is very different given that some of these companies have amassed 70,000, 100,000 accounts. Most of their growth is coming through upsell and cross-sell to their existing account bases. We got about 15,000 customers. Not a small customer base, but at the same time, 50%, and that's still true from pretty much every quarter for us, the bookings come from new logo acquisition, which is a motion that the others have largely kind of stopped pursuing or just don't really focus on pursuing. We have the same type of market opportunity. We have a different scale. We have a different challenge. We're going after new logos. They're mostly defending. It's just a different type of a ballgame.
Yeah.
In essence, technology is, to me, the biggest determining factor, and we got the best technology in the market when you think about endpoint security and when you think about workload security. We can talk about some of the attacks that we're seeing right now that also point to a very specific way of deploying endpoint security, and another one that we've talked about for many, many years, which is autonomous security. The last couple of years, people have opened up to the notion of, okay, things can happen in an autonomous way. When we said autonomous security five years ago, many people raised the eyebrow and said, "Hmm.
Maybe yes, maybe not." Today, if you're seeing this onslaught of supply chain attacks, and when you understand that AI agents are becoming the attack surface, and they are being abused by their automated mechanism of work, they import libraries automatically. These libraries can be poisoned and can be used to trick the AI agent to take all your credentials and passwords and send them out in the course of 20 milliseconds. You understand that most of what you have in cybersecurity today is defunct, not designed to understand when something goes wrong, not designed to do it in real time, and not designed to stop it while our EDR can. We stopped all of these supply chain attacks in the past 30, 60 days that we've seen that hit many Fortune 100 companies. Frontier labs, I think OpenAI disclosed publicly that they were affected by two of those.
Not our customers.
Some other Frontier Labs are our customers, not them. It's also about what technology you can deploy, when can you deploy it. Not all EDRs were created equal. I think that if we put direct competition aside, there's still 50% of this market that's in the hand of incumbents. A lot of the conversations that we're hearing right now are about customers, even our customers, that still have footprints with incumbents, are now waking up and saying, "Okay, now is the time to move, and we need to move fast because a non-modern EDR would not stand any shot. Obviously, an autonomous EDR is something that can really help us, especially if we're deploying more and more of these AI agents." Now, the notion of an AI agent is also expanding. It's not this code-based thing that is not applicable. Claude is an AI agent.
If you have Claude installed on your desktop, you have a tab that's called Claude Cowork, that's a fully fledged autonomous agent that can do stuff for you, sometimes doing stuff for you without you even knowing. That growing recognition for a customer that they need visibility into it, that they need better regulation, that they need governance, is driving EDR sales. It's driving Prompt Security, generative AI, DLP protection. It is driving more data that needs to go someplace. All of those are the exact same, I think, areas that we've been focused on and we're now even more focused on. We moved away a little bit. People have been asking us throughout the day and through earnings, "Okay, so you said you're reinvesting and you're putting more stuff in the focus areas. What are those and what are you moving from?" These are the areas.
All the other small adjacencies in cybersecurity, exposure management here and there, and identity and some others, let's let other people deal with that. To me, we have such tremendous opportunity in the core of cybersecurity and such adequate technology to deal with it, that if we're not doing that, if we're not putting everything we can into that opportunity, which is big in itself, then we're just kind of wasting our time or not yielding as much, which is part of what Sonalee and I decided to do.
Yeah.
It's why I took the job.
Last question before I speak with Sonalee. Last year we spoke about a lot of initiatives, but the results were not as good. This quarter, when I look at below the surface, above the surface, everywhere I looked at your numbers, things were clicking. What changed? What changed in the last year that now, and I don't care what the share price did because that's just different market, kind of different issue. I care more about the numbers. The numbers were strong across the board. The question is, what changed in the last year and how sustainable is the strength that you're seeing today in the numbers?
Yeah, I mean, a lot changed. I think we took all of last year to basically redo a lot of parts of our business. I think we talked a lot about go-to-market in the previous earnings call last year, maybe more than I ever wanted to talk about go-to-market. It was needed. We needed to adjust. We needed more rigor. We needed a better sales force, needed better talent. We were saying, we want to move up market. We weren't as much of an upmarket company in the past couple of years. Now look at our ACV per customer. It's shooting up in a pretty significant way. Our logo acquisition in the upper end of the market is much, much better. That starts to create a dynamic where you're becoming more effective.
If ACV per customer is up, if the percentage of sales and marketing for revenue is starting to look much more like a grown-up company, I think that just drives the right type of secular tailwind that we want to see across our business. Making sure that we can create the customer experience that we need. If we're moving up market, if we're talking to different customers we haven't talked to before, we want to make sure that we do it in the best way possible to create the outcome that we set out to create. All of that, it doesn't change overnight. I think it's something that we started seeing evidence of internally, throughout last year. You're right, it wasn't fully reflected in the number because there were still a lot of moving parts. We're rebuilding lots of parts of our executive team.
We have pretty much a fresh, ready-to-roll executive team for a couple of quarters now, and these are amazing people. Amazing people that we just didn't have, that same caliber in the past. All of these things I think are now things that are now driving just bigger, better rigor across the business. Technology was always great. We always had phenomenal technology. I think throughout the years, that was the one thing that we didn't manage to mess up.
Yeah.
I'm kidding, of course. I think now it's aligning with just better operational rigor, better go to market. I'm not declaring victory, by the way.
Yeah. I understand.
There is still much more work to do, but it is looking better.
Sonalee, I'm going to start with a tough question. You're the third CFO in a short period of time. Tell us about the infrastructure you have seen from a numbers management point of view. What are you working on? What are you focusing on? What do you need to do in order to have consistent reporting and not to have the hiccups we had in the past?
Yeah, that is a tough question. You're the first one to ask me that particular question. Firstly, just with respect to the infrastructure and the team I inherited, kudos to my predecessor. I inherited an extremely strong finance bench. One of them is sitting right there, who has made my life amazing in the last couple of months as I prepped for earnings, our head of IR. In terms of bench strength infrastructure, I don't worry about things like the control environment.
Yeah.
That is just not even on my radar. I actually feel like, or it is on my radar, but I don't need to worry about it. I actually feel like I have been able to go really deep in some of the operational things that are big priorities for my boss here really early on because the infrastructure is so good. In terms of priorities and where I'm focused. First and foremost, I feel like it's incumbent on me in this seat to ensure that we are allocating our capital and investing in our highest conviction opportunities. Tomer talked about some of those. One of the things he didn't say about one of the factors of our success in the last year is we are a true platform, and we are now truly diversified. We are not just an endpoint company.
We now have 50% of our ARR coming from outside of endpoint, and there are some real growth drivers within that. We talked about AI security and Prompt. Prompt has basically doubled ARR for two consecutive quarters and nearly quadrupled since we acquired it just a couple of quarters ago. That's phenomenal growth. It's my job to ensure that we feed that baby so it can grow.
Yeah.
In my first week, I asked for a meeting with the GM of Prompt, and I asked him what he needed from me in order to ensure that the target that he has for the full year is actually 20% or 25% higher. Why can't that be a $100 million business in a couple of years? These are the kind of things I'm focused on, which is great because this category has a lot of opportunity. Tomer talked about the $100 billion TAM. AI security data, where we have a very strong presence. Again, we saw that accelerate this quarter. Cloud, again, accelerating. I think my biggest priority, and what I really feel like I need to get right, is ensuring we make those investments.
Yeah.
Secondly, operational excellence and rigor. There are certain things that when I arrived, when I looked at our sales and marketing spend as a percentage of revenue, it was really off benchmark. Now we've made some progress this quarter. Hopefully, you saw 39% as a percentage of revenue as opposed to 47% a year ago. There is more to do there, and I think actually some small changes that we've even made on some of our marketing channels, and the efficacy of our marketing spend has already started to yield results. You'll see continued progress there as the year rolls on. Thirdly, I think net retention is a big one for me. Our platform strategy really helps with that. This quarter, it was a number I was extremely focused on. We saw net retention for our customers spending $100,000 or more with us going above $110,000.
That was a significant improvement. As I look ahead, and I think about what's going to drive our growth, I think we will continue to see improvements in that net retention number. Those are near-term priorities. In terms of the cadence around earnings and.
Yeah.
getting back into this beat and raise cadence, of course, that is what we want. Of course, that is discipline that I will hopefully bring. Some of you in this room have known me for a long time. Hopefully, I have a track record in doing that. I think one of the things that I have become really involved in is the weekly forecast meeting. I work very closely with our sales ops team. I think there are investments that we are going to make there. I think the CFO office will be a lot closer to sales ops than perhaps in the past.
Yeah.
Other investments we're making on the customer success side around our churn and downgrade. That's, again, an area that I think has real scope to improve with some small changes. Those are, again, priorities right now. In terms of the margin side of the business, I see already a very clear multi-quarter sequential margin improvement story that will translate into a multi-year margin improvement story because of the industry-leading gross margins that we have today and the operating leverage that's inherent in this great business as we continue to grow 20%.
Margin. In the past, a year ago, I remember that I compared your margin to CrowdStrike that were the same level, and I showed big difference. They were higher margin. The question is structure. What are the levers in margin? What are the things that you can improve with margins over time, is it just about revenue growth and leverage on revenue growth, or is there anything that you can structurally change within the expense level?
Yeah. On the gross margin side.
Yeah.
There might be some optimization, but I think so it's really in the other line items, and that roll up to operating margin. I think sales and marketing, I'm going to come back to that. We're not stopping at 39%, right? I think if you look at not just CrowdStrike, but if you look at other peers and software companies that are $1 billion+ , we're going to be ARR significantly above $1 billion. We are outside the benchmark, and I do not see any structural reason. We see no structural reason, and we are fully aligned on the efficiency measures that we're taking that we actually feel are going to drive not just better outcomes and unit economics, but we think it's actually going to drive better revenue growth as well.
Yeah.
I think that there were layers of pockets of inefficiency that were actually dragging the whole business down. I've ran this playbook at other places that I've worked as well, and when you eliminate those bottom-producing sellers, you create way better books and territories for your great sellers to go and attain and over-attain. Like, we have no problem incentivizing our sellers to go and over-attain. We want them to, and we think we're creating the conditions for that to happen. If you were to ask me, is there any structural reason why you should not have best-in-class operating margins? Absolutely not.
Yeah.
We did 700 basis points year-over-year this year. We will have significant operating margin expansion next year. We also believe really strongly in investing alongside those operating margin improvements.
Yeah.
While we have these incredible opportunities, shame on us if we squander the opportunity to go and fuel the growth. It's going to be balanced.
Yeah.
Got it.
I would say, just to add to that, and we're fully aligned, we were expanding margin pretty fast. 700 basis points.
Yeah.
Year- after- year almost. Just look at where we're going to exit this year, and I think that's going to give you a good sign as to, hey, we're starting to look pretty close to everybody else. You're right that at that same scale, I think it's just a different opportunity and a different interest environment, and hard to compare.
Yeah.
Now that things are starting to be more aligned, I think you're going to see us kind of operate at those same levels pretty quickly.
I tell you what caught my eyes this time, this cycle. I stopped covering you for about six months, we had an analyst, then I came back to cover you about two months ago, and when you reported the numbers before that when we were preparing, I looked back at your growth and I said, "This company had so many issues, the sales and some products, and still you grew revenues over 20%, consistently.
That's the way we look at it, too.
Right. The question I have is, do you think you can accelerate growth? What's your goal? Achievable goal. Accelerate growth, maintain growth? 20% is pretty darn good in this kind of market.
I don't think there's a day that passes that we don't think about how we accelerate growth.
Yep.
Can we do it? Are we committing to do it? I think that's not for us to say at this point, but it is something that by far, we have as a target internally for ourselves to figure out how we do.
Yeah.
I think there's plenty of levers in the business to achieve that, while recognizing that what you call, you've had so many issues, it's also flying a very fast plane and changing its part at the same time. Those are the issues that you see.
Yeah.
Look, this has nothing to do with somebody. I would take the full responsibility for all of it. These are needed changes. We're at the scale that as a public company, there is no way for you to hide some of these things.
Yeah.
Ideally, we would want to maybe do some of these things in a private setting, but it doesn't make them less of an imperative to do. My stance is, I'd rather do it. I don't care if it looks like an issue or doesn't look like an issue. It's the right thing to do. It's what's serving the business for the long term, and I'm going to keep on doing that, to the dismay of sometimes even people that work at SentinelOne, to the dismay of my loss of hair. To the dismay of all of it, I'm going to keep on taking the right decisions for the long term. I think we're seeing less and less of that, and we're becoming better and better. I think those are the exact same things that then funnel into accelerated growth.
Yeah.
That's something that we absolutely want to see. We believe the opportunity for SentinelOne is bigger than even that 20%. There are things that still need to line up for us to sit on this stage or other stages and come and say, "Hey, we're now guiding up. We're accelerating.
I agree.
It looks tremendous. By the way, we've had some acceleration even in Q1.
Yeah.
From Q4, that was nice. We've had massive improvement in Net New ARR, 55% year-over-year, non-trivial by any degree. The components are there. There's still a lot of things that we need to align, but I think it's on both of ours radar, for sure.
In the interest of time, I'll just go maybe to my last question, which is something we spoke about, but I want to understand it. We speak a lot about AI, but there is a difference between when I talk to cybersecurity companies, there is a real concern over AI, et cetera. When I speak with software companies, deployment of agentic AI is not giant. It's not big. It's starting. We talk about it, but it's relatively a small piece of revenues. Why is it the driver now in cyber? Meaning, is this just a potential opportunity in the future, or do you see already now enterprises, customers deploying, not just thinking about, but rather deploying AI cyber solutions?
Yeah. No, we're definitely seeing them deploy. I think that you're going to have to have the cybersecurity controls to deploy AI. Cybersecurity comes first. I'm glad that that's actually happening. I think that Mythos and Glasswing, beyond the tangible specific, like vulnerability discovery and all that stuff, I think the awareness that you really have to have a handle on what's happening before you just start deploying things, that awareness is there. I think we're starting to see cybersecurity become a prerequisite for AI adoption. You're still seeing AI adoption that's uncontrolled. You're still seeing a lot of AI in the enterprise right now, maybe not agents, but AI usage that is completely unregulated. Not every one of our customers have Prompt Security. I can tell you that they have nothing else. Same is true for many other customers across the cybersecurity landscape.
The need is there, the deployment is starting. I think the understanding that a lot of these agents are not something that is easily controlled is both delaying the pace and making cybersecurity a much-needed ingredient. It's going to take a little bit of time. I think these agents are just not as accurate as we want them to be. We're great partners of Anthropic and OpenAI and Google across all these facets. Lots of promise, lots of talk, lots of examples, but true production-grade type of capabilities, I'll be weary of deploying at scale at this point. I think the more that proves to be a tried and tested motion, I think your SaaS companies might have a different aspect at that point. Cybersecurity has to be infused in it, otherwise you lose control very quickly, and you have no idea what's happening.
That is, I think, the most critical thing that our customers are worried about. When I have conversations with large customers, they're not asking about EDR, they're not asking about a capability, they're asking about security strategy. They're asking how to deal with everything given the portfolio that you have.
Great. Tomer, Sonalee , thank you very much.
Absolutely. Thank you for having me.
Thank you, Tom.
Thank you.
Appreciate it.
For joining us. My name's Amy Liu, I'm the TMT specialist at BofA. I'm stepping in for Ruplu here to host the session. Thank you everyone for coming in. We really want to thank Revathi and Michael for joining us today. This is really a great time to be talking about Flex. We definitely want to talk a little bit about the spins. I'll hop right into it so we can save some time at the end for questions. Revathi, you really created a lot of value for shareholders in the past with the Nextracker spinoff. Can you talk a little bit about why now is the right time to be doing this spin, and what will it let you do that you could not do prior as a combined company?
Yeah. I'd say first is, in the last seven years, if you think about Flex, where we're a pure-play contract manufacturing company, we started building out this infrastructure to put compute power and cooling together well before the ChatGPT moment. By the time that came around, compute got more power-intensive, the technology of this thermal architecture became a big deal, and then growth was explosive. Right? As all those things started to come together, we ended up with this company that has more of a product architecture with all the technology shifts going on, and then the compute scaling was happening at the same time. It felt like we were putting all our money into the data center utilities build-out. Capital allocation works where it's a zero-sum game. The best returns get all the money, and we run our portfolio that way.
At the same time, we had tremendous opportunities in our healthcare and our industrial business, and we wanted to invest in those, too. We reached a point where there was enough scale in both businesses to say it needs different management attention. It needs different capital allocation framework, let's go spin that out to make sure both businesses can be successful longer term. That was the thinking behind why now. You get out of that Flex, which is going to be a pretty significant sized contract manufacturing company with some great end markets that we want to really double down and invest in. Out of SpinCo, you get something of an industrial electrical player in one of the largest electrical transformation that is happening today in the space. You get best of both worlds.
The thinking was, let's go do it, and why not now? Timing seemed great.
Yeah. Great. We want to dig a little bit into both of these businesses. Let's start with the SpinCo. Can you talk a little bit about what the SpinCo provides in terms of competitive differentiation, and then the addressable market and how fast that market's growing?
Yeah. What's cool about the SpinCo is sometimes people are confused that we put everything that happens in an AI infrastructure build-out into SpinCo. That's not what we did. We have been thinking about SpinCo in terms of thermal architecture. The technology is all about what's going to drive heat, how do you cool that, and how do you bring the best technology to put that together? Take that all the way out from data centers to the grid, because the largest electrical transformation driven by data centers is also going to happen in the grid. That was the framework and the thinking from a technology perspective. SpinCo has our cloud business, our cooling business, our cloud business being rack integration, and then cooling business, and then our power business, both embedded power and distributed power. That's what SpinCo has.
We have said $6.7 billion last year. It's going to grow at 70% at the midpoint this year, and then at 80% next year. That's what's in that SpinCo business. It's really driven by the AI infrastructure investment, and that's going to drive electrical technology transformation, then that'll move forward into the grid itself. That's what's there in that business.
Yeah. You mentioned you guys guided really strong, 70% this fiscal year, 80% next fiscal year. Can we talk a little about fiscal year 2029? What is your visibility there? A lot of investors are really focused on whether there will be an AI slowdown in demand. What is the visibility you have there?
What I'll start with is to say, we've said 2027 is 90% booked out, 2028 is 70% booked out, because we have flow-through business also that kind of flows through in that 70% booked out. Haven't given 2029 guidance. We'll have an Investor Day here in fall, where both businesses will give more longer-term guidance than what we have provided so far. I'd tell you, if you think about CapEx cycles and investment today, there's a lot of legwork that needs to happen to make those investments come true. We're power constrained. When you're thinking about 2029, those investments are getting made, thinking about how long it takes to get power, 12- 18 months. I'm not going to give you new numbers for 2029 because I've already given you some fantastic numbers for the next two years.
The way you should think about SpinCo in the three-to-five-year cycle is, what SpinCo will come out looking like in the next three to five years is right now, heavy data center business, AI infrastructure build-out, strong utility business in terms of grid build-out. Really I would say think of it in the mid-cycle, long cycle play right now. We will continue to invest, as we have done in the last five years in building this out, into the services business, which we don't have enough of a portfolio today. We'll invest in more product flow through business that'll see an impact from 800 VDC solid state transformation. SpinCo.
coming out of this in the next three to five years, hopefully will look more like a balanced portfolio in terms of short cycle, mid-cycle, long cycle, no cycle business, and more electrical play, more than anything else. That's the best I can give you at this point in time, but hold on for our Investor Day for more.
Great. Can you talk a little about the relative growth rates for the critical power segment versus the embedded power, as well as the margin profile for each, and what could drive margin expansion from here? Is it driven by the higher voltage abilities, or what can drive margin expansion?
What we have said about growth is, in the 70% and 80% growth that we have shared, we have said both cloud and power, both grow in that same direction. This year, power will grow more, cloud will grow less. Next year it'll switch. It's not a barbell, it's pretty close in that range. It's not one is 10% and another is 150%. They're both in that 70%, 80% range, both power and cloud. We haven't split out embedded and distributed power. All I'll say is they're both pretty high growth. One driven by this power density technology shift that's happening in embedded power. You're going from 10 kW, 35 kW, to 1 MW rack, to 400 VDC, 800 VDC.
Our distributed power business is basically driven by, we're small, we're nimble, we know how to customize and put things together. That's having a pretty high growth trajectory. What I'll say about margins is this. What we've said is, when we exited last year at $6.7 billion, we were 9.2% operating margin. Cloud's a little less than that. Power is in the mid-teens. We invested around 100 basis points into the business in the last year. We'll recoup that this year. Next year we'll grow another 50- 100 basis points in terms of margin, driven by both mix and incremental basically. I would just think about that framework to say that, as power density and complexity improves, it should provide us continued opportunity to improve margins longer term.
Power being in the mid- teens is lower than our peers. We don't have a 100-year heritage for electrical. We just built this the last five years. We're putting in a lot of investment to drive the 60%-70% growth. We expect that to catch up with our peers at some point in time. Margins will continue to improve.
Yeah. You caught me on my next question. We want to talk a little bit about the competitors in the power space, and to your point, the mid-teens operating margin. Delta and Vertiv are at 20%-25% operating margins. Is that something you could expect to get to over time? What are the key levers to get you there?
Absolutely. I've said my history is coming from running one of the largest electrical players. I've seen them go from low tens to the high teens, then all electrical peers have progressed from there. It's not a pricing issue because our pricing is fine. It is about we're building this from scratch. We've put together four acquisitions to build this electrical business. We have to make investments. Electrical, the history of that business in general, it's never grown 60%, 70%. 5 7% was a great year for us a decade ago. It requires heavy investment to build the right infrastructure out. We're trying to build that out in an AI native way. Yeah, it is going to get to the same that our peers is at. We look at this in terms of long-term.
We will build out the profile in a way that we're making big inroads into margin, we're also investing for the long term. In two years we're going to be one of the biggest electrical players here in North America. That's a pretty heavy responsibility, and we want to make sure that it's done well. It'll be a mix of good margin improvement, but good investment to build out the base case for the business.
Now I want to touch a little on the cloud side as well. You guys have mentioned Google and AWS announcements in the past. What is your target set of customers here, and what are the key competitive advantages that Flex has in the cloud space?
Let me just step back and say for the SpinCo, the way I think about customers is hyperscalers, neoclouds colos, silicon providers, and utilities. All five of those end markets we participate in. In all those five end markets, we will give you just cutting metal if you want. We'll put that metal together and integrate it into trays and racks, and do all the way to L11 testing, and we'll drop it in place if you want. We will build your power modules for your chip, or we'll design your power custom rack solution for your chip, or we'll do all your distributed power busbar, data bar, all the way to utilities. We'll provide this entire portfolio for each of these end markets that I talked about.
Hyperscalers will be concentrated because four of them make up 75% of the current spend, so there will be some concentration towards that for all of them. Right? The way I think about diversity of portfolio is within hyperscalers are we providing this wide variety of products. The differentiation for us in the entire space is this, you're either an electrical player that you've got the legacy, 100-year legacy, and you've built it in a certain way, right? You're only playing in the compute integration space. Today, all those walls are getting divided. When you design your compute integration, you want to think about integrated cooling. You want to think about how much power, and how do you dissipate that power. Bringing that thermal architecture technology thinking to the customers well ahead of the cycle is a true differentiation, right?
Electrical players are trying to enter into that space now. Harder to do because margins are the other direction. For us, it's easier to do. If you look at our competitors, we have a competitor, maybe couple competitors in cloud integration. We have one major competitor in embedded power, and we have couple of major electrical players in distributed power. We're the only ones who are doing it end-to-end. If you're a hyperscaler or a neocloud who needs everything designed, we're your only pure play solution.
I have to ask about the elephant in the room, AI CapEx spend. How do you get confidence that the demand will continue for compute spend, and what are your concerns that it could potentially slow?
I'd say the same confidence that all of you are hearing, right? Outside of the $1 trillion investment, we're hearing there's $2 trillion of backlog that these hyperscalers have, right? We are the beneficiaries of trying to fulfill that backlog. There is a moment in time of how much compute requirement is out there and how behind we are to fulfill that. That's why we have a lot of credibility in terms of the backlog. What we are building out today fulfills what people need in two years and three years, right? There is a long cycle in terms of how backlogged the industry is. For us, the great news is we can use that investment cycle then to take the cash we generate and invest it in the electrical side, where we're building out the solid state 800 VDC infrastructure.
I would say, I don't have a crystal ball to five years and 10 years, but I can tell you this is the next three years in terms of compute infrastructure seems like a solid spend. After that, the grid has to transform. Our grid is so behind, that's going to be a 10-year play plus for that grid transformation to work out, right? I'm thinking of it in terms of both cycles.
Great. Does the SpinCo have enough of a footprint to support these upcoming projects, or will you need to add facilities from here? How do we think about the annual CapEx for the SpinCo?
We have announced a big CapEx this year, mainly towards SpinCo. We have said, as you think about us exiting this cycle, think of it as 3% of revenue, but remember, revenue is growing pretty fast, right? It will need continued CapEx. I would say most of our investments are here in North America and U.S., and it's more to do with getting power to our facilities, getting cooling infrastructure set up, and things like that. We are actively investing in extra capacity. We've already leased a new facility in Texas, in Georgetown, that'll give us 50 MW of power. We just announced an acquisition in Iowa for our utility business. We'll be expanding that pretty significantly. Yes, there will be extra investments. We think we can hold it within that framework of 3% of CapEx.
In March, you announced that Flex is building 800 VDC for Nvidia. Is Flex manufacturing or providing everything in that power rack? How should investors think about the allocation between you and potentially other peers like Delta?
I'll tell you this, that in the 400 VDC space and embedded power, there's basically two players, right? Us and our largest competitor. We always are one or two in most of these design cycles, and then we both share manufacturing typically, so that they can have some supply chain resiliency. I'd say yeah, not just Nvidia, I'd say almost all hyperscaler who's designing a 400 VDC or 800 VDC, we are present in that design phase. I'll leave it at that.
Kind of moving over to AMD, you also announced that you're building the compute tray for the AMD Helios rack. How do we think about the AMD revenue opportunity over the next few years?
I'd say whether it's hyperscalers or neoclouds or silicon providers, like I said, we want to be diversified everywhere. We're pretty excited about the AMD opportunity. We're kind of their North American player for integrating a very complex product for their GPU product line that's going to grow pretty well. I think it's part of our diversification strategy of how we're playing out this business.
Great. Taking a step back, do you see SpinCo growing more via organic growth or acquisitions at this stage? Over the years, there's been multiple acquisitions, do we expect your history of M&A to continue?
I'd say yes. You should expect both. It is going to grow organically 70%, 80%, we've already said. Will we use the cash to look for smart technology investments? I would say absolutely.
Great. We talked a lot about SpinCo. Let's move more towards the RemainCo.
Yes.
You've guided to low single to mid-single digit revenue growth. What advice are you giving to Michael? We'll get to Michael in a second, but what advice are you giving to Michael, who will be the CEO of RemainCo after the split?
First is I'd say we are fortunate to be in this position where we are not only able to stand up two companies, but then have the candidates to succeed both leadership teams, right? That is awesome. That didn't happen by chance. Michael and I have been side by side on this journey for seven years. My advice to him is, of course, I'm biased, is it's a good playbook. Hopefully you continue it. I'm going to hand it over to Michael so he can talk about the playbook.
Yeah, right after you said, "Don't screw it up," I think. First, I think you had a question earlier also, and maybe I'll just provide some context for what Flex post-spin looks like. Keep in mind, even post-spin, Flex is going to be a $22 billion manufacturing services platform. Still operating at global scale, still servicing a wide variety of diversified end markets. A very substantial company, very difficult to replicate by others. If you think about the playbook that Revathi mentioned earlier, it's a playbook that for the past seven years, have led us to this moment where you've seen top-line growth. You've seen us double margins. You've seen the second value creation opportunity, first with Nextracker or now with SpinCo in the last, what? Three years. That's a playbook that we'll be executing into the future as well.
It's a playbook that really isn't about chasing revenue. It's about generating high-quality earnings that maximize cash. It's being underpinned by this constant desire to continue to expand margins. What that does for us is that enables us to really deploy the capital to the highest value opportunities. For us, in the portfolio today, we have terrific opportunities that we just haven't been able to get to because that capital's been deployed where it should, to the highest value opportunities, and that's been data center up to this point in time. Now post-spin, that'll be destinations like industrial and healthcare, among other things. Really excited about where we can take the business. When you think about where the high-value market opportunities are, I would think about those markets that are tied to longer-term secular trends, right? These aren't event-based.
Our healthcare business, very substantial medical devices business and drug delivery business. Kind of things like aging population, increase in chronic disease. Think about our industrial business. Lots of discussion around the geopolitical situation, creating regionalization, right for our applications in robotics, warehouse automation. Communications. Satellite communications for us is a fast-growing market. People's desire for ongoing, always reliable communications is another opportunity for us. Don't forget, we're not spinning all of our data center business into SpinCo. We still have three large businesses that are still positively influenced by pull-through demand from the data center. All of our networking business, anything involved with secure communications, it could be high-speed switching, it could be optical, it could be interface technologies. That entire suite of networking services is staying. Energy infrastructure.
We're spinning our IP and our power product portfolio, but we're maintaining a contract manufacturing focus on power generation, transmission, distribution, and storage. A large and growing business. Finally, semiconductors are required to fuel the growth of AI compute, and that takes capital equipment. Our capital equipment business is also positively influenced by data center trends as well.
Can you talk a little bit, you touched on most of the verticals here. Can you talk about where we could be seeing more end market recovery cyclically, and what's most compelling to you right now?
Yeah. I would say this. When you think about the portfolio and these diversified end markets, you have to think about it on a spectrum. On the one end of the spectrum, we have our high-value markets, industrial and healthcare. Those markets have been and will continue to grow, no recovery necessary. Those are just up into the right verticals for us. On the other end of the spectrum, we've long talked about really de-emphasizing our exposure to some of the lower value markets. Think things like consumer. If you remember the story over the past four or five years, we've taken out over $2 billion of consumer business over the past few years, and replaced it with higher value data center business over the same time. In the middle, you have things like automotive, right?
Automotive, no secret, selling into a really challenging environment, but I would call that as a stabilization period. Not going backwards as actually going forward when it comes to that industry. That's what you get when you have a diversified portfolio. High value markets we'll continue to lean in on, and we'll continue to diversify out of some of the lower value opportunities.
How are you both thinking about the capital structure for each company, the free cash flow profile, and uses of cash from here?
What we have said is Flex will retain up to 19.9% of equity in Spin, and then post-spin, it'll be an attractive way for Flex to use that equity to pay down debt. Flex will come out with a clean balance sheet investment-grade rating. SpinCo will be not highly leveraged. Both will have very clean balance sheets. If you think about capital allocation moving forward, SpinCo, as I've said, is going to focus on organic growth and M&A. That's going to be an important part of the strategy in terms of capital allocation. Flex, our view is, will continue the capital allocation that's worked for us so far.
Great. Post-spin, are there any dyssynergies that investors should be aware of or focused on?
No. We've been running our six business unit structure standalone for a long time. Our business unit leaders are incentivized to grow and manage those businesses end to end, which means that our factories have also run that way. Out of our 80 factories, five of them have some level of overlap, so that's all we have to work to separate. That work's already in place, so it's not a pretty big deal. SpinCo will have standalone company cost, and then Flex has some costs left over that we know how to manage. We don't expect any significant dyssynergies in our modeling moving forward.
Great. This is my final question. What do you guys think on both sides of the business is still the most underappreciated by the market and by investors?
Yeah. I'd say that's one of the more exciting parts, is that for sure there's a lot of excitement, and rightly so, created by our decision to spin. Right? That's a business that is front and center and gets the headlines. I think what's most underappreciated is really the position that Flex post-spin is in to grow in these higher value markets and continue the trajectory that we started five, six, seven years ago. By executing this playbook, it could lead us to potentially another event, another value creation opportunity like Nextracker, like SpinCo. For sure, it provides it with a roadmap to continue to drive top line, but more importantly, earnings expansion over and over again in these higher value markets that we've leaned into up to this point in time.
I'd say for SpinCo, we'll see what value the market assigns to us post-spin. At this point we think it isn't valued enough, but that's always my biased view. I think the market's understanding the significance of creating such a large electrical player. It hasn't happened in a while, right? To standalone something from scratch and create something like that. I think the largest transformation that's happening in the electrical industry is in front of us, and we get to create it from scratch without any of the heritage and history, right? I'm sure that will have tremendous value too. Yeah, we'll see where it goes.
Great. Thank you. I really appreciate both your time. Thanks, everyone, for joining us.
Excellent.
Yeah.
Thanks, everyone.
Thank you.
Bye-bye.