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SentinelOne (NYSE:S) Reports Upbeat Q2, Provides Optimistic Full Year Guidance


Full Report / September 21, 2022
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Cyber security company SentinelOne (NYSE:S) reported Q2 FY2023 results beating Wall St's expectations, with revenue up 124% year on year to $102.5 million. Guidance for next quarter's revenue was $111 million at the midpoint, 2.59% above the average of analyst estimates. SentinelOne made a GAAP loss of $96.3 million, down on its loss of $68.1 million, in the same quarter last year.

SentinelOne (S) Q2 FY2023 Highlights:

  • Revenue: $102.5 million vs analyst estimates of $95.6 million (7.15% beat)
  • EPS (non-GAAP): -$0.20 vs analyst estimates of -$0.25
  • Revenue guidance for Q3 2023 is $111 million at the midpoint, above analyst estimates of $108.1 million
  • The company lifted revenue guidance for the full year, from $405 million to $416 million at the midpoint, a 2.71% increase
  • Free cash flow was negative $66.8 million, compared to negative free cash flow of $54.7 million in previous quarter
  • Net Revenue Retention Rate: 137%, up from 131% previous quarter
  • Customers: 8,600, up from 7,450 in previous quarter
  • Gross Margin (GAAP): 64.6%, up from 58.9% same quarter last year

With roots in the Israeli cyber intelligence community, SentinelOne (NYSE:S) provides software to help organizations efficiently detect, prevent, and investigate cyber attacks.

Cyber attacks are costly for organizations, as they lead to the loss of sensitive information, destruction of assets, and a diminished brand image. While organizations invest in tools and devices to prevent cyber threats, they still get breached due to their reliance on old security solutions that are slow, don't scale, don't talk to each other and are often unable to keep up with the new threats.

SentinelOne's software allows organizations to monitor all their online assets and networks, and to automate the process of defending against cyber attacks. Its main promise is speed and autonomy, its machine learning based system is able to automatically not only identify an attack, but also block and remediate it and its detection capabilities run locally and don't depend on any cloud-based connections, which reduces the response time even further.

Once the SentinelOne software is installed on a system such as a laptop or a web server, it can identify every IT asset within the organization. It then connects signals and data from these assets in one place where further analysis is performed to detect security threats. SentinelOne also provides analysts with detailed information on malicious software and processes running on a network by proactively searching for suspicious activities. This makes it faster and more efficient for organizations to investigate cyber attacks.

Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. As the volume of internet enabled devices grows, every device that employees use to connect to business networks represents a potential risk. Endpoint security software enables businesses to protect devices (endpoints) that employees use for work purposes either on a network or in the cloud from cyber threats.

SentinelOne faces competition from legacy security platforms who are shifting to modern cloud offerings such as Microsoft (NASDAQ:MSFT), Palo Alto Networks (NYSE:PANW) and McAfee (NASDAQ:MCFE) as well as cloud-native innovators such as CrowdStrike (NASDAQ:CRWD).

Sales Growth

As you can see below, SentinelOne's revenue growth has been incredible over the last year, growing from quarterly revenue of $45.7 million, to $102.5 million.

SentinelOne Total Revenue

This was another standout quarter with the revenue up a splendid 124% year on year. On top of that, revenue increased $24.2 million quarter on quarter, a very strong improvement on the $12.6 million increase in Q1 2023, and a sign of re-acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates SentinelOne is expecting revenue to grow 98.1% year on year to $111 million, slowing down from the 128% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 78.2% over the next twelve months.

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

SentinelOne Net Revenue Retention Rate

SentinelOne's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 137% in Q2. That means even if they didn't win any new customers, SentinelOne would have grown its revenue 37% year on year. Significantly up from the last quarter, this is an absolutely exceptional retention rate, meaning SentinelOne's software is extremely successful with their customers who are rapidly expanding the use of it across their organizations.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. SentinelOne's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 64.6% in Q2.

SentinelOne Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.64 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. SentinelOne burned through $66.8 million in Q2, increasing the cash burn by 49.4% year on year.

SentinelOne Free Cash Flow

SentinelOne has burned through $149.3 million in cash over the last twelve months, a negative 49.3% free cash flow margin. This low FCF margin is a result of SentinelOne's need to still heavily invest in the business.

Key Takeaways from SentinelOne's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on SentinelOne’s balance sheet, but we note that with a market capitalization of $7.77 billion and more than $1.21 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the exceptional revenue growth SentinelOne delivered this quarter. And we were also glad to see the improvement in net revenue retention rate. On the other hand, there was a deterioration in gross margin and cash burn has increased. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company currently trades at $26.6 per share.

Is Now The Time?

SentinelOne may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think SentinelOne is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its growth is coming at a cost of significant cash burn, the good news is its customers are increasing their spending quite quickly, suggesting that they love the product, and its very efficient customer acquisition hints at the potential for strong profitability.

SentinelOne's price to sales ratio based on the next twelve months is 14.3x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. There are definitely things to like about SentinelOne and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $36.8 per share right before these results, implying that they saw upside in buying SentinelOne even in the short term.

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