SentinelOne (NYSE:S) Reports Sales Below Analyst Estimates In Q1 Earnings, Stock Drops 32.5%

Full Report / June 01, 2023
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Cyber security company SentinelOne (NYSE:S) missed analyst expectations in Q1 FY2024 quarter, with revenue up 70.5% year on year to $133.4 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $141 million at the midpoint, or 7.28% below analyst estimates. SentinelOne made a GAAP loss of $106.9 million, down on its loss of $89.8 million, in the same quarter last year.

SentinelOne (S) Q1 FY2024 Highlights:

  • Revenue: $133.4 million vs analyst estimates of $136.6 million (2.36% miss)
  • EPS (non-GAAP): -$0.15 vs analyst estimates of -$0.17
  • Revenue guidance for Q2 2024 is $141 million at the midpoint, below analyst estimates of $152.1 million
  • The company dropped revenue guidance for the full year, from $635.5 million to $595 million at the midpoint, a 6.37% decrease
  • Free cash flow was negative $31.4 million, compared to negative free cash flow of $25.4 million in previous quarter
  • Net Revenue Retention Rate: 125%, down from 130% previous quarter
  • Customers: 10,680, up from 10,000 in previous quarter
  • Gross Margin (GAAP): 68.1%, up from 65.3% 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 two years, growing from quarterly revenue of $37.4 million in Q1 FY2022, to $133.4 million.

SentinelOne Total Revenue

And while we saw even higher rates of growth previously, the revenue growth was still very strong; up a rather splendid 70.5% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $7.3 million in Q1, compared to $10.8 million in Q4 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates SentinelOne is expecting revenue to grow 37.6% year on year to $141 million, slowing down from the 124% 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 45.7% 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 125% in Q1. That means even if they didn't win any new customers, SentinelOne would have grown its revenue 25% year on year. Despite the recent drop this is still a good retention rate and a proof that SentinelOne's customers are satisfied with their software and are getting more value from it over time. That is good to see.


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 68.1% in Q1.

SentinelOne Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.68 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 we would like to see it start improving.

Cash Is King

If you have followed 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 $31.4 million in Q1, reducing the cash burn by 42.6% year on year.

SentinelOne Free Cash Flow

SentinelOne has burned through $188.4 million in cash over the last twelve months, a negative 39.5% 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 Q1 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 $6.23 billion and more than $718.2 million in cash, the company has the capacity to continue to prioritise growth over profitability.

It was good to see the company reduce cash burn this quarter. On the other hand, it was unfortunate to see that SentinelOne's revenue guidance missed analysts' expectations. Overall, this quarter's results could have been better. The market was pricing the company for perfection and as a result of the miss it is down 32.5% on the results and currently trades at $14 per share.

Is Now The Time?

When considering SentinelOne, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although SentinelOne is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. But while its customers are increasing their spending quite quickly, suggesting that they love the product, the downside is that its growth is coming at a cost of significant cash burn and its gross margins show its business model is much less lucrative than the best software businesses.

The market is certainly expecting long term growth from SentinelOne given its price to sales ratio based on the next twelve months is 8.6x. We can find things to like about SentinelOne and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.

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