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SentinelOne (NYSE:S) Exceeds Q3 Expectations, Stock Soars


Full Report / December 05, 2023

Cyber security company SentinelOne (NYSE:S) reported Q3 FY2024 results topping analysts' expectations, with revenue up 42.4% year on year to $164.2 million. Guidance for next quarter's revenue was also better than expected at $169 million at the midpoint, 1.4% above analysts' estimates. It made a GAAP loss of $0.24 per share, improving from its loss of $0.35 per share in the same quarter last year.

SentinelOne (S) Q3 FY2024 Highlights:

  • Revenue: $164.2 million vs analyst estimates of $156.3 million (5% beat)
  • EPS (non-GAAP): -$0.03 vs analyst estimates of -$0.08
  • Revenue Guidance for Q4 2024 is $169 million at the midpoint, above analyst estimates of $166.6 million
  • Free Cash Flow was -$26.38 million compared to -$15.19 million in the previous quarter
  • Net Revenue Retention Rate: 115%, in line with the previous quarter
  • Customers: 11,500, up from 11,000 in the previous quarter
  • Gross Margin (GAAP): 73.3%, up from 64.4% in the 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.

Endpoint Security

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 $56.02 million in Q3 FY2022 to $164.2 million this quarter.

SentinelOne Total Revenue

Unsurprisingly, this was another great quarter for SentinelOne with revenue up 42.4% year on year. Quarter on quarter, its revenue increased by $14.74 million in Q3, which was roughly in line with the Q2 2024 increase. This steady growth shows that the company can maintain a strong growth trajectory.

Next quarter, SentinelOne is guiding for a 25.4% year-on-year revenue decline to $169 million, a further deceleration from the 92.1% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 30.6% over the next 12 months before the earnings results announcement.

Customer Growth

SentinelOne reported 11,500 customers at the end of the quarter, an increase of 500 from the previous quarter. That's a little better customer growth than last quarter but a bit below what we've typically seen over the last year, suggesting that the company may be reinvigorating growth.

SentinelOne Customers

Product Success

One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.

SentinelOne Net Revenue Retention Rate

SentinelOne's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 115% in Q3. This means that even if SentinelOne didn't win any new customers over the last 12 months, it would've grown its revenue by 15%.

Despite falling over the last year, SentinelOne still has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 73.3% in Q3.

SentinelOne Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.73 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, SentinelOne's gross margin is around the average of a typical SaaS businesses. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. SentinelOne burned through $26.38 million of cash in Q3 , increasing its cash burn by 59.2% year on year.

SentinelOne Free Cash Flow

SentinelOne has burned through $98.36 million of cash over the last 12 months, resulting in a negative 17.5% free cash flow margin. This low FCF margin stems from SentinelOne's poor unit economics or a constant need to reinvest in its business to stay competitive.

Key Takeaways from SentinelOne's Q3 Results

Although SentinelOne, which has a market capitalization of $5.98 billion, has been burning cash over the last 12 months, its more than $798 million in cash on hand gives it the flexibility to continue prioritizing growth over profitability.

We were impressed by SentinelOne's strong gross margin improvement this quarter, showing the company is unlocking the operating leverage in its business model. We were also excited its revenue and EPS outperformed Wall Street's estimates. Overall, we think this was a strong quarter that should satisfy shareholders. The stock is up 9.8% after reporting and currently trades at $21.99 per share.

Is Now The Time?

When considering an investment in SentinelOne, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

Although we have other favorites, we understand the arguments that SentinelOne isn't a bad business. We'd 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 they love the product.

The market is certainly expecting long-term growth from SentinelOne given its price to sales ratio based on the next 12 months is 7.9x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that SentinelOne doesn't trade at a completely unreasonable price point.

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