SentinelOne (NYSE:S) Q3: Beats On Revenue

Full Report / December 06, 2022
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Cyber security company SentinelOne (NYSE:S) beat analyst expectations in Q3 FY2023 quarter, with revenue up 105% year on year to $115.3 million. The company expects that next quarter's revenue would be around $125 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. SentinelOne made a GAAP loss of $98.8 million, down on its loss of $68.5 million, in the same quarter last year.

SentinelOne (S) Q3 FY2023 Highlights:

  • Revenue: $115.3 million vs analyst estimates of $111 million (3.89% beat)
  • EPS (non-GAAP): -$0.16 vs analyst estimates of -$0.22
  • Revenue guidance for Q4 2023 is $125 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow was negative $64.7 million, compared to negative free cash flow of $66.8 million in previous quarter
  • Net Revenue Retention Rate: 134%, down from 137% previous quarter
  • Customers: 9,250, up from 8,600 in previous quarter
  • Gross Margin (GAAP): 64.4%, up from 63.6% 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 $24.5 million in Q3 FY2021, to $115.3 million.

SentinelOne Total Revenue

This was another standout quarter with the revenue up a splendid 105% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $12.8 million in Q3, compared to $24.2 million in Q2 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 90.4% year on year to $125 million, slowing down from the 119% 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 68.7% 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 134% in Q3. That means even if they didn't win any new customers, SentinelOne would have grown its revenue 34% year on year. Despite the recent drop this is still a great retention rate and a clear proof of a great product. We can see that SentinelOne's customers are very satisfied with their software and are using it more and more over time.


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 64.4% in Q3.

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 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 $64.7 million in Q3, increasing the cash burn by 213% year on year.

SentinelOne Free Cash Flow

SentinelOne has burned through $193.4 million in cash over the last twelve months, a negative 53.4% 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 Q3 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 $4 billion and more than $701.2 million 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 excited to see that it outperformed analysts' revenue expectations. On the other hand, there was a deterioration in revenue retention rate. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. But the market was likely expecting more and the company is down 0.99% 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 we have other favorites, we understand the arguments that SentinelOne is not a bad 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.

The market is certainly expecting long term growth from SentinelOne given its price to sales ratio based on the next twelve months is 6.5x. 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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