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SentinelOne (S) Research Report: Q1 CY2024 Update


Full Report / May 30, 2024

Cyber security company SentinelOne (NYSE:S) reported results ahead of analysts' expectations in Q1 CY2024, with revenue up 39.7% year on year to $186.4 million. The company expects next quarter's revenue to be around $197 million, in line with analysts' estimates. It made a non-GAAP loss of $0 per share, improving from its loss of $0.15 per share in the same quarter last year.

SentinelOne (S) Q1 CY2024 Highlights:

  • Revenue: $186.4 million vs analyst estimates of $181.1 million (2.9% beat)
  • EPS (non-GAAP): $0 vs analyst estimates of -$0.05 ($0.05 beat)
  • Revenue Guidance for Q2 CY2024 is $197 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed its revenue guidance for the full year of $811.5 million at the midpoint
  • Gross Margin (GAAP): 73.1%, up from 68.1% in the same quarter last year
  • Free Cash Flow of $33.76 million is up from -$10.64 million in the previous quarter
  • Annual Recurring Revenue: $762 million at quarter end, up 35.2% year on year
  • Market Capitalization: $6.46 billion

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 three years, growing from $37.4 million in Q1 2022 to $186.4 million this quarter.

SentinelOne Total Revenue

Unsurprisingly, this was another great quarter for SentinelOne with revenue up 39.7% year on year. On top of that, its revenue increased $12.18 million quarter on quarter, a very strong improvement from the $10.01 million increase in Q4 CY2023. This is a sign of acceleration of growth and great to see.

Next quarter's guidance suggests that SentinelOne is expecting revenue to grow 31.8% year on year to $197 million, slowing down from the 45.8% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 28.7% over the next 12 months before the earnings results announcement.

Large Customers Growth

This quarter, SentinelOne reported 1,193 enterprise customers paying more than $100,000 annually, an increase of 60 from the previous quarter. That's a bit fewer contract wins than last quarter and quite a bit below what we've typically observed over the past four quarters, suggesting that its sales momentum with large customers is slowing.

SentinelOne customers paying more than $100,000 annually

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 73.1% in Q1.

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's free cash flow came in at $33.76 million in Q1, turning positive over the last year.

SentinelOne Free Cash Flow

SentinelOne has burned through $18.45 million of cash over the last 12 months, resulting in a negative 2.7% free cash flow margin. This low FCF margin stems from SentinelOne's constant need to reinvest in its business to stay competitive.

Key Takeaways from SentinelOne's Q1 Results

It was good to see SentinelOne beat analysts' revenue and EPS expectations this quarter. We were also glad its gross margin improved. On the other hand, its full-year revenue guidance was below expectations, sending the stock down 8% after hours. Overall, this was a mediocre quarter for SentinelOne. The company currently trades at $17.87 per share.

Is Now The Time?

SentinelOne may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

There are several reasons why we think SentinelOne is a great business. While we'd expect growth rates to moderate from here, its revenue growth has been exceptional over the last three years. And while its growth is coming at the cost of significant cash burn, the good news is its customers are increasing their spending quite quickly, suggesting they love the product. On top of that, its efficient customer acquisition hints at the potential for strong profitability.

The market is certainly expecting long-term growth from SentinelOne given its price-to-sales ratio based on the next 12 months is 6.9x. But looking at the tech landscape today, SentinelOne's qualities stand out, and we think that the multiple is justified. We still like the stock at this price.

Wall Street analysts covering the company had a one-year price target of $29.61 right before these results (compared to the current share price of $17.87), implying they see short-term upside potential in SentinelOne.

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