SentinelOne, Inc. — Q3 fiscal 2024 Form 10-Q
Reporting period: Three and nine months ended October 31, 2023; comparisons are with the corresponding 2022 periods. SentinelOne provides an AI-powered cybersecurity platform, with substantially all revenue from subscriptions. Figures below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance and liquidity
| Metric | Quarter | Nine months |
|---|---|---|
| Revenue | $164.2m, up 42% | $447.0m, up 51% |
| Gross margin | 73%, versus 64% | 71%, versus 65% |
| Operating loss | $81.5m, versus $104.1m | $297.2m, versus $302.5m |
| Net loss | $70.3m, versus $98.9m | $266.7m, versus $285.0m |
| Net loss per share, diluted | $0.24, versus $0.35 | $0.91, versus $1.03 |
- Nine-month operating cash use was $62.2m, down from $171.2m. Investing activities provided $27.6m and financing activities provided $23.8m. Cash, cash equivalents and restricted cash totaled $191.6m at period-end.
- Cash and cash equivalents plus short- and long-term investments were approximately $1.123bn at October 31, compared with $1.159bn at January 31. Management said available cash and investments should fund working capital and capital expenditures for at least 12 months.
- Total liabilities were $615.0m, including $422.6m of deferred revenue. The balance sheet presents no debt balance; the company refers to a previously terminated loan and security agreement.
- Stock-based compensation was $54.9m for the quarter and $163.3m for the nine months. Accumulated deficit was $1.267bn.
Business trends and changes
- Growth reflected new customers and expanded endpoint and module purchases by existing customers. The company reported more than 11,500 customers, versus more than 9,250 a year earlier; customers with at least $100,000 ARR rose to 1,060 from 797.
- ARR was $663.9m, up 43% year over year. Dollar-based net retention exceeded 115%, compared with more than 130% a year earlier. Management attributed the decline in retention to softer expansion, while citing endpoint growth and added modules as expansion drivers.
- Management disclosed a one-time approximately 5% adjustment to historical ARR after identifying inaccuracies and changing its treatment of consumption-based contracts. Prior-period ARR and large-customer comparisons shown in the filing reflect that adjustment.
- Remaining performance obligations were $776.0m; the company expected to recognize 87% over the next 24 months. Deferred revenue increased from $406.3m at January 31 to $422.6m.
- Gross margin improved as revenue growth outpaced cost growth. Operating expenses remained substantial: quarterly sales and marketing rose 17% and general and administrative rose 21%; nine-month increases were 32% and 29%, respectively.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects operating losses to continue for the foreseeable future and anticipates continued investment in research and development, sales and marketing, and general and administrative expenses.
- Management reported longer sales cycles, customer usage declines and deal downsizing, particularly among larger enterprises, and expects macroeconomic demand pressures to persist in the near term. It also cited interest rates, inflation, IT spending, banking-system uncertainty and geopolitical conflicts as risks.
- The June 2023 restructuring targeted approximately 5% of the workforce, or about 100 employees. Nine-month charges were approximately $5.0m, substantially paid by October 31; additional office-exit charges may arise. Completion is expected by the end of fiscal 2025.
- A non-cancellable cloud infrastructure agreement requires at least $860m of spending from March 2023 through February 2029.
- Legal matters include a consolidated securities class action alleging misleading statements about ARR and internal controls, and Fortis Advisors litigation concerning the Attivo acquisition and indemnification escrow. SentinelOne says it believes the claims are without merit. BlackBerry litigation was settled in September 2023, with remaining actions to be dismissed.
- After quarter-end, SentinelOne acquired cybersecurity consulting firm Krebs Stamos Group for approximately $14m in cash, subject to customary adjustments. Approximately 14% of personnel were in Israel; management reported no adverse business impact from the conflict there as of the filing, but warned that worsening conditions could disrupt operations.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- ARR definitions, the approximately 5% historical adjustment, and the sustainability of ARR growth and net retention.
- Customer consumption trends, sales-cycle length, deal sizes and renewals, especially among large enterprise customers.
- Path to profitability and cash burn, including stock-based compensation, restructuring costs and the long-term cloud spending commitment.
- Developments and potential costs or outcomes in the securities and Fortis litigation, including any impact on indemnification escrow.
- Integration and purchase accounting for the post-quarter KSG acquisition, and potential operational effects of geopolitical conditions in Israel.