SentinelOne, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended April 30, 2023. SentinelOne provides AI-powered cybersecurity subscriptions, primarily through its Singularity Platform. Fiscal Q1 FY2024 is compared below with the three months ended April 30, 2022.
Financial and operating performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $133.4 million | $78.3 million | Up 70% |
| Gross profit / margin | $90.8 million / 68% | $51.1 million / 65% | Margin up 3 percentage points |
| Operating loss | $115.4 million | $90.3 million | Loss increased |
| Net loss | $106.9 million | $89.8 million | Loss increased |
| Net loss per share, diluted | $0.37 | $0.33 | Loss per share increased |
| Cash used in operating activities | $28.1 million | $49.4 million | Use decreased |
Revenue growth was attributed to new customers and expansion in existing accounts, including additional endpoints and modules; $6.9 million of Q1 FY2024 revenue came from the Attivo acquisition. Gross margin improved as revenue growth outpaced cost of revenue growth. Operating expenses rose 46% to $206.2 million, including sales and marketing expense up 64% and general and administrative expense up 48%. Stock-based compensation was $55.5 million, compared with $31.6 million.
At April 30, 2023, cash and cash equivalents were $150.1 million, short- and long-term investments totaled approximately $992.0 million, and total cash, cash equivalents, and investments were approximately $1.1 billion. Restricted cash was $65.1 million. Total liabilities were $595.6 million, including $408.5 million of deferred revenue; the filing reports no material debt balance. Accumulated deficit was $1.107 billion. Total assets were $2.213 billion.
Investing activities provided $31.1 million, principally reflecting investment maturities and sales exceeding purchases. Financing activities provided $9.8 million, from employee stock-option exercises. Cash, cash equivalents, and restricted cash increased $12.8 million during the quarter.
Business metrics and changes versus prior period
- Annualized recurring revenue (ARR) was $563.6 million, up 75% year over year. The company changed its calculation for usage-based contracts to use committed contract values and corrected historical contract-recording inaccuracies, resulting in a one-time $27.0 million ARR adjustment, approximately 5% of reported ARR. Prior fiscal 2023 ARR figures shown in the filing were adjusted using the same percentage; the adjustment did not affect historical bookings or revenue.
- Customers exceeded 10,680, versus more than 7,450 a year earlier. Customers with ARR of at least $100,000 increased to 917 from 569.
- Dollar-based net retention was 128%, down from 131%. Management attributed expansion to increased endpoint coverage and purchases of additional modules.
- Channel partners generated 93% of revenue, versus 91%; Exclusive Networks represented 19% of revenue, versus 18%. International markets contributed 35% of revenue, versus 33%.
- Gross margin rose from 65% to 68%, while the operating loss margin improved from 115% to 86% of revenue. The company remained unprofitable, and the net loss increased year over year.
Outlook, risks, and unusual items
- Management said operating losses are expected to continue for the foreseeable future and that it expects continued investment in research and development, sales and marketing, and general and administrative functions. It believes existing cash, cash equivalents, and investments are sufficient for working capital and capital expenditures for at least the next 12 months. The filing does not provide a clear numeric revenue or earnings forecast.
- Management reported longer sales cycles, deal downsizing, and reduced usage or consumption among some customers, particularly larger enterprises, amid macroeconomic uncertainty. It expects demand pressures to persist in the near term.
- On June 1, 2023, after quarter-end, management approved a restructuring plan affecting approximately 5% of the workforce, or about 100 employees, to reduce costs and improve operating margins. The company estimated $3.9 million to $6.7 million of charges net of expected stock-compensation savings; it also disclosed estimated severance and benefit cash costs of $3.8 million to $6.9 million, inventory write-offs of $1.2 million to $1.5 million, and expected stock-compensation savings of $1.1 million to $1.7 million. The affected workforce actions were expected to be substantially completed in Q2 FY2024; the broader plan by FY2025. Potential office exit charges depend on securing a sublease.
- A non-cancellable cloud-infrastructure agreement requires at least $860 million of spending between March 2023 and February 2029. This is a significant long-term commitment.
- BlackBerry-related litigation remains pending, including cases involving alleged trade-secret misappropriation and related claims. SentinelOne reported that it had not accrued a loss contingency because an unfavorable outcome was not deemed probable or reasonably estimable. The filing also describes patent-related communications from IBM and an indemnity claim from AT&T; no litigation had been filed in either matter as of the report.
- SentinelOne cited cybersecurity incidents, platform defects or outages, intense competition, customer retention and renewal, channel-partner dependence, macroeconomic conditions, privacy and regulatory requirements, and its history of losses as key risks. The filing reported that disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- How the revised ARR methodology and $27.0 million adjustment affect comparisons, usage-based contracts, and future reported ARR growth.
- Whether customer usage, sales-cycle length, deal size, and retention stabilize, particularly among larger enterprise customers.
- Progress toward profitability and cash-flow improvement, considering operating losses and substantial stock-based compensation.
- The economics and flexibility of the $860 million minimum cloud-infrastructure commitment and the company’s reliance on third-party infrastructure.
- Execution and final costs of the restructuring, including any additional office exit charges.
- Developments in BlackBerry litigation and the IBM and AT&T intellectual-property matters, as well as concentration in channel partners and Exclusive Networks.