SentinelOne, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended July 31, 2023; comparisons are with the periods ended July 31, 2022. SentinelOne provides an AI-powered cybersecurity platform, with substantially all revenue from subscriptions.
Financial performance and position
| Metric | Q2 FY2024 | Prior-year Q2 | Six months FY2024 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $149.4 million | $102.5 million | $282.8 million | $180.8 million |
| Gross profit / margin | $104.8 million / 70% | $66.2 million / 65% | $195.6 million / 69% | $117.4 million / 65% |
| Operating loss | $100.4 million | $108.2 million | $215.7 million | $198.5 million |
| Net loss | $89.5 million | $96.3 million | $196.4 million | $186.1 million |
| Operating cash flow | Not provided for the quarter | $(40.0) million | $(111.5) million |
- Q2 revenue grew 46% year over year; six-month revenue grew 56%. Q2 net loss per share was $0.31 versus $0.35; six-month loss per share was $0.68 in both periods.
- Q2 operating loss narrowed despite higher operating expenses. For the six-month period, operating loss and net loss increased year over year. Higher interest income—$22.0 million for the six months versus $4.3 million—partly offset operating losses.
- At July 31, cash and cash equivalents were $133.1 million, short-term investments $598.5 million, and long-term investments $410.3 million. Management described cash, cash equivalents, and investments as approximately $1.1 billion. Restricted cash was $64.3 million. The filing reports no outstanding borrowings on the balance sheet; it says a prior loan and security agreement was terminated.
- Total liabilities were $617.9 million, including $421.4 million of deferred revenue. Accumulated deficit was $1.20 billion. Six-month financing cash flow was $20.3 million, mainly employee stock option exercises and employee stock purchase plan proceeds.
- Stock-based compensation expense was $52.8 million in Q2 and $108.4 million for six months. Six-month operating cash use improved from the prior year, partly due to non-cash expenses and working-capital movements.
Operating trends and changes
- Gross margin improved from 65% to 70% in Q2 and from 65% to 69% for six months, as revenue growth outpaced cost-of-revenue growth.
- Sales and marketing expense rose 24% in Q2 and 41% for six months; general and administrative expense rose 20% and 33%, respectively. Research and development expense decreased 2% in Q2 but increased 8% for six months.
- Customers exceeded 11,000, versus 8,500 a year earlier. Customers with ARR of at least $100,000 increased to 994 from 727. ARR was $612.2 million, up 47%, and dollar-based net retention was above 115%, compared with above 135% a year earlier.
- Management disclosed a one-time approximately 5% adjustment to historical ARR following review of certain contracts and a change in the methodology for usage-based agreements. The prior-year ARR and large-customer comparisons shown were adjusted accordingly.
- Revenue outside the U.S. was 36% of Q2 revenue, up from 33%. Exclusive Networks, the largest channel partner, accounted for 19% of Q2 revenue, compared with 17% a year earlier.
Outlook, risks, and unusual items
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Management said existing cash, cash equivalents, and investments should cover working capital and capital expenditure needs for at least 12 months, while operating losses are expected to continue for the foreseeable future.
- Management reported longer sales cycles, deal downsizing, and reduced usage or consumption among some customers, particularly larger enterprises, and expects macroeconomic pressures on demand to persist in the near term.
- A June 2023 restructuring targets approximately 5% of the workforce, or about 100 employees, to reduce costs and improve margins. The plan is expected to be substantially complete by fiscal year-end 2024. The company recorded $4.3 million of restructuring operating expense in the quarter; related inventory write-offs were recorded in cost of revenue.
- Remaining performance obligations were $676.1 million at July 31, with 87% expected to be recognized over the next 24 months. Separately, the company has a non-cancellable cloud infrastructure commitment of at least $860 million from March 2023 through February 2029.
- Two securities class actions filed in June 2023 allege misleading statements concerning the company’s business, operations, prospects, ARR, and internal controls. The company disputes the claims; no loss accrual was recorded. BlackBerry-related litigation also remains pending, including a California action with trial set for March 2024. The company said potential losses were not probable or reasonably estimable.
- Key risks include persistent losses, intense cybersecurity competition, customer spending caution, platform availability and security, reliance on cloud providers and channel partners, evolving AI and privacy regulation, and the possibility of further litigation. Management concluded disclosure controls were effective at the reasonable assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How the ARR methodology change and approximately 5% historical adjustment affect reported growth and future comparisons; also track the decline in net retention.
- Whether customer spending, renewals, sales cycles, and enterprise consumption improve or deteriorate, and whether revenue growth supports progress toward profitability.
- Restructuring execution, realized cost savings, and the effect of workforce reductions on growth and operations.
- Cash burn and investment liquidity relative to the long-term cloud infrastructure commitment and ongoing operating losses.
- Developments in the securities and BlackBerry litigation, and any changes to the company’s assessment of potential losses.
- Stock-based compensation and share-count trends, including the potential effect of outstanding equity awards on dilution.