SentinelOne, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended July 31, 2021. The quarter followed the company’s July 2021 IPO; amounts below are in U.S. dollars.
Business context and performance
SentinelOne sells subscriptions to its AI-powered Singularity cybersecurity platform, primarily through channel partners. It reported more than 5,400 customers, up from more than 3,000 a year earlier. The company completed its acquisition of cloud analytics company Scalyr in February 2021.
Key financial metrics
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $45.8 million | $20.7 million | $83.1 million | $38.6 million |
| Gross margin | 59% | 64% | 55% | 61% |
| Operating loss | $67.2 million | $22.6 million | $128.8 million | $48.8 million |
| Net loss | $68.2 million | $22.9 million | $130.8 million | $49.6 million |
| Net loss per share, diluted | $0.57 | $0.67 | $1.59 | $1.45 |
| Operating cash flow | Not provided for the quarter | $(72.8) million | $(25.5) million |
Q2 revenue grew 121% year over year; six-month revenue grew 115%. Operating expenses for the quarter rose to $94.1 million from $35.7 million, including higher personnel, sales and marketing, and stock-based compensation costs. Q2 stock-based compensation was $21.4 million, compared with $1.6 million a year earlier.
At July 31, cash and cash equivalents were $1.685 billion, short-term investments were $0.4 million, and restricted cash was $4.1 million. Total liabilities were $260.6 million; no long-term debt remained after repayment of the $20 million borrowing and termination of the credit facility in June. Deferred revenue was $184.6 million, and remaining performance obligations were $219.1 million, of which the company expected to recognize 87% over the next 24 months.
Material changes and notable items
- IPO and concurrent private placement: 41.7 million Class A shares issued at $35 per share; approximately $1.4 billion of net proceeds. Preferred shares converted into Class B common stock.
- Scalyr acquisition: preliminary purchase consideration of $124.6 million, primarily in stock; the acquisition added $5.0 million of revenue and $0.9 million of net loss from closing through July 31. It also resulted in $108.2 million of goodwill.
- Gross margin fell 5 percentage points year over year in the quarter. Management attributed the decline mainly to higher cloud infrastructure costs, support staffing, and stock-based compensation.
- Cash used in operations increased year over year. Deferred revenue growth provided cash, partially offset by increases in deferred contract acquisition costs, prepaid expenses, and receivables.
- Customer expansion indicators improved: annual recurring revenue was $198.0 million, up 127%; customers with at least $100,000 ARR numbered 348, versus 145; dollar-based net retention was 129%, versus 121%. Gross retention was 97% in both periods.
Outlook, risks, and contingencies
The filing gives no formal revenue or earnings guidance. Management said existing cash and investments should fund working capital and capital expenditures for at least 12 months, while expecting continued investment in research and development, sales and marketing, and international expansion. Management cautioned that growth investments may pressure near-term results and profitability is not assured.
Key disclosed risks include sustained operating losses, rising cloud infrastructure costs and lower gross margin, intense competition, reliance on channel partners (92% of quarterly revenue), cybersecurity or service-availability failures, and uncertainty from COVID-19. The company reported that disclosure controls were effective at a reasonable assurance level.
BlackBerry litigation remained pending in several jurisdictions; the company had not accrued a loss or determined that an unfavorable outcome was probable or reasonably estimable. SentinelOne also disclosed receiving an IBM letter alleging infringement of three U.S. patents; no IBM lawsuit had been filed as of the report. The company’s dual-class structure gives Class B shares 20 votes per share; Class B holders held approximately 99.1% of voting power as of July 31.
Important facts for investors to verify
- Whether rapid revenue, ARR, and large-customer growth continues and translates into durable cash generation.
- Whether cloud infrastructure costs and support needs stabilize sufficiently to recover gross margin.
- The scale and persistence of stock-based compensation, potential share dilution, and the effects of dual-class voting control and share lockup expirations.
- Exposure to major channel partners and the status and potential financial impact of the BlackBerry and IBM matters.
- Whether acquisition integration and continued expansion deliver expected benefits without further pressure on losses and cash flow.