Thanks to all your insights on the quarter. Here are my thoughts:
Revenue and Guidance
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Revenue was $126.1M, up 92.1% year over year, 9.4% quarter over quarter. A slight beat of 0.9%. I had hoped for $129M but am still satisfied given the current environment.
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Net new ARR was $61.3M (total ARR of $548.7M), up 10.8% year over year, 25.6% quarter over quarter. Like Crowdstrike, sequential net new ARR growth accelerated again.
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Deferred revenues were $303.20M, up 18.7% sequentially. Good to see this metric growing double digits sequentially.
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Q1 revenue guidance of $137M, suggesting $139M, 10.2% quarter over quarter and 77.6% year over year growth if they continue exceeding guidance by 1.5%, assuming slight improvement.
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FY2024 revenue guidance of $640M, suggesting $652.8M, up 54.6% year over year if they exceed conservative guidance assuming headwinds persist through year-end. Still, I expect up to 60% year over year growth for FY2024 as macro effects fade. This requires: Q1: $139M (10.2% QoQ) → Q2: $157M (12.9% QoQ) → Q3: $178M (13.4% QoQ) → Q4: $205M (15.2% QoQ). Optimistic yet realistic, and initial fiscal year guidance is usually most conservative. “We expect macro-related uncertainties to persist for the full year, which is factored into our guidance.”
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FY2024 ARR guidance of 47% YoY growth. CFO Dave Bernhardt couldn’t help highlighting multiple times how conservative that forecast is. I try not to read too much into it, though he seemed really eager to convey how absurdly low that guidance is. I’d like that, but his last mistake guiding to 50% ARR growth 90 days ago makes me wary.
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Sentinel’s cloud security solution more than doubled quarter over quarter, including multiple million-dollar customer wins, contributing about 15% of quarterly ACV. Potential greenfield market opportunity. Recall, Sentinel One’s subscription model is primarily seat-based. The number of cloud workloads, which benefit from cloud security, can easily exceed the number of employees at any enterprise.
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About 30% of revenue from EMEA,
Cash Flow & Profitability
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Gross margin rose to 75.1% from 68.7% last year. → Great trend moving in the right direction.
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Operating loss was -$43.74M (-34.7% of revenue), down from $43.37M previously, but as a percentage improved from -66.1% of revenue. → Smaller loss resulted from revenue growth exceeding the increase in expenses.
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Net loss was -$37.39M (-29.6% of revenue), up from -$43.98M, and percentage-wise up from -67%.
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Earnings per share were -$0.13, up from -$0.17 last year.
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Operating cash flow was -$22M (-17.4% of revenue), up from -$5.8M, and percentage-wise down from -8.8%, which seemed like an outlier. The sequential trend still looks good.
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Free cash flow was -$25M (19.8% of revenue), down from -$7.8M, and percentage-wise down from -10.8% last year.
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R&D expense was $39.56M (31.4% of revenue). A big decrease from last year at 49% of revenue, still above their long-term target of 20%.
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S&M expense was $73.14M (58% of revenue), up from 55.3% of revenue last year due to more headcount. Their Go-To-Market strategy is the main reason for still being cash flow negative. I like them being aggressive, especially when others are slowing down but let’s hope the aggressive approach pays off long term.
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G&A expense was $25.67M (20.4% of revenue), declining but consistent with previous trends.
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Q1 operating margin guide of -41%, up from -73.4% in 1Q23. → A sequential decrease from -34.7% in 4Q23, but fine since Sentinel One is frontloading expenses early in the year = seasonality. All good here.
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FY2024 gross margin guide of 74.7%, up from 72.1% in FY2023.
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FY2024 operating margin guide of -25%, up from -49.5% in FY2023 → Last 4 years’ guide was: -152%, -107%, -86%, -49%. We can expect them to reach around -19% by the end of FY2024.
Customers
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Added 750 customers, reaching 10,000, up 49.3% year over year and 8.1% from last quarter → Growth accelerated from last quarter, which is good given the environment. Note: MSSP partners count as one customer, though they may add hundreds of customers below them, which isn’t reflected in customer metrics.
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Added 78 $100k+ customers, reaching 905, up 74.0% year over year and 9.4% from last quarter → Growth in line with last quarter. Hoping to see growth accelerate here soon.
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Dollar-based Net Retention Rate was 130+% , down from 134% last quarter but up from 129% a year ago.
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Gross retention rate “improved.”
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Added “a record number of Global 2000 enterprises” in the quarter, including major U.S. federal agencies, global financial institutions, and tech leaders for endpoint and cloud security.
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ARR per customer “continued to increase.”
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MSSP partners continue to perform well.
Macro
- Continue to see customers being cost-conscious and prudent about IT budgets, which has led to longer sales cycles and ensuring deals are sized appropriately. Expecting these dynamics to persist. Though, linearity has been much better than Q3 stated Tomer Weingarten, CEO.
Competition & Go-To-Market
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Win rates increased in the fourth quarter, including against large next-generation competitors
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Named a Leader in the 2022 Gartner Magic Quadrant for Endpoint Protection Platforms
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Ranked highest across all customer use cases in Gartner’s 2022 Critical Capabilities for Endpoint Protection Platforms
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FY2024 focus will be on three core areas of product innovation: 1) Advancing leadership in endpoint security, 2) Strengthening competitive advantage in cloud security, and 3) Expanding platform capabilities and market opportunity
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Partnered with Wiz, a cloud security company, to offer cloud workload and application protection to customers of all sizes. By combining platforms, they aim to provide comprehensive visibility into cloud infrastructure, detect and fix vulnerabilities, and prevent threats across cloud environments.
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Entering FY24, the pipeline nearly doubled year-over-year → Great to see, but with S&M expenses eating much of the cash, I don’t want to see anything else.
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Launched a partner enablement program in June 2021 to build a collaborative go-to-market approach. In Q4, they crossed a milestone with over 20,000 partner accreditations across sales and technical training courses.
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Expecting target TAMs to exceed $100 billion in the coming years.
Product
- Sentinel’s Singularity platform has the first and only unified security data lake with EDR hunting and querying capabilities. It eliminates the need for multiple data query languages and logging solutions from other vendors, resulting in faster, cheaper, and easier cybersecurity data analysis. Sentinel One believes this innovative, integrated approach gives them a competitive advantage in the growing market for security data analytics solutions.
Misc
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They expect dilution to slow to 5% YoY in FY2024, still high but trending in the right direction.
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Employee retention is about 10% higher than the industry average. However, some leadership team members left, which “had minimal effect on us”.
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Strong Glassdoor ratings of 4.9. SentinelOne was named the best workplace and tech company on Fortune’s 2022 U.S. ranking.
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Exposure to Silicon Valley Bank’s insolvency was immaterial, and no financial risks associated with them.
My Take
After delivering strong 92.1% YoY revenue growth, the market reaction to earnings was muted. I assume analysts’ FY24 revenue estimate of $651.26M versus the company’s lower-than-anticipated FY guidance of $640M was the reason. The stock price increased about 7% during the confident and uplifting earnings call, which felt slightly oversold.
Compared to Sentinel One’s 9.4% sequential growth, Crowdstrike’s 9.7% sequential growth at 4x the revenue seems strong. To maintain conviction in Sentinel One, I want to see acceleration in sequential growth soon, as their smaller size is an advantage. That said, the market is big enough for many players, so I avoid reading much into comparisons.
Viewed in isolation, I liked the results. Clearly, the valuation suffers from lack of profitability. I remain concerned about negative profitability. However, sequentially, I expect a 6% increase in shares for FY2024, still high but a big improvement.
The trend to profitability remains on track, which is mission-critical for them, though absolute negative cash flow metrics must improve soon. $1.2B in cash provides enough runway.
I didn’t change my allocation and don’t plan to. Lack of positive profitability mutes conviction, though the relatively small market cap indicating an easy double in share price intrigues me to buy more which I resist. Key metrics I’ll watch closely and want to see improve in particular: $100k+ customers, DBNRR, and cash flow.
Edit: Fixed the statements on dilution. Thanks @wsm007 and @Softie !