SentinelOne just posted (in my view) great Q3 results with continued strong and accelerating revenue growth combined with rapidly improving margins. I will also compare S1 to ‘early’ Crowdstrike, when Crowdstrike was at a similar quarterly run rate as S1 today (which is Q2 FY19 and calendar year 18. CRWD was still private and numbers are from the prospectus). Stock is down AH, presumably because the lock-up period will expire on Thursday (and apparently moved forward from 31 Dec, however I have been unable to verify that information).
Headlines
Total revenue was $56.0 million in the third quarter of fiscal year 2022, a 128% increase compared to $24.6 million for the same period of fiscal 2021.
Annualized recurring revenue (ARR) increased 131% year-over-year to $237 million as of October 31, 2021.
Total customer count grew more than 75% year-over-year to over 6,000 customers as of October 31, 2021. Customers with ARR over $100K grew 140% year-over-year to 416 as of October 31, 2021. Dollar-based net revenue retention rate reached a new high of 130%.
Gross margin: GAAP gross margin was 64% in the third quarter of fiscal year 2022, compared to 58% for the same period of fiscal 2021. Non-GAAP gross margin was 67%, compared to 58% for the same period of fiscal 2021.
Loss from operations: GAAP loss from operations was $67.4 million in the third quarter of fiscal year 2022 compared to $29.7 million for the same period of fiscal year 2021. Non-GAAP loss from operations was $38.7 million in the third quarter of fiscal year 2022, compared to $25.1 million for the same period of fiscal year 2021.
Revenue
Revenue growth in the last 7 quarters, including YoY and QoQ growth rates:
22Q3 56.0M +128% +22%
22Q2 45.8M +121% +23%
22Q1 37.3M +108% +25% => Partially inorganic QoQ due to Scalyr acquisition (log management tool)
21Q4 29.9M +97% +22%
21Q3 24.6M +103% +19%
21Q2 20.7M +95% +16%
21Q1 17.9M +108% +15%
Revenue growth continues strongly with QoQ growth rates above 20% for the last 4 quarters. 22% QoQ annualizes to 121%, no signs of slowdown yet. In Q2 2019, Crowdstrike grew revenue from 47.3M to 55.7M, a 18% QoQ growth rate.
ARR grew 130% YoY and 20% QoQ, which is a slowdown from 23% in the previous 2 quarters. They added 37M ARR this quarter, compared to Crowdstrike’s 38M and 22% QoQ growth in 19Q2.
Gross margins
Gross margins improved significantly this quarter and management is guiding for long-term 75%-80% gross margins and >20% operating margins, stating that they expect similar margin profile to your average SaaS company.
22Q3 67%
22Q2 62%
22Q1 53%
21Q4 54%
21Q3 58%
21Q2 64%
21Q1 58%
Note that the Scalyr acquisition also results in duplicative storage costs in Q3 and Q4 of this year as customers are migrated to Scalyr: “Reflected in our guidance is our plan to migrate existing customers to our Scalyr back end in Q3 and Q4. The migration will result in some duplicative storage and processing cost as we ensure data and performance continuity. This is intended to further improve data processing for the future and unlock long-term platform and go-to-market synergies.” Therefore, further improvement can be expected next year.
Crowdstrike had 71% gross margins in 19Q2, 4 percentage points higher than SentinelOne.
Non-GAAP Operating Income
Operating income is highly negative but now improving fast:
22Q3 -69%
22Q2 -98%
22Q1 -127%
21Q4 -103%
21Q3 -102%
21Q2 -101%
21Q1 -126%
In the comparative quarter, CRWD had a negative operating margin of -50%, improving from -66% the quarter before.
SentinelOne’s FCF margin improved significantly from -98% last quarter to -37% in Q3.
Customers
SentinelOne now has 6.000 customers growing 75% YoY, stable compared to 75% and 74% in the previous two quarters. They added 600 new customers, or 11.1% sequentially, which is a similar growth rate to Q3 of last year (11.2%). No indications of slowdown in customer growth yet. The average quarterly revenue per customer is $9.3K. Crowdstrike did not report the number of customers in the comparative quarter, however it is clear that Crowdstrike is more focused on the enterprise segment. In the last quarter, Crowdstrike had 14.687 customers or almost $26K quarterly revenue per customer, 3 times the amount of SentinelOne. While Crowdstrike is now moving towards the mid-market segment, S1 is doing the opposite and moving towards the enterprise segment.
Number of customers >100K ARR continues to grow strongly, up 140% and accelerating:
22Q3 140%
22Q2 140%
22Q1 127%
21Q4 111%
21Q3 125%
21Q2 138%
21Q1 not reported
Dollar based net retention rates
Similar to Crowdstrike, SentinelOne continues to release new modules, resulting in record dollar net retention rates this quarter:
22Q3 130%
22Q2 129%
22Q1 124%
21Q4 117%
21Q3 115%
21Q2 121%
21Q1 122%
Crowdstrike’s NRR was similar to S1 in the comparative quarter: 127%
SentinelOne reports gross retention rates of 97% compared to 97.8% at Crowdstrike. While Kurtz like to mention competitive displacements regarding S1 (which in my opinion shows that he perceives S1 as a threat, why waste time otherwise?), these net and gross retention rates do not seem to indicate that customers are flocking from S1 to CRWD.
Guidance and valuation
SentinelOne guided for 61M at the top-end for Q4. Assuming the exact same beat as this quarter, this will translate into another quarter of 128% YoY and 22% QoQ revenue growth.
Valuation-wise and considering after-hours price action, SentinelOne now has an enterprise value of approx. 10.6B and based on my expected revenue of 400M in calendar year 2022 of 400M, SentinelOne is trading at an EV/S of 26.5 2022 revenue while still expected to almost double its revenue in 2022.
My view: We have one of the fastest growing public SaaS companies ever, down 40% from ATH due to the recent sell-off in growth stocks and trading at a compelling multiple relative to the growth rate. Margins are improving rapidly and the growth trajectory is similar to Crowdstrike in its earlier stages. I can see this company growing into a 25-40B company over the next couple of years compared to 10B today. One of the cons is that SentinelOne is not the market leader, however the market is big enough for several competitors and I can see S1 and CRWD both doing well.