SentinelOne Q4 2022

[fish13]

I thought this was a great quarter honestly.

Just running through the numbers, here are the last 5 quarters of YoY revenue growth:

97%
108%
121%
128%
119%

And here are the QoQ numbers:

19%
22%
25%
22%
22%
17%

You’ll notice that there is a slowdown in the latest QoQ number. So shouldn’t that be worrying?

Well, maybe not because the Q1 guide was very strong.

For the last two quarters, SentinelOne has guided for 9% QoQ growth. But Q1 is for 14%!

Putting it another way, the company added $9.6 million in revenue this quarter and without beating the high end of their guidance, they will do $9.4 million in revenue.

I wonder if they’ll speak to that dynamic on the call. This quarter seemed a tad light but next quarter already seems to be shaping up very strong.

Moreover, the full-year guide is for 81% at the high end. I think it’s quite likely that they will do more than 100% YoY with the standard beats and raises. One important thing to point out is that the guidance doesn’t include any contribution from Attivo.

From the shareholder letter, we found out that Attivo does about $30 million in revenue and is growing over 50%. The acquisition (58% in cash and 42% in stock) is expected to close in Q2.

So if the acquisition does close in Q2, let’s say that SentinelOne can recognize two full quarters of Attivo revenue. My guess is that would be at least $25 million in revenue so that means SentinelOne would grow at least 93% without any beats and raises from their current fiscal guide. But we know that isn’t super likely. That’s why I have pretty high confidence they will grow more than 100%, maybe even 110% if we include the Attivo contributions.

And here are some more recent numbers:

Gross margins
54%
51%
59%
64%
63%

Non-GAAP operating margins
-103%
-129%
-98%
-70%
-66%

FCF margins
-86%
-87%
-98%
-38%
-11%

I think this was my favorite thing from the report. Look at the YoY difference in FCF margin! YoY it went from -86% to -11%!! That is just awesome. If anyone was having doubts if SentinelOne could ever be FCF positive, that is some serious evidence.

And here are the QoQ net new 100k customer additions:

46
58
68
71
104

YoY ARR growth:

96%
116%
127%
131%
123%

QoQ ARR growth:

27%
23%
23%
20%
23%

Lastly, here are some interesting quotes from the shareholder letter:

In the fourth quarter, we added a record number of $100K plus ARR customers, a record number of million-dollar plus ARR customers, and closed our largest ever net new customer contract – one of the most influential and leading global internet companies.

over one-third of our fourth-quarter new business was driven by our Singularity modules and DataSet, up from about 20% last year. Our Cloud and Data Retention modules achieved the highest growth, each delivering phenomenal year-over-year growth of over 10X.

Attivo is a premier and highly differentiated solution that will enable us to provide cybersecurity in one of the most critical and dynamic parts of enterprise security today, the identity perimeter. We believe it is the best and most comprehensive identity security platform in the market today. With Attivo’s user-centric identity capabilities, we will be able to support an even more holistic zero trust framework.

Building upon the acquisition of Scalyr, we launched DataSet in February 2022, a revolutionary live enterprise data platform for data queries, analytics, insights, and retention. DataSet expands our capabilities beyond cybersecurity use cases.

For instance, in one of many of our recent joint solutions, Zscaler data is ingested into Singularity XDR and can then be queried and filtered, allowing security teams to quickly triage and respond to attacks. This seamless integration enables enhanced end-to-end visibility, contextual awareness on abnormal activity, automated response, and conditional access

In the fourth quarter, Mandiant selected SentinelOne as a global go-to-market partner. Mandiant is one of the world’s leading IR firms and this strategic alliance brings the best of both worlds to our joint customers – top incident response consultants leveraging the best-in-class XDR platform

I thought this was a good quarter overall and growth isn’t slowing as much as the 17% QoQ growth would make you think. I mean without any beat at all, QoQ growth will be 14% QoQ next quarter.

Best,
Fish

[HorsePlayAndrew]

Nice analysis Fish. I am yet to look at the call but I think the guidance looks very juicy.

Q4 they beat by 6%, so using a similar figure, they should be hitting $80m, 23% QOQ, so showing that Q4 was more of a blip, and back on track with their 2021 QOQ numbers. For me the annual guidance is very exciting, I think they are telling us to expect another 100%+ year.

[anthonyms]

Agreed Andrew - thanks Fish.

I was impressed across the board. I had a slight level of reservation over the slow progress against GAAP margins but the Non GAAP margin improvement was stellar. The free cash flow movement was the greatest upside surprise to me. Everything else was just reassuringly excellent particularly given the strong guidance going forwards.

I totally applaud the separation in guidance from any inclusion of Attivo acquisition and I liked the re-iteration that it is accretive and TAM expanding…

This acquisition aligns with our M&A strategy. First, it expands our addressable market into a $4 billion dollar (Gartner, August 2021) and growing Identity Security market (as of CY22). And within this market, Attivo is gaining share by growing its ARR by over 50%. Second, Attivo’s user-centric identity security is highly complementary and value-add for our XDR platform and customers. It opens new customer and cross sell opportunities. Third, it has a compelling finan- cial profile and strong cultural fit - additive to our hypergrowth and accretive to GAAP and Non-GAAP gross margins.

The ZS integration looks very promising and the Mandiant win look seriously important. It remains to be seen whether this contract would survive the change in control at Mandiant with the Google acquisition but if it does then this partnership could hold even greater importance.

Ant

[wsm007]

I thought it was a fantastic quarter too. In addition to the points you raise, fish, the KPI’s and commentary that spoke the most to me were around ARR.

ARR looked like this:

2020			54	67
2021	75	87	103	131
2022	161	198	237	292

And net new ARR:

2020				13
2021	8	12	16	28
2022	30	37	39	**55**

ARR in Q4 was up 123% yoy in 2022 ($131m → $292m) vs 96% ($67m → $131m) in 2021. That to me means the underlying business has/will accelerate (as ARR is a forward-looking metric - what you expect current customers will spend in the coming year).

COO:

“In Q4, we reported impressive ARR growth of 123%, reaching $292 million. This growth was driven by a healthy mix of new customer additions, renewals and upsells. Our momentum with large enterprises was particularly strong this quarter. We added a record number of customers with ARR over $100,000 and a record number of million dollar-plus ARR customers. All of this is extraordinary and reflects the success of our sales and marketing organizations.”

This CFO pointed to ARR as important to predicting their growth in the guidance section. His specific quote:

“While we don’t specifically guide for ARR, I do want to remind you that we are a subscription business. Our ARR and revenue growth track very closely. Our revenue guidance for Q1 implies that we should be at or better than typical Q1 net new ARR seasonality, which has been down between 25% to 35% sequentially in the past 2 years.”

Hence, I tried to do a similar thing to what I did with ZScaler. I listened well to what the CFO was saying about leading indicators for revenue and then tried to come up with a regression that works for what he pointed to.

And surprise, surprise current quarter plus prior 3 quarters ARR predicts almost perfectly current quarter revenue; r2 of 99.6% (the formula for those so inclined is [(current Q ARR plus prior 3 Qs ARR) x 0.0754 + $0.116m]. Why? Because for a sub business ARR should align perfectly with revenue of the next 4 quarters if you have no churn and a NRR of 100%, and if that’s not the case and you’re growing at a relatively constant rate, then the following quarterly ARR numbers captures your growth and the impact of NRR. So to put that into action we just need a forecast of ARR end of next Q. And the CFO told us in the guidance above that it will be slightly better than atypical Q1 for ARR. So, if we assume a slight slowdown in qoq ARR growth to 15% qoq next q (which is a 21% net new slowdown vs the 25%-35% the CFO gave), then ARR will be $336m and Revenue will be $80.3m vs the guide of $75m at the top, good for 115% yoy growth next Q vs 101% at the top end guide. So I’m feeling very, very confident on where they will end next Q, just as with ZS.

Their full-year guide is also extraordinary - guiding for 80% yoy growth, much better than Upstart at 65%, Datadog at 49% yoy. And they will blow that out of the water:

They have not included any contribution from Attivo in their revenue guide despite this presenting clear cross-sell opportunities in addition to revenue accretion. Attivo is good for at least $40m ARR next year of which they will include more than half - call it $25m, which is another 7% on top of their $370m / 80% yoy guide. If you add that I think they’ll grow by around 115% in Q1 without any Attivo turbo, then next year could be really, really good.

And to make all of this extra sweet, they are guiding for margin improvements - both gross and operating margins.

So in summary - this company is growing like crazy, at similar rates to what CRWD was doing at a similar stage of growth, and looks like they are accelerating, with record new customer additions, large customer additions, ARR and average ARR per customer. Add to this the current tailwinds around security and the guidance for next year, they look to be accelerating and will likely be doing better than CRWD at a similar stage of life - organically as they acquire larger and larger customers. And they’ve just done a fairly big tuck-in acquisition which will present them with cross-sell possibilities, TAM expansion and product differentiation at exactly the right time from a macro perspective.

Sounds to me like a very sure thing with massive tailwinds.

-WSM