SentinelOne Can Go on Attack, Too
Sales are growing, margins are growing, guidance was solid and free cash flow is impressive. Here's how I'm approaching this favorite holding.
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SentinelOne S, another Sarge favorite, went to the tape on Tuesday night, with its fiscal second-quarter financial results.
The small, but growing, high-end cybersecurity provider posted an adjusted earnings per share of $0.01 (unadjusted loss per share $0.22) on revenue of $198.937 million. The adjusted earnings per share print beat Wall Street by a penny. The sales print not only beat Wall Street but was good enough for year-over-year growth of 33%. The lion's share of the adjustment was made for the purpose of stock-based compensation. Annualized recurring revenue (ARR) increased 32% to $806 million, while customers with ARR of $100,000 or more grew 24% to 1,233.
The Executive Take
In the shareholder letter, CEO Tomer Weingarten commented on some problems elsewhere in the industry.
"These are unprecedented times—the frequency, complexity, and costs of cyberattacks are reaching new heights. At the same time, the performance shortcomings of other market offerings are becoming visible to the public. In just the last few months, we’ve seen high-profile breaches and system failures from the top two endpoint market share vendors. These incidents are extremely disruptive for the millions of people and thousands of businesses who expect reliability from their security providers. Our top priority during this time has been to support our customers and enterprises around the world—providing resources and having objective conversations about technology."
Weingarten said in the press release that he's seeing a "distinct rise in customer interest and appreciation for the advantages of our patented AI-powered Singularity Platform to help build higher quality and more durable cyber defense. We remain committed to an open ecosystem platform, superior technology, and earning customer trust through transparency.”
CFO Dave Bernhardt noted, “We outperformed on all key metrics, including record margins and profitability. We continue to lead the industry in terms of technology, revenue growth, and margin expansion. Q2 marked our 12th consecutive quarter with double digit operating margin improvement.”
Operations
As revenue generation for the quarter grew 33.1%, the cost of that revenue increased 13.5% to $50.699 million, leaving a gross profit of $148.238 million. This was good for a unadjusted gross margin of 75%, up from 70% for the year-ago comp. On an adjusted basis, gross margin landed at 80%, up from 77%. Total operating expenses grew 11% to $227.619 million, leaving an operating loss of $79.381 million. That put the unadjusted operating margin at -40%, up from -67% a year ago. On an adjusted basis, operating margin improved to -3% from -22%.
After accounting for interest, other income and losses and taxes, net loss printed at $69.184 million, which works out to a unadjusted loss per share of $0.22, up from the year-ago comparison of a loss per share of $0.31. On an adjusted basis, net income hit the tape at $3.492 million, up from $-24.608 million a year ago. This works out to a positive EPS of $0.01, up from an $0.08 loss.
Guidance
For the current quarter, SentinelOne sees revenue generation at $209.5 million, which is just about on top of Wall Street's consensus view. I have seen differing numbers for this consensus across the media since last night. I show it at $209.47 million. The company also sees an adjusted gross margin of 79% and an adjusted operating margin of -3%.
For the full fiscal year, the SentinelOne projects total revenue of $815 million, which is also slightly above the $813 million that Wall Street had in mind. This was an increase from previous guidance of $811.5 million. For the full year, SentinelOne sees adjusted gross margin at 79% and adjusted operating margin of -5% to -3%.
Fundamentals
Over the first half of the fiscal year, SentinelOne has generated operating cash flow of $44.303 million. Out of that number came capital spending of $1.439 million and $14.544 million in the capitalization of internal-use software. This leaves free cash flow of $28.32 million. That's an operating cash flow margin of 11% and a free cash flow margin of 7%. The company does not return capital to shareholders.
Turning to the balance sheet, the cash position stands at $708.172 million and current assets of $1.021 billion. Current liabilities add up to $587.908 million, which includes deferred revenue of $399.536 million. As we know, deferred revenue is not a true financial obligation unless one does not deliver on goods and services owed. At the headline, SentinelOne's current ratio stands at 1.74. This is strong enough, but once adjusted for those deferred revenues, the ratio rises to a very muscular 5.42.
Total assets ended the quarter at $2.347 billion, including $749.943 million in goodwill and other intangibles. At 32% of total assets, this is worth keeping an eye on, but in my opinion, not enough to worry about just yet. Total liabilities less equity comes to $713.432 million, which includes an additional $103.086 million in deferred revenue. This is a very strong balance sheet. No debt, long or short-term outside of accounts payable.
What the 16 Analysts Say
Since these earnings were released last night, I have come across 16 highly rated sell-side analysts (and quite a few not so highly rated analysts as well). Among the 16 highly rated analysts, after allowing for changes, there are 11 "buy" or buy-equivalent ratings and five "hold" of hold-equivalent ratings. Two of the "holds' chose not to set target prices, so we are working with 14 of those.
Across these 14 analysts, the average target price is $29.79 with a high of $35 (Shaul Eyal of TD Cowen) and a low of $25 (Rob Owens of Piper Sandler). After omitting these two as potential outliers, the average target across the remaining 12 drops just a few pennies to $29.75. For those with an interest, the average "buy" target is $30.64, while the average of just three "hold" targets is $26.67.
My Thoughts: Wow
Color me impressed. There's not a lot that implies that SentinelOne was able to take some business away from CrowdStrike CRWD during the problems in July. As I am also long CrowdStrike, that's fine by me. That said, sales are growing, margins are growing, guidance was solid, free cash flow is impressive, unadjusted profitability is being approached and the company is not there yet only because of the stock-based compensation. Demand for SentinelOne's services does not appear to be waning as high-end cybersecurity will only become more of a necessity going forward than before. On that, make no end, from what my feeble brain can comprehend, SentinelOne's technology is toward the top of the industry food chain.
The Chart, The Plan
I see the stock, that had been up all night, is now trading lower, perhaps as some traders may have been looking for a larger than what we saw pop from what happened over at CrowdStrike last month. That's OK. I think.
Relative strength is strong without being technically overbought. The daily moving average convergence divergence indicator is postured bullishly with all three components in positive territory and with the fast line (12-day exponential moving average) above the slow line (26-day EMA).
That leaves us with the pattern I think I see, which is a rather flat six month long inverse head and shoulders. I show the neckline at about $24.75. I will use that as my pivot, creating a target price of $31. Will I add?
I'm up 23% on the name with a net basis of $20.05. I don't think violating net basis would be that big a deal for this company. I think that SentinelOne will either ultimately succeed or end up being purchased by a larger tech firm for its cybersecurity platform. Yes, I likely add at both the 200-day and 50-day simple moving averages, given the opportunity.
At the time of publication, Guilfoyle was long S, CRWD equity.
