SentinelOne (S +5.26%) recently reported fiscal 2023 first-quarter earnings for the quarter ending April 30 had its share of good and bad news. The question for investors is which of the data metrics is most likely to affect the stock going forward.
Since the company came public a year ago, shares for the artificial intelligence-driven cybersecurity company have been among the most expensive on Wall Street, so investor expectations were high. The mix of information means that investors will need to consider both sides of the coin to properly evaluate this stock.
Here are two good and two bad things about SentinelOne's earnings report. Let's see what insight they offer.
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1. Good: Strong growth across the board
SentinelOne reported $78 million in revenue for the quarter, a 109% year-over-year increase and more than $3 million higher than analysts estimated. New customers drove growth; total customers grew 58% over last year, and those spending $100,000 or more rose 113%.
Additionally, SentinelOne's net revenue retention rate (NRR) expanded to 131%, its highest as a public company. This signals that customers are spending more over time, and this trend is improving.
Lastly, management raised its full fiscal 2023 guidance (for the year ending Jan. 31, 2023) from $370 million to between $403 million and $407 million, implying 100% growth over the fiscal 2022 year. The company's recent acquisition of Attivo Networks is helping this.
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Key Data Points
SentinelOne is a young company that's growing as fast as it can. Judging by its rapid customer growth and how customers are spending more over time, there's not much to pick at here.
2. Good: Improving margins
SentinelOne loses a ton of money, but don't be alarmed. It's common for businesses to lose money when they are prioritizing revenue growth above everything else. However, investors should want to see the company become more profitable as it grows, and that's what SentinelOne is showing.
The company's operating margin improved from negative 165% in fiscal Q1 2022 to negative 115% in fiscal Q1 2023. Management's explanation was simple: Revenue grew faster than expenses. It won't always be a smooth ride -- operating margins were negative 66% the previous quarter, so margins worsened over the past three months.
Still, the year-over-year comparables show improvement, so it's something investors should keep an eye on.
1. Bad: A balance sheet weighed down by stock-based compensation
Many technology companies need to pay talent to remain competitive. However, cash is a precious commodity for young businesses, so they give employees shares of stock instead of massive salaries.
This compensation is a non-cash expense, affecting the bottom line number, but not cash flow. Unfortunately, stock-based compensation dilutes existing shareholders, meaning the existing shares lose value. It's like cutting a pie twice and then four times; the individual pieces get smaller.
SentinelOne issued a whopping $31 million in stock during the quarter, or 40% of total revenue. That's high and not something investors should want to see happen frequently. The business is rapidly growing from a small revenue number, so stock-based compensation should make up a smaller percentage of revenue over time, but it was still shocking.
2. Bad: Profitability will not be coming anytime soon
The high amount of stock-based compensation combined with negative operating margins means heavy losses. SentinelOne's non-GAAP net loss was $57 million for the quarter versus $49 million a year ago. Management pointed to an increased headcount and higher operating costs.
CFO David Bernhardt estimated on the company's earnings call that the business could reach operating profitability by fiscal 2025, which is about two calendar years from now. A lot can happen between now and then, but it's encouraging to see management speak to it.
While the heavy losses are a "bad" thing for this quarter, investors should note that SentinelOne has $1.6 billion in cash and equivalents on hand, plenty of money to endure these losses in the name of growth.
Investor takeaway
Overall, it seems that SentinelOne had a solid quarter. The business continues growing rapidly, and it's great to see customers spending more over time. The company took a step back financially with some higher losses, but it's something that long-term investors should monitor rather than panic over.
The cybersecurity industry is very competitive, but SentinelOne's continued growth shows its product wins over customers.
