Strictly Business: S and CRWD Earnings Recaps

Thoughts on recent reports from SentinelOne and CrowdStrike

There was no rest for the weary to begin June. SentinelOne kicked things off with a June 1 report. CrowdStrike immediately followed up June 2. Below is my take on their respective quarters…

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S – SentinelOne (S1) reported what turned out to be a complicated quarter June 1. It was the first report incorporating the Attivo acquisition, so there was naturally more to sort through. Unfortunately, after all the sorting I had just as many questions as answers.

First and foremost, the headline fell short of my expectations. Even with management’s limited guiding history, I was looking for $79-$80M in revenue and an $87-88M Q2 guide excluding any Attivo contribution. The combined revenue was just $78.3M with a total guide of $96M. I honestly anticipated more in both categories.

The shortfall was even more confusing considering some of the supporting numbers and comments. Gross margin hit a record 68.4%, a strong showing versus 65.7% last quarter and 53.4% last year. As a result, the FY gross margin guide was bumped to 69-70%. A record 750 new customers were added, bringing the total to 7,450 (+55% YoY). Net retention rate hit a record 131%. International business now represents 33% of the total and grew 129% YoY. In addition, S1 landed its largest US federal government deal to date and exits the quarter “with our largest ever pipeline.”

That all seems great. So, where’s the hang up? Well, a few things rubbed me the wrong way. First, expenses jumped considerably this quarter. That meant cash flow and loss margins took a sharp step back from prior quarters. Next, management kept its previous -55% FY operating margin guide, suggesting a longer slog toward profits. Lastly, I thought management was subpar handling its first call combined with Attivo. Every company I’ve ever owned is asked by analysts about organic versus combined numbers when adding an acquisition. In this case, S1 sounded almost unprepared. Rather than a clear breakdown of the two businesses in their first joint quarter, messaging was suspiciously vague with the comment management did not plan to break out the two going forward. Most notable was clumsiness by the CFO on exactly how the two companies contributed to the updated FY guide. Two analysts asked specifically, and neither answer was particularly strong. He did target “low-to-mid 90’s” Q2 organic growth with “mid-80’s” for the FY, which are decent enough rates. However, it shouldn’t have been this difficult. Frankly, it felt like management couldn’t engineer a guide that looked strong off its initial Attivo numbers while still leaving room for beats going forward. It also smelled like a group that might not have as much visibility as thought on exactly how the combined company will track the next few quarters. Maybe those aren’t red flags, but they are some shade of yellow for sure. I must admit to not feeling great about it.

Is SentinelOne still making inroads toward being a successful company? I’d say yes. But it has also run headfirst into an environment where current and potential customers are watching every cent going out the door. That makes every new dollar tougher to win. It also means recent progress on improved cash burn and narrowing losses likely slows considerably. Since the path to profits is an important part of any thesis, I exit the quarter with considerably less conviction in SentinelOne.

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CRWD – Well, CrowdStrike gave us another CrowdStrike quarter June 2. I wrote last month I hoped to see “60% growth [with] the usual strong profits/cash flows.” I’d say everything was on target. CRWD posted $488M in revenue for 61% YoY growth. Gross margin held at 77% with subscription gross margin at 79%. International business ticked up to 29% of the total growing at 71% YoY as CRWD expands its global presence. Net new annual recurring revenue (ARR) was seasonally light but exceeded expectations and was still large enough to grow total ARR 11% QoQ. Operating cash flow was a record $215M with free cash flow a record $157M. That in turn led to $83M in operating and $75M in net income, both records as well. Management felt comfortable enough to guide for 53% growth next quarter while raising the FY estimate to 52%. I’d anticipate something closer to 59-60% in Q2 and 55% on the year with the same record cash flow and profit trends. That’s an impressive combination of top line performance and bottom-line execution at this scale.

Eyeing supporting metrics, CrowdStrike added 1,600+ new customers for the fourth consecutive quarter, bringing the total to 17,945 (+57% YoY). 59% of those customers are now using 5 or more modules versus 57% last quarter and 50% last year. 35% are using 6+ (vs 34% and 27%). With 70%+ now using 4+, management decided to retire that metric and initiate a 7+ category instead. The 7+ figure debuts at 19%, showing customers have no issue embedding several CRWD products into their operation. With 22 modules and a sturdy customer base, there appears to be plenty of room for continued upsells.

As usual, CEO George Kurtz expressed plenty of confidence on the call. He called the current demand environment more robust than last year with no visible slowdown in “the willingness to buy security.” The CFO agreed stating, “Given the current geopolitical environment and growing regulatory requirements, such as GDPR, CISA reporting mandates and the forthcoming SEC cybersecurity disclosure requirements, we believe the essential nature of our offerings is increasing.”

Kurtz also touted CRWD’s cash flow as a tool for continuing investment “at a time when companies are forced to reduce their spending and hiring plans.” That included a record number of net new hires this quarter. With $2.15B in cash, management is very comfortable it can seize any opportunities that come its way including potential acquisitions. In that respect, CRWD is dealing from a position of strength.

All in all, I’m happy with the quarter. Even in a tightening environment, the general need for increased security appears intact. Kurtz believes CrowdStrike has “a winning formula that includes scale, growth, profitability, and free cash flow.” I’d tend to agree.

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Please remember I am not a Financial Advisor and nothing here should be taken as investing advice. All thoughts and opinions are for informational purposes only. As usual, thanks for reading.