SentinelOne published its second-quarter report for fiscal 2027, and management describes it as "an exceptional quarter of execution" with "record profitability".
In that exact same quarter, the net loss under generally accepted accounting principles widened by 30%.
Both sentences are true. This piece is about how.
Errors or inaccuracies are possible. Spotted something that looks wrong? Write to me and I will correct it.
What This Company Does
SentinelOne sells endpoint protection - computers, servers and cloud workloads.
And the central idea in its product is that it does not look for signatures of known malware, but for behaviour.
The old approach compares every file to a list of known malware. It works excellently against attacks already seen, and poorly against ones that have not been.
SentinelOne builds a model of what is normal on a given machine, and raises an alert when something deviates - a process starting to encrypt files, a connection to an unusual address, a permission changing. Which is why the company describes itself as "AI-native".
And this is a business sold by subscription per device, so the measure that decides is not quarterly revenue but ARR - the annualised recurring revenue from all customers at the measurement date.
The Quarter
| $ thousands | The quarter | Year ago | Change |
|---|---|---|---|
| Revenue | 291,981 | 242,183 | +20.6% |
| Cost of revenue | 81,563 | 60,474 | +34.9% |
| Gross profit | 210,418 | 181,709 | 72.1% |
| Research and development | 96,882 | 79,091 | +22.5% |
| Sales and marketing | 123,545 | 127,879 | -3.4% |
| General and administrative | 56,327 | 51,474 | +9.4% |
| Restructuring | 24,425 | 3,883 | 6.3 times |
| Operating loss | -90,761 | -80,618 | -31.1% |
| Interest income, net | 6,151 | 12,196 | -49.6% |
| Net loss | -93,400 | -72,019 | -32.0% |
| Loss per share | -$0.27 | -$0.22 |
| The quarter | Growth | |
|---|---|---|
| ARR | $1.218 billion | +22% |
| Customers with $100,000 or more | 1,715 | +13% |
| Cash and investments | $813 million |
How the Same Quarter Is Both a Record and a Deterioration
The non-GAAP operating margin: 10%, against 2% a year earlier. That is a real and impressive jump.
The GAAP operating margin: minus 31%, against minus 33%.
The gap between the two measures is 41 percentage points.
And it is mainly stock-based compensation: $81.3 million in the quarter, which is 27.8% of revenue.
And what makes this quarter particularly interesting is a third line: restructuring expenses of $24.4 million, against $3.9 million a year earlier - 6.3 times.
That expense is stripped out of the non-GAAP measure, and is not stripped out of GAAP. So it alone explains almost the entire deterioration in the bottom line: the net loss widened by $21.4 million, and restructuring grew by $20.5 million.
In other words: the quarter in which the company celebrates record profitability is also the quarter in which it paid for efficiency. And those are precisely the same thing, measured twice.
The Operating Leverage, Which Is the Positive Story
Revenue rose 20.6%. Sales and marketing expenses fell 3.4%.
That is the most important line in the report in the company's favour.
From $127.9 to $123.5 million - a fall in absolute terms, while revenue grew by a fifth. As a share of revenue, sales and marketing fell from 52.8% to 42.3% - a drop of 10.5 percentage points in one year.
And that is what turned the non-GAAP margin from 2% to 10%. Not a new product and not a higher price - simply a halt in the growth of the sales machine.
And the guidance reflects continuation: for the full year the company guides revenue of $1.202 to $1.207 billion, and non-GAAP operating income of $124 to $128 million.
And the Gross Margin, Which Fell
GAAP gross margin: 72%, against 75%. Non-GAAP: 77%, against 79%.
And the explanation is in the cost line: cost of revenue rose 34.9% - almost twice the pace of revenue.
And in security software running in the cloud, cost of revenue is mainly compute and storage infrastructure. The release does not detail the source of the increase, so I state the fact and not the explanation - but the obvious hypothesis is that a model analysing behaviour in real time consumes compute, and that is a cost that grows with usage.
This is not unique to SentinelOne. The same night, at both Rubrik and Marvell cost of revenue grew faster than revenue. Three companies, three different businesses, the same direction.
And one more line worth noticing: interest income was cut in half - from $12.2 to $6.2 million. On a balance of $813 million, that says the yield on cash has fallen - and that is falling interest rates entering the accounts.
And the Comparison That Cannot Be Avoided
Exactly two days ago CrowdStrike published its quarter. The two companies compete in the same market, for the same customers.
| SentinelOne | CrowdStrike | |
|---|---|---|
| ARR | $1.218 billion | $5.84 billion |
| ARR growth | +22% | +25% |
| Revenue growth | +21% | +26% |
| GAAP operating income | -$90.8m | -$33.2m |
| Non-GAAP operating margin | 10% | 25.3% |
CrowdStrike is 4.8 times larger in ARR, and grows three percentage points faster.
And that is the hard part of this figure: when the larger player in a market grows faster than the smaller one, the gap between them widens rather than closes. That does not say SentinelOne is not a good business - it does say it is not closing a gap.
What I Will Check Next Quarter
| The gross margin | 72% GAAP - whether the decline stops |
| Sales and marketing | Fell in absolute terms - whether that is sustainable |
| Restructuring expenses | $24.4m this quarter - whether it is one-off |
| The ARR run rate | 22% against 25% at the larger competitor |
| Large customers | 1,715, growing only 13% - slower than ARR |
| Interest income | Cut in half |
הזווית שלי
דעה אישית של אילן אברמוב - לא ייעוץ ולא המלצה
This report is one of the best demonstrations I have seen of the question "by which number are you measuring".
Because there is nothing misleading here. The company published both numbers, clearly and in the same release. Whoever reads non-GAAP operating profit sees a jump from 2% to 10%; whoever reads GAAP net loss sees a deterioration from $72 to $93 million. Both are real.
And what I try to hold in cases like this is: the non-GAAP measure is good for answering "is the business improving", and GAAP is good for answering "what does it cost the shareholder". Both questions are necessary.
The answer to the first here is genuinely positive. A 10.5-point drop in the sales-and-marketing ratio within a year is a real operating achievement, and it is the only reason the non-GAAP margin jumped.
The answer to the second is less comfortable. Stock compensation of 27.8% of revenue is not cash, but it is dilution - and the share count did rise from 330.9 to 341.5 million over the year. Anyone stripping compensation out of earnings should remember the denominator grew.
And what troubles me most in the report is neither of those two, but the gross margin. 75% to 72% is a meaningful decline at a software company, and if the source is the compute cost of running models, that is a cost that grows with usage rather than shrinking. And that is exactly the opposite of classic software logic, where each additional customer costs almost nothing.
This is the phenomenon I saw last night at three different companies, and wrote about in the day's summary. In my view it is the real story of this quarter.
(It is important to stress: this is my personal opinion only, and nothing herein constitutes a recommendation to take any action.)
