“Success is certain if you surround yourself with great leaders, operators, and teammates … and work harder than them.” –Dave Bernhardt, CFO, SentinelOne
How should a textbook rental company respond when it discovers that Amazon has just introduced offerings that will make the giant retailer its newest and biggest competitor?
If it’s 2013 and the company is Chegg, Inc., management finds a conference room and locks itself inside not for hours but for days and weeks, according to Dave Bernhardt, who sat alongside the company’s CFO and other operations leaders as they together considered some of the grim realities of having Amazon as a competitor.
Read More“When Amazon entered the market, pricing on textbooks fell about 40%, so the profit in the business disappeared immediately,” explains Bernhardt, who first joined Chegg as a corporate controller and soon advanced into the vice president of finance role as Chegg tapped into more of Bernhardt’s FP&A acumen.
“We needed to find a way to make our business ‘capital light,’ and the question became: ‘How do we get out of where we are and take our money and put it back into something that will basically give it back to us?,’” recalls Bernhardt, who notes that Chegg’s management quickly zeroed in on partners and competitors facing a similar Amazon threat.
“We partnered with the logistics company Ingram, which did fulfillment for us. Later, we partnered with the publishers themselves when we moved to a consignment model. This meant that we weren’t buying any of these books and thus had that cash available to us,” remarks Bernhardt.
Nevertheless, Chegg’s profits from book rentals were being put on life support.
“We essentially gave to our partners whatever profits existed in the rental business. We had to tell Wall Street, ‘Hey, ignore this side of the business because all we’re viewing it as now is as a low-cost customer acquisition vehicle,’” remembers Bernhardt, who adds that the company then began to aggressively upsell customers to Chegg services consisting of more high-margin products.
“I want to say that at the time Chegg services might have been 5% to 10% of the business, and now it’s probably 95%,” reports Bernhardt, who estimates that the education company’s profit margins today run higher than 80%, on average. Reflecting on Chegg’s response, Bernhardt doesn’t hesitate to characterize fear as being an effective catalyst: “I don’t know that Chegg would be where it is today if Amazon hadn’t entered the market—or at least its transformation never would have happened as quickly or as successfully.” –Jack Sweeney
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CFOTL: Tell us about SentinelOne … what does this company do, and what are its offerings today?
Bernhardt: If you’re thinking about competitive landscape, we operate as an endpoint security company. This is where our roots are, but we really truly believe that cyber defense must be more holistic. Security’s got to be autonomous, faster, and more accurate, and we offer that. We harness AI and machine learning. Our customers choose us because we offer better protection, detection, and remediation, and they’re the structural drivers of our business.
When I think about the transition that we’ve seen and why the endpoint has become so important, I realize that we’re never going back to a traditional, only-office setting. The idea that a firewall or any kind of perimeter security is good enough just isn’t true anymore. We work from airplanes and coffee shops and homes and parks and everywhere, and if you can’t maintain the endpoint, the rest of it doesn’t matter—because once a bad actor can get in, they can infiltrate your network. The endpoint has become very important very quickly. What we saw with COVID was an acceleration of our business, but it was an acceleration to the inevitable. This was always going to happen when you had people working from somewhere else besides an office, and this is something that isn’t going back. You can’t put this genie back in the bottle. This is the future: You now have people working from everywhere at any time.
Read MoreWe provided long-term targets to the Street when we went public, so I need to juggle the need for investments that will pay off in the future and the challenges of making sure that we hit the targets that are out there right now. This is a constant discussion that is going on. We’ve provided long-term targets in which everything gets better—gross margins, operating margins—but I need to do all of this while also sustaining the growth that we’ve been achieving and especially the valuation we have.
It’s really a juggling act. It’s something that I focus on daily, that the executive team focuses on daily, but we do have to make a lot of these decisions. Is it worth going out and spending more money and being less profitable but capturing a larger portion of the market because it’s available to us? Or should we become a little bit more profitable, but at the cost of our market share going down a bit? This is the discussion that we’re constantly having. I think that anyone who’s investing in us now is looking for continued growth, so how do I maintain this? This is something on which I am maniacally focused.
jb
SentinelOne | www.sentinelone.com | Mountain View, CA