Saul's portfolio at the end of 2022 - part 3

Sentinel announced in early December. I’m giving them extra space since while I have confidence in them, there is a lot of disagreement about them, and some smart people I know have sold out while other smart and careful people, like Bert Hochfeld have taken new positions or kept the ones they had. I’ll start with Sentinel’s recent results . Bolding, and comments in parentheses, are mine.

Total revenue was up 106%

ARR was up 106%

Total customer count was up 55%

Customers with ARR over $100,000 grew by 99%

NRR was 134%

Adj gross margin was 71%, up 4 points from 67% yoy, [and up a remarkable 18 points from 53% just six quarters ago.].

Adj operating margin was up 26 points to minus 43% from minus 69% a year ago.

Cash and equivalents were $1.2 billion.

[To me, Saul, that was a Wow! quarter, considering that it’s in the middle of a market meltdown, and everyone else is talking about how bad the macro is**.**

But let’s go on to what they said in the Conference Call , that you may not be aware of. What you see below is from my notes, and therefore may be shortened or paraphrased.It’s worth reading through what follows below if you are trying to make up your mind about them.]

Sentinel’s CONFERENCE CALL (as paraphrased, shortened, and organized by me for my notes, but what they said to the best of my ability).

We reported another quarter of triple-digit revenue and ARR growth with significant margin expansion, meaningfully ahead of our guidance. Once again, we achieved a Rule of 60, and we are raising our full year revenue and margin guidance.

We will focus on two key areas; one, details of our quarterly performance; and two, the actions we are taking to enable our path to profitability and to execute in today’s environment.

Financially, we have taken a more prudent approach to investments like moderating new headcount growth. And operationally, we are streamlining our teams to unlock higher productivity and performance.

We have expanded operating margin by over 25 points yoy for five consecutive quarters. We expect that to continue in Q4.

We added over 600 new customers in the quarter. Our customer base now exceeds 9,250. That’s well over 3,000 more businesses added in just the last 12 months. Our customers over $100,000 grew nearly 100%, reflecting continued traction with larger enterprises.

Building on our partnership with CISA, we also extended our success in the federal arena by securing three new agencies during the quarter.

Q3 was a record quarter for Singularity Cloud, which once again remained our fastest-growing solution in Q3. We are seeing strong adoption of cloud security among new and existing customers. We believe we are still in the early innings of a very large expansion opportunity.

NRR is proving to be resilient regardless of macro conditions. Our customer retention remains extremely high. We expect NRR to continue to drive a healthy base of growth.

Our momentum with channel partners continues to shine, especially with MSSP’s and incidence response providers. Our partners and customers want automated solutions that reduce reliance on human intensive processes, while offering best-in-class protection. We don’t compete with our partners, but enable them. This makes us the partner of choice for MSSPs across the globe. We are partnering with most of the leading MSSPs.

THE MACRO CLIMATE: Consistent with many other software companies and even our competitors, we are seeing higher cost consciousness and prudence around IT budgets. That’s leading to elongated sales cycles and limited budget availability. These factors are most pronounced in larger deals and they require higher level of evaluations and approvals.

And finally, foreign exchange presented an incremental headwind in EMEA. While we price in dollars, foreign exchange can impact the purchasing power of international organizations. Still, we are growing at a very healthy pace with ARR growth over 100%.

We believe these macro factors are temporary and there is no change to the long-term opportunity for our leading next-generation security. Our pipeline once again grew to a new high, giving us confidence in the opportunity in front of us.

ON RAMPING SALES REPS: We believe we can elevate our execution further regardless of market conditions. We moved quickly to hire a lot of terrific talent over the past year. Nearly half of our sales reps are newer and still ramping. As these reps ramp up the maturity curve, it should deliver meaningful productivity gains and improve our execution further.

ON LARGE ACCOUNTS: And finally, a more tactical change, placing a higher emphasis on the largest account opportunities in our pipeline. We have made significant progress in the past few years winning Fortune 500 and Global 2000 accounts.

We achieved a healthy mix of new customer additions and existing customer renewals and upsells. Our number of customers over $100,000 grew by 99% yoy to 827, much faster than the total customer count, and growth in customers with ARR over $1 million was even faster.

Over two-thirds of our ARR comes from large enterprises and customers over $1 mil grew by more than 100% yoy in Q3. This is the right next step to drive further success with the largest enterprises.

ON MSSP’S AND CUSTOMER COUNT. One reminder on customer count is that we count each MSSP as just a single customer.

Therefore, a lot of customers that we added in the quarter can be uncounted as they are actually masked by one master MSSP service provider that basically onboards all of them.

ON MARGIN PROGRESS: Our gross margin in Q3 was 71.5%, up 5 points yoy. I CAN’T OVERSTATE the progress we have made on gross margins, improving nearly 20 points since the beginning of last year.

Operating margin was up 26 points yoy to minus 43%.

We beat our EBIT margin guidance by 14 points. On a dollar basis, we also reduced our operating losses compared to the prior quarters of fiscal 2023. We are achieving scale, leveraging our channel and globalizing our talent pool.

Our magic number was over 1.2x. These results signify our ability to maintain a balance between compelling topline growth and progress towards our profitability targets.

GUIDANCE: In Q4, we expect revenue of about $125 million, for 90% yoy growth. For the full year, we are raising our revenue outlook to $421 million, reflecting 105% growth. This is up over $4 million from our prior guidance.

To be clear, we expect Q4 Net New ARR to be at least 20% greater than last quarter was. And we believe this is a prudent view that reflects a continuation of the macro headwinds we experienced in Q3, yet we are in a position to deliver a seasonally strong end of the year.

We expect Q4 gross margin to be about 72% and we are increasing our full year gross margin guidance of 71% to 71.5%. This is up from prior fiscal 2023 guidance of 70.5% to 71% and up about 8 points year-over-year.

We expect Q4 operating margin of minus 39%, improving by 27 points yoy and implying a Rule of 50 for the quarter.

At the same time, we are improving our full year operating margin outlook to negative 50%. This new operating margin guidance is up 6 points at the midpoint from our prior range. It is also up 35 points compared to last year.

Our long-term margin targets remain intact and our goal is to reach operating breakeven for fiscal year 2025, which is basically calendar year 2024. We are making excellent progress.

We believe we will deliver at least 50% total ARR growth in fiscal year 2024. This is also based on our growing pipeline, strong win rates, high retention and expansion rates, and the enterprise need for security.

[In the Q&A a little further down, they emphasize that they consider this a floor, something that they can’t miss, and that they will be raising throughout the year.]

We are increasing our focus on profitability and cash flow . We don’t intend to sacrifice growth, but we are moderating the pace of our investments and focusing on the most strategic areas.


While Microsoft’s Defender offering might be perceived as free, if you look at integration costs, management costs, etc., they actually bump up the price in a pretty significant manner. We we have seen more and more Microsoft displacements, customers rebounding from Microsoft’s offering. Some citing it as the most expensive solution they had to manage over the years.

The ARR tentative guidance for next year is really a floor . When I think about it, we believe it’s conservative. We are looking at it as something we can build from.

Our OpEx spend, a lot of it is highly elective and we will invest when it makes sense and we will pull back when it doesn’t. We basically cut down our losses by about half every year and I would anticipate that to continue into next year

OUR LONG-TERM GOALS AND OUR PATH TO THEM IS UNCHANGED, no matter what the growth is. [This is a crucial thought!]

Comment from an analyst - I appreciate the color you gave for Q4 and ARR for at least 20% sequential growth. Others in the broader market are calling for no seasonal budget flush, no Christmas this year, even sequential declines in Q4.

[Saul here again: This is an inspiring read and very positive and confident. Very much like Snowflake as I see it. It’s only the 5th highest position of my big five, so I’m not being silly about it, but I see no reason to lose confidence in Sentinel. There is no way that I can be sure about this, or any other company, but it was hard to go through this presentation and not be impressed. Just my way of thinking, you have to decide for yourself.]