“Bear, here is what I thought (…)”
@ZoroSGInvesting, I thought that was an excellent post. You made some very important and relevant points.
I just wanted to share some additional thoughts about the math and behavior of ARR and net new ARR in particular. This is an excerpt of a discussion I had with @Bear off-board, but thought some others might find it useful as well:
One question I asked myself that was motivated by @Bear’s post is this: Is their 20% QoQ net new ARR guide for Q4 consistent with their revenue guide or not?
To make it easier to follow the numbers, have a look at below table:
Now, by guiding for 20% QoQ net new ARR growth they effectively guide for $546M in total ARR. So ARR/4 would be 136.5. Historically, actual revenue has then been in-between 90% and 95% of the actual ARR/4 figure. Using the net new ARR guide we get ARR/4 of $123M -$130M. They guided revenue to be at $125M at the midpoint, right in-between.
So, bottom-line, they guided revenue through ARR calculations to be in-between 123 and 130M and they guided revenue directly to be at 125M at the midpoint. Makes sense to me and pretty consistent.
What might be surprising to some is that if revenue changes by just a few percent, then net new ARR will change by tens of percent and vice versa:
you could do this calculation the other way round which shows you that QoQ net new ARR growth is an extremely lumpy metric, which is why I am always careful interpreting too much into changes, or guides in this metric:
they guided for 125M in revenue. Since actual revenue is historically in-between 90 and 95% of total actual ARR/4, you can get an equivalent ARR/4 guide in a range of 131.6 to 138.9. This translates to a total ARR guide of 526.3M to 555.6M. Now comes the interesting part: this translates to a net new ARR guide of 38.9M to 68.2M OR a guided net new ARR growth range of -20% to +40%; a huge range of possible outcomes which are all consistent with their revenue growth guide.
By the way, this is nothing unique to Sentinel, but rather a consequence of the math that applies to every company that quotes and guides ARR.
So I think we should just be careful not to interpret too much into net new ARR growth and as @Bear rightfully pointed out to me, guiding for 20%+ QoQ net new ARR growth for next quarter seems somewhat silly for two reasons. First, given the large range of possible outcomes for net new ARR growth when guiding for $125M in revenue and second, given that they just missed their last net new ARR guide.