CrowdStrike First Quarter Earnings

Digging through the results of this disruptor.

Today's earnings review is powered by Commonstock:

1. Demand

CrowdStrike guided to $462.1 million in revenue while analysts were looking for $464.4 million. CrowdStrike posted $487.8 million, beating its own expectations by 5.6% and analyst estimates by 5.0%.

Analysts were also looking for:

  1. $1.90 billion in ARR. CrowdStrike posted $1.92 billion, beating expectations by 1.1%.

  2. $2.58 billion in RPOs. CrowdStrike posted $2.35 billion, missing expectations by 8.9%. More on this later.

  3. 17,783 subscription customers. It reported 17,945 customers, beating expectations by 0.9%.

ARR = annual recurring revenue; RPO = remaining performance obligations

More context on demand:

  1. Last quarter, CFO Burt Podbere told us that sequential net new ARR growth as well as RPO growth would be challenged by multiple 8-figure deals closing in Q4 2022. That's why sequential RPO growth especially was so slow.

  2. CrowdStrike incurs the vast majority of its operating expenses when on-boarding the first module for a client.

    1. More module adoption from there is largely profit and so feeds incremental margin expansion.

    2. Now that CrowdStrike has over 70% of its client base with 4+ modules, it will no longer disclose this metric. Instead, it will disclose 5+ modules, 6+ modules and now 7+ modules to highlight the strong momentum it's seeing in terms of module up-selling. Investors had been told to expect this for a few quarters.

  3. CrowdStrike’s gross retention rate “reached an all-time high” which implies it was above the 98.1% result that it reported last year.

  4. CrowdStrike did get a pandemic boost via workforces becoming more distributed and remote which required broader endpoint protection.

    1. This elite 60%+ growth is on top of that material boost.

  5. International growth of 71% outpaced domestic growth of 59% as CrowdStrike begins to realize returns on its global investments. A fortress balance sheet allows for these investments to comfortably take place.

2. Profitability

CrowdStrike guided to $0.23 in earnings per share (EPS) with analysts looking for the same. Its net income guidance of $54.3 million also implied an 11.8% margin. CrowdStrike posted $0.31 in EPS, beating expectations by 34.7%. It also posted a 15.3% net income margin which beat expectations by 350 bps. This is evidence that the incremental growth it delivered in the quarter flowed down the income statement quite nicely -- it was efficient, profitable growth.

CrowdStrike also guided to $64.1 million in non-GAAP operating income with analysts expecting $65.1 million. It generated $83 million, beating its expectations by 29.4% and analyst estimates by 27.4%.

Analysts were also looking for a 76.8% gross margin. It's unclear to me if this was subscription gross margin guidance (where CrowdStrike focuses) or overall gross margin guidance. If it's for subscription gross margin, the result beat expectations by 190 basis points (bps). If it's for overall gross margin, it missed by 10 bps.

GPM = gross profit margin; NI = net income; FCF = free cash flow; bps = basis point = 0.01%

More margin context:

  1. The gap between GAAP and non-GAAP NI margins is powered by stock based compensation. Q4 2022 FCF margin was also held back by an IP transfer tax charge via the Humio M&A. It would have been 45.7% without this help.

    1. The low point of the mostly positive report was stock-based compensation of $102.4 million vs. expectations of $85 million. Still, Stock based compensation expense growth is expected to slow this year with the firm’s fully diluted share count poised to grow by roughly 1.2% in calendar 2022. Previously, CrowdStrike thought this growth would be 2.0% for the year.

  2. Cash flow margins were impacted by capital expenditures more than doubling YoY to support rapid growth in products and geographies.

CrowdStrike has $2.15 billion in cash and equivalents on its balance sheet vs. $2 billion last quarter.

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3. Guidance

Fiscal 2023 (calendar 2022):

  1. CrowdStrike had previously guided to $2.15 billion in sales and analysts wanted the same.

    1. CrowdStrike revised that guidance roughly 2.2% higher to $2.20 billion.

  2. CrowdStrike had previously guided to $300.5 million in operating income with analysts looking for $308.1 million.

    1. It revised its guidance to $312.2 million which represents a 3.9% raise to its own expectations and a 1.3% beat to analyst estimates.

  3. CrowdStrike had previously guided to $1.08 in EPS while analysts wanted $1.10 in EPS. CrowdStrike guided to a $1.20 EPS midpoint. This beat its own expectations by 11.1% and analysts estimates by 9.1%.

CrowdStrike’s Q2 fiscal year 2023 guidance was:

  1. $514.8 million in revenue (1.0% analyst estimate beat).

  2. $0.275 in EPS (14.6% analyst estimate beat).

  3. $71.9 million in operating income (8.8% analyst estimate beat).

4. Notes from Founder/CEO George Kurtz

On Starting the Year Strong:

The company's fiscal 2023 is off to a "fantastic start" with highlights such as a record number of deployments in public cloud environments (accelerated QoQ), a record for net new Falcon Complete ARR and continued rapid module adoption. Notably, identity customers grew 30% sequentially as uptake of that service remains robust.

Kurtz described the current environment for demand as even better than the first quarter last year. Considering endpoint security supposedly got a large boost from distributed workforces amid social distancing, this was a notable positive to me. Things are not slowing down in the world of cybersecurity.

CrowdStrike remained the largest vendor of modern endpoint security but leapfrogged to number one in its categories overall per IDC's latest security report. CFO Burt Podbere expressed confidence in this market share continuing to grow from the current 12.6% mark.

The themes of the call were "strong differentiation" and "wide moat."

On Go-To-Market:

Earlier in the year, CrowdStrike expanded its free trials from 4 modules to 12 modules to encouraging experimentation. Kurtz is "pleased" with the performance and conversion metrics from this so far. No other commentary was offered.

On Worsening Macro:

"We haven't seen any slowdown in deal velocity. This is not discretionary spend... we see no indication that tailwinds will slow."

Founder/CEO George Kurtz

Kurtz also pointed to a large value proposition builder for CrowdStrike: Agent consolidation. Moving from a half dozen vendors to just CrowdStrike's single, light-weight, cloud-native agent works wonders in limiting costs (and allows CrowdStrike to charge more).

CFO Burt Podbere chimed in here to assure investors that not only does demand remain extremely strong with its pipeline setting new size records, but they've seen no change to discounting needs to win over this new business. They're not winning with price cuts, but with incremental product utility.

On Competition:

Kurtz highlighted a key S&P 500 member win that displaced Microsoft despite CrowdStrike's offering being more expensive. Another large client -- after months of issues with Microsoft and then a large breach -- turned to CrowdStrike for incident response and remediation. Soon after, it fully on-boarded Falcon Complete within 24 hours after choosing it.

Kurtz was noticeably excited on the call about Broadcom buying VMWare. It has been taking Carbon Black (owned by VMWare) marketshare for years and thinks this will merely accelerate that trend (like when Broadcom bought Symantec)

“We continue to win at a very high rate vs. the competition. No change there.”

Founder/CEO George Kurtz

On the Cybersecurity and Infrastructure Security Agency (CISA):

“Many agencies can now procure a contract with us through the CISA deal. There’s tremendous interest within areas like identity. They all know it’s the leading product in the industry… This is 10 years in the making to get the contract and the runway for federal, state and local is very long.”

Founder/CEO George Kurtz

Remaining notes:

  1. Humio won several new and existing CrowdStrike customers including a Fortune 100 industrial vendor a a Fortune 500 materials manufacturer.

  2. Emerging product ARR (includes log management and identity) again grew by over 100% YoY this quarter.

  3. CrowdStrike expanded its strategic relationship with Cloudflare with depended integrations to “strengthen Zero Trust posture of joint customers.” Cloudflare became a CrowdStrike customer last quarter.

5. Notes from CFO Burt Podbere

On the Magic Number:

Magic number refers to net new subscription revenue multiplied by 4 and then divided by the company’s sales and marketing expense. Anything above 1.0 is a sign to Podbere to lean even more heavily into growth spend. The fact that sales grew 61% YoY yet its magic number rose sequentially is a great sign that there's still plenty of productive incremental spend on growth left for the company.

On Hiring:

CrowdStrike remains full speed ahead with its hiring plan for this year. It added a record number of new employees this past quarter. While some companies slow down hiring and even layoff workers, CrowdStrike is business as usual. It thinks hiring could even accelerate from here with all the new talent becoming available via layoffs.

The company also sees multiple compression within its competitive landscape as an opportunity to possibly get more aggressive with M&A.

6. My Take

This report was almost entirely positive. There was a time when CrowdStrike was thought of as being propped up by the pandemic with its performance worsening when it finally ended. That is not coming to fruition with the company's growth & guidance remaining admirably impressive.

There were two things to pick at here in my view -- slow RPO growth and hefty stock based compensation (SBC). RPO growth doesn't concern me all that much based on the strong forward demand guidance and the uniqueness of Q4 2022 large deal landing. SBC also doesn't concern me as share count growth is expected to be well below 2% for this calendar year. Everything else was strong and I'm very pleased overall.

I have no interest in selling any shares. Still -- regardless of how well the company is doing -- I'd need more multiple compression to justify adding to my already large stake as it remains quite expensive at about 120X earnings and 50X free cash flow.