Since I just shared my thoughts on SentinelOne here, it seems appropriate to also share my thoughts on CrowdStrike’s Q4:
Revenue & Guidance
-
Revenue was $637.4M, 47.9% YoY, 9.7% QoQ → Revenue exceeded my expectation of $634.48M and accelerated on a QoQ basis, pleasing me.
-
Net New ARR was $221.67M (totaling ARR of $2,560M), 2.2% YoY, 11.9% QoQ → Surprised by the sequential increase since management guided for up to -10%.
-
Remaining performance obligations were $3,368.49M, up 20.4% sequentially. → A record high in adding net new RPO of $570.73M since they exist. Though Q4 is seasonally strong and easy comps vs Q3, great to see customers commit future spending.
-
They guided to $678.2M, translating to $690M revenue for Q1, suggesting 8.3% quarter-over-quarter and 41.4% year-over-year growth if they keep beating their guide by 1.7%. To return to pre-macro sequential growth, they must beat it by ~6%, unlikely.
-
FY2024 revenue guide was $3,014.8M, up 34.5% year over year, or 37.2% ($3,075M) if they beat their conservative guide assuming headwinds continue until year-end. Still, I expect up to 40% YoY at FY2024’s end due to fading macro effects. This requires Q1: $690M (8.3% QoQ) → Q2: $745M (8.0% QoQ) → Q3: $810M (8.7% QoQ) → Q4: $885M (9.3% QoQ). Optimistic but realistic, and first FY guides are usually most conservative.
-
FY2024 net income guide is $580.7M, up from $368.44M in FY2023. → No issue.
-
Reiterated vision to grow ARR to $5 billion by FY2026 end and reach target operating model within FY2025.
-
Revenue growth in U.S. at 44% and international at 57% year-over-year.
Cash Flow & Profitability
-
Subscription gross margin declined to 77% due to investments in data centers and acquiring Humio. Though still within their target range, they expect it to recover to 78% next quarter.
-
Operating income was $59.6M (15% of revenue), down from $80.39M last year.
-
Net income was $111.6M (17.5% of revenue), up from $70.4M.
-
Earnings per share were $0.47, up from $0.30.
-
Operating cash flow was $273.3M (42.9% of revenue), up from $159.72M. Nearly half of the revenue generated cash flow, indicating financial strength.
-
Free cash flow was $209.5M (32.9% of revenue), up from $127.33M.
-
R&D expense was $137.48M (21.6% of revenue). They continue investing substantially in R&D.
-
S&M expense was $203.07M (31.9% of revenue) but declining relative to revenue. Spending appears healthy but trending lower.
-
G&A expense was $44.64M (7% of revenue), consistent with previous trends.
Customers
-
Added 1,873 subscription customers, reaching 23,019, up 41% year over year and 8.9% from last quarter → an acceleration from last quarter, though inflated by small “Falcon Go” customers, which they don’t specify. Falcon Go costs only $300 per year. Still, the raw customer additions hit a record high, even without Falcon Go customers.
-
Added 1,000 Falcon Go customers in the past 6 months. Falcon Go is Crowdstrike’s e-commerce offering, which anyone can buy for $300 on their website. Great to see traction for this group. I’d like to see this excluded from the total subscription customers going forward.
-
Dollar-based Net Retention Rate was 125.3%, down from 127.6% last quarter but up from 124% a year ago.
-
Customers using 5+ modules was 62%, up from 61% last quarter, 6+ modules was 39%, up from 37%, 7+ modules was 22%, unchanged from last quarter → Crowdstrike continues adding value to customers, leading them to buy more. The smaller Falcon Go customers are excluded from the module adoption metrics.
-
ACV per customer was $25,990, up from $24,840 a year ago. → Smaller Falcon Go customers don’t seem to negatively impact this metric.
-
Ending ARR for the $1 million-plus cohort grew 57% year over year. They now have over 400 subscription customers with ending ARR over $1 million using an average of 10 modules.
-
Gross retention rate remained strong at 98.0%.
-
CrowdStrike now serves over 25% of the Global 2000, over 50% of the Fortune 500, and 75% of the top 20 U.S. banks.
-
Crowdstrike is moving from reporting new logo metric numbers quarterly to annually.
- Quarterly fluctuations do not appropriately reflect the health of the growing business.
- Additional details will be provided in the April 4th investor webinar.
- The number of smaller end customers served through partners (MSSPs) is estimated to exceed 18,000.
- Downmarket bundles are also contributing to the overall business health.
Competition & Go-To-Market
- Customers prefer CrowdStrike for its broad platform, simplicity, and lower cost over Microsoft Defender. Deploying Defender requires more effort, leaves security gaps, and costs twice as much.
- Gartner again named CrowdStrike a leader in endpoint protection.
- To drive growth, CrowdStrike appointed Daniel Bernard Chief Business Officer to lead partnerships and channels. He has a proven track record of success at other cybersecurity companies like SentinelOne.
- Claimed to remain in a strong competitive position and average selling prices remain steady.
Pipeline & Channels
-
In fiscal year 2023, managed security service provider (MSSP) annual recurring revenue (ARR) grew over 100% and partner-sourced ARR grew over 50% year over year. Revenue through channel partners reached 83% of total revenue.
-
Despite longer sales cycles and lack of typical budget increases, they achieved a record pipeline in Q1 as organizations continue navigating macroeconomic concerns.
-
The Dell partnership will include:
- Placing software on Dell computers for customer purchase
- Dell selling subscriptions to large and small customers, including a small and medium-sized business (SMB) bundle and device-as-a-service offering
- Driving Dell’s managed endpoint security service
Products
- Emerging cybersecurity products contributed $182M in new revenue, 22% of total new revenue and up 97%. Emerging products revenue grew 116% to $339M, exceeding CrowdStrike’s 2019 IPO revenue. Identity Protection products contributed over $100M in revenue and 1,000+ new customers. LogScale revenue grew over 200%.
- CrowdStrike’s Falcon Go bundle for small businesses with 100 endpoints or less added 1,000+ new customers in under 2 quarters.
Misc
- In FY23, Crowdstrike expanded the team by 46% to over 7,000 people.
- Shares outstanding increased by 4.3% in FY2022, 2.6% in FY2023 they expect an increase of 4.3% in FY2024. Considering the company’s performance I am fine with the dilution due to stock-based compensation.
My Take
I liked:
- The upbeat and confident tone of the call. Several analysts congratulated them on their strong performance.
- Revenue was $637.4M, up 47.9% year over year, 9.7% quarter over quarter, which exceeded my expectation of $634.48M and accelerated sequentially, so I’m pleased with that.
- Remaining performance obligations were $3,368.49M, up 20.4% quarter over quarter. Wow!
- Strong profitability and cash flows, especially the 42.9% operating cash flow margin while still investing in future growth.
- Healthy customer adds and customer retention metrics. Though, I’ll keep a close eye on customer adds since Crowdstrike now focuses more on the lower end of the market, meaning more small and midsize businesses with lower average contract values.
- Instead of a 10% quarter over quarter decline in quarterly annualized recurring revenue growth, they delivered an 11.9% quarter over quarter increase!
The problem is the guidance again, driven by budget scrutiny and longer sales cycles.
Last quarter my $1 million question was: Competition or macro? I believe we got the answer.
The new big question: When will this end?
Here is my thesis: Crowdstrike has a seat-based subscription model. I interpret the stabilization of sequential metrics as a slowdown in layoffs, which is good for seat-based subscription model businesses like Crowdstrike, indicating the endpoint market is not saturated and the market has stabilized.
However, this does not mean we should expect further quarter over quarter acceleration, as businesses are not currently hiring more. So, I assume we’ll see minimal beats for another 1 to 2 quarters and possibly acceleration again in Q3.
I believe assuming Q1 revenue of $690M, 8.3% quarter over quarter growth with a 1.7% beat is realistic and “prudent.” I try to make conservative assumptions (and if these sound too conservative, it’s time to trim) - the last thing I want is a negative surprise every quarter.
I also assume Crowdstrike will achieve around 40% revenue year over year (with luck), more would be very optimistic.
I added after-earnings.