Allow me a little bit of a comment here at the risk of wading into a dogfight. I feel we don’t often enough look at the cash flow statement, focusing disproportionally on the P&L…FCF is a non-gaap number generally calculated from the CF statement that is useful for valuing companies.
It is not universally calculated the same way. And it is not cash in the bank - for that you need to go and look at the cash flow statement right at the bottom, where it shows what happened to your cash and cash equivalent balances for the year. It specifically excludes all the cash flows the company gets or pays for financing activities (say you borrow money and get cash in return - excluded, issue shares and get cash in return - excluded, pay cash for an acquisition - generally excluded). SBC is absent from all of this as it is a non-cash expense (the cash flow statement excludes all non-cash items), same as depreciation, amortisation and other accruals like accruals for taxes (the CF statement only includes the actual cash taxes paid in a period) for example.
CRWD has this to say in their latest release about FCF: “Free cash flow is a non-GAAP financial measure that we define as net cash provided by operating activities less purchases of property and equipment and capitalized internal-use software and website development costs. We monitor free cash flow as one measure of our overall business performance, which enables us to analyze our future performance without the effects of non-cash items and allow us to better understand the cash needs of our business. While we believe that free cash flow is useful in evaluating our business, free cash flow is a non-GAAP financial measure that has limitations as an analytical tool, and free cash flow should not be considered as an alternative to, or substitute for, net cash provided by operating activities in accordance with GAAP. The utility of free cash flow as a measure of our liquidity is further limited as it does not represent the total increase or decrease in our cash balance for any given period. In addition, other companies, including companies in our industry, may calculate free cash flow differently or not at all, which reduces the usefulness of free cash flow as a tool for comparison.”
Free cash flow aims to calculate the cash flow that a company would have generated if it wasn’t actually financed the way it is, and didn’t receive things like proceeds from share issues that it actually may have received, didn’t receive or repay any loans, or pay cash to buy companies, which it likewise may have done. CRWD’s FCF does not include the $38.7m cash that they received last Q from investing activities, for example. FCF also excludes some actual, real cash outflows from investing - generally reducing cashflow only by the capex part of investing activities (and in CRWD’s case also by the cash they spent on developing software for internal use). CRWD deducted $74m of its $79m cash used in investing activities last quarter, and $35m of the $41m in the quarter before to arrive at FCF.
For CRWD - go and have a look at what they adjust their P&L for on p11 of their latest 10-Q to get to operating CF: https://ir.crowdstrike.com/static-files/49137c3e-100d-4ad7-8… - it’s a list of 16 non-cash things, one of which is SBC. Their big kicker is that deferred revenue of course gets added to operating loss as it’s cash actually received. So FCF includes all “operating” cash flows and aims to exclude all “non-operating” cash flows.
As another example have a look at ZI (which has debt and pays interest) - they specifically show unlevered FCF - i.e. with leverage aka debt taken out. CRWD does not specify that because they have no debt. ZI defines FCF thus: “We define Unlevered Free Cash Flow as net cash provided from operating activities less (i) purchases of property and equipment and other assets, plus (ii) cash interest expense, (iii) cash payments related to restructuring and transaction-related expenses, and (iv) cash payments related to integration costs and acquisition-related compensation. Unlevered Free Cash Flow does not represent residual cash flow available for discretionary expenditures since, among other things, we have mandatory debt service requirements.”
So if FCF isn’t the actual cash flow of our companies, what’s the point? It’s a “what if” calc which is very useful in comparing companies with each other. What if SNOW didn’t have $5bn of cash on it’s balance sheet, and what if ZI didn’t owe tons? If we tried to strip out how the company is financed and other funnies/non-operating items in cash flow and try to normalise/standardise the cash flow number - what would cash flow have been? That’s the utility of that number. Deciding what is operating cash flows vs non-operating cash flows is at least a bit of a judgment call. FCF is used in DCF valuations so that you can value a company independently of it’s actual capital structure (adding or deducting the actual cash or debts of company as a last step of the valuation.)
I think that asking the question: “what if” a company actually paid its employees with cash in stead of with SBC is as valid a question as asking “what if” a company didn’t actually have any cash or debts on balance sheet, didn’t receive any dividends, didn’t actually pay all of the taxes it owed and didn’t actually pay the cash it did for the acquisitions it has made. The SBC “what if” question is interesting as paying with SBC / not is at least a bit of a financing decision - should we pay our employees or should we ask our shareholders to pay them directly? Ethan and Bear’s analysis raised an orange flag for CRWD and a screaming red flag for ZS and showed the superiority of DDOG and SNOW on this measure. It’s not useful in isolation but its another piece of the puzzle, nothing more, and quite a useful one imo.