Let me chime in here and add my voice to stocknovice’s, as S was my second-biggest allocation stock just 1 day ago at 15% and I’ve been following them for a while.
The thesis was based on 1) them taking market share from their competitors 2) them hitting their revenue guidance and thereby growing exceptionally fast and 3) expected cf positivity by year-end.
All three of those were blasted apart in their call yesterday and then some.
- They grew revenue 5.8% qoq at $133m. CRWD grew 8.7% qoq at $693m - five times the size and growing much faster!! S is NOT winning. Their revenue growth has come to a screeching halt. They are growing at a qoq annualised rate of 25% atm. This is their qoq growth over the last several quarters. It takes a special type of analysis to get that to look good:
| QoQ | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2020 | 26.4% | |||
| 2021 | 17.0% | 15.6% | 18.8% | 21.5% |
| 2022 | 24.7% | 22.8% | 22.3% | 17.1% |
| 2023 | 19.4% | 30.9% | 12.5% | 9.4% |
| 2024 | 5.8% |
Last quarter I also looked at ARR and noted that this looked hunky-dory and growing faster than CRWD. And that ARR strength pointed to good things ahead. Because ARR is forward-looking!! And here comes the really big problem. And supposedly RECURRING!!! Excuse me but this is important and if people don’t get this then they need to pay attention. ARR is recurring revenue at the end of the period you are reporting on. So you could theoretically have almost zero incremental revenue in a quarter if you signed up all of your new business on the last day of the quarter, and that new business will show in your ARR (and to state the obvious - point to a good quarter ahead).
And they misrepresented ARR for the last several quarters. They included NON-recurring usage-based revenue in that number. So ARR was actually lower than what they thought and what they told us.
And this caught the management team by surprise! They couldn’t understand why their revenue was falling short in this quarter relative to their guide, given their great ARR numbers. Then, when the CFO delved into the ARR of all of their customers - only then - did they realise that their ARR was too high and included usage-based NON-recurring revenue. And because it was too high and it is a forward-looking number, the penny dropped for them and they had to restate ARR lower. Imagine the oh dear moment there. And once they realised that, they had to also face the music and lower their guidance for the remainder of the year.
So even though the ARR snafu is not directly visible in the P&L, the fact that they overstated that number led me and others to project the ARR forward and come up with relatively rosy future revenue numbers. Not only me, but also them! They - the CFO - did that and therefore gave too rosy a guide before realising his mistake.
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They missed their revenue guide for the quarter. Big no-no. Revenue was $133.4m vs a $137m guide. The FY guide was $631m-640m and they lowered that to $590-$600m - but can we trust them to hit that now? Point 2 of the thesis in tatters.
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They stated that they would get fcf positive end of this year. They did not give an update in the prepared remarks, but one of the analysts dragged it out of the CFO, who grudgingly admitted that this will not happen until 2025.
That’s on top of what can only be described as incompetence in reporting ARR. As CFO you either deliberately misstate your numbers or you do it because you did not get it right despite your best efforts. I don’t think there was anything deliberate here, so that means the CFO and team made such a rookie mistake by simply fumbling the ball. That’s not good enough for a listed company CFO imho and for an important number such as ARR. That’s forgivable in amateur sport, not professional…
The call was an absolute shambles. Their answers were not convincing, the tone was almost shell-shocked and the analysts were (understandably) acid. Just listen to how the CEO ended the call - that says it all.
It was a terrible call.
I feel lucky to have hedged my position somewhat going into earnings and to have gotten out at above $14 today. I sold everything. The numbers tell a story of rapid deceleration and of losing against competitors. In addition I have lost faith in the company and management.
-wsm.