CrowdStrike Holdings, Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter and first nine months ended October 31, 2020; comparisons are with the corresponding 2019 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context
CrowdStrike sells subscriptions to its cloud-delivered Falcon cybersecurity platform and related professional services. It offered 16 cloud modules and, following its September 30, 2020 acquisition of Preempt Security, entered the identity-protection market. Revenue is primarily subscription-based and recognized over contract terms.
Key financial metrics
| Metric | Three months ended October 31 | Nine months ended October 31 |
|---|---|---|
| Total revenue | $232.5 million, up 86% year over year | $609.5 million, up 85% |
| Subscription revenue | $213.5 million, up 87% | $560.0 million, up 88% |
| Professional services revenue | $18.9 million, up 74% | $49.5 million, up 57% |
| Gross profit / gross margin | $170.9 million / 74%, versus $87.8 million / 70% | $446.7 million / 73%, versus $231.1 million / 70% |
| Operating loss | $24.2 million, versus $38.5 million | $76.7 million, versus $114.9 million |
| Net loss | $24.5 million, or $0.11 per diluted share | $73.6 million, or $0.34 per diluted share |
| Operating cash flow | Not separately stated here | $242.1 million, versus $33.8 million |
| Free cash flow (non-GAAP) | $76.1 million, versus $7.0 million | $195.5 million, versus negative $38.2 million |
At October 31, 2020, cash and cash equivalents were $1.06 billion, with no marketable securities. Deferred revenue was $762.7 million, including $579.7 million current. Total liabilities were $934.7 million and stockholders’ equity was $814.8 million. The company had no borrowings under its $150 million revolving credit facility and was in compliance with its covenants.
Operating cash flow for the nine months benefited substantially from a $189.6 million increase in deferred revenue and $102.0 million of stock-based compensation, among other noncash adjustments. Investing cash flow was $512.7 million provided, largely reflecting proceeds and maturities from liquidated marketable securities; financing cash flow was $39.6 million provided.
Material changes versus the prior period
- Revenue growth was driven by customer additions and expansion. Subscription customers rose 85% year over year to 8,416; ARR reached $907.4 million, up 81%, with $116.8 million of net new ARR in the quarter, including $6.8 million from Preempt.
- Dollar-based net retention exceeded 120% in the quarter. Management said gross retention remained consistently high. As of October 31, 61% of customers used at least four modules, compared with 52% a year earlier.
- Gross margin expanded by four percentage points for the quarter and three points for the nine-month period. Management attributed subscription margin improvement to data-center and software efficiencies and broader module adoption.
- Operating losses narrowed despite increased spending. Operating expenses rose 54% in the quarter and 51% over nine months, reflecting hiring, stock-based compensation, marketing, and continued investment in research and development.
- Preempt was acquired for total consideration of $91.2 million, primarily cash. Preliminary purchase accounting included $75.2 million of goodwill and $16.4 million of identifiable intangible assets; the allocation remained subject to change. Acquisition-related expenses were $2.1 million.
- Cash increased from $264.8 million at January 31, 2020, following liquidation of the marketable-securities portfolio and strong operating cash generation. The nine-month comparison also reflects the prior-year IPO proceeds.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects operating losses to continue for the foreseeable future as it invests in sales and marketing, research and development, and growth. It expects gross profit to increase and gross margin to improve modestly over the long term, while cautioning that margins may fluctuate.
- Management said COVID-19’s impact had been modest to date, but customers in affected industries had requested special billing or payment terms. Longer-term effects remain uncertain and could include weaker demand, longer sales cycles, delayed collections, or higher churn. The company shifted its workforce to remote work and liquidated its marketable securities amid economic uncertainty.
- The company expects seasonal patterns, with net new ARR generally stronger in the second half of its fiscal year, particularly the fourth quarter. It also noted that subscription accounting can delay the effect of changes in sales and renewals on reported revenue.
- Key risks include intense competition; customer renewal and expansion; cybersecurity incidents or service disruptions; reliance on third-party and colocation data centers; privacy and regulatory compliance; rapid growth and hiring; and foreign-currency exposure. A hypothetical 10% U.S. dollar depreciation would have increased nine-month operating loss by approximately $11.6 million.
- Committed obligations included $149.6 million of purchase commitments at October 31, plus $48.6 million of operating lease payments. A November 2020 agreement extension added $88.4 million of non-cancelable purchase obligations for fiscal 2022–2025, not included in that reported commitment total.
- The company is involved in trademark proceedings with FICO concerning Falcon marks. It said a loss was reasonably possible but it could not estimate the likelihood of success or a loss range; no liability was recorded. No other pending or threatened proceeding was identified as likely to have a material adverse financial-statement effect.
- Stock-based compensation was $40.6 million for the quarter and $102.0 million for the nine months. Non-GAAP operating income was $18.9 million for the quarter and $27.9 million for the nine months; these measures exclude stock-based compensation, acquired-intangible amortization, and, where applicable, acquisition expenses.
Most important facts for investors to verify
- Whether ARR growth, customer additions, and retention remain strong, and how much growth comes from existing-customer expansion versus new customers.
- Whether gross-margin gains persist as customer usage grows and data-center capacity expands.
- How operating expenses and stock-based compensation affect the path toward GAAP profitability and cash generation.
- Whether deferred-revenue-driven operating cash flow converts into sustainable cash generation, apart from working-capital timing and securities liquidation.
- The final Preempt purchase-price allocation, integration progress, and associated costs or dilution.
- Potential COVID-19 effects, the additional $88.4 million commitment, and developments in the FICO trademark proceedings.
- The impact of Class B shares’ ten votes per share and concentrated voting control on shareholder influence.