CrowdStrike Holdings, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2019. CrowdStrike provides cloud-delivered cybersecurity subscriptions and professional services. The quarter included the company’s June 14, 2019 IPO.
Financial performance and liquidity
| Metric | Three months ended July 31, 2019 | Prior-year quarter | Six months ended July 31, 2019 | Prior-year period |
|---|---|---|---|---|
| Revenue | $108.1m | $55.7m | $204.2m | $103.0m |
| Subscription revenue | $97.6m | $49.2m | $183.6m | $88.9m |
| Professional services revenue | $10.5m | $6.5m | $20.6m | $14.1m |
| Gross profit / margin | $76.5m / 71% | $37.1m / 67% | $143.3m / 70% | $65.0m / 63% |
| Operating loss | $(50.6)m | $(30.4)m | $(76.4)m | $(63.5)m |
| Net loss | $(51.9)m | $(32.9)m | $(77.9)m | $(66.5)m |
| Operating cash flow | $(6.2)m | $(28.7)m | $(4.8)m | $(35.1)m |
| Free cash flow, non-GAAP | $(29.2)m | $(35.7)m | $(45.3)m | $(52.4)m |
Quarterly revenue grew 94% year over year; subscription revenue grew 98%. For the six-month period, revenue grew 98% and subscription revenue grew 106%. Quarterly gross margin improved four percentage points, while six-month gross margin improved seven points. GAAP net losses widened in dollars, reflecting operating investment and a substantial increase in stock-based compensation; quarterly operating expenses rose 88%, including a 257% rise in general and administrative expense. Net loss per share was $(0.40) for the quarter and $(0.87) for the six months.
- Cash and liquidity: At July 31, cash and cash equivalents were $732.8m and marketable securities were $94.0m. Current assets were $1,005.4m and current liabilities $341.8m. The company reported no outstanding borrowings under its revolving credit facility.
- Financing: The IPO sold 20.7m Class A shares at $34 per share and generated $659.2m net proceeds, after underwriting discounts and offering costs. Preferred shares converted into Class B common shares.
- Debt facility: A revolving facility provides up to $150m, with an option to request up to $75m more. It is secured by substantially all company assets, includes financial and other covenants, and matures in April 2022. CrowdStrike reported covenant compliance at July 31, 2019.
- Deferred revenue and obligations: Deferred revenue was $369.8m, including $280.0m current. Remaining performance obligations were $455.0m; the company expected to recognize 72% within the following 12 months. Contractual obligations totaled $246.8m, including $205.3m of data-center commitments and $25.0m of operating lease payments.
Material changes and business indicators
- Subscription customers reached 3,789 at July 31, up 111% year over year. ARR was $423.8m, up 104%; management defines ARR as a non-GAAP operating metric.
- Management attributed subscription growth mainly to new customer additions. Expansion through additional endpoints and modules also contributed; dollar-based net retention had consistently exceeded 100% since January 2016, according to the filing.
- Channel partners generated 65% of quarterly revenue, compared with 66% a year earlier. One channel partner represented 11% of revenue in both the quarter and six-month period.
- Subscription gross margin improved to 74% from 70% in the quarter. Management cited greater use of colocation data centers, renegotiated cloud-provider terms, sales incentives, channel optimization, and additional modules using shared data infrastructure.
- Stock-based compensation was $29.9m for the quarter versus $2.2m a year earlier, and $33.6m for six months versus $3.9m. IPO-related satisfaction of RSU performance conditions triggered $17.3m of deferred RSU expense.
Outlook, risks, and unusual items
- The filing provides no specific financial guidance. Management expected continued operating losses and negative operating cash flows for the foreseeable future as it invests in sales and marketing, research and development, and public-company costs. It stated existing cash and investments were expected to cover anticipated needs for at least 12 months.
- Effective February 1, 2019, CrowdStrike adopted ASC 606 using the modified retrospective method. The adoption increased opening equity by a net $23.4m through a cumulative adjustment to accumulated deficit, primarily reflecting capitalization of contract-acquisition commissions. The change lowered reported sales and marketing expense and net loss; without ASC 606, the filing estimates quarterly net loss would have been $56.6m and six-month net loss $86.9m. Prior-year figures were not restated.
- The company’s key risks include intense competition, uncertain adoption and renewal of cloud security subscriptions, rapid growth and hiring demands, platform availability and cybersecurity incidents, dependence on third-party and colocation data centers, channel-partner reliance, and privacy, data-protection, and regulatory compliance.
- Fair Isaac Corporation (FICO) challenged CrowdStrike’s “CrowdStrike Falcon” registrations and “Falcon OverWatch” application before the Trademark Trial and Appeal Board. Proceedings were ongoing; the company could not predict the outcome or estimate a loss. An adverse result could require rebranding.
- In July 2019, CrowdStrike agreed to commit up to $10m to Falcon Fund LLC, a 10-year investment vehicle managed by the company and jointly funded with entities associated with Accel. No contribution had been made by July 31.
- The company cited potential volatility from IPO lock-up expirations and the dual-class share structure. Class B shares carry ten votes each versus one vote for Class A shares.
Important facts for investors to verify
- Track subscription growth, ARR, customer retention, renewal trends, and expansion sales; ARR and retention are company-defined metrics.
- Assess whether gross-margin gains persist as hosting, data-center, and support costs grow, and reconcile GAAP results with non-GAAP measures.
- Monitor stock-based compensation, IPO-related equity awards, and dilution from options, RSUs, and the dual-class structure.
- Review operating cash flow and free cash flow alongside the large IPO-driven cash balance, contractual commitments, and future investment needs.
- Follow the FICO trademark proceedings, cybersecurity and service-availability risks, channel-partner concentration, and credit-facility covenant compliance.