CrowdStrike Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended July 31, 2020 (fiscal 2021 Q2). Comparisons are with the periods ended July 31, 2019, except balance-sheet amounts, which compare with January 31, 2020. Figures below are in U.S. dollars.
Business context
CrowdStrike provides 11 cloud modules on its Falcon cybersecurity platform through a SaaS subscription model, alongside professional services. Subscription revenue is recognized over contract terms, while customers commonly pay in advance. Channel partners generated 77% of Q2 revenue; the United States accounted for 71%.
Key financial metrics
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Total revenue | $199.0 million, up 84% from $108.1 million | $377.0 million, up 85% from $204.2 million |
| Subscription revenue | $184.3 million, up 89% | $346.5 million, up 89% |
| Professional services revenue | $14.7 million, up 40% | $30.6 million, up 48% |
| Gross profit and margin | $144.6 million; 73%, versus 71% | $275.8 million; 73%, versus 70% |
| Operating expenses | $174.6 million, up 37% | $328.3 million, up 49% |
| Operating loss | $30.0 million, versus $50.6 million | $52.6 million, versus $76.4 million |
| Net loss | $29.9 million, versus $51.9 million; loss per share $0.14 versus $0.40 | $49.1 million, versus $77.9 million; loss per share $0.23 versus $0.87 |
| Operating cash flow | $55.0 million, versus cash use of $6.2 million | $153.6 million, versus cash use of $4.8 million |
| Free cash flow (non-GAAP) | $32.4 million, versus cash use of $29.2 million | $119.4 million, versus cash use of $45.3 million |
For the six-month period, free cash flow is operating cash flow less purchases of property and equipment and capitalized internal-use software. Operating cash flow benefited substantially from a $118.7 million increase in deferred revenue. Stock-based compensation was $37.7 million in Q2 and $61.4 million in the first half; it is a significant expense and a major adjustment in the company’s non-GAAP operating results.
At July 31, cash and cash equivalents were $1.065 billion, compared with $264.8 million at January 31; the company held no marketable securities after liquidating its portfolio during Q1. Current assets were $1.316 billion and current liabilities $603.3 million. Deferred revenue totaled $689.8 million. The company had no borrowings under its $150 million secured revolving credit facility and was in compliance with its covenants. Accumulated deficit was $686.6 million.
Material changes and operating indicators
- Subscription customers increased 91% year over year to 7,230; ARR was $790.6 million, up 87%.
- Management reported dollar-based net retention above 120% and continued customer expansion into additional modules. At quarter-end, 57% of customers used at least four modules, versus 50% a year earlier.
- Gross margin improved three percentage points year over year in the first half, mainly from data-center and cloud-provider cost efficiencies and greater module adoption. Professional services margin declined six points in the first half, which management attributed to lower utilization.
- Sales and marketing and R&D spending rose 50% and 64%, respectively, in the first half, reflecting hiring and growth investments. General and administrative expense rose 28%.
- Cash rose partly because the company sold and received maturities on marketable securities, not solely from operating performance. Investing cash flow was $611.1 million for the first half, largely reflecting those portfolio transactions.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management expects continued investment in sales and marketing, R&D, and public-company costs, and expects operating losses for the foreseeable future. It anticipates modest long-term gross-margin improvement, with quarterly fluctuations possible.
- COVID-19 had not materially affected reported results through July 31, according to management, though some customers sought special billing or payment terms. The company moved to a fully remote workforce, restricted travel, and cautioned that economic effects may emerge later due to its subscription model.
- Management says existing cash is expected to cover anticipated working-capital and capital-expenditure needs for at least 12 months. The company also notes that future growth investments or strategic initiatives could require additional capital.
- Contractual commitments totaled $221.1 million, including $140.8 million for data-center capacity and $51.4 million of undiscounted real-estate lease payments. Remaining performance obligations were $925.5 million; 72% was expected to be recognized in the following 12 months. Backlog was approximately $235.6 million.
- A trademark dispute with Fair Isaac Corporation concerning “CrowdStrike Falcon” and “Falcon OverWatch” remained unresolved. The company said a loss was reasonably possible but could not estimate the likelihood or potential loss; no liability was recorded.
- Principal risks include pandemic-driven customer or sales-cycle impacts, intense competition and pricing pressure, cybersecurity incidents or service disruptions, dependence on channel partners and cloud infrastructure providers, privacy and regulatory compliance, and continued operating losses. A hypothetical 10% decline in the U.S. dollar against other currencies would have increased first-half operating loss by approximately $7.2 million.
Important facts for investors to verify
- Whether high subscription growth, ARR growth, and retention persist, particularly as customer acquisition and expansion deal sizes fluctuate.
- How much reported cash generation depends on advance customer billings and deferred-revenue growth, and whether free cash flow remains positive after infrastructure investment.
- The trajectory of GAAP losses, stock-based compensation, operating expenses, and share-based dilution.
- Whether gross-margin gains continue as data-center capacity expands and cloud hosting costs change.
- Developments in COVID-19’s impact on customers, collections, renewals, and sales cycles, and the outcome of the FICO trademark proceedings.
- Compliance with secured-credit-facility covenants and the company’s ability to meet substantial data-center, lease, and other contractual commitments.