CrowdStrike Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2019 (fiscal first quarter), compared with the three months ended April 30, 2018. The filing was signed July 19, 2019. CrowdStrike sells subscriptions to its cloud-delivered Falcon cybersecurity platform and related professional services.
Financial results and liquidity
| Metric | Q1 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $96.1 million | $47.3 million | +103% |
| Subscription revenue | $86.0 million | $39.8 million | +116% |
| Professional services revenue | $10.1 million | $7.5 million | +34% |
| Gross profit / gross margin | $66.8 million / 70% | $27.9 million / 59% | Margin +11 percentage points |
| Operating loss | $25.8 million | $33.1 million | Loss narrowed |
| Net loss | $26.0 million | $33.6 million | Loss narrowed |
| Net loss per share, basic and diluted | $0.55 | $0.77 | Loss per share narrowed |
| Cash from operations | $1.4 million provided | $6.4 million used | Improved |
| Free cash flow (non-GAAP) | $(16.1) million | $(16.7) million | Deficit modestly narrowed |
Cash and cash equivalents were $93.0 million and marketable securities were $82.1 million at April 30, 2019, totaling $175.1 million. Current assets were $311.3 million versus current liabilities of $302.7 million. The company reported no borrowings under its new revolving credit facility. Total liabilities were $384.6 million; stockholders’ deficit was $485.2 million, alongside $557.9 million of redeemable convertible preferred stock.
Deferred revenue was $315.2 million on the balance sheet, including $244.3 million current and $70.9 million noncurrent. Remaining performance obligations were $386.0 million; the company expected to recognize 69% within 12 months. ARR was $364.6 million, up 114% year over year, and subscription customers numbered 3,059, up 105%. Management said dollar-based net retention had consistently exceeded 100%, but did not provide a current-period rate in the filing text provided.
Material changes and notable items
- Subscription revenue grew primarily with new customer additions; expansion through additional endpoints and modules also contributed. Subscription revenue rose to 90% of total revenue from 84% a year earlier.
- Subscription gross margin increased to 72% from 62%. Management attributed the improvement to moving more operations to colocation data centers, renegotiating a cloud-provider contract, and efforts to promote higher-margin subscriptions and optimize channel programs.
- Operating expenses increased 52% to $92.6 million, led by sales and marketing (+55%), research and development (+36%), and general and administrative (+75%), reflecting increased hiring and investment.
- Effective February 1, 2019, CrowdStrike adopted ASC 606 using the modified retrospective method. The adoption reduced opening accumulated deficit by $23.4 million, net of tax, primarily because commissions were capitalized rather than expensed immediately. Q1 2019 net loss was $4.3 million lower than it would have been under the prior accounting method; the comparative 2018 period was not restated.
- After quarter-end, the June 14, 2019 IPO sold 20.7 million Class A shares at $34 per share and generated reported net proceeds of $659.1 million. Preferred stock converted into Class B shares. The IPO also triggered recognition of approximately $13.0 million of deferred RSU compensation expense in the subsequent quarter.
Outlook, risks, and contingencies
The filing provides no specific quarterly or full-year revenue or earnings guidance. Management expected operating losses and negative operating cash flows to continue for the foreseeable future, while stating that April 30 cash, cash equivalents, and marketable securities were adequate for at least 12 months. The subsequent IPO materially strengthened the company’s funding position.
Key risks include intense competition; reliance on channel partners (which generated 67% of Q1 revenue, with one partner representing 12%); dependence on AWS and other data-center infrastructure; cybersecurity, service availability, and customer-data risks; rapid growth and execution challenges; and evolving privacy, regulatory, and international compliance requirements. The company had $222.4 million of noncancelable purchase commitments, including $207.4 million for data-center capacity, and $24.2 million of future minimum lease payments. Its $150 million revolving facility, with an option for up to $75 million more, is secured by substantially all assets and carries financial covenants; the company reported covenant compliance and no outstanding borrowings at quarter-end.
CrowdStrike was defending trademark proceedings brought by Fair Isaac Corporation concerning “CrowdStrike Falcon” and “Falcon OverWatch.” The company said it could not predict the outcome or estimate a loss; no liability was recorded. The filing also described a civil investigation involving cybersecurity testing standard-setting, without stating that it was expected to have a material adverse effect. Management assessed disclosure controls as effective at a reasonable assurance level.
Important facts for investors to verify
- Reconcile the filing’s deferred-revenue figures: the balance sheet and note show $315.2 million, while the MD&A liquidity discussion states $313.4 million and $242.5 million current.
- Confirm the IPO proceeds and offering-cost presentation across sections: the filing reports $659.1 million net proceeds, with differing descriptions of deductions and expenses.
- Assess the sustainability of margin gains and operating-cash-flow improvement against continued hiring, infrastructure investment, and negative free cash flow.
- Review the credit agreement’s revenue-growth and minimum-liquidity covenants, the substantial data-center commitments, and future funding needs.
- Monitor post-IPO RSU expense, share dilution and dual-class voting control, the FICO trademark proceedings, and the cybersecurity testing investigation.