CrowdStrike Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2020 third quarter, three months ended October 31, 2019; comparative periods are the three and nine months ended October 31, 2018. CrowdStrike provides cloud-delivered cybersecurity subscriptions and professional services through its Falcon platform. The company completed its IPO on June 14, 2019.
Key financial metrics
| Metric | Three months ended October 31, 2019 | Nine months ended October 31, 2019 |
|---|---|---|
| Revenue | $125.1 million, up 88% year over year | $329.3 million, up 94% |
| Subscription revenue | $114.2 million, up 98% | $297.8 million, up 103% |
| Professional services revenue | $10.9 million, up 25% | $31.5 million, up 38% |
| Gross profit / gross margin | $87.8 million / 70% | $231.1 million / 70% |
| Operating loss / operating margin | $38.5 million / (31)% | $114.9 million / (35)% |
| Net loss | $35.5 million; $0.17 per share | $113.4 million; $0.89 per share |
| Operating cash flow | $38.6 million | $33.8 million |
| Free cash flow, non-GAAP | $7.0 million | $(38.2) million |
At October 31, cash and cash equivalents were $743.6 million and marketable securities were $90.1 million. Current assets were $1.05 billion versus current liabilities of $415.6 million. Deferred revenue was $447.6 million, including $335.8 million current. There were no borrowings under the $150 million revolving credit facility; the company reported compliance with its covenants. Accumulated deficit was $609.1 million.
Material changes and operating trends
- Revenue growth was driven primarily by subscription customers, whose count rose 112% year over year to 4,561. ARR was $501.7 million, up 97% year over year. Dollar-based net retention had consistently exceeded 100%, but the filing does not provide a specific current-period rate.
- Gross margin improved from 66% to 70% for the quarter and from 64% to 70% for the nine-month period. Management cited data-center and cloud-provider cost efficiencies, sales incentives, channel optimization, and multi-module adoption. Professional-services margin declined to 25% for the quarter and 35% for the nine months, attributed to lower utilization.
- Operating expenses increased 47% for the quarter and 61% for the nine months, reflecting hiring, marketing, public-company costs, and higher stock-based compensation. Nine-month stock-based compensation was $55.6 million, versus $17.4 million a year earlier.
- Operating cash flow turned positive from a $38.8 million use in the prior-year nine months, helped substantially by deferred-revenue growth. Capital spending remained significant: purchases of property and equipment were $66.8 million in the nine-month period.
- The IPO generated approximately $659.2 million in net proceeds after offering costs. The IPO also converted all preferred stock to Class B common stock. Class B shares carry ten votes per share, compared with one vote for Class A.
Outlook, risks, and unusual items
- Management expects continued operating losses as it invests in sales and marketing, research and development, and public-company infrastructure. It expects gross profit to increase and gross margin to improve modestly over the long term; no numerical financial guidance is provided in this filing.
- Management stated that available cash, cash equivalents, and marketable securities are expected to cover anticipated working-capital and capital-expenditure needs for at least 12 months. This is a forward-looking statement, not a guarantee.
- Remaining performance obligations were $577.2 million; the company expected to recognize 71% in the 12 months after October 31, 2019. Backlog was approximately $129.5 million, of which $27.5 million was not reasonably expected to be billed within 12 months.
- The company had $274.0 million of disclosed contractual obligations, including $188.5 million of data-center commitments, and $47.5 million of future operating lease payments. These commitments are relevant alongside its growth investments.
- ASC 606 adoption changed commission-cost timing: it reduced reported sales and marketing expense by $6.7 million for the quarter and $15.6 million for the nine months versus prior ASC 605 accounting. The adoption increased opening accumulated earnings by $23.4 million. Prior-year figures were not restated, so comparisons are affected.
- IPO-related RSU vesting triggered recognition of $17.3 million in previously deferred compensation expense. A trademark dispute with Fair Isaac Corporation over “CrowdStrike Falcon” and “Falcon OverWatch” remained pending; the company could not estimate a loss, and recorded no liability.
- Risks include rapid growth and sustained losses; cybersecurity incidents or service outages; intense competition and pricing pressure; dependence on channel partners, which generated 68% of nine-month revenue; privacy and regulatory obligations; and execution of international expansion. A single channel partner represented 11% of nine-month revenue.
Important facts for investors to verify
- Whether customer growth, ARR growth, and retention remain strong, and how much revenue is attributable to new customers versus renewals and expansion.
- Whether improving gross margins and positive quarterly free cash flow can persist as infrastructure spending and data-center commitments grow.
- How much of operating cash flow depends on advance customer billings and deferred-revenue growth, rather than sustained profitability.
- The effect of ASC 606 commission capitalization and substantial stock-based compensation on reported expenses, losses, and future dilution.
- Progress and potential outcomes of the FICO trademark proceedings, as well as cybersecurity, privacy, and service-availability risks.
- Whether the company remains within revolving-credit covenants and can fund contractual commitments and growth plans without additional capital.