CrowdStrike reported a new record for net new ARR in Q4, far surpassing the record it set in the previous quarter, and GAAP margins continued to strengthen. Net new ARR accelerated significantly in the quarter to 27% growth, which is a 14-point acceleration from 13% growth in Q3. This is up from 2% growth for net new ARR in the year ago quarter. The turnaround in this particular key metric is notable, especially compared to other cloud stocks whose key metrics are decelerating. ARR increased 34% to $3.44 billion, which was down 1 percent from 35% growth last quarter.
For FY25, CrowdStrike’s guide was marginally above consensus, yet the market is clearly pleased with the continued expansion in operating and net margins. The turnaround on net new ARR is notable, yet the turnaround on GAAP profitability is what is most impressive compared to its cloud peers, especially considering the far majority of cloud stocks are years away from GAAP profitability (if they ever get there). We covered this in-depth here.
Revenue and EPS:
- Q4 revenue was $845.3 million, beating estimates by $5.3 million, representing YoY growth of 33%. This is down from 36% growth in the previous quarter.
- Q1 revenue was guided between $902.2 million to $905.8 million, representing YoY growth of 30%.
- FY24 revenue was $3.06 billion, an increase of 36% YoY.
- FY25 revenue was guided at $3.925 billion to $3.99 billion, slightly ahead of consensus for $3.94 billion and representing YoY growth of approximately 29% at midpoint.
- Q4 adjusted EPS was $0.95, beating estimates by $0.13 and representing YoY growth of 102%. GAAP EPS was $0.22, compared to ($0.20) in the year ago quarter.
- FY24 adjusted EPS was $3.09, an increase of 101% YoY. GAAP EPS was $0.37, compared to ($0.79) in FY23.
- The bottom line is expected to grow steadily over the next two fiscal years, suggesting that GAAP profitability is permanent. With that said, analyst consensus for next quarter of $0.82 is lower than Q4’s EPS of $0.95. It’s likely we see upward revisions to Q1’s EPS over the next few days, although management guided for an adjusted operating margin that is four points lower QoQ than the current quarter.
Margins:
Margins strengthened across the board – driven by four quarters of GAAP gross margin at 75% and GAAP subscription margin at 78%. For the full year, CrowdStrike nearly broke even from operations, reporting just a ($2 million) loss from operations, or a (0%) margin, an 800 bp improvement from FY23. CrowdStrike also reported its first full year with GAAP net profitability, reporting a 2.9% net margin, compared to an (8.2%) margin in FY23.
Q4 saw net margin more than double sequentially, from 3% in Q3 to 6.4% in Q4, as net income surged 101% QoQ to $53.7 million – this means that CrowdStrike generated 60% of its GAAP net income in Q4 alone.
- Q4 GAAP gross margin was 75.3%, compared to 72% in the year ago quarter.
- Q4 GAAP operating margin was 3.5%, the second straight quarter with a positive margin and an increase from 0.3% in the previous quarter.
o To further illustrate CrowdStrike’s margin expansion, GAAP operating income was $30 million this quarter compared to (-$61.5) million in the year ago quarter. This is up from $3.2 million last quarter.
o CrowdStrike’s adjusted operating income was $213.1 million for a margin of 25%. The company is guiding for a lower margin next quarter of 21%. - Q4 GAAP net margin was 6.4%, the fourth consecutive quarter with a positive margin and an increase from 3% in the previous quarter.
Stock based compensation was 20.9% of revenue compared to 20.3% of revenue in the previous quarter for a total of $176.3 million.
Fiscal Year 2024 Margins:
- FY24 GAAP gross margin was 75%, compared to 73% in FY23.
- FY24 GAAP operating margin was (0%), compared to (8%) in FY23.
- FY24 GAAP net margin was 2.9%, compared to (8.2%) in FY23.
For FY2025, the CFO provided the following color: “As a result of increased hiring in the first half of the year, changes to the timing of our merit cycle and the timing of certain marketing programs, we expect operating leverage to be more weighted to the back half of FY '25.”
Cash and Debt:
CrowdStrike is known for its strong cash flow margins and this quarter was no exception. The company raised its FY2025 free cash flow target by 1-point at the midpoint. Per the CFO: “Next, we are raising our free cash flow target for FY '25 from between 30% and 32% to between 31% and 33% of revenue.”
- Q4 operating cash flow was $347 million, representing a 41% margin. Free cash flow in the quarter was $283 million, a 33.5% margin.
- FY24 operating cash flow was $1.16 billion for a margin of 38%. Free cash flow was $938.2 million for a margin of 30.7%.
- Cash, equivalents and short-term investments totaled $3.47 billion.
- Debt totaled $742.5 million.
Key Metrics:
CrowdStrike added a record $281.9 million in net new ARR in Q4, far surpassing its previous net new ARR record of $223 million set just in Q3. Net new ARR increased 27% in Q4, a 14 percentage point acceleration from just 13% growth in Q3.
According to the CFO: “while we do not specifically guide to ending or net new ARR, given the incredible performance of Q4, I will share our currerpnt seasonality assumptions with respect to net new ARR in Q1, which calls for Q1 net new ARR year-over-year growth to be at least double digits up to the low teens.” The CFO is tempering expectations that 27% is not realistic for next quarter, but strong growth is still achievable.
ARR of $3.44 billion was up 34% YoY compared to ARR of $3.15 billion and growth of 35% in the previous quarter. Management has stated: “We continue to aggressively invest in our innovation engine and flank the company to achieve its vision of reaching $10 billion in ARR over the next 5 to 7 years.” That would imply about 200% growth in 5-7 years. The growth of deals with total value exceeding $1 million accelerated to “over 30%” this quarter for 250 customers.
Deferred revenue of $3.05 billion was up from $2.36 billion in the year ago quarter. The sequential increase from $2.5 billion suggests that billings are strong. Billings for this quarter comes to $1.36 billion, up 65% QoQ and up 39% YoY. There was mention on the call that total billings outgrew short-term billings, which translates to customers committing for longer contracts. Management likes to remind analysts that ARR is a better measure of their business, even during quarters when deferred revenue and billings are strong.
Similar to deferred revenue, RPO reported an astonishing surge that points toward CrowdStrike being resilient compared to its peers. RPO was up 35% YoY and up 24% QoQ to $4.6 billion. This is the highest QoQ growth we’ve seen the company report since tracking this metric over the past 11 quarters. Compare the 24% QoQ growth to only 3% QoQ growth last quarter.
Subscription revenue of $795.9 million increased 33% compared to 34% last quarter. Professional Services grew 26.3% for revenue of $49.4 million.
Customers with multiple modules increased 1% across the board, including in the 7+ module cohort, 6+ module cohort, and 5+ module cohort.
Dollar based net retention was 119%, same as last quarter. The company offered visibility (finally) into the quarterly DBNRR over the past year of “Net retention was 119% in Q3, 119% in Q2 and 122% in Q1.” These numbers had been left vague before. It’s softening a bit and 120% is the benchmark CrowdStrike has stated they want to achieve.
Earnings Call:
Data-Centric Architecture in a Single Platform:
The predominant question in the Q&A is why is CrowdStrike resilient when peers are not. As you’re likely aware, Palo Alto Network, Fortinet and Zscaler saw turbulence following their earnings reports. Overall, the CEO and management team focused on why a platform is important instead of a fragmented approach to acquisitions from “multi-platform hardware vendors [that] evangelize their stitched together patchwork of point products, masquerading as thinly veiled piecemeal platforms.” Wow, those are strong words. CrowdStrike is not shy about naming the companies they are taking business from. In this call, it was Azure Sentinel, Splunk and Palo Alto Networks. Later on, there was a quote that I think best juxtaposes the differences between the piecemeal platforms and what CrowdStrike is offering:
“So when we think about architecture, architecture does matter and really what we've created is a very data-centric architecture that allows us to get data at scale into our platform, leverage our AI and then create the outcomes. It's that collect once, use many. We have a single platform. Our competitors have many other platforms as they call them. We have a single agent. Our competitors have 5, 6, 7, 8 agents depending on the competitors.
So when we look at our architecture, it was really designed from the beginning to solve the problems of today and the future problems. And the result of that is ease of use, the outcome that a customer is looking for, stopping breaches and lowering the cost, and future proofing what they want. I've — in a prior life, I've been involved in companies that acquired a lot of products. And I can tell you, it is near impossible to stitch all this stuff together, particularly at the agent level unless you're very diligent about it.
This was further quantified in the opening remarks when it was stated that a recent IDC platform is “showcasing $6 of return for every dollar invested in the Falcon platform.”
We first covered the impact AI can have on lower costs in previous free analysis here and a deep dive on CrowdStrike here.
AI Revenue Won’t be Easy to Detect
It’s important to drop a note that many companies can break out AI revenue, whereas CrowdStrike’s data-driven AI features are inherent to the platform. Therefore, I don’t believe it’s possible to have a separate AI segment the same way other companies offer.
The previous deep dive on CrowdStrike stated the following:
“The statement that CrowdStrike’s data is more valuable is based on the vast number of threats their platform has already detected. Essentially, the argument is that their XDR platform is better than competitors, and therefore, their data is better than competitors, which results in smarter and more accurate AI output. Here is how management spoke about it: “we actually have a very well-defined training set that's annotated based upon all the threat hunting that we've done over the last 10 years.”
Automation reduces the number of false positives. Instead of getting every piece of telemetry that requires the security team to investigate, AI-assisted endpoint detection and response solutions eliminates the noise so that the security team is only responding to those that have the potential to be critical. Fundamentally, cybersecurity is a data problem. CrowdStrike’s Falcon platform ingests, correlates, and queries petabytes of structured and unstructured data from ever-expanding disparate external and internal sources in real-time. It builds rich context and delivers greater visibility by constructing a dynamic representation of data across an organization. As a result, the company’s AI models are often highly accurate in triggering a response.
However, in the earnings report this quarter, the CEO stated a few new things that investors should see creates a more all-encompassing AI platform:
“We collect trillions of threat signals daily creating one of the world's largest and fastest-growing cyber threat data set. From day 1, we've been an AI company, training the industry's most effective and accurate AI models to prevent attacks based upon our data moat.”
Falcon for IT:
On the same note that AI is not a separate revenue segment for CrowdStrike, there are additional ways CrowdStrike plans to leverage its “AI-native” platform. One of the more popular hybrid use case is called Falcon for IT, which allows IT teams to leverage AI and automation to query the IT systems and servers. This is useful for things like fleet management, compliance, and performance monitoring. By using generative AI, IT Teams can query assets for unauthorized software, outdated machines, patch status and also schedule queries to detect anomalies.
I’m highlighting this as a segue into the broader idea that AI and automation is likely to have a large impact on CrowdStrike (and perhaps more immediate) compared to other cloud stocks on the market.
This was the CEO’s commentary on the call:
“Customers are looking for a better solution in this area. And one of the things that we found is that the security team has been solving a lot of IT problems and challenges for IT for a long time, and we really needed to carve out a home for IT. So when you look at some of our competitors in that market, it's — obviously, it's a pretty big market, but having a single agent and the ability to actually solve IT problems, which many of our customers were doing already, is fantastic.
So again, early days, but the feedback and the interest is off the charts for Falcon for IT, and it goes to the heart of how we built the platform. To collect data, it doesn't have to be security data. It can be almost any data related to either our agent first-party data or now third-party data we can ingest. And that solves many use cases beyond what we originally came to market with. So I think the sky is the limit there.”
FY2025 Net New ARR Commentary
Since ARR and net new ARR is what moves the stock, I wanted to include what the CFO stated in terms of FY2025. It’s very vague but sounds positive in terms of net new ARR building from Q1 and beyond.
Question
Matthew Hedberg (Analyst)
I'll offer my congrats as well, guys. Burt, your new ARR commentary was helpful for Q1. I'm curious, this time last year, I believe you talked about flat net new ARR growth for fiscal '24. And obviously, I think you guys did about 6% this year. Any just sort of like directional guardrails you give us from a full year perspective in terms of just thinking about it from a net new perspective?
Answer
Burt Podbere
So with respect to ARR, obviously, we don't guide to it. But we have talked about in the past where we've started the year in Q1 and build from there. And that's kind of really all I can really comment on ARR. You can kind of infer where we're going with our guide. And — but at the end of the day, our guide — the methodology has remained consistent, and that's how we think about it.
Conclusion:
CrowdStrike’s post-earnings reaction is as much about CrowdStrike as it is about the weakness of its peers. The excellent timing of the increasing GAAP profitability merging with accelerating key metrics is something we are not likely to see in any other best-of-breed cloud company this earnings season.
The market is anxious to find AI winners early-on. By combining cybersecurity with AI in a single platform with a data-centric architecture, CrowdStrike is emerging as one of the few cloud companies that has resiliency and the AI “it” factor. We continue to believe that 20 Forward P/S is the ceiling for cloud stocks, yet we also continue to believe that CrowdStrike is the leader in the cloud category. For reasons quite apparent this evening, CRWD is one of two that we are interested in owning now and into the foreseeable future out of the dozens and dozens of cloud stocks on the market.
Note: We have updated the analysis on 03/06 with the following: Billings for this quarter comes to $1.36 billion, up 65% QoQ and up 39% YoY.
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