We want to put a spotlight on CrowdStrike going into the earnings report tomorrow, and to point out the company was GAAP profitable in the last quarter. This is something that other cloud companies will take years to achieve — if they get there at all.
This was an important accomplishment, yet per management, this will take time to become more consistent: "We also reached GAAP profitability for the first time in company history. While we are very proud of this milestone, we have yet to reach sustained GAAP profitability […] We believe reaching this milestone demonstrates that our financial model will deliver GAAP profitability in due time."we have yet to reach sustained GAAP profitability […] We believe reaching this milestone demonstrates that our financial model will deliver GAAP profitability in due time."
Here’s how CrowdStrike compares to a sample of best-of-breed. For illustrative purposes, much larger companies that have been public for a long time have been omitted (Adobe, Salesforce, Microsoft, etc.). Note that net margin was 0% last quarter while GAAP operating margin was (-2.8%)
CrowdStrike went public in 2019, yet has a cash flow margin of 33% and an operating cash flow margin of 43%. The cash flow margin defies the few, brief years the company has been on the market. Most tech companies are burdened with stock-based compensation or growth tactics that deplete cash, especially in the initial years that follow the IPO. Stock based compensation is at 18.9% in the most recent quarter, and has been trending downward from the 24% range.
One thing to watch for in the upcoming earnings report is the net new ARR, as it had a steep decline last year from a range of 60% growth YoY down to 17% YoY. We covered this in November.
Fast-forward, and net new ARR was down (-8.6%) in the most recent quarter and is expected to be (-11.3%) in the current quarter. The decline pictured below is expected to continue this quarter.
We are interested in this earnings report to see if Crowdstrike bottoms soon in this regard, which would indicate new business is recovering and upgrades are resuming. Per management in the last earnings call: “When we look at our pipeline for the remainder of the year, we expect this trend to continue, giving us confidence in our ability to deliver net-new ARR growth in the back half of the year.”
ARR has been more resilient, but per some comments on various earnings calls, it’s expected to exit FY2024 at “low 30%” growth. I’m curious if this will beat as the year goes on, and if FY2024 is a bottom for ARR, as well.
It will also be interesting to see if RPO bottoms over the next few quarters. It was at 41.2% growth last quarter.
Revenue and EPS:
Crowdstrike is expected to report revenue of $724.4 million in the upcoming earnings report, due on August 30th. This will represent growth of 35.4%.
Next quarter, the company is expected to report revenue of $774.5 million for growth of 33.3%.
Expected adjusted EPS this quarter is $0.56 which is 55% higher than last year’s Q2 at $0.36.
Margins – Reported Last Quarter:
The most important takeaway is that margins are very strong for Crowdstrike compared to its peers.
- Last quarter, the gross margin of 76% expanded by 200 basis points compared to the year ago quarter.
- The adjusted gross margin of 78% improved by 100 basis points compared to the year ago quarter. Subscription gross margin also improved 100 basis points.
- The GAAP operating margin of (-3%) improved from (-4.90%) in the year ago quarter. Although it’s promising that the margin is close to reaching GAAP operating profitability, the quarter ending in April tends to have the better margin profile.
- Adjusted operating margin of 17% was flat year-over-year.
- GAAP net margin of 0% improved from (-6.5%) in the year ago quarter.
- The adjusted GAAP net margin of 20% improved from 15.3% in the year ago quarter.
Margins – In the Upcoming Quarter:
Management guided for $120.1 million at the midpoint in adjusted operating income, which represents an adjusted operating margin of 16.6%.
Management also guided for $133.3 million for net profits, for a margin of 18.4%
If CrowdStrike reports as expected, it’ll be some of the best margins the company has reported.
Cash Flow:
- Last quarter, operating cash flow was $300.9 million for a margin of 43%.
- The free cash flow was $227.4 million, for a margin of 33%.
There is $1.91 billion on the balance sheet and $739 million in debt.
Conclusion:
This is a brief note to say we are watching CrowdStrike very closely. This is not an earnings call rather it’s a few bullet points prior to earnings to organize our thoughts should there be a strong ER. If it’s a weak ER, we will put the company on hold until next quarter.