As we near the end of the Q1 earnings season with a few reports left to go, there is no denying what is the strongest cloud stock and cybersecurity stock in the market. Every single cloud and cybersecurity report this quarter has carried a line item or two of disappointment. CrowdStrike shrugged off the cloud woes and is continuing to set itself apart in a meaningful way.
The company delivered a strong quarter as it beat on both the top and bottom line, and increased its full-year revenue guide. Net new ARR growth was far ahead of management’s expectation from last quarter. Cash flows rose to new records, and module adoption rates increased sequentially. However, operating margins took a step backward, as operating expenses increased 13.5% QoQ, driven by a more than 20% QoQ increase in sales and marketing spend.
Consolidation was the primary theme on the call as it led to the beat/raise that other cloud companies, almost without exception, have been unable to deliver. CFO Burt Podbere said the quarter was characterized by “strong execution and platform adoption as customers increasingly consolidate on the Falcon platform.”
CEO George Kurtz elaborated on the consolidation in the earnings call, and reiterated that the company is still “firmly on the path to $10 billion in ending ARR.” This would be up from $3.65 billion in ARR today. The timeline is a bit unclear as to when this will be achieved, but the vision that management has for where the company could go certainly doesn’t hurt to hear.
The high-profile exclusivity deal with AWS for Falcon and a deal with Google Cloud were announced in May, and were also a focus of the opening remarks and Q&A.
For additional reading on CrowdStrike, please read “CrowdStrike: Steady Growth, Strong Bottom Line” with information on its full product suite and also CrowdStrike Q4: RPO Surges, Net New ARR Impresses with more information on why AI revenue won’t be easy to detect.CrowdStrike: Steady Growth, Strong Bottom Line” with information on its full product suite and also CrowdStrike Q4: RPO Surges, Net New ARR Impresses with more information on why AI revenue won’t be easy to detect.
Revenue and EPS:
CrowdStrike reported 33% revenue growth in Q1, a slight QoQ acceleration, though revenue growth is expected to continue decelerating through the rest of the year.
- CrowdStrike reported revenue of $921 million in Q1, representing YoY growth of 33% and beating estimates by $16 million. This marked a 40 bp acceleration in YoY revenue growth from 32.6% last quarter.
- Adjusted EPS was $0.94, increasing 63% YoY and beating estimates by $0.04. GAAP EPS was $0.18, compared to $0.00 in the same quarter last year.
- For Q2, CrowdStrike guided for revenue of $958.3 to $961.2 million, for YoY growth of 31.2% at midpoint. This was slightly above the consensus estimate for $956.3 million in the upcoming quarter.
- CrowdStrike guided for adjusted EPS of $0.98 to $0.99 in Q2, an increase of 33.1% YoY at midpoint.
- CrowdStrike increased its full-year revenue guide, now seeing FY25 revenue between $3.976 billion and $4.01 billion, compared to its prior view for $3.925 billion to $3.989 billion. Adjusted EPS guide was increased to $3.93 to $4.03, versus a prior view for $3.77 to $3.97. The boost adds confidence to management’s view that operating leverage will be felt more heavily in the back half of the year.
Margins:
While GAAP gross margin remained flat, CrowdStrike felt some margin pressures down the line on a sequential basis, as operating expenditures ramped higher in the first quarter. This pushed both GAAP and adjusted operating margins lower sequentially.
- GAAP Gross margin in Q1 was 75.6%, staying flat YoY. Adjusted gross margin was 78.3%, a 30 bp expansion from 78% in the year ago quarter.
- GAAP operating margin was 0.8%, for a third straight quarter of positive GAAP operating margin; this compares to 3.5% last quarter and (2.8%) in the year ago quarter. Adjusted operating margin was 22%, compared to 25% last quarter and 17% in the year ago quarter.
- GAAP net margin was 4.6%, down from 6.4% last quarter but up from 0.1% in the year ago quarter. Adjusted net margin was 25%, down from 28% last quarter but up from 20% in the year ago quarter.
Cash and Debt:
Cash flows have been strong for CrowdStrike, and the company reported record cash flows this quarter.
- Operating cash flow was $383.2 million, increasing more than 27% YoY, for a margin of 42%.
- Free cash flow reached a record $322.5 million, rising nearly 42% YoY for a 35% margin.
- CrowdStrike reported cash and equivalents of $3.702 billion.
- Debt totaled $742.9 million.
Key Metrics:
ARR:
ARR increased 33% YoY to $3.65 billion, a 1 percentage point deceleration from Q4.
Net New ARR:
CrowdStrike had guided for Q1’s net new ARR to increase “at least double digits up to the low teens,” yet it easily surpassed this guide as it reported 22% YoY growth in net new ARR to $211.7 million.
CrowdStrike has notched three consecutive quarters with net new ARR growth >10%, with two straight quarters above 20% growth. This is a notable shift in the trends that we have seen recently in net new ARR.
Given that this is one of the most tracked metrics for the company, maintaining strong growth in net new ARR in the double digits reflects positively on business momentum as we progress through 2024 and entering 2025. Management noted that while they “did not specifically guide to net new ARR, our net new ARR year-over-year growth assumptions for the second quarter of the fiscal year are at least double digits, up to the low teensour net new ARR year-over-year growth assumptions for the second quarter of the fiscal year are at least double digits, up to the low teens,” implying that we may see a deceleration in Q2 relative to Q1.
Module Adoption:
Customers adopting 5+, 6+, or 7+ modules all increased sequentially, and one of the highlights here was that deals involving 8+ modules nearly doubled YoY — CrowdStrike reported that these large deals increased 95% this quarter. In addition, CrowdStrike noted that the number of deals involving cloud, identity, or next-gen SIEM more than doubled YoY in Q1.
RPO:
RPO was $4.7 billion in Q1, accelerating to 42% YoY growth from 35% last quarter, though on a QoQ basis, growth was minimal, at just 2% QoQ from $4.6 billion in Q4.
Earnings Call:
Consolidation = CrowdStrike is a Fierce Competitor
Consolidation on Falcon was one of the core topics of the Q1 earnings call, with CrowdStrike touting strong initial momentum for Falcon Flex. Analysts pressed management about their long-term $10 billion ARR target, as well as the recent AWS exclusivity deal and generative AI slowing down other software deals.
CEO George Kurtz discussed how consolidation is one of CrowdStrike’s strengths: the “foundational theme underpinning CrowdStrike's results is the power of the Falcon platform to consolidate cybersecurity at scale. This is coupled with the market's unequivocal desire for a single AI-powered software platform consolidator. We're landing with more modules than ever before. The number of deals involving cloud, identity or Falcon Next-Gen SIEM modules more than doubled year-over-year, and we're closing some of our largest deals ever.foundational theme underpinning CrowdStrike's results is the power of the Falcon platform to consolidate cybersecurity at scale. This is coupled with the market's unequivocal desire for a single AI-powered software platform consolidator. We're landing with more modules than ever before. The number of deals involving cloud, identity or Falcon Next-Gen SIEM modules more than doubled year-over-year, and we're closing some of our largest deals ever.
We're consistently hearing that customers want to partner with us as they consolidate, standardizing their cybersecurity future on the Falcon platform and investing their trust in CrowdStrike as cybersecurity’s North Star. Let me explain why.
We built the right architecture from the start, the industry's lightest weight, easiest to install sensor embedded with AI, no system reboot required a single AI native platform console, not disparate stitch together or siloed multi-platforms. … The Falcon platform's differentiated architecture creates a technological competitive moat around our ability to be cybersecurity's premier platform consolidator. … And now with Charlotte AI, customers are experiencing more platform utility at faster speeds, shrinking hours of their security workdays into minutes… The Falcon platform's differentiated architecture creates a technological competitive moat around our ability to be cybersecurity's premier platform consolidator. … And now with Charlotte AI, customers are experiencing more platform utility at faster speeds, shrinking hours of their security workdays into minutes.” This consolidation “delivers extreme cost savings, [meaning] the more modules customers adopt, the more cost savings they realize,” up to $6 for every $1 invested in the Falcon platform.
Building on the consolidation point was some interesting commentary from management about its subscription model, Falcon Flex, which also underpinned the recent AWS deal. Management said that “in the 3 quarters since we've built the Falcon Flex program, the customers who have subscribed to this new licensing model represent over $500 million in deal value, growing our share of customer wallet while consolidating and simplifying their security.” CFO Burt Podbere added more color on Falcon Flex, saying that the “Falcon platform's unique ability to consolidate multiple vendors along with the early success of our Falcon Flex program drove bigger consolidation deals in the quarter.” the early success of our Falcon Flex program drove bigger consolidation deals in the quarter.” It also was noted that Falcon Flex aided in CrowdStrike reaching “record levels of pipeline for the year.”
Exclusivity Deal with AWS:
CrowdStrike’s recent deal with AWS as its exclusive cloud security provider was underpinned by Falcon Flex, and Barclays analyst Saket Kalia questioned management about the deal, asking how the relationship with AWS was expanded and how it sets CrowdStrike apart in cloud security.
CEO George Kurtz responded, saying it is “really reflective of what we’ve built” in terms of the scope of the platform, spanning agent and agentless, code to cloud solutions, and the “technical advantages that our offerings have for our customers. When you look at someone like AWS, they’re obviously looking for the best cloud technology in the market, and we believe we have it, and it’s fantastic to be able to expand our relationship there. This is also a Falcon Flex deal, again reflective of the fact that customers want to do more with us, they want to buy more, and we’re giving them the opportunity to do this.”
The Impact of Generative AI
Analysts were also curious as to how generative AI was impacting the customer journey.
Q, Matt Hedberg (RBC): “In the spirit of a customer's overall GenAI journey, one of the things we're hearing is that, that could potentially slow down deal cycles for the broader software landscape. I'm wondering, as your customers adopt your AI platform, maybe more specifically Charlotte AI, are they seeing faster time to production for GenAI application? In other words, does it speed up a customer's GenAI journey?”
A, CEO George Kurtz: “Yes. I think what we're seeing is that customers are really embracing the fact that we can reduce their operational workload for their stock analysts. We can take hours of mundane front work and turn it into minutes. And not only answer questions with the collective wisdom and knowledge that CrowdStrike has developed over the many years, but also drive automation. We talked about the Falcon Fusion or technology built in. So when they look at what we've built and how we can save time and how we can drive AI automation into an AI-native SoC, I think this is really important for them.”
Double-Clicking on the $10B ARR Target:
While generative AI is likely aiding growth via significant reductions in operational workload, there was no specific commentary as to the revenue impacts from genAI products. However, management’s confidence in its $10 billion ARR target was scrutinized.
Q, Fatima Boolani (Citi): “what do you feel like will help your relative velocity in attaining that [$10 billion ARR]. So frankly, what would have to go really right for that outcome to be realized within 3 years versus 5 years, appreciating that you haven't put a time frame on it.”
A, CEO George Kurtz: “When we look at our ability to consolidate, and I talked about in the call, Falcon Flex, I think is a game changer for a lot of customers, buying more, buying bigger, leveraging the platform and you see velocity of adoption using Falcon Flex. So really excited about that and what it's going to mean for CrowdStrike.
The second piece again, as I talked about in my prepared remarks is, that Next-Gen SIEM is natively built in. So rather than sending data out somewhere else and paying for the transport costs and all the complexity around that, the bulk of the use cases and the data that's generated that goes into a SIEM is already in the platform of choice for customers, and we see that being a meaningful opportunity for us to massive market opportunity.”
While Kurtz primarily focused on the product opportunities from Falcon Flex and SIEM, CFO Burt Podbere explained CrowdStrike’s target in terms of its TAM: “We talked about cloud being around in that same time frame, $2.5 billion to $3 billion. We talked about identity being $1 billion to $1.5 billion. We talked about Next-Gen SIEM being $1 billion to $1.5 billion. So you start adding up those numbers and you get more and more confidence in terms of being able to attain that number. That's how we think about it internally.”cloud being around in that same time frame, $2.5 billion to $3 billion. We talked about identity being $1 billion to $1.5 billion. We talked about Next-Gen SIEM being $1 billion to $1.5 billion. So you start adding up those numbers and you get more and more confidence in terms of being able to attain that number. That's how we think about it internally.”
Essentially, cloud is expected to remain the largest overall driver in dollar terms, but SIEM and identity are expected to quickly catch up to the billion-dollar range – Next-Gen SIEM and identity ARR surpassed $450 million in ARR combined last quarter, and Podbere’s comments point to both combining to a $3 billion opportunity, or nearly 6x growth over the next 5 to 7 years. He also noted that CrowdStrike grew its headcount 15% YoY in Q1 to support its trajectory to the $10 billion – this was a likely culprit of the increased operating expenses in Q1 and subsequent QoQ margin weakness.
Conclusion
CrowdStrike delivered a strong quarter, reporting a rare QoQ revenue growth acceleration for Q1 in what has unfolded as a difficult quarter for cloud stocks. Margins dipped down the line, though key metrics, particularly net new ARR, remained strong. CrowdStrike also boosted its full-year revenue and adjusted EPS guide, as it continues to sign larger deals, benefitting from the strength of its Falcon platform. It is not only the excellence of this report that stands out, yet the also the weakness of CrowdStrike’s peers. As you can imagine, we are currently looking to add to our position. Our goal is to buy at lower levels (worth a shot), or if price does not cooperate, we will buy on a breakout.
Damien Robbins, Equity Analyst at the I/O Fund, contributed to this article.
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