Business

CrowdStrike got CrowdStruck, but I have a long-term investment plan


Cloud-based cybersecurity provider CrowdStrike Holdings (CRWD) reported the company’s third-quarter financial results Tuesday night. Stocks were taken out of the warehouse overnight, trading down nearly 18% when I started reporting and commenting on those results.

In short, I don’t see anything really terrible in this report. That said, we know that pricing has been an issue for the entire up-and-coming cybersecurity software space.

For the three-month period ending October 31, CrowdStrike posted adjusted EPS of $0.4 (GAAP EPS: -0.24) on revenue of $580,882 million. The company beat Wall Street in both top and adjusted returns. Those results were up from $0.17 and $380.051M (+52.8%) a year ago.

The GAAP print is down from a loss of $0.22 for Q3 2021. The main adjustment made ($0.59) was for stock-based compensation. The cost of stock-based compensation is up to $140,113M. accounted for 24% of total revenue. This is not sustainable in the future. The company’s sales growth rate as well as better payroll control will help here.

ARR (Annual Recurring Revenue) grew 54% to $2.34 billion, including $198.1 million in new this quarter. The adjusted gross profit margin of subscribers reached 78%, lower than 79% of the previous year. Net new customer registrations increased 44% to 21,146. Registered customers who have used 5+, 6+ and 7+ modules now have 60%, 36% and 21% respectively. Free cash flow increased 41% to $174,077 million as the free cash flow margin fell from 32% to 30%.

Business efficiency

Register drove revenue to $547,376 million (+53.3%), as the cost of this revenue increased 57.6% to $134.229 million. This puts gross profit at $413,147M (+52.1%).

Professional services boosted revenue of $33,506M (+45.6%), as the cost of this revenue increased 48.1% to $23,999M. This puts gross profit at $9.507 million (+39.4%).

Reserved

CEO George Kurtz commented in the press release: “Total ARR was lower than we expected as increased macroeconomic headwinds lengthened the sales cycle with smaller customers and caused some larger customers pursue a multi-stage enrollment start date, which delays ARR recognition until future quarters.”

Kurtz further explained during the earnings call: “As Q3 progresses and recession fears grow, this dynamic becomes more apparent. In our smaller, more-trading accounts, We’ve seen customers delay purchasing decisions more and more, with the average closing date extending about 11% and new net ARR contributions down $15 million from Q2.”

Kurtz went on to explain that the company’s “win rate” improves significantly, so as the sales cycle lengthens, he believes these deals won’t be lost. Kurtz expects these conditions to continue in the current quarter.

guide

For the current quarter: The company sees revenue at $619.1M to $628.2M. Consensus has reached about $633 million. Adjusted earnings from operations are said to be $87.2 million to $93.7 million. Adjusted EPS is expected to print between $0.42 and $0.45 on adjusted net income of $100.9 million to $107.5 million. Wall Street is looking for downward correction EPS around $0.34.

For the whole year: The company sees revenue at $2,223B to $2,232B. Consensus has reached about $2.23 billion. This is up from the previous guide of $2,190.5B to $2,205.8B. Adjusted operating income is projected at $347.2M to $353.8M. Adjusted EPS is expected to print between $1.49 and $1.52 on adjusted net income of $357.6 million to $364.4 million. This is up from the previous guidance of $1.31 to $1.33. Wall Street was looking for $1.34.

Accounting balance sheet

CrowdStrike ended the quarter with a net cash position of $2,467B and current assets of $3,204B. Both of these items have increased significantly since the beginning of the year. Current liabilities amount to $1,817B, $1,483B is made up of deferred revenue. The company came in at the end of the quarter with a healthy enough current ratio of 1.36.

Total assets add up to $4.469 billion, including $517,785 million worth of “goodwill” and other intangible assets. At 11.6% of total assets, I see no problem here. Total liabilities minus equity is $3,132B. This includes $740.6 million in long-term debt and another $532.3 million in deferred revenue that is labeled as non-current. CrowdStrke was able to pay off its debt threefold, out of pocket. This is a very strong balance sheet.

Wall Street

I found 13 sell-side analysts rated 4 stars or higher at TipRanks who have also chosen CRWD since this earnings report was released. There was a series of target price cuts and a notable downgrade. Out of the 13, there are 12 “buy” or equivalent buy ratings and one “hold” rating. One of the “buys” chose not to set a target price. The average target price across the remaining 12 companies is $161.92 with a high of $180 (Shaul Eyal of Cowen & Co) and a low of $120 (Brad Reback of Stifel Nicolaus). After removing the high and low targets as outliers, the average target price rises to $164.30.

My thoughts

I don’t think the third quarter, once completed, looks bad at all. The guidance on fourth-quarter revenue and the CEO’s honesty on the conference call was enough to make shareholders nervous about a name trading for more than 100 times earnings expectations. Investors shouldn’t really read the transcript of the call yet. I have tried to quote Kurtz’s comments here for the purpose of writing an article short enough to read. He went into more detail at several points during the call.

By the way, I respect frankness. It should not be overlooked that the company has released full-year guidance for both revenue and profit, and reiterates its vision to achieve its target operating model in fiscal year 2025 (CY 2024) and increase year-end ARR to $5 billion by the end of fiscal year 2026 (CY 2024 2025).

Know what I think. I think CRWD is tradable. What’s more, starting at these levels, with valuations falling dramatically, I think CRWD is becoming investable… especially with expected earnings more than what we’re seeing. seen at Palo Alto Networks (PANW), and is less comparable to the valuation that Zscaler (ZS) transaction at.

The stock is still in a downtrend and will test the descending support line below today. My thoughts? A small item about $110. This is followed by incremental purchases down to around $105. Then see. Zscaler reports on Thursday night, so come here.

I’m looking at this as the start of a potential long-term investment. I still haven’t long equity, as I took the time to write this first. I look forward to being long before the day runs out.

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