CrowdStrike Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 7, 2023

There are 9 speakers on the call.

Operator

Thank you for standing by, and welcome to CrowdStrike Holdings 4th Quarter and Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer I would now like to hand the call over to Maria Riley, VP, Investor Relations, please go ahead.

Speaker 1

Good afternoon and thank you for your participation today. With me on the call are George Kurtz, President and Chief Executive Officer and Co Founder of CrowdStrike and Bert Baubert, Chief Financial Officer. Before we get started, I would like to note that certain statements made during this conference call that are not historical facts, Including those regarding our future plans, objectives, growth and expected performance, including our outlook for the 1st Quarter and fiscal year 2024 and any assumptions for fiscal periods beyond that are forward looking statements within the meaning of the Private These forward looking statements represent our outlook only as of the date of this call. While we believe any forward looking statements we make are reasonable, actual results could differ materially because the statements are based on current expectations and are subject to risks and uncertainties. We do not undertake and expressly disclaim any obligation to update or alter our forward looking statements whether as a result of new information, future events or otherwise.

Speaker 1

Further information on these and other factors that could affect the company's financial results is included in the filings we make with the SEC from time to time, including the section titled Risk Factors in the company's quarterly and annual reports. Additionally, unless otherwise stated, Excluding revenue, all financial measures disclosed on this call will be non GAAP. A discussion of why we use non GAAP financial measures And the reconciliation schedule showing GAAP versus non GAAP results is currently available in our earnings press release, which may be found on our Investor Relations website at ir.cloudtrike.com or on our Form 8 ks filed with the SEC today. With that, I will now turn the call over to George to begin.

Speaker 2

Thank you, Maria, and thank you all for joining us. CrowdStrike delivered a record 4th quarter that exceeded our expectations across the board. I will focus my comments today on a few key points. First, CrowdStrike is executing exceptionally well in a challenging macro environment. We believe this is best showcased By the 4th quarter's record net new ARR of $222,000,000 record net new customers of 18.73, strong retention rates, record operating income, record free cash flow of $209,000,000 and a rule of 81 on a free cash flow basis.

Speaker 2

2nd, the dual mandate of high efficacy and low total cost of ownership Thanks to CrowdStrike's strength as a leading consolidator. CrowdStrike's growing market share showcases the Falcon platform's advanced AI and technology leadership that drives better security outcomes, automation and lower PCO for customers And third, our conviction in CrowdStrike's expansive opportunity continues to grow. We see a massive opportunity to leverage our AI driven We remain steadfast in our vision to grow ending ARR to $5,000,000,000 by the end of fiscal year 2026 and to reach our target operating model sometime within fiscal year 2025. The key to our success in the Q4 was execution and strong market demand for the Falcon platform. We converted our pipeline into wins and built a record Q1 pipeline even as sales cycles elongated as we saw late in Q3 And we did not see the typical budget flush as organizations continue to work through macro concerns.

Speaker 2

Our competitive win rates remained high and ASPs remained consistent and we ended the year with a best in class Gross retention rate and a strong net retention rate. We believe our strong 4th quarter performance and record Q1 pipeline demonstrates the mission critical nature of cybersecurity for modern businesses, the resiliency of our market and CrowdStrike's Growing leadership as the cybersecurity platform of record. I'd like to thank each and every CrowdStrike for their dedication and hard work in making the 4th Our best quarter to date. As a team, we should be proud of the amazing accomplishments we have achieved and excited about the opportunities ahead of us. We'll take a moment to highlight several year over year milestones The CrowdStrike team delivered in FY 2023 that I'm most excited about.

Speaker 2

Ending ARR grew 48% to reach $2,560,000,000 Net new ARR grew 22% to reach 8 $28,000,000 setting a new record. Our emerging product category contributed $182,000,000 To net new ARR, which was 22% of all net new ARR and a 97% increase. Emerging Products ended ARR growing 116% to $339,000,000 surpassing CrowdStrike's total ARR at the time of IPO in 2019. This included a standout year for our identity protection modules, which contributed over $100,000,000 in ending ARR in over 1,000 net new identity customers. Additionally, LogScale posted over 200 From a public cloud deployment view, ending ARR surpassed the $200,000,000 milestone to reach $224,000,000 And we added a record 6,694 net new customers For the fiscal year to bring us to 23,019 subscription customers, a 41% increase.

Speaker 2

CrowdStrike now serves 556 of the Global 2000, 271 of the Fortune 500 and 15 of the top 20 U. S. Banks. On the bottom line, FY2023 operating and net income growth Well outpaced revenue growth showcasing the leverage in our model. Non GAAP operating income grew 81% year over year to reach a record $356,000,000 non GAAP diluted EPS grew 130% to reach a record $1.54 Free cash flow grew 53% to reach a record $677,000,000 and we achieved at least 30% free cash flow margin for the 3rd consecutive year.

Speaker 2

Our market leadership continues to grow as customers are voting for their platform of choice with their wallets. CrowdStrike ranked 1st in IDC's annual worldwide modern endpoint security market share report for the 3rd consecutive year with 17.7 percent market share outpacing all vendors by posting the largest increase in revenue and market share. The efficacy of the Falcon platform continues to be widely tested and recognized for delivering superior outcomes, Regardless of whether you are looking at MITRE, TrustRadius, G2, Frost and Sullivan, Forrester Wave, SC Labs, Gartner Pure Insights or Gartner Magic Quadrant, Falcon's superior technology has been awarded a lead or number 1 position. This was most recently highlighted by winning the 2023 SE Labs award for best EDR and best product development. This is the 3rd consecutive time that CrowdStrike has won in the best EDR category, further reinforcing our innovation in endpoint security and putting us in the pole position to help customers enter the XDR era.

Speaker 2

Additionally, CrowdStrike was once again positioned as a leader, furthest to the right for completeness of vision in Gartner's Magic Quadrant for endpoint protection platforms for the 3rd consecutive year. We believe this recognition highlights our long standing track record of disruptive innovation, including our use of AI and indicators of attack to stop cyber adversaries in real time. While the use of AI has become the new topic of the day, it is not new to CrowdStrike. We were a pioneer in applying AI in cybersecurity. The Falcon platform was designed from the ground up to effectively process and correlate the massive volume of data required for effective AI and leverage it across our entire platform from prevention through to detection and response.

Speaker 2

This enables Falcon to spot fainter signals and identify activity earlier in the kill chain. We have become experts at leveraging data science to deliver Best of breed attack discovery and prevention for our more than 23,000 customers. This drives immense leverage across the platform and better, more efficient outcomes for our customers. There is a clear mandate from customers. They want to reduce cost and headcount, reduce the number of point products and agents, reduce complexity and simplify operations.

Speaker 2

This mandate is even more acute for customers given the current macro climate And it is the exact imperative that Falcon platform was built to deliver from day 1 with its advanced AI engine and collect once reuse many architecture. CrowdStrike delivers on these customer mandates with our hallmark immediate time to value that accelerates cost savings for the customer. Let's take a look at a few customers that are using CrowdStrike to drive consolidation, Lower TCO and realize better outcomes within their environments. 1 of our marquee enterprise customer wins this quarter Was with a leading financial institution in the Fortune 50 that is consolidating on Falcon and replacing 4 vendors and multiple point products, including Symantec, Trellix, Trend Micro and Aqua. Their testing These factors, along with Falcon's holistic approach to protecting the cloud environment with our integrated CNAP offering, drove the decision to adopt the Falcon platform.

Speaker 2

Another customer win I'd like to highlight was with a multinational FinTech company Looking for a security partner to consolidate their hodgepodge of legacy and next gen vendors. This customer identified 8 vendors They could eliminate with their initial deployment of Falcon, including Microsoft, Carbon Black, Trellix, Trend Micro, Sophos, ESET, eProT and ClamAV, the Falcon platform provides them the ability to significantly reduce the complexity, reduce agent bloat, reduce TCO and improve security outcomes. Additionally, this customer purchased LogScale to store its security data to gain better performance and avoid the high cost associated with existing log management solutions. Another large scale win this quarter was with a leading global financial institution that wanted to increase the volume of Falcon data retained as well as gain faster query results and avoid the high cost associated with expanding the usage of their legacy log management system. Their testing showed that LogScale delivered query speed orders of magnitude faster than their existing tools.

Speaker 2

This customer is now ingesting close to 40 terabytes of data per day with plans to standardize on LogScale across their organization over time. The next exciting win I'd like to share with you is an expansion to Falcon Complete with 1 of the largest global transportation and logistic companies In a highly targeted sector by cyber adversaries, this customer wanted around the clock 365 day sock. While this customer had budget and headcount reserved to build out an internal stock, after performing a thorough Cost benefit analysis. This customer determined that Falcon Complete, including Falcon Complete for identity threat protection, would deliver the best coverage, Protection and value without adding headcount. Falcon Complete for identity threat protection was a key aspect to the win as they sought to run an effective and mature identity security program without the burden, cost and time associated with managing it internally.

Speaker 2

Even as doing more with fewer internal resources has become the new normal for many companies, The outcome of stopping breaches remains the number one priority for CISOs and CIOs. As cited in our Global Threat Report, The threat landscape remains elevated with an observed 50% increase in the number of interactive intrusion campaigns and 95% growth of the number of cloud exploitation cases in 2022. Compromising on security can easily translate to compromised coverage, Added complexity and catastrophe. Let me be clear, there is no participation trophy for coming in 2nd place When up against cyber adversaries, good is never good enough on the cyber battlefield and proceed free is never free. To demonstrate my point, I'd like to share a recent win with a company that suffered a breach after relying on an OS vendor that claimed their legacy Signature based product was good enough to take on today's threat actors.

Speaker 2

This company had initially chosen Microsoft to replace existing AV products across their estate, but quickly ran into trouble when they discovered that Defender Could not be fully deployed within their heterogeneous environment, leaving their servers vulnerable. Unfortunately, it did not take long for threat actors to find these gaps and brief their environment. They turn to one of our incident response partners, a leading global SI that uses Falcon as a key part of their response and remediation service. During the engagement, the customer found that Falcon provided 2.5 times More coverage in Defender and was much simpler to operationalize. It quickly became obvious to this company why AI protection was Far superior to signature based technologies and they needed world class protection across heterogeneous operating systems.

Speaker 2

The CISO also determined that excluding the cost to remediate the breach, Defender costs twice as much and would still fall short of the functionality, Simplicity and efficacy of Falcon. Having lost faith in Microsoft's low cost good enough promise, This new CraftsRite customer adopted Falcon Complete. Our professional services organization is a strong lead generation engine for the Falcon platform. The average ARR per dollar of professional services revenue derived from organizations new to CrowdStrike through our incident response or proactive services grew to $6.07 as of January 31, 2023. To summarize, every dollar from these professional services engagements in the past 2 years has turned into $6.07 of ARR.

Speaker 2

Our thriving partner ecosystem is also growing to become a powerful source of lead generation. In FY 2023, MSSP ending ARR grew over 100% and partner sourced Ending ARR grew over 50% year over year. Additionally, revenue through channel partners grew to 83% of total revenue. Strategically expanding and investing in our partner ecosystem with the goal of further expanding our reach within the enterprise as well as down market In the SMB is one of our top initiatives in FY 2024. As we recently announced, We entered into a new multifaceted strategic partnership with Dell to deliver the Falcon platform to Dell's customers globally.

Speaker 2

The Falcon platform is now offered through Dell's global go to market organization via several avenues, including a traditional reseller agreement, On device for new purchases made through Dell's direct sales team and as the cornerstone to Dell's managed cybersecurity service offering. While it is still early days for this new go to market partnership, we expect it to significantly expand our reach across the market From large enterprises to the small s in the SMB, customers have chosen CrowdStrike as the platform of choice and so has Dell. We had tremendous initial success with our FalconGo bundle, which was specifically designed as a starter package or landing point for smaller businesses with 100 endpoints or less that may be more price sensitive. We launched FalconGo a little more than 2 quarters ago and have already added over 1,000 net new customers through the program. We believe this early success reaching the S in the SMB demonstrates The immense demand for CrowdStrike's best in class endpoint protection even among the smallest and cost conscious organizations.

Speaker 2

In late January, we launched the next gen iteration of our e commerce engine with the goal of removing even more friction out of the buying process and driving higher connection between digital top of funnel and conversion into buying. We view these advancements in our e commerce engine As a differentiator and within just a few weeks post launch, we have seen a dramatic increase in no touch digital conversions. The market dynamics in the SMB are velocity driven and very different from our traditional enterprise customer base. To accelerate growth and drive market share within the massive SMB opportunity as well as increased growth through all of our channels, We changed the organizational structure and created a new leadership role with the appointment of Daniel Bernard as Chief Business Officer. Daniel has a proven track record in leading channel partnerships and business development at several high growth SaaS, cloud and cybersecurity companies and is most recently recognized for transforming SentinelOne's market awareness.

Speaker 2

I'd also like to welcome Raj Rajamani to the CrowdStrike team, who will also join us from SentinelOne. Reporting to Amalf Kulkarni, Raj is our Chief Product Officer for Data, Identity, Cloud and Endpoint. I've worked with Raj in the past and I'm Excited to have him join our team as we continue to drive disruptive innovation. And finally, I'm extremely proud to congratulate Mike Santos On his promotion to President, Mike has been an invaluable contributor to CrowdStrike's success and as President, he has responsibility for leading the company's Product and go to market functions. These leadership changes are designed to drive greater focus and alignment across our key growth initiatives and enable me to spend more time with customers as we scale CrowdStrike to achieve our vision of $5,000,000,000 in ending ARR and beyond.

Speaker 2

In summary, CrowdStrike is executing across all facets of our strategy, winning in our markets and providing customers with protection that powers them. With that, I will turn the call over to Bert to discuss our financial results in more detail.

Speaker 3

Thank you, George, and good afternoon, everyone. As a quick reminder, unless otherwise noted, all numbers except revenue mentioned during my remarks today are non GAAP. We delivered an exceptional 4th quarter and a strong finish to the year with $221,700,000 in net new ARR, bringing ending ARR to $2,560,000,000 up 48% over last year. In the quarter, we saw strong expansion within our customer base, including an 8 figure net new ARR expansion. Ending ARR for the $1,000,000 plus cohort grew 57% year over year.

Speaker 3

We now have over 400 subscription customers with ending ARR over $1,000,000 at an average of 10 modules. Overall in Q4, we landed a record number of net new customers fueled by growth in enterprise, non enterprise and public sector accounts. We continue to be very pleased with the success of our land and expand strategy. Our dollar based net retention rate was above the 120% benchmark throughout the year, ending Q4 at 125.3%, which is higher than last year and on a much bigger base. For the interim FY 2023 quarters, net retention was 127.6 percent in Q3, 127.6 percent in Q2 and 125.5 percent in Q1.

Speaker 3

Our best in class gross retention rate remained exceptionally strong at 98.0% as of year end. Subscription customers with 5 or more, 6 or more and 7 or more modules grew 52%, 62% 75% year over year respectively. Now the respective module adoption cohorts Represent 62%, 39% and 22% of subscription customers respectively. Given the strong momentum we have seen with our FalconGo bundle of 3 modules for very small businesses, we are now Excluding these customers from our module adoption metrics and have provided comparable metrics for prior periods in the investor presentation on our website. Additionally, given the growing number of smaller end customers that we serve through our MSSP partners, which we estimate exceeds 18,000 and our down market bundles, as George discussed, we don't believe that Therefore, we are moving to reporting logo metrics on an annual basis only.

Speaker 3

We look forward to providing additional details, including the usual annual deep dive of our customer cohorts on our investor webinar scheduled for April 4. Moving to the P and L, total revenue grew 48% over Q4 of last year to reach $637,400,000 Subscription revenue grew 48% over Q4 of last year to reach $598,300,000 Professional services revenue was $39,100,000 setting a new record for the 10th consecutive quarter and representing 53% year over year growth. This brings total revenue growth for FY 2023 to 54%. In terms of our geographic performance in Q4, we continue to see strong growth in the U. S.

Speaker 3

At 44% and international revenue growth at 57% year over year. 4th quarter total and subscription non GAAP Gross margins were 75% and 77%, respectively. Looking into Q1, we expect subscription gross margin to increase by up to 1 percentage point quarter over quarter driven by cost optimization. Total non GAAP operating expenses in the 4th quarter Fiscal year 2023 were $385,000,000

Speaker 2

$1,350,000,000

Speaker 3

respectively. Operating expenses in fiscal year 2023 were 60% of revenue compared to 63% of revenue in fiscal year 2022. In Q4, our magic number was 1.1, reflecting the continued efficiency of our go to market engine. 4th quarter non GAAP operating income grew 19% year over year to reach a record $95,600,000 and we reported operating margin of 15%. Looking at fiscal year 2023, non GAAP operating income growth Outpaced revenue growth, increasing 81% year over year to reach $355,600,000 and 16% of revenue, picking up 2 35 basis points of operating margin for the year.

Speaker 3

As our magic number and rule of 40 reflect, we have a highly efficient model. For the past 3 years, We have grown operating income faster than revenue and we remain focused on continuing to drive efficiency, Balancing robust growth with increased leverage. In FY2023, we took advantage of opportunities we saw in the labor market This gives us a significant head start to achieving our goals for FY 2024 and enables us to significantly moderate the pace of new hires, while continuing to invest responsibly for the long term. Non GAAP net income attributable to CrowdStrike in Q4 grew to a record $111,600,000 or $0.47 on a diluted per share basis. Our weighted average Common shares used to calculate 4th quarter non GAAP EPS attributable to CrowdStrike was on a diluted basis and totaled approximately 240,000,000 shares.

Speaker 3

We ended the 4th quarter with a strong balance sheet. Cash, cash equivalents and short term investments increased to approximately $2,710,000,000 Cash flow from operations grew 71% year over year to a record $273,300,000 Free cash flow grew 65% year over year to a record $209,500,000 or approximately 33% of revenue. This brings free cash flow for the year to $676,800,000 or 30% of revenue. Before I move to our guidance, I'd like to provide a few comments about how we view the ongoing impact of the current macro climate on our business and a few modeling notes. We delivered a record Q4 and have a record Q1 pipeline.

Speaker 3

However, given continued increased budget We believe it is prudent to maintain the FY 'twenty four ARR assumptions We discussed on our last earnings call that normalized the first half of the year for the current macro environment with a full year net new ARR This would imply a low 30s ending ARR growth rate for the year. As our guidance implies, We expect to deliver operating margin leverage for the full year with operating income growing faster than revenue. In terms of seasonality, we expect operating margin leverage to be more weighted to the back half of the year in comparison to FY2023. We expect to deliver a free cash flow margin of approximately 30% of revenue in FY 2024. This assumes CapEx as a percentage of revenue to be between 6% 8% for FY 2024 and approximately $32,000,000 and cash outlay for income taxes compared with $12,000,000 in FY2023.

Speaker 3

The midpoint of our FY 'twenty four non GAAP net income guidance assumes $129,000,000 in interest income and we expect interest expense to remain consistent with FY2023. And lastly, as implied in our guidance, We expect weighted average diluted share count to increase less than 2% in fiscal 2024. For the Q1 of FY 2024, We expect total revenue to be in the range of $674,900,000 to $678,200,000 reflecting a year over year growth rate of 38% to 39% with subscription revenue being the dominant driver of growth. We expect non GAAP income from operations to be in the range of $107,100,000 to $109,500,000 and non GAAP net income attributable to CrowdStrike to be in the range of $121,100,000 to $123,500,000 We expect diluted non GAAP net income per share attributable to CrowdStrike to be in the range of $0.50 to $0.51 utilizing a weighted average share count of 241,000,000 shares on a diluted basis. For the full fiscal year 2024, we currently expect total revenue to be in the range of $2,955,100,000 to $3,014,800,000 reflecting a growth rate of 32% to 35% over the prior fiscal year.

Speaker 3

Non GAAP income from operations is expected to be between $474,000,000 $518,700,000 We expect fiscal 2024 non GAAP net income attributable to CrowdStrike to be between $535,900,000 and $580,700,000 Utilizing 243,000,000 weighted average shares on a diluted basis, We expect non GAAP net income per share attributable to CrowdStrike to be in the range of $2.21 to $2.39 We look forward to sharing additional details about our business on our next investor webinar scheduled for April 4. George and I will now take your questions.

Operator

You are to limit yourself to one question, then return to the queue. Please stand by while we compile the Q and A roster. Our first question comes from the line of Saket Kalia of Barclays. Your question please Saket.

Speaker 4

Hey, good afternoon guys. Thanks for taking my question here. George, maybe for you.

Speaker 2

Hey, Taki. Thanks.

Speaker 4

Hey, George. Maybe I'll direct my one question to you. Very helpful customer example there of that Microsoft switch out. The numbers certainly wouldn't indicate it, but curious if you can just talk about the general competitive environment, particularly with respect to Microsoft and how, if at all, that competitive backdrop is impacting industry pricing?

Speaker 2

Sure. Thanks Saket. Our ASPs remain consistent. Certainly, you've Seeing what we've been able to do in the SMB market, and I think we've been very focused on that where we have run some promotions, which is where we designed the promotions to be run. But I think when you look at the competitive positioning, just as an example, in IDC's modern endpoint Including outpacing Microsoft.

Speaker 2

And what customers are really telling us is that Microsoft's good enough security is not good enough. And we've been winning because of our coverage across multiple operating systems, the complexity of Microsoft 6 consoles. In fact, Just today alone, they had 6 signature updates. And in general, as I call them the 3 Cs, the last one is catastrophe. During our incident response engagements, The majority of the systems that are breached are using Defender.

Speaker 2

So when you wrap all that together, we feel good about our competitive positioning. And Again, from a pricing perspective, ASPs have remained consistent.

Operator

Thank you. Our next question comes from the line of Sterling Auty of MoffettNathanson. Please go ahead, Sterling.

Speaker 4

Yes, thanks. Hi, guys. So my question actually is on, George, what you touched on with SMB. I'm wondering if you can kind of go a layer deeper in terms of what you're doing to drive the business there, because that's one area that we've Some sluggishness out of vendors, what are you doing to drive the velocity in that business And how much durability do you think that gives you?

Speaker 2

Well, we're really excited about that segment. As I mentioned, we hired Daniel Bernard, Who is at SentinelOne, he is now our Chief Business Officer and a big part of his remit, not only in channel and partnerships is the SMB Mark, you saw the partnership with Dell. We're excited about that as an exclusive partner for the endpoint piece in their market. And then when we think about Falcon Go, it really is a very lightweight bundle that is Perfect for the SMB market, the S and the SMB. So we can go down market.

Speaker 2

We've got some updates that we've done in our e commerce engine to make it even more Frictionless to acquire customers and we've seen great adoption in those markets and It's not only delivering what we believe is the best technology, but making it also the best go to market motion with our partnerships and channels. So We continue to focus on that. We're still in the early innings of our SMB journey. But again, customers are wanting this. They're telling the likes of Dell that they want our technology, which is why we were selected by Dell and more to go, but Early innings and very favorable in the SMB market.

Operator

Thank you. Our next question comes from the line of Joel Fishman of Truist. Your question please, Joel.

Speaker 4

Thanks for taking my questions and congrats Mike on the Promotion, Bert for you, just you had a very tough comp this quarter and you called out the 8 figure net new AR expansion. Just Like to get any more color on any larger deals that contributed to the quarter and obviously this is a big renewal quarter, how those trended as well? That would be really helpful. Thank you.

Speaker 3

Hi, Joel. Yes, we were really pleased with being able to sell an 8 figure deal into an existing client. I think in general, we were really happy with the overall mix of our $1,000,000 plus deals as well as our SMB. So overall, just a really well balanced quarter and we're really happy with that result.

Operator

Thank you. Our next question comes from the line of Matt Hedberg of RBC. Your question please, Matt.

Speaker 4

Great, guys. Thanks for taking my question. George, a lot of great year end metrics. I think the emerging product growth is particularly exciting and Identity really sticks out to us from what you've said and what we've been hearing. Fast forward a year from now, which emerging product do you think will look back at having the biggest incremental impact on fiscal 'twenty four and why?

Speaker 2

Well, we continue to be excited about Identity. As you called out, it's a big business For us, it's one of those modules that's super easy to turn on. There's a tremendous amount of competitive differentiation between what we have in a single agent and How it actually works versus our competitors, including the likes of Microsoft. So we feel really good about that. And then I call that large scale.

Speaker 2

I think that To have one of the largest financial institutions in the world adopt their technology, battle test it, they understand the scalability and What it's able to do in sub second search results, we're incredibly excited about that. And even Surface, which is Enterprise and Tax Service Management has been one of our fastest growing sort of early adopter modules post acquisition. So, by and large, when you look at sort of the kind of emerging business, including cloud, great opportunities there, fantastic growth and I think it really showcases the power of the platform.

Operator

Thank you. Our next Question comes from the line of Rob Owens of Piper Sandler. Please go ahead, Rob.

Speaker 4

Thank you for taking my questions. Building on Matt's question a little bit, are you seeing those emerging modules as the tip of the spear as you're seeing new customer acquisition at this point. And can you give us some color with regard to that? Thanks.

Speaker 2

Sure. When we think about how a customer can come into the CrowdStrike family, it's certainly the traditional way has been on the endpoint, your core modules of AV, EDR, things of that nature. But when you look at something like Surface, it's so easy to get up and running and just You can get a trial, you can use it, you don't have to install anything. And we see customers coming in, in various ways. I think log scale is another good example.

Speaker 2

Someone might have a need for collection of data at scale and Looking at the cost and expense of the current SIEM and looking at this and saying, hey, can we get something that's faster, better, cheaper, And they might enter that way. And then even when you think about our cloud offering, we have plenty of customers that actually come to us in the cloud first before they actually deploy us on their internal network. So I think we've got enough modules and coverage and breadth in the environment in the marketplace that customers can get to us In various ways depending on what their needs are.

Operator

Thank you. Our next question comes from the line of Andrew Nowinski of Wells Fargo. Please go ahead, Andrew.

Speaker 4

Okay, great. Thank you. Great quarter and nice recovery from last quarter despite not seeing a real change in the macro. I just had a question on the Dell partnership. So I thought that was really interesting.

Speaker 4

And I know you said it will help you reach SMB customers all the way up to large enterprise. But Can you give us any more color around maybe how that partnership will work and any sort of framework for how you're thinking about it as it relates to your fiscal 2024 guidance?

Speaker 2

Sure. Let me take the first part of that. So when we think about what we're doing with Dell, we'll be on the box. So you can An SMB bundle, so they actually have a device as a service, which is really interesting and that's a subscription service they have, we'll be part of that. And then part of their managed service, they actually selected us to drive their managed service on the endpoint side.

Speaker 2

So there's various Go to market motions with them, which we're really excited about. And again, I think it showcases our technology leadership in the market and the customer Paul, because customers have been clamoring for this technology to Dell. So Bert, you want to talk about the outlook?

Speaker 3

Sure. Thanks, George. Look, the partnership is just getting started. So we have not factored that into our guidance. As with any new alliance, it does

Operator

Thank you. Our next question comes from the line of Tai Liani of Bank of America. Please go ahead, Tai.

Speaker 4

Did you say Tal Liani?

Operator

Yes, sir. Please go ahead.

Speaker 2

Okay. Sorry, I didn't hear my name. I have a few questions. Gross so you beat on revenues, great numbers, but gross margin was down and EBIT is kind of not above not much above expectations. So is the pricing environment deteriorating?

Speaker 2

Did you have to give Price concessions in order to grow faster or is it the impact of Microsoft? Just anything about pricing and the difference between the beat on revenues and margins? Maybe I'll start with that.

Speaker 3

Sure. So first on gross margin, it's It's not really about pricing. I think we expect it to fluctuate quarter over quarter. And as I said on the prepared remarks, we expect it to increase up to 1% in Q1. But there are a few things that are impacting gross margin in the short term, which will pay dividends in the long term.

Speaker 3

One is we're continuing to invest in our data centers. And as we continue to do that, that is going to impact our gross margin again in the short term, but long term that's what we believe is the right strategy. And second, with our acquisition of Humio, it's not been fully synchronized. So when that does happen, that'll take some Pressure off of our COGS. So those two things are really some of the drivers on the cost side.

Speaker 3

And I think as we continue to move into Q1 and beyond, We'll be looking for more of that cost optimization. And I still strongly and firmly believe in our long term model, which talks about our subscription gross margin going up to 82 plus percent.

Operator

Thank you. Our next question comes from the line of Hamzah Fodderwala of Morgan Stanley. Your question please Hamzah.

Speaker 5

Hey, good afternoon. Thank you for taking my question. George, you talked about AI being nothing new in cybersecurity. Obviously, there's a lot of focus on it these days from customers.

Speaker 3

Can you talk about

Speaker 5

how you're Equipping yourself to sort of handle this growing threat around AI and how being on the endpoint gives you that strategic real estate to

Speaker 2

Sure. Thanks. And when we think about AI, we really are one of the pioneers In AI from a security perspective, we started the company leveraging big data AI to be able With the massive data and telemetry that we collect every week, it's mind boggling. We can use that When we think about stopping breaches, the tip of the spear really is the endpoint, the workloads, that's where the adversaries are targeting and that's where they're focused on data and encrypting it and breaking in and doing damage. And I think when you look at our technology lead in this area, we've proven Our efficacy through various testing outlets, we continue to get incredible scores.

Speaker 2

And at the end of the day, it's really about the brand promise So stopping breaches and AI is a massive part of what we're able to do to implement to how we stop those breaches And it does represent a competitive advantage and moat for us.

Operator

Thank you. Our next question comes from the line of Brian Essex of JPMorgan. Your question please, Brian.

Speaker 4

Hi, good afternoon and thank you for taking the question. I guess, Bert for you, would like to dig in a little bit In terms of the levers that you see for margin expansion, appreciate the commentary that you had on accelerated hires in 2022 and it sounded like the moderation in But you've already hit free cash flow margins of about 30% on operating margins of about 16%. As we kind of model out And fine tune our models over the next few years, how should we think about the levers that you have for better operating profitability and cash flow? What should the spread between the 2 be? And how should we think of it?

Speaker 4

Obviously, you've consistently been conservative, but just want to understand How you're thinking about the spend versus growth and prioritization given the success that we've seen so far with the margin expansion? Thank you.

Speaker 3

Yes, great question. So number 1, we're going to continue our balanced approach to supporting our rapid growth Even our greater scale with profitability, I think it's always going to be a slider and I think we've done a great job in being able to manage that growth, not at all costs, But with a real eye to the bottom, I mean operating in a magic number above 1 and a rule of 81 on a free cash flow basis are best in class and we're excited about Being able to continue to monitor that and watch that, look, I think we posted record operating income in Q4 and FY2023, Growing operating margin to 16% for the year. I think that what we talked about last quarter with respect to our hiring and Pace of hiring, we've taken a really solid approach about moderating the pace of hiring for this year. And I think that it goes to watching how and who we're hiring with an increased eye to making sure we're hiring the best. And for us, that really matters and we're going to get the results that we want to get by doing that.

Operator

Thank you. Our next question comes from the line of Gabriela Borges of Goldman Sachs. Your line is open Gabriela.

Speaker 1

Good afternoon. Thank you. Bert, I wanted to ask you the rate of change question on the budgeting environment. Last quarter, you gave a statistic on deals taking 11% longer to close. So looking for a quantitative update there.

Speaker 1

And then Any qualitative overlay either from yourself or from you, George, and what you're hearing from customers and willingness to spend an endpoint In 2023 versus maybe what they were expecting 90 days ago? Thank you.

Operator

Hi, Gabriel, it's great to hear

Speaker 3

your voice. So first, deals did take longer to close this quarter. We did see that And we do anticipate to see those headwinds continue throughout next year. And for us as we think about next year, Our thoughts are consistent with what we said last quarter. I'll turn it over to George.

Speaker 2

Yes. In terms of modernizing The security stack, I think that's front and center. There isn't a CIO that I haven't talked to that doesn't want to consolidate their hodgepodge of technologies out there. And again, that goes beyond just endpoint, right, in terms of the things that we offer and the capabilities and the outcomes. And if you just think about the endpoint market itself as we talked about the IDC numbers, we're 17.7%.

Speaker 2

There's a lot more to go, right? There's still a massive, massive amount of legacy technology that's out there. And again, customers Looking to really take a modern platform approach and consolidate their spend. So, it's been something that customers are not Looking to just stick with what they have and breaches are not getting any better. They're getting worse.

Speaker 2

The threat actors are being more sophisticated And it's going to require better protection with a better outcome.

Operator

Thank you. Our next question comes from the line of Brian McAuley of Stephens. Your question please, Brian.

Speaker 6

Hi, thanks for taking my question. So I'm curious on the XDR front, if you've seen an acceleration in XDR adoption since you've introduced Falcon Insight XDR and the new pricing strategy there. And I was also wondering if you could kind of share what the average ARR or ASP up

Speaker 2

Yes, sure. So, we haven't given that level of information out specific to XDR, so I can't comment on that. But when we think about XDR, I think as an industry, it's still in the early innings. We're of course one of the pioneers of EDR. We've extended that out into XDR with our 3rd party integrations.

Speaker 2

I think we've got some incredible partners that we're now flowing data into the CrowdStrike platform and being able to make Advanced decisions on whether something is good or bad across multiple platforms, including CrowdStrike, and it's

Speaker 3

I'd just add that we are seeing great early traction.

Operator

Thank you. Our next question comes from the line of Ittai Kidron of Oppenheimer. Your line is open, Ittai.

Speaker 4

Thanks guys and nice quarter. I was hoping I could get some more color on the SMB. Clearly, it's a very big opportunity for you then and with the gold bundles you're Going off to a very good start there. But maybe as a point of reference, can you tell us how much of your revenue ARR is concentrated in that tier? How do you how much do you think Where do you think that can go within a year's time?

Speaker 4

And also Bert, specifically on the dollar retention rate, I can't imagine that the expansion opportunity with those type of customers is similar to that end of enterprise customer. So how do I think about the impact of those of the growing mix of those type of customers On the dollar based retention rates.

Speaker 3

So look, we're really excited About our SMB space, George talked about Dana Barnard coming on Ward. We think we've got great products for them to come in and to expand. It's not just limited to our enterprise, although certainly the EMVR is going to be driven by our enterprise customers. For dollar based on retention, as I think about next year, I think we're going to see slightly more Net new ARR coming from expansion deals and net new ARR coming from new logos. I think that we've got this incredible base of 23,000 subscription customers today and we can certainly continue to add more modules to their security stack And continue to delight them.

Speaker 3

So that's how we think about the splits.

Operator

Thank you. Our next question comes from the line of Patrick Kozel of Scotiabank. Your line is open, Patrick.

Speaker 7

Hey, this is Patrick Collin from Scotiabank. My question is about The net cash, you guys have about $2,000,000,000 of net cash on the balance sheet. We saw CRM, We saw Workday and just last week Snowflake announced buyback programs. Do you think that's something that you guys might consider on a go forward basis To limit dilution in calendar 2023 beyond?

Speaker 3

Yes. Look, we will evaluate every quarter that proposition. So I think that that's just a quarter by quarter We do look at it. We do look at what's happening in the environment. There are many factors that we're going to decide whether we were going to do something like that.

Speaker 3

So we've been really on a quarter by quarter basis where we would do the evaluation.

Operator

Thank you. Our next question comes from the line of John DiFucci of Guggenheim. Please go ahead, John.

Speaker 8

I'm sorry, can you hear me? Yes. Hi. Thanks for taking my question. George, I sort of have a follow-up to several of the questions there.

Speaker 8

It has to do with price versus the mid market and new logos versus add on sales. I mean, I would think like it's a lot tougher to sell to new logos In this macro backdrop, especially in the enterprise, but you obviously sold a lot of new logos this quarter and it sounds like a lot to the Mid market and SMB. I guess, can you remind us how you think a typical mid market customer or SMB customer will evolve? Will they eventually buy as many modules as enterprises? I could see how they could because since it really makes Security easier for them to have an integrated solution.

Speaker 8

But then again, it's tough to say, I mean, the mid market customers are typically much less

Speaker 2

Sure. So let's think about this on a worldwide base. The mid market customer in the U. S. Is much different than a mid market customer, an APAC as an example, right.

Speaker 2

So the sizing is quite different. But when you think about sort of non enterprise customers, they still have all the same problems. These are $1,000,000,000 companies that have 1 IT person, 2 IT people, half a security person. And we think that's a perfect opportunity for Falcon Complete, where we can sell them multiple modules. We've added now Identity into Falcon Complete.

Speaker 2

End to end, we can service that account and basically take a lot of the burden away in a challenging macro environment. They're not getting more headcount, but they still have a great risk from a security perspective. So, that's the mid market all the way down to We have very small companies that are Falcon Complete customers. So if they can't quite digest everything that we have, that's okay. What they're buying is an outcome And our outcome is stopping the breaches, reducing complexity and lowering their overall cost.

Speaker 2

And that is resonating with customers as we consolidate

Operator

Thank you. I would now like to turn the conference back over to George Kurtz for closing remarks. Sir?

Speaker 2

Great. I want to thank all of you today for your time. We certainly appreciate your interest and look forward to seeing you at our upcoming investor webinar. Thanks so much And we'll see you soon.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Powered by Quartr

Key Takeaways

  • Record Q4 with $222 M net new ARR, record net new customers, strong retention rates, ending ARR of $2.56 B (+48% YoY), and free cash flow of $209 M in the quarter (a record $677 M for FY 2023).
  • FY 2023 milestones included 116% YoY growth in emerging products to $339 M ARR, identity protection ARR surpassing $100 M, LogScale ARR of $224 M, and a 41% increase in subscription customers to 23,019.
  • Customers consolidated multiple vendors (e.g., Microsoft Defender, Symantec, Trellix) onto the Falcon platform to achieve higher efficacy, greater automation, and lower total cost of ownership.
  • Go-to-market momentum driven by an exclusive Dell partnership, the FalconGo SMB bundle adding over 1,000 net new customers, partner-sourced ARR up 50% YoY, and e-commerce enhancements boosting digital conversions.
  • FY 2024 guidance targets 32–35% revenue growth ($2.96–3.01 B), operating income growing faster than revenue, approximately 30% free cash flow margin, and moderated hiring for profitability leverage.
AI Generated. May Contain Errors.
Earnings Conference Call
CrowdStrike Q4 2023
00:00 / 00:00