CrowdStrike Holdings, Inc. (CRWD) Earnings Call Transcript & Summary

Okay. Well, good afternoon to some, good morning to others. Welcome to day 2 of the Barclays TMT Conference. My name is Saket Kalia. I cover software here at Barclays. Very happy to have and would say, would not be a Barclays TMT conference without the team here from CrowdStrike. Very happy to have with us Burt Podbere, Chief Financial Officer; as well as Maria Riley, Head of Investor Relations. We've got about 30 minutes together. Maybe what we'll do is we'll take the first 15 or 20 minutes just to run through some fireside chat with Burt, which I know is going to be fun. But then would love to make this active. So any investors that have questions on the line, just feel free to shoot me an e-mail at [email protected], and I'll do my best to weave in your questions here as well. So with that, Burt, Maria, thanks so much for being with us here today.

Saket, pleasure to be here.

Thanks. Well, Burt, I think CrowdStrike doesn't need an introduction. I think everyone knows the company here. But maybe just to level set for everybody. Can you just recap some of the key financial items that you were particularly proud of coming out of last quarter?

Sure, Saket. Lots to be proud of last quarter. We delivered an outstanding third quarter, really headlined by the acceleration in net new ARR growth, strong execution across the market from large enterprises to small SMB businesses and of course, expansion in the U.S. federal government. And we're seeing an inflection in our new products, specifically our identity protection and Zero Trust, Humio and cloud security modules. And then I think the competitive environment and pricing remains really favorable to us. We continue to expand our lead on the legacy vendors and the next-gen vendors really due to our scalability, obviously, our efficacy and our differentiated offerings and such of things like Falcon Complete. And then you throw in some of the financial metrics themselves, so passing $1.51 billion in ARR, that's a milestone for the company, really proud about that. A record free cash flow of $123.5 million, really proud of that. And record non-GAAP operating income of $50.7 million. All those things were made the quarter just an outstanding quarter for us.

Fully agreed there, by the way. And there is a lot to be proud of there. And I want to hit on a few of those topics. Maybe we'll start with the endpoint business here first, Burt, obviously, where CrowdStrike has gotten it started. And I want to talk a little bit about competition, Burt, kind of just to sort of knock it out of the way, right, because it's been a topic of a lot of conversations. George talked about a few competitive displacements of next-gen vendors on the last call. We aren't talking about those examples anymore, but maybe you could just touch a little bit on what you said about win rates. And you talked about favorable pricing. Can you just go one level deeper into that to the extent that you can?

Yes. No. Win rates have increased. We're winning over legacy and next-gen vendors. If you look at a newly public next-gen vendor, competes with us last quarter, we had a difference of $113 million in net new ARR between the 2 companies. This quarter, it was $131 million in terms of the difference between the 2 companies in net new ARR. And that's the metric that we look at. And so we're winning more deals. The win rates are increased. We had a record number of displacements. We talked about a few. We have a lot of boomerang deals that take place where companies first buy somebody else and then boomerang back to us because they realize that you're not getting the same efficacy, you're not getting the same usability and ease of use and ease advantage and all the things that CrowdStrike offers. And it really highlights that the differentiation that our platform provides is value to customers, right? We're not a point solution. We're adding value across the board, and we're offering it at a total cost of ownership, which is less than what they had before. So you couple in the fact that we saw discounting remaining the same. We had no difference from last quarter or the quarter before in terms of our discounting. It all comes together to say, "Hey, we're winning, we're winning more. And we're winning -- we're taking more of the wallet size from our customers." And all those things are really good for us.

Absolutely. Burt, maybe just to stay on the competitive portion here, but zoom out a little bit, I think we've talked about the favorable competitive backdrop here with legacy vendors donating share. How do you think about that opportunity now? We get that question a lot, I'm sure you do as well. So how do you think about sort of the size of that displacement opportunity and sort of customer willingness to switch to a solution like CrowdStrike?

Well, I think there's fundamentally a generational shift. We're seeing cloud technologies take over. You're seeing this movement towards digital transformation, hybrid work models. With all of that, companies need to embrace security transformation, and that's through something like us, cloud-delivered security. The old school back for those folks who have been around a while, there is this notion of a refresh, and it used to be a refresh on feeds and speeds. Well, that doesn't work anymore. And CIOs and [ CISOs ], they're looking at this, okay, we need to really solve the outcome, which is stop the breach. And we need to find companies that can do that better than anybody else. And that's us. And we need to find companies that can deliver it in a really easy fashion, so we can deploy quickly. Time to value is immediate. And so what we're seeing is we have all that, and then you're seeing this heightened [ threat environment ], right? You're seeing the adversary being more sophisticated, more robust, more intricate in how they're doing it. And then you're also seeing just the prolification of something being able to open up ransomware as a service, right? You go online, download some tools and there you go. You can start your own little business, and they're using it from a subscription basis. So they're pulling all the tools that we see is on the other side of [indiscernible]. So when you're thinking about all that, companies are really scratching their head in terms of thinking about the old technology and the legacy vendors that just doesn't work. So they're looking for companies like us. And they're then looking for that platform play. They're looking for someone that they can really focus in on. And then for us, once you've bought into the platform, you have this ability to continue to upsell and cross-sell new capabilities as they come out to customers. And so more and more, they can swipe out other vendors that are clunkier that are not integrated and go with a seamless integrated solution. And I think the difference between a platform and [indiscernible] product is that with a platform, the more customers adopt on that platform, the easier it is to sell. They know you, they love you. You've been a part of their success, and they want to continue to use it. We have customers today that say, "Hey, whatever module you come out with, we're buying it." And even more, they'll go, "Hey, CrowdStrike, what are you coming out with? Or are you coming out with something like this? Because I'm planning to buy this. But if you're coming out with it, I'm going to wait." And so we're seeing dollars being shifted to us and even dollars put on the sidelines until we come out with the product, so -- or capability. So that's what we're seeing, Saket.

Yes. Yes, absolutely. That's a helpful foundation. I mean maybe just to sort of put a bow on the endpoint here, Burt. And again, there were a lot of proud things to be -- a lot of things to be proud of last quarter. I've got a really interesting point with the agreement with the CISA. And I know you and George are proud to be helping to protect the U.S. government. Can you just elaborate a little bit on how that contract works? And how big we could see that get over time?

Yes. No, it covers several agencies that CISA work with to select CrowdStrike as part of their EDR initiative in the executive order. So it's kind of handing love to the executive order and what we do specifically on EDR. It was a sizable deal for us. It will make the U.S. federal government one of our top customers. Again, minimal contribution into Q3 because the agencies are all going to roll out at different times. So we'll see that in the quarters to come in this particular deal, and it will fold into -- the ARR will fold in over several quarters. And we're just getting started in the Fed. And I think this is a license to sell more through CISA, which is another advocate of CrowdStrike. And it's an advocate, obviously, first start with the tech and all the things that we do around the tech. But then executive coverage, George talks to the folks at CISA, I myself and friends with the Deputy Director at CISA. And we continue to talk to each other on a quarterly basis or more frequently. And so all those things matter in terms of doing more with federal government.

Got it. Got it. And just to be clear, I mean, that really wasn't a material part of the net new ARR in Q3. That's something that's more on the comp going forward. Is that right?

Yes. [indiscernible] come as opposed to this quarter. Sure.

Got it. Very helpful. I want to shift over into the growing non endpoint part of the business. I think many of us remember, right, very fondly, right, when CrowdStrike IPO-ed with roughly 10 modules. And now you guys are somewhere north of 20 modules, right? I mean you've talked about it before. I mean customers waiting for additional modules to come out. Can you just walk us through the evolution of the product portfolio here a little bit? And how this has shown up in CrowdStrike's results?

Yes. I remember the IPO [ fondly ], and we were really happy at that time, working with you and getting all the -- getting everything in order and coming to market, even more excited now with the 20 modules -- 21 modules, to be precise. And basically, we're seeing strong performance on both core and emerging products. And I feel that we have a lot of headroom on both. And I think that's what's exciting. I think we're seeing the flywheel effect of the platform like we discussed. We're seeing success in each of our new markets, including Spotlight and cloud, both are gaining more and more traction. And I think we're emerging as a [indiscernible] Zero Trust and Humio were game changers for us, increasing the deal sizes and leverage within the platform. And Zero Trust has hit an inflection point, and we're excited about that. And I think at the end of the day, high module adoption increases stickiness. We give out the stats. We give out the stats in terms of customer adoption, 4, 5 and 6 modules. Soon, it will be 5, 6 and 7 modules because mostly everybody is going to have 1 to 4. And I think what you're seeing is a very similar path to what we saw with Salesforce and ServiceNow. The larger they became, the more successful they became, the stickier they were with customers and less competition, right? And that's what the path that we think we're on. And I think that speaks volumes and we think that this market is winner take most. It's a huge market, but we think it's winner take most just like ServiceNow and Salesforce.

Those are two really interesting parallels, actually. Maybe -- since you brought up Zero Trust, I think maybe we'll touch on a couple of the products there and maybe start with identity, right? I think you and George mentioned on the last call that Preempt, right, which brought some of the identity capability here, had a great quarter, adding I think -- and correct me here if I'm wrong, but adding more ARR in the quarter than it had done in the past, stand-alone, which was really great to hear. Without getting too technical, I guess, why does Preempt make sense with the rest of the portfolio? And how is it impacting deal sizes, out of curiosity?

Yes. No. We are seeing a tremendous force multiplier with respect to identity module or Preempt with the company that we bought. And it's due to the additional insights that we have on identity and now we're able to correlate with our routine telemetry and the additional data that we're getting in, a big picture. I think identity for us is indicators of attack on identity or EDR on identity. That's how we think about Preempt. And it really has two specific products. One is Active Directory and then the second is conditional access. And when you put those two together, you get a really unique view on the endpoint. And I think for us, we provide with that technology, Zero Trust score, we can tell a company who they are and where they're going. And I think that we can tell a lot of movement within a company's network. And that's very valuable. It complements the identity players, the identity brokers like the Pings and Oktas quite well. And then access control to different resources. So we're allowed -- we have the policies and procedures that we put in place to make sure that the people who are -- should have access to something, do have access to something. And so if something doesn't fit, we block it, right? So that's a big piece of an add-on for us, and it really resonates well with customers. So that's a real opportunity for us to upsize on the core, which is the AV, EDR, OverWatch. And then identity comes in, and we can lead with identity. Some companies are actually interested in identity first or Zero Trust. And then we talk about our core modules, and that's why we're getting deals that are upsized, and it's been working. And we're really happy with the results [indiscernible].

Absolutely. Burt, just to maybe build on that, right? I mean there's so many other modules here outside of the core, right? So you pick and choose which ones you want to talk about. But I think another really interesting one is Humio. That feels like really new TAM, right, for CrowdStrike with log management. And so maybe it's maybe a two-part question, but can you just talk about how George is thinking about that from a go-to-market perspective, right, for Humio? And is that something that you feel like displaces a SIEM or brings in -- I don't know if you talked about observability in the past as well. How do you think about that? How does the team think about that?

Yes. No, I think you hit on two big ones. One, you've got the SIEM, you got log management, and I think that we've been seeing a success in a number of verticals. When we think about the log management space, we think about that as kind of like what the AV space was for us when we came to the market, ready for disruption. There were some -- there are some vendors out there that are expensive and tough to scale with them. And when we come in with an index-free solution, and can provide something that can easily find correlator clearly on different aspects and be quite successful at that. And then on the SIEM side. What's a SIEM? It's out there to find advanced threats. And with Humio, all that additional data that we bring in just allows us to have that extension on the EDR, which is foundational to [indiscernible]. And so you're able to see different aspects on the endpoint with much more data. It also helps with the customers on the limitations they have on their EUBA [ lists ], right? So some EUBA tap out -- we have one customer that tapped out at 1 terabyte per day, and we replaced it and now they were able to log everything. We had one financial services company that tapped out with 20 terabytes and with the Humio product, it went up to 130 terabytes. So you're seeing an opportunity certainly on log management. You're seeing an opportunity to replace it. You're seeing an opportunity for companies to replace EUBA [indiscernible]. So you put all those things together and we get very excited about Humio. And in the years to come, we might see the Humio and what it brings to the table and certainly on log management have a significant part of net new ARR in the quarter. Not yet. It's still early days, but it's contributing today. But I think in the future, it could be material to the quarter.

Got it. Got it. I think that actually dovetails really nicely and -- I think something that George has been talking about a little bit more as well, which is Falcon XDR. And I know George and Mike and the team could talk about XDR, a bunch from a product perspective. I don't want you to get too technical here. But maybe just from your perspective, Burt, what makes an endpoint vendor like CrowdStrike more uniquely positioned for XDR. But trying to sort of tie together all these security tools versus other security vendors here. Curious to your thoughts.

Yes. I mean big picture, and yes, I'll bump it down not only for everybody on the public, for myself, right? It really -- it's about -- it starts with EDR, right? We believe that -- and many believe that we're the best EDR product on the market. And XDR starts with EDR. It's just an extension of EDR. So we were thought of as already an XDR company by many of the analysts out there already, right? Let alone announcing that we're new modules in our XDR. And so it's really the advantage of our architecture. It starts with cloud native. We're able to build this EDR platform and then you're able to extend it with the XDR and bring it into telemetry into our Threat Graph. And that is where the differentiation comes in. It got -- for XDR, which is really important because you're bringing in all aspects and all visibility from all sources, it really needs to start with a great EDR product. And we believe we're the best in the market by far. And I think that the fact that you can leverage what you already have gives you that tremendous advantage over the rest of our competition. And that's why customers are turning to us. And it's really been exciting for us to -- when we go to market and talk with the customer to be able to talk about what XDR can do for them. And as you know, XDR can mean many things to many people. But when you really boil it down to what it really does and how it really matters, we're right there. We think we've hit the [indiscernible].

Yes. Absolutely. Burt, I'd love to shift over to the go-to-market part of the equation here a little bit. There's been a little piece of noise out there just that some competitors maybe offer channel, better unit economics compared to CrowdStrike, right? Of course, there are limited data points to that, right? But just something that's been out there. I guess the question is now that we're all together here, like how do you think about that? And is that something that you think that CrowdStrike would have to consider or evaluate as well in the future?

Look, I love talking about go-to-market. I think we have flighted this company and put in all the automation and taking out the friction just as much as we've done on the tech side. And as you know, Saket, I do lean in a lot on the go-to-market side. And as you've said, I leave the tech stuff to Mike and George. But on the go-to-market side, that's a different story. And it starts with the channel. We're a channel-first company. We are very confident in our channel strategy, and we have a very good relationship with the channel. And if we're a channel-first company, and we just posted the quarter, we posted, something's working, right? Customers are asking for us. And the channel is point operating. They want to know what customers want to buy, and they want to sell it, and we're there to provide it. So it really comes down to customer choice. And the reason that other vendors have talked about the channel, these heavy discounting is because that's the only avenue they have. Whereas for us, we're going to sell volume because our stuff works. It's scalable. You can do upsells, cross-sells. There's so much opportunity with us. And the channel is smart. A bigger percentage of smaller sales does not necessarily mean it add more dollars to the [ company, too ]. We're going to add more dollars to the [indiscernible] platform. That's what's going to matter, not the discount on one point product. And I think the whole notion that the channel really goes for the heaviest discount and the most margin on a per module or a per application deal. That's just not right. They're looking at the bigger pie, right? They want to know what's the total dollar to be out of this, not the margin we make on one deal. What's the total dollars we're going to make on the deal. And that's something that I think is lost by a lot of folks.

Yes, absolutely. I think that's a good point. Maybe while we're -- Maybe we're all talking about go-to-market, just to sort of put a bow on the topic. We've got a transition coming here with Head of Sales, Mike Carpenter. I would definitely go on record saying a very well-regarded security sales veteran. I think you agree with that as well, right? And so maybe the question here is, can you talk about that transition a little bit within sales leadership? And how you feel about the strength of the sales organization after this change takes effect?

Yes. Look, we're excited for Mike on his new addition to his family. We're excited for his next chapter. Many of us will stay in touch with Mike for years to come, right? So we're really excited for Mike. On the other hand, we're excited for Jim. So Jim has been with the company longer than Mike, longer than me, longer than most. He was at the company when we only were selling Intel. And so there's nobody in the organization who knows CrowdStrike products and go-to-market like Jim. Jim handled all of the Americas under Mike. And so that's the lion's share that everybody knows. That's the lion's share of where our success came from. So really, really happy with Jim. Jim, basically -- he ran -- not basically, he did run last quarter, which was a record quarter for us across the board. So Jim has been executing at the highest level for years, helped us with this last quarter to become a record quarter for us and has helped us create the most momentum, the strongest pipe, the healthiest pipe we've ever seen going into the port. And I talked about that at the earnings call. And it's Jim, and we're excited for Jim. I partnered with Jim on many deals, specific deals, specifically in your sector, financial, right? So he would bring me in on many deals. And we've worked together hand in hand in working with and helping our customers. And it's gone really well. It's a great partnership, and I love Jim and what he's done to date. And we've been great partners for over my 6 years of tenure here at CrowdStrike. So really excited for Jim.

Yes. Yes, absolutely. Burt, maybe at the time that we've got left, I'd love to wrap up with margins and cash flow. Because, again, it's not every day that you see a company that is growing at this level, but then also generating the profitability and cash flow that CrowdStrike is. So it certainly goes without saying we're seeing some nice leverage in the business, several quarters of margins in the teens. I think the Q4 guide here is about 14%. You correct me in terms of operating margin that is -- you correct me there if I'm wrong. I guess the question there is, is there anything we should be thinking about as in-person expenses, hopefully, actually ramp up next year when we think about profitability? Does that make sense?

Yes, for sure. There's always -- CFO always is managing growth and profitability. For us, we're still going to be going after growth, right? We're going after growth. We see a huge opportunity for us. We see the opportunity to invest and invest aggressively, which I've done, I'm trying to do, and I'm going to do more. I'm going to do more on R&D. I'll get into more details at the end of next quarter in terms of our ability to kind of -- what our thinking is in more detail. But right now, it hasn't changed. We're going to invest aggressively. We're going to invest in R&D, but with an eye to the bottom. We've always had an eye on the bottom. We've had an eye to the cash, we've had an eye to the bottom. So it's not everything in the kitchen sink we're going to throw at our investments, but we're going to do it thoughtfully, like we've always done. I'm going to over-index in R&D. I think there's a real opportunity for us to spend more there and come out and delight our companies more -- our customers more and more, and build for the future and future growth. And so I'm excited about the opportunity to be able to do that. Look, we've had strong operating margins and unit economics for a while. And we're going to leverage the unit economics, specifically to be able to go after more on the top. And obviously, it gets harder to grow faster when you're this big. But we're super proud of the acceleration that we saw on ARR last quarter. And we're going to continue to invest in the future so that we can make sure that we continue to capture more and more share. That's really in a notch of how we think about it.

Yes. Yes, that's really helpful, Burt. Maybe the last question here, again, kind of taking everything that we talked about together with the ARR and the revenue growth at your point, the net new ARR accelerated, the profitability that we just talked about in that balance. The combination of that really produces nice free cash flow here as well. Is there anything we should keep in mind about cash flow near term and maybe have the team and the broader organization sort of thinks about uses of that cash as those cash balances grow?

Absolutely. So [indiscernible], really happy with our free cash flow generation. We talked about it on the first question, right? Really, really happy. Our performance this year demonstrates what we can achieve in our model. And I just want to drive that home with all of our investors is the model is really strong. It generates cash, profitability and obviously, we're going after growth. In terms of short term, I'm sure we bought the Humio payment, the tax authority, $70 million in [indiscernible] that people should build in, obviously, for Q4. And then what we're going to do with our cash? Well, we've been successful with M&A, and we're going to continue to look at new opportunities for M&A. It is more likely than not that we're going to continue the path of M&A. It's been successful. We like what M&A offers us, but we're going to stick to our knitting, right? It's got to be great tech and great people. If it has ARR, so be it. But the first two are the key. Great tech, great people that can fit into our culture, and we're really proud of what we've been able to do so far, and we're not going to deviate from that [indiscernible] successful and why wouldn't, right? Yes, we've got the means to do more. But we're going to be measured in our approach and like you would expect and thoughtful in our approach, like you would expect and stick to our knitting. So we're excited about the opportunities out there, and we're excited about what we can build ourselves as well.

Yes. No, for sure. And certainly, the bow on that topic. I mean, I think Preempt and Humio have been two great examples of that, right, in terms of actual data points around M&A. Well, Burt, as -- when we get together, I feel like I could just -- I could ask you questions for a good hour and just keep on going. But of course, I want to be -- make sure we're respectful of your time. Can't thank you enough for taking the time with us here, Burt. It's always a real pleasure having the team from CrowdStrike here at Barclays conference.

That's really kind of you to say. It's always a pleasure for us to do this with you guys. And Saket, you asked great questions and happy to answer them and get excited about answering great questions.

Thanks, Burt. I really appreciate it. Listen, I hope you enjoy the rest of your day, Burt. Thank you as well, Maria.

Thanks.