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

Good morning, everyone. Thanks for joining us. I'm Brad Reback. I head up the Stifel research team here on the software side. With us today is Burt Podbere, CFO of CrowdStrike. Burt, thanks so much for making the time. I know it's a busy week.

It's a busy week. Pleasure to be here, Brad.

Thanks so much. Let's start at the top. I mean, why does CrowdStrike win?

Yes. It starts with great tech, right? So if you dial it back to when the company was founded, the idea was, hey, we're going to deliver cloud security, which back in 2011 was not in vogue. So it started with the architecture, it started with a single lightweight agent. It started with being patient and collecting the data to put in something called a Threat Graph, which is graph technology and then being able to understand the data in ways that no one else could. And so it started with the tech. And then being patient, right? We started actually -- we started with EDR as opposed to -- which is the detection side of the house as opposed to going right for antivirus. And then we saw this market that was basically fragmented, antiquated. And we said, okay, there's got to be a better way. And so we started delivering security via the cloud, and we had initial success. We were going up against a bunch of companies that are no longer stand-alone. They all came out with the little better mousetrap than, let's say, a Symantec and put a big marketing program around that. And we said, no, that's not the right answer. We're going to build this thing for the long term. We're going to create a data moat. And once we do that, we're going to be able to come up with, what we call, collect the data once we use many times. So today, we have 22 modules. And what happens is we use the data to be able to create workflows on top of it, and we call it different modules to be able to do different things. And the beauty of that is that obviously, we've got core tech which is displacing the antivirus market and then we went into creating the EDR market, which we're #1. And then we're able to expand into other areas. And at the end of the day, you're seeing some of the success come through in our module adoption. We give out stats on module adoption, 4 or more modules; 70% of our customers have adopted 4 more; 59, 5 or more; 35, 6 or more. And we gave out a new stat this quarter, 19% have 7 or more modules. I think almost every company would take 19% for their second module, little on their 7th. And then ultimately, we're an agent consolidator. So even in times -- tough economic times, we'll come in and we'll show, hey, here's how we can lower your total cost of ownership. Nobody wants more agents. Everybody wants less. So we come in, we rip out a whole bunch of different agents. We charge you less than what you were paying before. We actually come in and do hard math. We do something called the business value assessment where we come in and show you here's what you're spending today, here's what you would spend with us. And on average, there's a 150% ROI in the first year. We've done 3,000 of these. So the data that we have is not end of one. It's a real end. And so we're super proud of being able to show how we're different than everybody else. And that's basically why we win.

So much to unpack there.

There's a lot to unpack. I could go on forever, but anyway.

Let's start with the data moat because I think it's such a key differentiator and that the security problem has fundamentally changed, right, to a data-first problem. So maybe you can sort of walk us through how much data you collect, what you do with that data and then how customers effectively leverage that?

Yes. So it's a lot of data. We're seeing -- we use the trillion word in terms of incidents that we're able to collect in a very short period of time and analyze that data. And it's all about the organization and analyzation -- and analysis. And that's the secret sauce, right? A lot of people can collect a lot of data, but it's really hard to collect that data and organize it in such a way where it's going to tell you things. And so we built this data moat to be able to create some IP around how we think about stopping the bad guys. Ultimately, that's what we're solving for. We're solving for the outcome of stopping the breach. And so to do that, they're -- the old traditional ways of signature-based technologies, it doesn't work, right? If you use that as standalone, you're going to get breached, and we saw it time and time again over the years. But being able to predict things before they happen, that's the key and it all comes from data. And the data that we collect is through the single lightweight smart agent where it collects the meta data and other types of data, security data, nonsecurity data. And then when we see something that looks a little odd, we open -- think about the agent as an aperture. If we see something that looks anomalous or looks a little odd, the aperture opens and we send more data to the cloud. And so for us, that's the key. It's all about how do you interpret the data, how do you build AI, machine learning around all that stuff and your machine learning is only as smart as your data. And so if you've got a ton of data, you're going to be smarter than everybody else. And so for us, that was the key differentiator. Even today when we think about the different modules that we're bringing to market and the acquisition that we just did called Humio which is both an XDR play and a log management play, XDR really is an extension of EDR, which is taking more data and looking at the detection side of the house. Our XDR has allowed us to even ingest even more data. We're into petabyte numbers, right? And so when you're able to look at all that data and see the trends and the anomalies, you're way ahead of the game.

And is it classic data-driven situation where the more -- like you indicated, the more data you get, the smarter you get. So the lead that you develop over your competitors gets bigger and bigger each day?

Bigger and bigger each day. And the funny thing is the data trains the AI models and the machine-learning models. So if you're able to collect more data, you are going to get smarter every day. And so for us, when we go into the open testing houses, we do really, really well. Actually, we're #1. In the peer models where you're not paying some of these agencies to play, we stand out. We don't need to do those, the pay for play agencies. We just go and say, here it is. And we're open about it. We talk about it. Some of our competitors, they don't do it.

Burt, I get questions often, are we at peak cyber right now? Can it get any better?

Yes. So how we think about that is, today, cybersecurity is essential. It's a need to have, not a nice to have. Then you throw in the backdrop of the threat environment, it's never been worse, right? The level of activity from the bad actors is at its -- to date, it's been the highest it's ever been. Then you throw in all the compliance agencies that are out there, whether it's GDPR or whether it's the system from the government, their mandate in terms of disclosure. And even the SEC is coming out with potential disclosure requirements for cyber. All these things are just saying one thing, right, that cyber is here to stay. It's going to grow, and the backdrop is just getting worse, whether it's from a regulatory environment, whether it's just the bad actors coming out more in droves, whatever it is, I think we would all agree in the room that cyber is here to stay for quite some time.

Got it. You guys have achieved something very few companies have, right? Over $1 billion of revenue, over 60% sustainable growth and 30% free cash flow margins. So how do you think about pressing that advantage using that efficiency to further sustain the growth?

It's a great question. So when you have a company that grew 61% in ARR over $1.2 billion, that's a real number. And if you're able to generate free cash flow margins of 30% and call it out that that's the floor, that's pretty impressive. It's the power of the model. Now how do we press that advantage? I've been talking about this quarter after quarter that we're going to aggressively invest. We're going to press that advantage. I'm going to over-index on the R&D line as a percentage of revenue, and we're going to continue to try and bring down some of our really, really strong unit economics. Pick one, magic number, Rule of 40, LTV/CAC, you pick, they're all to the right. And so we want to -- and they're all saying the same thing. You guys should be investing more. I'll be honest with everybody in the room, it's really hard. It's really hard to go out and make sure you hire the right amount of people that you need and making sure they're going to be productive, and you don't want to do too much and you not make your folks productive. I can say hand on heart for the first time in my career at CrowdStrike, which has been 7 years, for the first time, Q1, we actually hit our hiring plan. We have very robust hiring plans. We actually hit it. And so I was really pleased with that. So that means that we're able to attract the brightest and the best to come to us and really be part of the CrowdStrike family. And what that means is, on the R&D side, it means we're going to be continuing to stay on top of the innovations curve, which is the bloodline of any tech company as well as making sure that we have the right folks in terms of the go-to-market. And so I look forward to hopefully continuing to be able to hit our hiring plan and to continue to invest. And if anybody saw the guide, we thought it was a strong guide, top, bottom. But the guide for us indicates that we are going to invest, we still raised the midpoint of our op income guide, non-GAAP op income guide. Having said that, we've been doing really strong in that area and I'm kind of telling everybody I'm investing, I'm going to press the advantage, I'm going to go after it, and we're trying.

And it's great to hear about hiring. It's not surprising given how successful you've been and maybe some of the prevail some of your peers, public and private are having. How is retention? Has that also improved where people are less likely to try the next lottery ticket?

Yes. So we've done pretty well with retention. We've got -- when we compare it to our peers, we're below where our peers are. We're seeing folks kind of recognizing that the grass isn't greener on the other side. We're seeing folks that had left during the boom of all the private companies, right, touting, hey, look at us, we're going to be the next Crowdstrike, and we're like, so a lot of those folks boomerang back. And we're happy to take those who are meaningful to us and just wanted to try something else. We get that. Having said that, we've got a lot of programs in place to retain our folks. We've got strong benefits. We've got an ESPP program and it's a very strong program. And we think that those things matter. And then we've really try to develop an amazing culture around mission-critical, stopping the bad actors. Everybody wants to stop the bad actors, right? Everyone wants to feel good about what they do every single day. We've got lots of examples of that. We had a -- obviously, it's a tragedy what's happening in the Ukraine. We had one company reach out to us and say -- they're literally in a building. And they were in the basement trying to avoid being hit by rockets and the like. All their computers on the upstairs we're on, right? So you had the light that was on. So they contacted us and we were able to remotely turn them off, and they were able to escape. So when you hear stories like that, that you're actually making a difference in the world, it matters. So we're trying to build this incredible culture that really draws people together in a way that many other companies struggle with. And now we're also actively trying to get people back into the office. We're not forcing anybody. For those who are not familiar with the story, we were 70% remote before COVID. We hired -- wherever people were, we tried to hire the best. If you were in Atlanta, we would hire you there. If you were in New York, we would hire you there. And so when COVID hit, we were really prepared. But having said that, post COVID, obviously, we all suffered in unique ways and together. We said, "Look, we think it's a really good idea to bring people back together." So we've been encouraging it. We've been doing more interesting things in the offices. More happy hours. Just getting people together again, right? And we think that that's gone a long way in terms of bringing back some of that comradery, collaboration, all that kind of good stuff.

That's great. Maybe switching gears to customer acquisition. Given the value prop, product that sells itself, right? So how has customer acquisition evolved? And then what causes a customer to pick up the phone and call you or take your call?

Yes. So customer acquisition, we're super proud of the fact that new logo counts have been over 1,600 for the last 4 quarters. I think the other side of the coin that it's not as obvious is that our MSSP business is also growing tremendously. Last quarter, we gave out a stat that our MSSP business was growing 200%. So you're seeing a lot of flow on the down market going through our MSSP channel, and that's not really reflected in the 1,600 plus. So we're really excited about the customer acquisitions. How and why did customers come to us? So we're a channel-first company. So we depend and we partner strongly with our channel, and that's a big piece of how we get customers interested in us. We do a bunch of obviously, marketing programs and the like -- to be able to generate more brand recognition. I think we still have a long way to go with brand recognition. But having said that, it's -- a lot of it comes from channel, word of mouth, our programs. So there's a bunch of stuff that kind of gets people interested. We do all the testing so that people can see how well we're doing on the tests. And then we come in with this value prop, right? We come in and we're helping simplify a company's back-end and security stack. And we come in and we -- every COO that we talk to, they want to reduce the agent footprint. I think there was a stat the other day, I forget who it was from where they talked about the average number of enterprise -- the average number of agents that an enterprise company has is like 8. And we're like, my -- I don't even know what all 8 are, right? And so we would come in and we would show our talent certainly on our core, which is EDR and prevention. And then show, hey, look, you have a vulnerability management tool, why don't you just replace it with ours. We've got something called Spotlight, which really it's all integrated with the one single agent. Whatever it is, we've got an identity, a tool module that can come out and come in there and help you with that side of the house. It's not a replacement for Okta or Ping, it works in partnership with them. It's -- once you're in, we stop the lateral movement. We're stopping this new theme of, I call it, data extortion, where companies are getting smart against ransomware, right? So they're doing backups. Well, adversaries are now going after those backups and encrypting them and then threatening, what we call, the lock and leak. We'll lock up your backups and then leak it if you don't pay us, right? So we come in and we say, hey, we know who you are, and we know what you're supposed to be doing. If you're in finance, you shouldn't be going after the R&D files, right? So we'll be able to stop that in its tracks. So there's a lot of these different modules that we can bring in that really amplify the protection environment as well as consolidate. So at the end of the day, the idea is, let's have our customers spend less money on security and adjacencies, but just more of that wallet share with us.

You mentioned the MSSP channel growing at 200%, obviously, a good volume opportunity. E-commerce has also been sort of a newer sales motion, which performed very well in 1Q. Maybe update us on what that means and how that sort of augments the MSSP side?

I love that question, right? So there's no company today that's in security that has an e-commerce engine that's flighted in such a way where it can be touchless with the sales team. And so we've been working on that for years. This is not easy to build. And what happens is we have 2 ways to take out the friction on something like that. So #1 is just call it a free trial, we call it trial to pay where somebody can come in and take a look at their -- take a loot our technology and purchase. We had 4 modules part of that and we have increased it to 12. So that's taking out a lot of friction and people can come on their own, they can check it out. Small companies can purchase. Bigger companies can get their teams involved. So that works. And then we have something called an app trial. So basically, you're a customer, you're enjoying whatever modules you have. There's a big red button over here to try something else and it uses the same data. It's flighted the same way. So then you can see if that module works for you. If it does, boom, press the button, you're good to go. So I mean, when you think about taking out friction, that's one of the biggest things that we think about in terms of scale. I often talk about scale, how did you grow so fast over such a short period of time. Well, it's things like that. It's looking to take out friction on the front end with customers. It's looking to take a friction on the back end, which I'm involved with, with respect to how do we make the strike zone when we're contracting with customers bigger. And we basically assess the risk of each of the terms that are out there that are in all the contracts, which ones do we care about. We've got a lot of history now. So we know, well, that term doesn't really matter to us. So strike zone is going to be big. That one actually does matter. So we need to keep it where it is. But there's ways of taking out that friction, front end, back end, whatever it is, to enable sales to happen. And I think that's been a big success. E-commerce is, I think, going to be one of those big things for us in the future. Just getting -- we talk about how do you get people to come use us? Well, try us, right? No one's out there kind of bugging you and then it's flighted in such a way that once you become a customer, we have the opportunity to upsell you. Because once you're a customer, we know who you are, right? We're protecting it. We know who you are. And so we can toss it over to our corporate sales team, which is our inside sales team or beyond. And talking to how -- and we do, we reach out to our customers, how is it working for you? Why did you buy AV only? What are you trying to solve? And then the inside salesperson would hear or listen to our customers, and say, "Oh, you should try this. For example, it could be our Complete offering, which is our turnkey, we do it all for you." And that's been really successful. And I'll give you an example of a price uplift. So we had one customer come in through the e-commerce engine and spend $3,000 with us on antivirus. And then that would be flighted to the inside sales rep who would call the customer and say, "Hey, thank you for becoming a customer. Thank you for purchasing our AV tool. What are you trying to solve?" "Well, I'm trying to solve this, that and the other thing. And also, it's really hard to hire." Let me tell you about our Complete offering. We'll do it for you at a fraction of the cost. So that $3,000 deal turned into 36,000. Now that's not the same for -- when you're talking about Amazon, right, in terms of the difference between purchasing a few modules and Complete, but you get the idea. It's a tremendous opportunity to uplift and we see a ton of that. And our Complete offering has been a massive winner for us and differentiated in the market versus anybody else. We're not the, here's your to-do list, go fix it. We're the folks that have, we call it, Complete plus our Fusion, which is an automated tooling process. Complete plus Fusion, security automation, which delivers incredible speed and efficacy on how to manage your security -- our security stack within your org. And it's been a massive win for us. We had our largest ARR quarter on Complete and we're excited about the future about that one.

So maybe before I open up to questions on Complete, I do get some questions on that. As that continues to scale, will that be a margin headwind? Obviously, it was a big quarter. It wasn't a margin headwind. How should we -- and I know you have a lot of automation tools underneath it. How should we think about that?

Yes. I think, we've been selling Complete for a while, and it's becoming more meaningful period after period in terms of our overall ARR. And you've already seen them. The margins haven't gone down by a material amount, and it's because of the automation, right? I think that it's a big differentiation for us. It's the secret sauce. How do you automate all the things that we do and be able to proactively threat hunt through automation? And obviously, there are some people, but it's totally at scale for the automation side. And so we've developed all these playbooks, and we've developed the IP around that. And it's one of those things that, "Hey, we're able to do significant uplift as well as keeping our costs in check". And so that's why that's been such a home run for us. It's one of those things that -- it's almost like it's taste great and less filling, right? And that's hard to get. And there are competitors who are coming out there announcing, let's call it, a service that kind of looks and smells like us, but it's not. Most of them, if you look under the covers, it's just, well, here's your to-do list, go at it. Whereas us, we're actually hands on keyboard remediating on your behalf. And so a lot of it is automated remediation. And I think that's the key. Our Fusion technology that exists throughout our modules really enables that and that automated response, that is a key differentiator for that product and no one has it in the market but us.

That's great. Let's see if there are any questions in the audience. Go ahead, Tom.

I love to hear your thoughts about competitors that are coming up like Lacework or Quantum computing, photography and a lot of these things that are same [Technical Difficulty]?

Yes. Great question, Tom. So #1, I'll just state that, today, we feel that we're in the most favorable competitive environment we've ever been in, right? Obviously, the latest competitor in Carbon Black, VMware got acquired. So that's another one gone by the wayside. So in terms of -- and you ask yourself, why are these things happening because we're winning, right? All these companies that have been sold, we win. There are other companies out there like Lacework and others that you've talked about that we're talking really about kind of cloud security companies. So it's a massive opportunity for all of us in terms -- in security, in terms of the cloud. And when we think about companies like Lacework or others, they're touting agentless technology, which is great. But we're the only ones out there that have both agent and agentless solutions that are cloud native and delivered natively. We're the only ones. What does that mean? Well, if you're agentless only, you're not getting the visibility and you're not going to be able to remediate and that's a big difference. We're able to do it because we also have this agent. And it's the same agent we have on the noncloud devices. It's the same thing. So we have our agent that's able to give us the additional visibility, the remediation capabilities as well as the agentless side, which allows us to see a variety of other different things. We're the only ones that have both, right? And last I checked, building a lightweight agent that does what ours does is really, really hard to do. So there's going to be a lot of different players that come out for the cloud. We feel that we've got that competitive advantage. And there's no incumbent that's been in the cloud. It's not like Symantec, they were the company for on-prem. There's nobody there, it's greenfield for us. And I think that the world is going in that direction. I think cloud is only going to grow. I think more applications are going to be in the cloud. And so there's a great opportunity, I think, for CrowdStrike to really push our advantage.

Just to hear a little bit more about the expanded partnership that you guys signed with Cloudflare and what that brings to the table for you and also what you bring to the table for them?

So we've got a great relationship with Cloudflare. They're a customer, we're a customer. And I think that the advantage is we're doing things that they're not doing and they're doing things that we're not doing. They're kind of -- they have that web and they've also coming -- going into that other space, and that's driving a lot of their success. We're not going to go into the public cloud space. But they do things on the website and things of that nature that we just -- we're not going to do. It's similar to the network. We're not going to go into network. We've made that very clear. We know what we want to be involved in and a partner like Cloudflare really helps us in terms of what we're not going to go into. And the broader question is, hey, what do you think about in terms of buy -- build versus buy versus partner, right? So we've got a really robust road map. We've got a road map that really talks to what we think the adjacencies that are going to be best with us. And then we've got buy where we think, hey, this is going to be a while for us to go build. So let's go buy it. And we've done 3 since we've been public. We did a few more as a private company, and they've all been really successful for us. And then there's partner, like Cloudflare or many others. We have actually a store. And what's the benefit of the partnerships in our store? It's integrated. It's stuff that we're doing that we're not doing that we want to involve our partners and integrate it so that the customer wins. It's all about the customer, right? Let's solve for the customer outcomes. And if we're not providing a certain type of technology or use case, let's partner with somebody who does. But let's flight it on the back end so the customer is in pulling cables and going through that tough and terrible integration process, we'll do it all for you. And that's been a big, big win for us.

That's great, Burt, just about out of time. It flew by. Thanks so much.

It flew by. You're very welcome. Pleasure. Thanks, everybody.