CrowdStrike's (NASDAQ:CRWD) Q3 Sales Top Estimates But Stock Drops 16.5% On Weak Guidance

Full Report / November 29, 2022
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Cybersecurity company CrowdStrike (NASDAQ:CRWD) reported Q3 FY2023 results that beat analyst expectations, with revenue up 52.8% year on year to $580.8 million. However, guidance for the next quarter was less impressive, coming in at $623.6 million at the midpoint, being 1.66% below analyst estimates. CrowdStrike made a GAAP loss of $54.6 million, down on its loss of $50.4 million, in the same quarter last year.

CrowdStrike (CRWD) Q3 FY2023 Highlights:

  • Revenue: $580.8 million vs analyst estimates of $575 million (1.01% beat)
  • EPS (non-GAAP): $0.40 vs analyst estimates of $0.32 (26.5% beat)
  • Revenue guidance for Q4 2023 is $623.6 million at the midpoint, below analyst estimates of $634.1 million
  • Free cash flow of $174 million, up 28.2% from previous quarter
  • Customers: 21,146, up from 19,686 in previous quarter
  • Gross Margin (GAAP): 72.7%, in line with same quarter last year

Founded by George Kurtz, the former CTO of the antivirus company McAfee, CrowdStrike (NASDAQ:CRWD) provides cybersecurity software that protects companies from breaches and helps them detect and respond to cyber attacks.

Unlike the legacy antivirus products which are typically rules-based and on-premise, CrowdStrike's Falcon platform is cloud-based and uses prevention-and-detection technology based on machine-learning and artificial intelligence that looks for behavioral attack patterns and indicators of attack to identify bad actors. As a result, it is easier and cheaper to deploy, works on any device and it has superior efficacy rates in detecting threats compared to the legacy competitors.

The story of CrowdStrike started in 2011 when the founder George Kurtz watched a fellow plane passenger turn his laptop on and wait 15 minutes for the antivirus software to stop scanning before he could use the computer. Despite the existence of several antivirus software at that time, CrowdStrike has enjoyed huge success over the years due to its ease of deployment and its expanding focus on the growing market of cloud applications and infrastructure.

Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. As the volume of internet enabled devices grows, every device that employees use to connect to business networks represents a potential risk. Endpoint security software enables businesses to protect devices (endpoints) that employees use for work purposes either on a network or in the cloud from cyber threats.

CrowdStrike is competing with legacy security platforms that are expanding their cloud security capabilities, such as products offered by Microsoft (NASDAQ:MSFT) and Symantec, and also with cloud-native solutions such as SentinelOne (NYSE:S) and Zscaler (NASDAQ:ZS).

Sales Growth

As you can see below, CrowdStrike's revenue growth has been incredible over the last two years, growing from quarterly revenue of $232.4 million in Q3 FY2021, to $580.8 million.

CrowdStrike Total Revenue

This was another standout quarter with the revenue up a splendid 52.8% year on year. Quarter on quarter the revenue increased by $45.7 million in Q3, which was roughly in line with the Q2 2023 increase. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Guidance for the next quarter indicates CrowdStrike is expecting revenue to grow 44.6% year on year to $623.6 million, slowing down from the 62.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 40.1% over the next twelve months.

Customer Growth

You can see below that CrowdStrike reported 21,146 customers at the end of the quarter, an increase of 1,460 on last quarter. That is a fair bit slower customer growth than last quarter but still in line with what we are used to seeing lately, suggesting that the company still has decent sales momentum.

CrowdStrike Customers


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. CrowdStrike's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 72.7% in Q3.

CrowdStrike Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.72 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop this is still around the average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market, so it is important to track.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. CrowdStrike's free cash flow came in at $174 million in Q3, up 40.9% year on year.

CrowdStrike Free Cash Flow

CrowdStrike has generated $594.6 million in free cash flow over the last twelve months, an impressive 29.2% of revenues. This robust FCF margin is a result of CrowdStrike asset lite business model, scale advantages, and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from CrowdStrike's Q3 Results

Sporting a market capitalization of $32.5 billion, more than $2.46 billion in cash and with positive free cash flow over the last twelve months, we're confident that CrowdStrike has the resources it needs to pursue a high growth business strategy.

We were impressed by the exceptional revenue growth CrowdStrike delivered this quarter and we were glad to see the strong free cash flow. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results were not the best we've seen from CrowdStrike. The company is down 16.5% on the results and currently trades at $115.24 per share.

Is Now The Time?

CrowdStrike may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are a number of reasons why we think CrowdStrike is a great business. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last two years. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

There's no doubt that the market is optimistic about CrowdStrike's growth prospects, as its price to sales ratio based on the next twelve months of 11.3x would suggest. And looking at the tech landscape today, CrowdStrike's qualities as one of the best businesses really stand out and we think that the multiple is justified. We like the stock at this price.

The Wall St analysts covering the company had a one year price target of $228.4 per share right before these results, implying that they saw upside in buying CrowdStrike even in the short term.

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