CrowdStrike Stock Earnings Preview: What To Watch For

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CrowdStrike Stock Earnings Preview: What To Watch For

Seeking Alpha2023-03-07

SummaryOn Tuesday, CrowdStrike reports its Q4 2023 earnings (not a typo).The consensus stands at $625M for revenue, up 41% YoY, and $0.43 for EPS, up 42% YoY.How do the tech layoffs and macroeconomic ...

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Celia24
·2023-03-07
Ok
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LTKalien
·2023-03-07
Much appreciated. Shall wait and see, patience might be golden.
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Ruban5
·2023-03-07
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That's not a typo, as the company's fiscal year is one year ahead of the calendar year.In this article, I want to lookforward to those earnings. What is important? What can make the CRWD stock move? What to pay attention to?After the Q3 2023 earnings were reported,CrowdStrike's stock price collapsed: down 20%, despite another beat-beat-raise quarter. It kept going down for another month and a half, but started recovering with the rest of growth stocks in early January. Right now, the stock is still down about 9%.Data by YChartsAnother such extreme reaction is always possible with growth stocks. But as a long-term investor, I don't care too much about short-term movements as long as it's based on slight missesto the consensus. This doesn't impact the long-term investment thesis.CrowdStrike's RevenueFor a growth stock, the first thing to look at is revenue growth. For this quarter, the consensus forCrowdStrike stands at $625 million, up 45% year-over-year. That consensus has decreased since management guided for Q4 revenue between $619.1 million and $628.2 million in the previous quarter. The consensus back then stood at $634.2 million, which means the midpoint missed the consensus by 1.7%.Management usually guides very conservatively and it will probably beat its guidance. I would not even be surprised if it beats the original consensus of $634.2 million. That already shows how silly these big up and down swings in the stock price are. They are not caused by investors, but by traders and algorithms.Don't get me wrong, even for long-term investors, traders and algos are very important because they take care of the liquidity in the market, but it's just a totally different game. It may sound strange, but sometimes I can be really happy if a stock drops by 20% without material weaknesses. Yes, even now, after such a long time of bad results for growth investors. More pain now means more gains in the future.One of the reasons the stock was down so much after the Q3 2023 earnings was probably also that the company didn't beatenoughfor the market. While the company beat by 5.25% on average, this time the revenue beat was just 1%, the lowest beat sinceCrowdStrike's first quarter as a public company.Seeking Alpha PremiumIfCrowdStrike beat the consensus by the average before last quarter, so that 5.25% we already saw, revenue would come in at $658 million, about $30 million higher. It shows that the law of large numbers also works for beating the consensus. Just two years ago, beating by $30 million in Q4 would have meant beating the consensus by 22%.The company said in the previous earnings that sales cycles became a bit longer, by 11% on average, which is not unsubstantial. Most of this slowdown was caused by SMBs,CrowdStrike's smaller customers. But the deals were not canceled, just pushed further into the future. I expect to see more of the same in this quarter.ARR, or Annual Recurring Revenue, increased 54% year-over-year in the previous quarter and grew to $2.34 billion. $198.1 million was net new ARR from this quarter, about 10% quarter-over-quarter growth. This is something I will be watching again. Management ascribed the new ARR slightly below expectations to increased macroeconomic headwinds and longer sales cycles, especially for smaller customers.Big customers still signed up as fast as before, but instead of going all-in at the start, they chose multi-phase subscription start dates, which delays ARR recognition until future quarters. In Q3, $10 million of ARR was moved to Q4. Again, I will look at what management has to say about this. I expect more of the same. After all, the conditions have not improved in Q4, to the contrary even.ProfitabilitySince interest rates shot up, revenue growth is not enough anymore for the market. It asks for profitability, companies that don't have to go to the market to offer shares at depressed valuations or, even worse, take on debt to fund growth. Fortunately for its shareholders,CrowdStrike is profitable.EPS (earnings per share) are expected to come in at $0.43 on a non-GAAP basis. That would be up almost 42% year-over-year. If you look on a GAAP basis, the company still loses money, mainly because of the stock-based compensation.In the last quarters,CrowdStrike's stock-based compensation growth has been trending down. These are the year-over-year growth numbers in the last seven quarters.Seeking Alpha PremiumStock-based compensation is still 24% of revenue and I would like to see that number decrease over time. Because of certain contracts, companies can not always switch fast. It can take a few quarters or even over a year.GAAP rules require companies to fully deduct stock-based compensation from earnings. I don't think this gives a correct picture. After all, a company's free cash flow is much more important. That's the money it can use to pay employees, make an acquisition, do buybacks or whatever important activity that can make companies great over time.But completely ignoring stock-based compensation is also not advisable. That's why I look at the free cash flow per share growth.Seeking Alpha PremiumAs you can see,CrowdStrike's FCF per share growth is still very healthy, despite the dilution, although it will always be a bit bumpy.Tech Layoffs Impact?In the earnings of Datadog (DDOG) and Snowflake (SNOW), we have seen that usage-based models see quite a bit of growth slowdown as their customers look for savings and therefore optimize their spending.On the other hand, with the many tech lay-offs we have seen recently, models based on per-seat billing could also see pressure.CrowdStrike charges per endpoint, on a subscription basis. An endpoint is a device that can be connected to a network. So, think of laptops, desktops, mobile phones, tablets, servers, etc. I think this model is somewhat better protected from the strong economic headwinds we are experiencing but it is of course not immune.On the previous earnings call, George Kurtz also emphasized thatCrowdStrike has a great value proposition.Based upon our business value assessment and realized analysis, we estimate that, on average, enterprise customers observed a 68% increase in operational efficiencies with the Falcon platform, equating to an offset of approximately 3.5 full-time employees. We believe today's macro pressures on businesses and the escalating threat environment make Falcon's value proposition as a consolidator more important today than at any other time in CrowdStrike's history.This could be a very convincing argument for companies looking for efficiency everywhere now.Other Numbers I will be watchingThere are some other things I will be watching. One is definitely the number of new customers. In Q3,CrowdStrike added 1,460 new customers, which led to 21,146 customers, up 44% year-over-year. This also validated what management said. 44% more new customers but revenue up 'just' 41% means newer customers are more hesitant to start with big contracts from the start. I would not be surprised to see this continue in the Q4 results.In Q3, 60% of CrowdStrike’s customers subscribed to more than five modules, 36% to more than six and 21% to more than seven. This represents a 55%, 66% and 81% year-over-year increase in these module cohorts. These numbers show the great power ofCrowdStrike's platform approach. Judging from management's comment in the last earnings call, I expect this growth to slow down.Another very important number is DBNRR or dollar-based net retention rate. Let me explain why it's so important. They always say the best new customers are your own customers. That's what DBNRR measures.Don't confuse it with DBNER, which stands for dollar-based net expansion rate. DBNRR includes churn, DBNER doesn't.Let me illustrate this with an example. Company XYZ has 100 customers, paying $1 million each. The next year, 10 customers of that cohort leave, but those who stay buy extra services and pay $1.2 million each.The dollar-based netexpansionrate will be 120%, the 20% difference between $1 million and $1.2 million added to the 100% of last year.The dollar-based netretentionrate will be much lower. It's calculated as follows:year 1: revenue $100M (100x$1M)year 2: revenue $108M (90x$1.2M)The DBNRR will be just 108%, much lower than the DBNER of 120%.I think you can see why I prefer companies reporting DBNRR.Unfortunately,CrowdStrike stopped reporting the exact quarterly DBNRR. It reported that DBNRR was above 120% again, which has been the case forCrowdStrike for the last five years. Founder and CEO George Kurtz said on the Q3 conference call:Our dollar-based net retention rate was well above Q3 of last year and consistent with our Q2 performance, which was at the highest level in seven quarters.That meant that DBNRR was above 124.8%, quite impressive in such a tough environment. Ideally, DBNRR remains above 120%, although the law of large numbers will also have an impact there at a certain point. That great DBNRR is only possible becauseCrowdStrike's churn is minimal. In Q3 2022, yearly churn was just 2%. I hope management discloses this number again in Q4.The company has a very strong balance sheet, with $1.8 billion in net cash and equivalents, so there's no reason for worry there.GuidanceAs we saw in the last quarter, guidance coming in a bit lower than analysts had expected can move the stock substantially.The revenue consensus for Q1 2024 (again, that's the fiscal year, of course) stands at $666.73 million, which would mean growth of 36.66% YoY. Missing this consensus could move the stock down again. But for long-term investors, a slight miss is not a disaster. I will happily add to my position if the stock drops again on a slight miss.For EPS, the consensus is $0.43, the same as this quarter. For Q1 2024, that would mean growth of 40%.ConclusionThere's a great deal to watch out for whenCrowdStrike releases its earnings Tuesday. Of course, there could be an extreme move in the stock price again, but as long as this is not caused by something that really changes the long-term investment thesis, I don't think long-term investors should worry too much. I hope this article can help when you listen to the conference call or you go through articles assessing the earnings.In the meantime, keep growing!","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[{"id":9940788807,"gmtCreate":1678177670410,"gmtModify":1678177673952,"author":{"id":"3582085254286979","authorId":"3582085254286979","name":"Celia24","avatar":"https://community-static.tradeup.com/news/5c5b89756c8943408caeaab45fc6139b","vip":1,"hat":"https://static.tigerbbs.com/0a8758340a08196056f8bc1e54805193","crmLevel":4,"crmLevelSwitch":0},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9940788807","repostId":1183394463,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9940789003,"gmtCreate":1678176653902,"gmtModify":1678178398506,"author":{"id":"4138441693914192","authorId":"4138441693914192","name":"LTKalien","avatar":"https://community-static.tradeup.com/news/d2ccbfcfe6e70ce1130e526f89dc16d3","vip":1,"hat":"https://static.tigerbbs.com/f84d87792f02cf78e80ee34979fd31e5","crmLevel":6,"crmLevelSwitch":1},"htmlText":"Much appreciated. Shall wait and see, patience might be golden.&nbsp;","listText":"Much appreciated. Shall wait and see, patience might be golden.&nbsp;","text":"Much appreciated. Shall wait and see, patience might be golden.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9940789003","repostId":1183394463,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9940717577,"gmtCreate":1678176187299,"gmtModify":1678176190949,"author":{"id":"4104476862114130","authorId":"4104476862114130","name":"Ruban5","avatar":"https://static.itradeup.com/news/e3086cd73e69cf59419c9b6ab3ac36ea","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9940717577","repostId":1183394463,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":22,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}