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2021-03-23

CrowdStrike: Cloud Security Of Choice With Widening Moat, Expanding TAM, Phenomenal FY2021 Results

Summary CrowdStrike Q4 and FY2021 results were simply phenomenal with rapid growth across financial

CrowdStrike: Cloud Security Of Choice With Widening Moat, Expanding TAM, Phenomenal FY2021 Results

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It also posted record operating profit and free cash flow.</li>\n <li>CrowdStrike acquired Humio to add more capabilities in log management. Successful integration could expand the total addressable market for the company by $.4.9B.</li>\n <li>CrowdStrike&nbsp;may look expensive on the surface, but with a highly scalable business model added with the power of compounding and optionality, there is still a lot of upside from here. I added more shares.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/b767ea193c52a982e3b61009292175cd\" tg-width=\"768\" tg-height=\"432\">Photo by kanawatvector/iStock via Getty Images\nIntroduction\nCrowdStrike (CRWD) is on a mission to build a holistic security ecosystem. It started with endpoints protection, and now also covers workload, observability, and identity protection with the help of AI and behavioral analytics. The combination creates a winning formula, displacing legacy and even next-generation vendors.\nCrowdStrike's Q42021 and FY2021 results continued the strong momentum since IPO. It wrapped up a phenomenal year. Operationally, it added more modules to the Falcon Platform and more customers also adopted multiple modules. As a result, it achieved a record annual recurring revenue ('ARR') of over $1 billion. While still early in its growth stage, the company already generates a strong operating profit and free cash flow.\nStill, the company keeps up the pace. It recently acquired Humio to expand its capability to log management. It's an exciting acquisition because it supports CrowdStrike existing modules and also forms a new stand-alone module expanding the company's total addressable market by another $4.9B.\nWhat sets CrowdStrike apart?\nBefore diving into the Q4 and FY2021 results, let's have a quick refresher on why CrowdStrike still has the potential to be a Potential Multibagger. At the core of CrowdStrike is its AI-enabled Threat Graph. It is the brain of its Falcon Platform, and this is what sets it apart from all of its competitors, especially those that provide on-prem security solutions.\nHow it works is that it collects threat incidents and stores them all on the cloud. As more data is collected, the Threat Graph gets smarter by the instant, providing visibility and real-time protection for all customers. The capability demonstrates clear network effects moat because as the Threat Graph gets smarter from more data, its ability to protect customers also increases.\nTo have a sense of the scale and speed of the Threat Graph, in Q2, it captured 3 trillion high-fidelity signals per week. Fast forward to Q4, it captured 5 trillion, a 66% increase of a huge platform already.\n<img src=\"https://static.tigerbbs.com/8f7977b6533711bbf75da22f85cb77fc\" tg-width=\"1280\" tg-height=\"723\">Source: CrowdStrike Q4 2021 &amp; FY 2021 presentation\nThe Q4 2021 and FY 2021 results review\n<img src=\"https://static.tigerbbs.com/b34b8af659a319adaa5bc8bb6cc19db3\" tg-width=\"1280\" tg-height=\"458\">Source: CrowdStrike Q42021 &amp; FY2021 presentation\nThe following bullet points are the highlights of the financial and operational metrics. You can glance through this section or refer back when required. The sections after will discuss four key discussion points from the results.\n<ul>\n <li>the development of the Falcon Platform and its customers' adoption.</li>\n <li>the record ARR and the retention rate.</li>\n <li>the incredible operating leverage.</li>\n <li>finally, the acquisition of Humio.</li>\n</ul>\nQ4 2021 financial metrics:\n<ul>\n <li>Revenue was $264.9M, up 74% YoY, but a deceleration from 86% YoY growth in Q3.</li>\n <li>Annual recurring revenue ('ARR') grew to $1.07B, up 75% YoY. Net new ARR was $117M.</li>\n <li>Net dollar retention rate at 125% exceeded the 120% benchmark for the last three years.</li>\n <li>GAAP subscription gross margin was 78%, compared to 75% in Q42020.</li>\n <li>Non-GAAP subscription gross margin was 80%, compared to 77% in Q4 2020.</li>\n <li>GAAP loss from operations was $15.8M, compared to $31.1M in Q42020. Non-GAAP income from operations was $34.4M, compared to a loss of $6.7M in Q42020, 13% operating margin.</li>\n <li>Net cash generated from operations was $114.5M, compared to $66.1M in Q42020.</li>\n <li>Free cash flow was $97.4M, compared to $50.7M in Q42020, representing a 35.6% FCF margin.</li>\n <li>Cash and Cash Equivalents were $1.9B as of January 31, 2020.</li>\n</ul>\nFY2021 Financial metrics:\n<ul>\n <li>Revenue: Total revenue was $874.4 million, up 82% compared to $481.4 million in FY2020.</li>\n <li>Subscription revenue was $804.7M, up 84% compared to $436.3M in FY2020. Subscription</li>\n <li>Gross Margin: GAAP subscription gross margin was 77%, compared to 74% in FY2020.</li>\n <li>Non-GAAP subscription gross margin was 79%, compared to 75% in FY2020.</li>\n <li>Income/Loss from Operations: GAAP loss from operations was $92.5M, compared to $146.1M in FY2020.</li>\n <li>Non-GAAP income from operations was $62.4M, compared to a loss of $65.6M in FY2020, which represents a 7.1% operating margin.</li>\n <li>Net cash generated from operations was $356.6M, compared to $99.9M in FY2020.</li>\n <li>Free cash flow was $292.9M, compared to $12.5M in FY2020, representing a 33.5% free cash flow margin.</li>\n</ul>\nOperation metrics\n<ul>\n <li>Subscription customers were 9896, added 1,480 net new subscription customers in the quarter, representing 82% growth YoY.</li>\n <li>Customers with four or more modules were 63% of total subscribed customers-an acceleration from 61% in Q32021.</li>\n <li>Customers with five or more modules were 47%, and six or more were 24%.</li>\n <li>Acquired Humio to expand its addressable market into the cloud log management and observability space. Once integrated, Humio capabilities will become another module for the Falcon Platform.</li>\n <li>Expanded Cloud Security Posture Management and Cloud Workload Protection capabilities to deliver greater control, visibility, and security for cloud workloads and cloud-native applications from build to runtime.</li>\n <li>Integrated CrowdStrike Falcon's threat intelligence feeds with AWS Network Firewall, a managed service that makes it easy to deploy essential network protections across a customer's Amazon Virtual Private Clouds.</li>\n <li>Key customer additions: Salesforce, Pfizer, P&amp;G, a customer in the federal space, and Bank Leumi of Israel.</li>\n</ul>\nQ4 and FY2021 guidance\n<img src=\"https://static.tigerbbs.com/efc8681e209f05b12e3b70e3383f7a8a\" tg-width=\"1280\" tg-height=\"294\">Source: CrowdStrike Form 8-K, March 16, 2021\nNow that you have had a glance, I hope we can all agree that CrowdStrike has again over-delivered. It was a 'beat, beat, and raise.'\nNext, I'll go over the four most important takeaways in the quarter.\nExpanding module and increased adoption\nAt the core of CrowdStrike is its Falcon Platform. The following slide shows all the modules on the Falcon Platform at the end of Q4. There are 19 of them. Just for context, it only had 11 modules in Q1. This already shows how incredibly fast this company is evolving.\nEach module represents a stand-alone product covering a different cloud protection area and customer's asset base (on-prem, hybrid, and cloud).\n<img src=\"https://static.tigerbbs.com/ee82ec901a5482154ef9e23b734918e9\" tg-width=\"1280\" tg-height=\"592\">\nCustomers can pick and choose whatever fits their needs. But it's in their best interest to adopt more modules as it is the quickest way to cover broader aspects of their security system and their asset base.\nBut of course, the customers might not know that. So, CrowdStrike helps the customers by offering Trial-to-Pay and In-app Trial schemes. They allow users to try without any commitment. The big benefit of these is that users gradually get accustomed to CrowdStrike's modules. As a result, customers are more willing to try other products, thus spend more over time. This strategy is called land-and-expand. It has proven to be highly successful.\n<img src=\"https://static.tigerbbs.com/772f49de60ad0f5a5e0ab9c0ae73e735\" tg-width=\"1280\" tg-height=\"795\">\nIn Q4, 63% of all subscription customers adopted four or more modules, an increase from 61% in Q3 and a considerable leap from Q4 last year which was 57%. The difference is even more prominent from Q4 2018 at just 30%. Customers with five or more modules increased to 47%, representing an increase from 44% in Q3.\nSo, CrowdStrike has done very well in adding modules and getting the customers to use more of them. The success can also be demonstrated by looking at the 'magic number', a standard metric used by the SaaS industry to measure sales efficiency.\nAnything above 1 is excellent. CrowdStrike scores 1.3. Thus, it indicates a very successful sale and marketing strategy. Let's see how this contributes to its revenue side.\nThe Monster $1B ARR\nWith a strong line of products and a high number of module adoption per customer, it was no surprise to see CrowdStrike posting record revenue. The company ended FY 2021 with $874.4M, up 82% compared to $481.4 million in FY2020.\nSince most of the revenue is recurring revenue. It is even more useful to look at how those numbers were. And for the first time in its history, CrowdStrike's recurring revenue got over the $1B mark, coming in at $1.07 billion to be precise. It represents an increase of 75% YoY, 92% of which came from subscriptions. The growth rate decelerated slightly from 81% in Q3. However, it's still extremely impressive and elevated.\n<img src=\"https://static.tigerbbs.com/94a3f396ea6922f8d5c352dc42b3dd57\" tg-width=\"1280\" tg-height=\"806\">\nCrowdStrike was able to grow ARR at such a fast pace is due to two factors: 1) through adding new customers and 2) through encouraging existing customers to spend more. Let's look at some more details.\nAdding new customers\nIn Q4, CrowdStrike's customer base totaled 9,896, an increase of 82% YoY. Over half of the Fortune 100 were customers of CrowdStrike. I'll highlight some of the notable customer additions as follows.\n<img src=\"https://static.tigerbbs.com/0ed924e5cb47cd51755aac3cd1bf2553\" tg-width=\"1280\" tg-height=\"768\">\nCrowdStrike added Salesforce (CRM), Pfizer (PFE), P&amp;G (PG), and an unnamed federal entity. The list is impressive given that CrowdStrike added Okta (OKTA) in the previous quarter.\nIt was interesting to hear the CEO, George Kurtz, providing the reasons why Salesforce chose CrowdStrike over others. Spoiler alert! You could see CrowdStrike's moats written all over:\n<blockquote>\n […] And they chose us because of the\n scalable platform, low impact, and efficacy. And I think that's across the board, that's what we're seeing, whether it's a next-gen vendor or whether it's an incumbent vendor, is the\n ease of use, time to valueis incredible.\n</blockquote>\nApart from large enterprises, CrowdStrike also added smaller customers. It shows that it can provide organizations of various shapes and sizes demonstrating high flexibility and coverage in its security solutions.\nAmazon Marketplace played a key role in CrowdStrike being adopted by smaller customers. The company was very smart to integrate its threat intelligence feeds with the Amazon AWS network firewall. This integration enabled CrowdStrike to deploy essential network protections across customers on Amazon Virtual Private Clouds, speeding up sales by 80%.\nTo appreciate Amazon's contribution to CrowdStrike a bit further, in Q4, ARR transacted through the AWS marketplace grew 600% YoY, and transaction volume grew over 300%. Not many channels can deliver such growth.\nExisting customers to spend more\nSo, adding new customers contributed tremendously to ARR. How about existing customers? To measure the impact, there is no better metric than the Dollar-based Retention Rates ('DBRR') or Subscription ARR.\nThis metric shows you the growth of ARR that comes from existing customers (prior 12-month cohort). In other words, the metric strips out the effect of additional ARR from new customers.\nCrowdStrike didn't disclose the precise numbers during FY 2021, so I am glad to see the management revealed them in Q4, and they did not disappoint.\nDespite having decelerated compared to Q4 2019, the number was still extremely impressive. Q4's DBRR came in at 125%. This number shows revenue from existing customers still grew by 25% (likely from adopting more modules and expanding usage), even after excluding new ARR from new customer additions.\n<img src=\"https://static.tigerbbs.com/a81e495ff10ccf05a32255a7b26febbe\" tg-width=\"1280\" tg-height=\"537\">\nProfitability at scale\nThe third and most impressive takeaway from FY2021 results is CrowdStrike's ability to balance growth with profitability at scale. A lot of companies can focus on one and do very well, so either growing really fast or operating a really lean model and churn out lots of profits. However, there are not many companies that can do both and really excel. Zoom (ZM) is one but that's actually the only other one that is top of mind now for me at this moment.\nIn Q4, CrowdStrike posted 74% growth in revenue. It also posted a 13% operating margin. That is impressive. And looking at the sales and marketing, and general administrative costs as a percentage of revenue, you can see why. They both have shrunk considerably since FY2017, from nearly -168% operating margin to 13% within 4 years. Below is a beautiful chart.\n<img src=\"https://static.tigerbbs.com/b31f13e6a680aab36babe57d909fa728\" tg-width=\"1280\" tg-height=\"881\">\nEqually impressive is the improvement in the free cash flow margin. In Q4, free cash flow margins were a very high 37% and this marks seven consecutive quarters of generating positive free cash flow.\n<img src=\"https://static.tigerbbs.com/98be9cc93fed245da85ee732699f2c45\" tg-width=\"1280\" tg-height=\"474\">\nOne reason why the free cash flow margin is much higher than the operating margin is due to the high stock-option rewards. So, as CrowdStrike is still in its hyper-growth stage, the operating margin could be more representative of the bottom-line, counting stock options as a form of costs to invest in human capital. On the other hand, free cash flow is the lifeblood of a company. It's cash that can be used to generate new revenue streams, by developing them or acquiring them. The shares don't cost the company anything, but of course, they mean dilution for the shareholders.\nThe 13% operating margin isn't far off CrowdStrike's long-term target of 20%+.\n<img src=\"https://static.tigerbbs.com/f4826b0eeca46e32fd0af5b67e6a1836\" tg-width=\"834\" tg-height=\"498\">\nTo summarize CrowdStrike phenomenal FY 2021 results. It was driven by three key aspects:\n<ul>\n <li>Expanded the Falcon Platform to 19 modules and achieved a high number of customers' adoption with more than 4 modules.</li>\n <li>Achieved $1B of ARR at the growth rate of 75%, fuelled by record number subscription customers and high dollar-based retention rate at 125%.</li>\n <li>As a result, the company posted high profitability and generated free cash flow, demonstrating operating leverage and scalability.</li>\n</ul>\nMore growth ahead, enter Humio\nCrowdStrike has a perfect setup for future growth. The market for cybersecurity is still in its early innings of growth. The industry dynamic is changing so quickly that incumbents are getting disrupted. The reason is that they are often still on-prem, so on a single location. CrowdStrike sees that threat in one of their customers and can immediately stop the threat on the whole system. The reason why it is better than this than incumbents is that it was built from the ground up for the cloud and not stitched together from old on-prem solutions.\nHeightened awareness around security threats (Microsoft Exchange data breach) are pushing CIOs to make cloud security mission-critical. George Kurtz said this in Q3 and explained why CrowdStrike has a huge runway ahead.\n<blockquote>\n Stopping the breach is no longer just about protecting endpoints. It also encompasses cloud workload security and identity protection.\n</blockquote>\n<blockquote>\n […] Today's cloud workloads are massively under-protected and this could represent a 10x market opportunity in 2023, compared to IDC's estimate of the cloud security market in 2020, as we've illustrated in our cloud security webinar for investors at our Virtual Fal.Con Conference in October.\n</blockquote>\nHis comments underpin the following slides, showing that cloud workloads are under-protected as Cloud Security Spend as % of Cloud IT Spend is still just 1%. As such, he thinks the opportunity could 10x by 2023.\n<img src=\"https://static.tigerbbs.com/f9690b2114237e89fa10ae38ebb95340\" tg-width=\"898\" tg-height=\"522\"><img src=\"https://static.tigerbbs.com/38de4aebd1281d492be88c278f3b0e17\" tg-width=\"900\" tg-height=\"277\">\nAccordingly, the acquisition of Humio makes perfect sense. On its corporate website, Humio says that it \"log everything and answer anything in real-time.\"\nThis is a capability that fits under cybersecurity and observability. And it does mean that with Humio, CrowdStrike will be stepping on the turf of Datadog (DDOG) too.\n<img src=\"https://static.tigerbbs.com/21d0a8aaa6de41800d07d89edfa6dc7e\" tg-width=\"892\" tg-height=\"427\">Source: Humio corporate website\nGeorge Kurtz is incredibly excited to add&nbsp;Humioto the Falcon platform.\n<blockquote>\n With Humio, we are now redefining next-gen XDR through a platform that spans endpoints, identities, applications, the network edge and the cloud, CrowdStrike is building a unified data layer to power the next generation of enterprise security and IT. Humio provides us the ability to expand our data leg and to solve more security and non-security use cases in real time. I can't emphasize enough the power of index-free data ingestion when applied to security use cases, as it allows us to query the data in real time as it's being ingested.\n</blockquote>\nKurtz mentioned \"index-free data ingestion\", it's a technology that compresses data to take up less disk space. It also helps with reading data faster from disk. And it's an important point because it highlights the capability that makes Humio superior compared to the traditional log management solutions. Thus, it gave George Kurtz the confidence to claim that:\n<blockquote>\n Humio has the potential to disrupt the log management and observability markets.\n</blockquote>\n<img src=\"https://static.tigerbbs.com/ee82ec901a5482154ef9e23b734918e9\" tg-width=\"1280\" tg-height=\"592\">\nHow will Humio fit in the Falcon Platform? George Kurtz sees Humio build on Falcon OverWatch, Falcon Spotlight, and Falcon Discover as the first line of defense for cloud security (second pillar from the left) and threat intelligence (fourth pillar from the right). But more significantly, Humio will form a new module on the Falcon platform (second pillar from the right).\n<blockquote>\n Humio's capabilities will be built into the fabric of our Falcon OverWatch complete and threat intelligence modules as well as our professional services offerings, providing CrowdStrike with a greater time advantage over the competition and the adversary.\n</blockquote>\nIn the near term, Humio is unlikely to make a meaningful financial contribution, but it's good to know that it will be a high-margin business.\nThe market potential for Humio is very big. Humio broadens CrowdStrike's addressable market into log management. This market is forecasted to be $4.9 billion in 2023 based on IDC estimates, and that does not include any potential adjacencies, such as the massive observability market.\nInterestingly, the log management market estimated size grew from $4.1 billion in Q3 2021 to $4.9 billion in Q4 2021. And CrowdStrike total addressable market expanded from $38.7 billion in Q3 2021 to $43.6 billion in Q4 2021. Incredible.\n<img src=\"https://static.tigerbbs.com/9a597f07ca29a472086851ea9806d83a\" tg-width=\"1280\" tg-height=\"565\">\nOverall, it's a great addition to the Falcon Platform, adding another dimension to CrowdStrike's security ecosystem.\nValuation\nCrowdStrike has been performing exceptionally well. I believe this is the highest quality stock on the market at the moment and I also believe the business will continue to perform at a high level for many years to come.\nIn that context, I am not surprised that CrowdStrike has been beating analysts' consensus by roughly 6% every quarter since IPO. Hence, I expect the company to beat the FY2022 guidance again.\n<img src=\"https://static.tigerbbs.com/a27fdea41d4a288aca7535237d47705a\" tg-width=\"1280\" tg-height=\"553\">Source: SA premium tools\nWith the track record of overperformance and combined with a highly scalable business model with expanding revenue streams, investors should have an expectation that CrowdStrike will always be valued highly by the market.\nAs a useful exercise, let's work out the level of revenue and free cash flow in the next five years and apply a reasonable EV/S and EV/FCF to have an idea if the current price is reasonable or not.\nThe table below is my assumptions for a conservative scenario:\n+ Revenue growth at 50% for FY2022 then decelerates to 25% CAGR to FY2026\n+Free cash flow margin at ~30% by FY2 6 (from 35% in Q42021)\n<img src=\"https://static.tigerbbs.com/8aa57cbfd83203d97cd882174972585c\" tg-width=\"815\" tg-height=\"552\">Source: Estimates by DTF Capital\nAs you can see, by FY2026, CrowdStrike would reach an estimated $ 3.2 billion of sales and would have accumulated over $ 3 billion in free cash over the years.\nUsing the current market cap of $ 43 billion as of this writing, the current valuation is about 13x FY2026 estimated sales and 44x free cash flow.\nTo remind you, my assumptions above are very conservative. As a result, I see this as a base case and thus, I don't feel that CrowdStrike valuation is 'frothy' like how the market is feeling about tech stocks right now. If you bake in the overperformance, say 5%, CrowdStrike would be valued at just 10x EV/Sales and 36x FCF, or 15%, and it would be 7x EV/Sales and 27x FCF.\nTo close, I feel confident that CrowdStrike would be a huge winner for your portfolio and would treat the current mini tech correction as an opportunity to add more shares.\nTakeaways\nCrowdStrike wrapped up a phenomenal FY2021. It expanded its Falcon Platform to 19 modules; each covers a different cloud protection area and customer's asset base. The ease of trials and deployment enticed a record number of module adoption by Crowdstrike's customers. As a result, the company was able to reach a record $1B of ARR at a growth rate of 75% and record operating and free cash flow margins.\nThe company understands the vast market opportunity and continues to seek solutions that complement the Falcon Platform. Recently, it acquired Humio. The acquisition is interesting because it allows CrowdStrike to move into log management, boosting its total addressable market by $4.9B.\nI believe CrowdStrike is one of the best investment opportunities on the market. It's rare to find such a hyper-growth company that still has a long runway yet already highly profitable. CrowdStrike is also already seen as a category leader in cybersecurity and thus, deserves a premium valuation multiple. Any dips should be seen as an opportunity to add to your position.","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>CrowdStrike: Cloud Security Of Choice With Widening Moat, Expanding TAM, Phenomenal FY2021 Results</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nCrowdStrike: Cloud Security Of Choice With Widening Moat, Expanding TAM, Phenomenal FY2021 Results\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-03-23 17:15 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4415445-crowdstrike-cloud-widening-moat-expanding-tam-phenomenal>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nCrowdStrike Q4 and FY2021 results were simply phenomenal with rapid growth across financial and operations metrics.\nIt expanded the Falcon Platform to 19 modules and 63% of customers adopted ...\n\n<a href=\"https://seekingalpha.com/article/4415445-crowdstrike-cloud-widening-moat-expanding-tam-phenomenal\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"CRWD":"CrowdStrike Holdings, Inc."},"source_url":"https://seekingalpha.com/article/4415445-crowdstrike-cloud-widening-moat-expanding-tam-phenomenal","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1157609582","content_text":"Summary\n\nCrowdStrike Q4 and FY2021 results were simply phenomenal with rapid growth across financial and operations metrics.\nIt expanded the Falcon Platform to 19 modules and 63% of customers adopted more than 4 modules.\nAs a result, the company generated record annual recurring revenue, it crossed the $1B mark for the first time. It also posted record operating profit and free cash flow.\nCrowdStrike acquired Humio to add more capabilities in log management. Successful integration could expand the total addressable market for the company by $.4.9B.\nCrowdStrike may look expensive on the surface, but with a highly scalable business model added with the power of compounding and optionality, there is still a lot of upside from here. I added more shares.\n\nPhoto by kanawatvector/iStock via Getty Images\nIntroduction\nCrowdStrike (CRWD) is on a mission to build a holistic security ecosystem. It started with endpoints protection, and now also covers workload, observability, and identity protection with the help of AI and behavioral analytics. The combination creates a winning formula, displacing legacy and even next-generation vendors.\nCrowdStrike's Q42021 and FY2021 results continued the strong momentum since IPO. It wrapped up a phenomenal year. Operationally, it added more modules to the Falcon Platform and more customers also adopted multiple modules. As a result, it achieved a record annual recurring revenue ('ARR') of over $1 billion. While still early in its growth stage, the company already generates a strong operating profit and free cash flow.\nStill, the company keeps up the pace. It recently acquired Humio to expand its capability to log management. It's an exciting acquisition because it supports CrowdStrike existing modules and also forms a new stand-alone module expanding the company's total addressable market by another $4.9B.\nWhat sets CrowdStrike apart?\nBefore diving into the Q4 and FY2021 results, let's have a quick refresher on why CrowdStrike still has the potential to be a Potential Multibagger. At the core of CrowdStrike is its AI-enabled Threat Graph. It is the brain of its Falcon Platform, and this is what sets it apart from all of its competitors, especially those that provide on-prem security solutions.\nHow it works is that it collects threat incidents and stores them all on the cloud. As more data is collected, the Threat Graph gets smarter by the instant, providing visibility and real-time protection for all customers. The capability demonstrates clear network effects moat because as the Threat Graph gets smarter from more data, its ability to protect customers also increases.\nTo have a sense of the scale and speed of the Threat Graph, in Q2, it captured 3 trillion high-fidelity signals per week. Fast forward to Q4, it captured 5 trillion, a 66% increase of a huge platform already.\nSource: CrowdStrike Q4 2021 & FY 2021 presentation\nThe Q4 2021 and FY 2021 results review\nSource: CrowdStrike Q42021 & FY2021 presentation\nThe following bullet points are the highlights of the financial and operational metrics. You can glance through this section or refer back when required. The sections after will discuss four key discussion points from the results.\n\nthe development of the Falcon Platform and its customers' adoption.\nthe record ARR and the retention rate.\nthe incredible operating leverage.\nfinally, the acquisition of Humio.\n\nQ4 2021 financial metrics:\n\nRevenue was $264.9M, up 74% YoY, but a deceleration from 86% YoY growth in Q3.\nAnnual recurring revenue ('ARR') grew to $1.07B, up 75% YoY. Net new ARR was $117M.\nNet dollar retention rate at 125% exceeded the 120% benchmark for the last three years.\nGAAP subscription gross margin was 78%, compared to 75% in Q42020.\nNon-GAAP subscription gross margin was 80%, compared to 77% in Q4 2020.\nGAAP loss from operations was $15.8M, compared to $31.1M in Q42020. Non-GAAP income from operations was $34.4M, compared to a loss of $6.7M in Q42020, 13% operating margin.\nNet cash generated from operations was $114.5M, compared to $66.1M in Q42020.\nFree cash flow was $97.4M, compared to $50.7M in Q42020, representing a 35.6% FCF margin.\nCash and Cash Equivalents were $1.9B as of January 31, 2020.\n\nFY2021 Financial metrics:\n\nRevenue: Total revenue was $874.4 million, up 82% compared to $481.4 million in FY2020.\nSubscription revenue was $804.7M, up 84% compared to $436.3M in FY2020. Subscription\nGross Margin: GAAP subscription gross margin was 77%, compared to 74% in FY2020.\nNon-GAAP subscription gross margin was 79%, compared to 75% in FY2020.\nIncome/Loss from Operations: GAAP loss from operations was $92.5M, compared to $146.1M in FY2020.\nNon-GAAP income from operations was $62.4M, compared to a loss of $65.6M in FY2020, which represents a 7.1% operating margin.\nNet cash generated from operations was $356.6M, compared to $99.9M in FY2020.\nFree cash flow was $292.9M, compared to $12.5M in FY2020, representing a 33.5% free cash flow margin.\n\nOperation metrics\n\nSubscription customers were 9896, added 1,480 net new subscription customers in the quarter, representing 82% growth YoY.\nCustomers with four or more modules were 63% of total subscribed customers-an acceleration from 61% in Q32021.\nCustomers with five or more modules were 47%, and six or more were 24%.\nAcquired Humio to expand its addressable market into the cloud log management and observability space. Once integrated, Humio capabilities will become another module for the Falcon Platform.\nExpanded Cloud Security Posture Management and Cloud Workload Protection capabilities to deliver greater control, visibility, and security for cloud workloads and cloud-native applications from build to runtime.\nIntegrated CrowdStrike Falcon's threat intelligence feeds with AWS Network Firewall, a managed service that makes it easy to deploy essential network protections across a customer's Amazon Virtual Private Clouds.\nKey customer additions: Salesforce, Pfizer, P&G, a customer in the federal space, and Bank Leumi of Israel.\n\nQ4 and FY2021 guidance\nSource: CrowdStrike Form 8-K, March 16, 2021\nNow that you have had a glance, I hope we can all agree that CrowdStrike has again over-delivered. It was a 'beat, beat, and raise.'\nNext, I'll go over the four most important takeaways in the quarter.\nExpanding module and increased adoption\nAt the core of CrowdStrike is its Falcon Platform. The following slide shows all the modules on the Falcon Platform at the end of Q4. There are 19 of them. Just for context, it only had 11 modules in Q1. This already shows how incredibly fast this company is evolving.\nEach module represents a stand-alone product covering a different cloud protection area and customer's asset base (on-prem, hybrid, and cloud).\n\nCustomers can pick and choose whatever fits their needs. But it's in their best interest to adopt more modules as it is the quickest way to cover broader aspects of their security system and their asset base.\nBut of course, the customers might not know that. So, CrowdStrike helps the customers by offering Trial-to-Pay and In-app Trial schemes. They allow users to try without any commitment. The big benefit of these is that users gradually get accustomed to CrowdStrike's modules. As a result, customers are more willing to try other products, thus spend more over time. This strategy is called land-and-expand. It has proven to be highly successful.\n\nIn Q4, 63% of all subscription customers adopted four or more modules, an increase from 61% in Q3 and a considerable leap from Q4 last year which was 57%. The difference is even more prominent from Q4 2018 at just 30%. Customers with five or more modules increased to 47%, representing an increase from 44% in Q3.\nSo, CrowdStrike has done very well in adding modules and getting the customers to use more of them. The success can also be demonstrated by looking at the 'magic number', a standard metric used by the SaaS industry to measure sales efficiency.\nAnything above 1 is excellent. CrowdStrike scores 1.3. Thus, it indicates a very successful sale and marketing strategy. Let's see how this contributes to its revenue side.\nThe Monster $1B ARR\nWith a strong line of products and a high number of module adoption per customer, it was no surprise to see CrowdStrike posting record revenue. The company ended FY 2021 with $874.4M, up 82% compared to $481.4 million in FY2020.\nSince most of the revenue is recurring revenue. It is even more useful to look at how those numbers were. And for the first time in its history, CrowdStrike's recurring revenue got over the $1B mark, coming in at $1.07 billion to be precise. It represents an increase of 75% YoY, 92% of which came from subscriptions. The growth rate decelerated slightly from 81% in Q3. However, it's still extremely impressive and elevated.\n\nCrowdStrike was able to grow ARR at such a fast pace is due to two factors: 1) through adding new customers and 2) through encouraging existing customers to spend more. Let's look at some more details.\nAdding new customers\nIn Q4, CrowdStrike's customer base totaled 9,896, an increase of 82% YoY. Over half of the Fortune 100 were customers of CrowdStrike. I'll highlight some of the notable customer additions as follows.\n\nCrowdStrike added Salesforce (CRM), Pfizer (PFE), P&G (PG), and an unnamed federal entity. The list is impressive given that CrowdStrike added Okta (OKTA) in the previous quarter.\nIt was interesting to hear the CEO, George Kurtz, providing the reasons why Salesforce chose CrowdStrike over others. Spoiler alert! You could see CrowdStrike's moats written all over:\n\n […] And they chose us because of the\n scalable platform, low impact, and efficacy. And I think that's across the board, that's what we're seeing, whether it's a next-gen vendor or whether it's an incumbent vendor, is the\n ease of use, time to valueis incredible.\n\nApart from large enterprises, CrowdStrike also added smaller customers. It shows that it can provide organizations of various shapes and sizes demonstrating high flexibility and coverage in its security solutions.\nAmazon Marketplace played a key role in CrowdStrike being adopted by smaller customers. The company was very smart to integrate its threat intelligence feeds with the Amazon AWS network firewall. This integration enabled CrowdStrike to deploy essential network protections across customers on Amazon Virtual Private Clouds, speeding up sales by 80%.\nTo appreciate Amazon's contribution to CrowdStrike a bit further, in Q4, ARR transacted through the AWS marketplace grew 600% YoY, and transaction volume grew over 300%. Not many channels can deliver such growth.\nExisting customers to spend more\nSo, adding new customers contributed tremendously to ARR. How about existing customers? To measure the impact, there is no better metric than the Dollar-based Retention Rates ('DBRR') or Subscription ARR.\nThis metric shows you the growth of ARR that comes from existing customers (prior 12-month cohort). In other words, the metric strips out the effect of additional ARR from new customers.\nCrowdStrike didn't disclose the precise numbers during FY 2021, so I am glad to see the management revealed them in Q4, and they did not disappoint.\nDespite having decelerated compared to Q4 2019, the number was still extremely impressive. Q4's DBRR came in at 125%. This number shows revenue from existing customers still grew by 25% (likely from adopting more modules and expanding usage), even after excluding new ARR from new customer additions.\n\nProfitability at scale\nThe third and most impressive takeaway from FY2021 results is CrowdStrike's ability to balance growth with profitability at scale. A lot of companies can focus on one and do very well, so either growing really fast or operating a really lean model and churn out lots of profits. However, there are not many companies that can do both and really excel. Zoom (ZM) is one but that's actually the only other one that is top of mind now for me at this moment.\nIn Q4, CrowdStrike posted 74% growth in revenue. It also posted a 13% operating margin. That is impressive. And looking at the sales and marketing, and general administrative costs as a percentage of revenue, you can see why. They both have shrunk considerably since FY2017, from nearly -168% operating margin to 13% within 4 years. Below is a beautiful chart.\n\nEqually impressive is the improvement in the free cash flow margin. In Q4, free cash flow margins were a very high 37% and this marks seven consecutive quarters of generating positive free cash flow.\n\nOne reason why the free cash flow margin is much higher than the operating margin is due to the high stock-option rewards. So, as CrowdStrike is still in its hyper-growth stage, the operating margin could be more representative of the bottom-line, counting stock options as a form of costs to invest in human capital. On the other hand, free cash flow is the lifeblood of a company. It's cash that can be used to generate new revenue streams, by developing them or acquiring them. The shares don't cost the company anything, but of course, they mean dilution for the shareholders.\nThe 13% operating margin isn't far off CrowdStrike's long-term target of 20%+.\n\nTo summarize CrowdStrike phenomenal FY 2021 results. It was driven by three key aspects:\n\nExpanded the Falcon Platform to 19 modules and achieved a high number of customers' adoption with more than 4 modules.\nAchieved $1B of ARR at the growth rate of 75%, fuelled by record number subscription customers and high dollar-based retention rate at 125%.\nAs a result, the company posted high profitability and generated free cash flow, demonstrating operating leverage and scalability.\n\nMore growth ahead, enter Humio\nCrowdStrike has a perfect setup for future growth. The market for cybersecurity is still in its early innings of growth. The industry dynamic is changing so quickly that incumbents are getting disrupted. The reason is that they are often still on-prem, so on a single location. CrowdStrike sees that threat in one of their customers and can immediately stop the threat on the whole system. The reason why it is better than this than incumbents is that it was built from the ground up for the cloud and not stitched together from old on-prem solutions.\nHeightened awareness around security threats (Microsoft Exchange data breach) are pushing CIOs to make cloud security mission-critical. George Kurtz said this in Q3 and explained why CrowdStrike has a huge runway ahead.\n\n Stopping the breach is no longer just about protecting endpoints. It also encompasses cloud workload security and identity protection.\n\n\n […] Today's cloud workloads are massively under-protected and this could represent a 10x market opportunity in 2023, compared to IDC's estimate of the cloud security market in 2020, as we've illustrated in our cloud security webinar for investors at our Virtual Fal.Con Conference in October.\n\nHis comments underpin the following slides, showing that cloud workloads are under-protected as Cloud Security Spend as % of Cloud IT Spend is still just 1%. As such, he thinks the opportunity could 10x by 2023.\n\nAccordingly, the acquisition of Humio makes perfect sense. On its corporate website, Humio says that it \"log everything and answer anything in real-time.\"\nThis is a capability that fits under cybersecurity and observability. And it does mean that with Humio, CrowdStrike will be stepping on the turf of Datadog (DDOG) too.\nSource: Humio corporate website\nGeorge Kurtz is incredibly excited to add Humioto the Falcon platform.\n\n With Humio, we are now redefining next-gen XDR through a platform that spans endpoints, identities, applications, the network edge and the cloud, CrowdStrike is building a unified data layer to power the next generation of enterprise security and IT. Humio provides us the ability to expand our data leg and to solve more security and non-security use cases in real time. I can't emphasize enough the power of index-free data ingestion when applied to security use cases, as it allows us to query the data in real time as it's being ingested.\n\nKurtz mentioned \"index-free data ingestion\", it's a technology that compresses data to take up less disk space. It also helps with reading data faster from disk. And it's an important point because it highlights the capability that makes Humio superior compared to the traditional log management solutions. Thus, it gave George Kurtz the confidence to claim that:\n\n Humio has the potential to disrupt the log management and observability markets.\n\n\nHow will Humio fit in the Falcon Platform? George Kurtz sees Humio build on Falcon OverWatch, Falcon Spotlight, and Falcon Discover as the first line of defense for cloud security (second pillar from the left) and threat intelligence (fourth pillar from the right). But more significantly, Humio will form a new module on the Falcon platform (second pillar from the right).\n\n Humio's capabilities will be built into the fabric of our Falcon OverWatch complete and threat intelligence modules as well as our professional services offerings, providing CrowdStrike with a greater time advantage over the competition and the adversary.\n\nIn the near term, Humio is unlikely to make a meaningful financial contribution, but it's good to know that it will be a high-margin business.\nThe market potential for Humio is very big. Humio broadens CrowdStrike's addressable market into log management. This market is forecasted to be $4.9 billion in 2023 based on IDC estimates, and that does not include any potential adjacencies, such as the massive observability market.\nInterestingly, the log management market estimated size grew from $4.1 billion in Q3 2021 to $4.9 billion in Q4 2021. And CrowdStrike total addressable market expanded from $38.7 billion in Q3 2021 to $43.6 billion in Q4 2021. Incredible.\n\nOverall, it's a great addition to the Falcon Platform, adding another dimension to CrowdStrike's security ecosystem.\nValuation\nCrowdStrike has been performing exceptionally well. I believe this is the highest quality stock on the market at the moment and I also believe the business will continue to perform at a high level for many years to come.\nIn that context, I am not surprised that CrowdStrike has been beating analysts' consensus by roughly 6% every quarter since IPO. Hence, I expect the company to beat the FY2022 guidance again.\nSource: SA premium tools\nWith the track record of overperformance and combined with a highly scalable business model with expanding revenue streams, investors should have an expectation that CrowdStrike will always be valued highly by the market.\nAs a useful exercise, let's work out the level of revenue and free cash flow in the next five years and apply a reasonable EV/S and EV/FCF to have an idea if the current price is reasonable or not.\nThe table below is my assumptions for a conservative scenario:\n+ Revenue growth at 50% for FY2022 then decelerates to 25% CAGR to FY2026\n+Free cash flow margin at ~30% by FY2 6 (from 35% in Q42021)\nSource: Estimates by DTF Capital\nAs you can see, by FY2026, CrowdStrike would reach an estimated $ 3.2 billion of sales and would have accumulated over $ 3 billion in free cash over the years.\nUsing the current market cap of $ 43 billion as of this writing, the current valuation is about 13x FY2026 estimated sales and 44x free cash flow.\nTo remind you, my assumptions above are very conservative. As a result, I see this as a base case and thus, I don't feel that CrowdStrike valuation is 'frothy' like how the market is feeling about tech stocks right now. If you bake in the overperformance, say 5%, CrowdStrike would be valued at just 10x EV/Sales and 36x FCF, or 15%, and it would be 7x EV/Sales and 27x FCF.\nTo close, I feel confident that CrowdStrike would be a huge winner for your portfolio and would treat the current mini tech correction as an opportunity to add more shares.\nTakeaways\nCrowdStrike wrapped up a phenomenal FY2021. It expanded its Falcon Platform to 19 modules; each covers a different cloud protection area and customer's asset base. The ease of trials and deployment enticed a record number of module adoption by Crowdstrike's customers. As a result, the company was able to reach a record $1B of ARR at a growth rate of 75% and record operating and free cash flow margins.\nThe company understands the vast market opportunity and continues to seek solutions that complement the Falcon Platform. Recently, it acquired Humio. The acquisition is interesting because it allows CrowdStrike to move into log management, boosting its total addressable market by $4.9B.\nI believe CrowdStrike is one of the best investment opportunities on the market. It's rare to find such a hyper-growth company that still has a long runway yet already highly profitable. CrowdStrike is also already seen as a category leader in cybersecurity and thus, deserves a premium valuation multiple. Any dips should be seen as an opportunity to add to your position.","news_type":1},"isVote":1,"tweetType":1,"viewCount":342,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":2,"xxTargetLangEnum":"ORIG"},"commentList":[],"hasMoreComment":false,"orderType":2}