Crowdstrike Earnings Review

CRWD Q2 FY 23 Earnings Review: Highest Dollar-Based Net Retention in 7 quarters

Good morning investors. Remember to prioritize your health today.

Q2 2023 Results

If you only have 30 seconds, the four sentences from Crowdstrike Co-Founder and CEO George Kurtz summarize the quarter and strength of the business nicely:

Quarterly revenue exceeded $500 million for the first time. We added over 1,700 net new customers, another first for the company. Gross retention climbed to a new record for the second consecutive quarter, and dollar-based net retention reached its highest level in 7 quarters. We achieved these results while also driving record non-GAAP operating profit of $87 million, a 147% increase over Q2 of last year, and growing free cash flow of 84%.

As Burt will discuss in a few minutes, we are raising our revenue guidance for the year and remain committed to delivering non-GAAP operating leverage and 30% or greater free cash flow margin for the year while investing in key initiatives that will further widen the gap between CrowdStrike and the competition.

Crowdstrike beat quarterly adjusted EPS and revenue expectations and they raised Fiscal year 2023 guidance. I have no idea how the stock will react over the short-term, but these numbers tell me the current business is in good shape and management has a good view of the business even during volatile times. I talked about that in my earnings preview post.

Q2 2023 Business Highlights

Added 1,741 net new subscription customers, up 51% YoY. I want to see this above 45% for the full year which seems highly likely.
Total non-GAAP operating expenses in the second quarter were approximately $321.4 million or 60% of revenue versus $222.4 million last year or 66% of revenue.
Cash flow from operations of $210 million, up 94% YoY
Free cash flow of $136 million, up 84% YoY
Cash and cash equivalents was $2.32B as of July 31, 2022
Q2 subscription customers with 5 or more, 6 or more and 7 or more modules were 59%, 36% and 20%, respectively. This represents a 70%, 84% and 105% year-over-year increase in these respective module adoption cohorts
Gross customer retention reached a record high level and dollar-based net revenue retention reached its highest level in 7 quarters
Here is management’s long-term target operating model. This outlines how they intend to get to Adjusted operating margin of 20% + and Adjusted free cash flow margin of 30%+.

My thoughts on the stock price and multiple

With shares at $193.30, the P/S is 27. This seems high, but if we look at it on a P/S to Sales growth ratio (P/S ratio / sales growth rate) we get 0.46. For reference below 0.43 is where I like to be buying shares of great enterprise software companies and above 0.7 is where the multiple feels a bit extreme and I would consider trimming.

The scenario below shows the return is revenue grows at an average of 28% per year from FY 23 - FY 28 and the stock trades at a P/S of 10 in FY 2028. It’s important to note this is just for reference and these numbers are surely wrong. But the result is an 11% annual return and a 76% total return.

I’ll update subscribers before I make any changes to the portfolio

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