CrowdStrike Holdings, Inc. (CRWD -1.04%)
Q3 2023 Earnings Call
Nov 29, 2022, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello, and thank you for standing by. Welcome to CrowdStrike’s fiscal third quarter 2023 results conference call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session.
[Operator instructions] It is now my pleasure to introduce vice president of investor relations, Maria Riley.
Maria Riley — Vice President, Investor Relations
Good afternoon and thank you for your participation today. With me on the call are George Kurtz, president and chief executive officer and co-founder of CrowdStrike; and Burt Podbere, chief financial officer. Before we get started, I would like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives, growth, and expected performance, including our outlook for the fourth quarter and fiscal year 2023, as well as any assumptions for fiscal periods beyond that, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call.
While we believe any forward-looking statements we make are reasonable, actual results could differ materially because the statements are based on current expectations and are subject to risks and uncertainties. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements whether as a result of new information, future events, or otherwise. Further information on these and other factors that could affect the company’s financial results is included in the filings we make with the SEC from time to time, including the section titled risk factors in the company’s quarterly and annual reports. Additionally, unless otherwise stated, excluding revenue, all financial measures disclosed on this call will be non-GAAP.
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A discussion of why we use non-GAAP financial measures and a reconciliation schedule showing GAAP versus non-GAAP results is currently available in our earnings press release, which may be found on our Investor Relations website at ir.crowdstrike.com or on our Form 8-K filed with the SEC today. With that, I will now turn the call over to George to begin.
George Kurtz — President, Chief Executive Officer and Co-Founder
Thank you, Maria, and thank you all for joining us. Let me start with a summary of our results. In Q3, we delivered 53% revenue growth year over year, 15% non-GAAP operating margin, and record non-GAAP net income, all of which were ahead of our guidance. Additionally, we achieved record free cash flow of $174 million or approximately 30% of revenue.
There are many positive trends we see in our business, including strong competitive win rates, consistent ASPs, exceptional retention rates, and the mission-critical nature of cybersecurity. However, I would first like to address the increased macroeconomic headwinds we saw in the quarter, which caused Q3 net new ARR to come in below our expectations. As we discussed on our last earnings call, organizations were starting to respond to macroeconomic conditions by adding extra layers of required approvals and extending the time it took to close some deals. As Q3 progressed and fears of a recession grew, this dynamic became more pronounced.
In our smaller, more transactional non-enterprise accounts, we saw customers increasingly delay purchasing decisions with average days to close lengthening by approximately 11% and net new ARR contribution decreasing $15 million from Q2. This also impacted our net new logo additions in the quarter, even though our quarter-over-quarter POV win rates increased meaningfully over more complex vendors that require more headcount to manage. While sales cycles lengthen, we believe the vast majority of these deals are not lost, just delayed. In the enterprise, sales cycles or average days to close remain consistent with last quarter’s modestly higher level.
In Q3, these larger customers continue to prioritize their CrowdStrike investments, but some also had to manage timing issues related to opex budgets and cash flow amid the rapidly evolving macro. To achieve this, some customers signed contracts that have multiphase subscription start dates, which pushes their expense and CrowdStrike’s ARR recognition into future quarters. While every quarter, we have some deals with multiphase subscription start dates, in comparison to last quarter, in Q3, we saw approximately $10 million more ARR deferred into future quarters. We expect these macro headwinds to persist through Q4.
Additionally, given the increased scrutiny on budgets, we’re not going to expect a typical Q4 budget flush, leading us to adjust our Q4 net new ARR expectations, as Burt will discuss in more detail. But this caution does not deter our confidence in the long-term market position of CrowdStrike or the resiliency of the cybersecurity market. We see strong inherent demand for our products, and we entered Q4 with a record pipeline. Pipeline expansion is even more important in times of an evolving macro and elongated sales cycles.
We are working to stay out in front of pipeline creation. With Jennifer Johnson, our recently appointed CMO, now at the marketing helm, we are realigning our marketing initiatives and increasing our focus on ramping more top-of-funnel initiatives and brand awareness to drive pipeline to even greater heights. We also gained significant leverage from our partner ecosystem, with partner-sourced ARR growing 55% year over year. There were many positives in this quarter highlighted by the record number of customers contributing at least $1 million in net new ARR in the quarter.
Additionally, ending ARR for the $1 million-plus cohort surpassed the $1 billion milestone in Q3 with a 67% year-over-year growth rate. These larger customers are standardizing on Falcon, consolidating vendors, and prioritizing expansion projects that represent sizable cross-sell and upsell opportunity that are moving forward even under uncertain macro conditions. Marquee brands that are new to our $1 million-plus cohort included a Global 500 manufacturer that landed with 10 modules, providing unprecedented visibility and protection to all areas of their environment and allowing them to consolidate four agents and vendors with their initial deployment of Falcon. Two Global 500 financial institutions who chose Falcon for its ability to replace multiple legacy security products and bolster their security posture through a single agent, a Global 500 consumer goods manufacturer that is now leveraging Falcon Complete for a fully managed approach to protecting its critical infrastructure and a Fortune 500 luxury brand, leveraging Falcon to protect both its traditional endpoints and cloud workloads.
In the third quarter, we also delivered strong results in the public sector driven by a Falcon Complete LAN with one of the largest U.S. federal agencies now standardizing on the Falcon platform and a strong quarter for our SLED business with the U.S. state government standardizing on CrowdStrike in the quarter, as well as wins and expansion across multiple U.S. state and local government agencies and educational institutions.
To date, 40 U.S. state governments are CrowdStrike customers, of which 21 in the District of Columbia have standardized on Falcon. Additionally, we secured a win with one of the largest federal systems integrators that will be using Falcon to protect its internal estate, as well as integrate it into its MSSP offering. Moving to our expansion and retention performance.
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. Our best-in-class gross retention rates remained at record levels above 98%. We are also seeing more customers standardizing the Falcon platform and adopt more modules. Q3 subscription customers with five or more — six or more and seven or more modules were 60%, 36%, and 21%, respectively.
This represents a 55%, 66%, and 81% year-over-year increase in these respective module adoption cohorts. It was another record quarter for our emerging product category, which includes our Discover, Spotlight, Identity Protection, and LogScale modules. Our identity protection solutions are the largest contributor to ARR within the emerging category, and Q3 was another record quarter. Net new ARR for identity protection solution grew to a new all-time high, and the attach rate on net new logos continue to grow rapidly.
With close to 80% of cyberattack leveraging identity-based tactics to compromise legitimate credentials and use techniques like lateral movement to evade detection, identity protection is core to stopping breaches. Our identity protection capabilities are a game changer in shoring up active directory, as well as stopping ransomware and lateral movement. To punctuate the value of our identity protection capabilities, I’d like to share a recent seven-figure expansion with a leading global brand. This customer has a very capable security team that spent years building a dedicated identity and access management…
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