CrowdStrike Holdings, Inc. (CRWD) Barclays Global Technology Conference – (Transcript)

CrowdStrike Holdings, Inc. (NASDAQ:CRWD) Barclays Global Technology Conference Call December 6, 2023 12:15 PM ET

Company Participants

Burt Podbere – Chief Financial Officer

Conference Call Participants

Saket Kalia – Barclays

Saket Kalia

Okay. Great. Well, hey, good morning, everyone. Welcome to Day One of the Barclays Tech Conference. My name is Saket Kalia. I cover software here at Barclays. Honored to have my buddy, Burt Podbere, Chief Financial Officer of CrowdStrike here; and Maria Riley, Head of Investor Relations, and other members of the team as well.

Maybe just to frame this, we’ve got about 30 minutes together. Less than 20 or 25 minutes in fireside chat with Burt, which I know is going to be fun. And then I would love to make this interactive. Anyone that’s got a question, just pop up your hands, we’ve got a mic right in the back of the room.

So with maybe all that, Burt, thanks for joining us here today.

Burt Podbere

Saket, it’s great to be here. It’s great to be here every year.

Saket Kalia

Yes. Wouldn’t be a Barclays conference without CrowdStrike.

Question-and-Answer Session

Q – Saket Kalia

Burt, I think a lot of us were on the earnings call last week. And frankly, I think, the net new ARR acceleration itself. Maybe to make sure that we’re all on the same page, maybe just recap some of the key items that maybe you were personally most proud of coming out of last quarter? Does that makes sense?

Burt Podbere

Absolutely. Well, I guess, starting with net new ARR, the reacceleration, a record $223 million. So that was obviously a big deal the company was focused on that. That’s our metric. For those who don’t follow the company, ARR is our metric. That’s the one that we disclose on the build the health of the business. This quarter has a few other really good things. I have been super proud of gross margin, right, another record gross margin quarter for us. I spend a lot of time on gross margin, as you know. I invite the DevOps team monthly, and we spend the first 15 minutes DevOps and how we’re doing with COGS. So it’s the DevOps team, 70 accounts. So it’s been part of growth and kind of given the attention it needs. So really happy with that. Really happy with record GAAP and non-GAAP profitability. So that’s something that we’re really proud of. Icing bits, use of our dollars, really taking — really enjoying the leverage in the P&L. And that just doesn’t happen. It takes years to get that in the right place to be able to reap the benefits of preparing a company for being a public company and then being able to execute against that model. And then finally, free cash flow, currently $239 million, a record for us. It was at that 30% free cash flow margin percentage. Those are the ones that just, okay, that’s great. We’re really proud of the whole company.

Saket Kalia

Yes, absolutely. That’s the quarter. I’ll assume that a little bit, Burt. And George and the team really been talking more about this idea of a platform. And there are several security companies out there, right, that talk about the same thing. Some have built a few products, some have assembled multiple products that are acquisition. Maybe the question is for you. what does the platform mean to CrowdStrike itself? How does the company think about sort of that use of the word platform internally?

Burt Podbere

Yes. So first, let’s start with the fact that I think it’s the most overused term as security platform. And then probably the most overused term in IT in general. So for us, if you take a look at the different types of offerings that are out there, you have companies that are [Technical Difficulty], right? They offer one specific thing. Then years ago, you had folks that offered what they call a suite right? So that would be a set of different products, and they were offered in a bundle. And then you have this concept of for us, which is the platform, which that is a set of products that are uniform that all the integration is already done for you. It all works together seamlessly right out of the gate. And so for us, that’s who we are. And when you think about us, we have one agent and we have 1 console, not multiple agents, not multiple consoles, not multiple platforms. We have one. So it’s really the unification of a set of products. It’s the flexibility that you have within that platform. It’s open ended, so that we’re enabling not only internally all of our products working together, but we have folks in what we call our CrowdStrike store that can leverage what we have. Data and how we’re able to leverage their analytics on top of our data. That’s what a platform is. When other folks can use that you have. And that’s what we endeavor to build and we were successful at it. It really makes it easy for the customer at the end of the day, right? One console. And it really mattered. You talk to any of our customers, they’ll tell you part of the reason they appreciate CrowdStrike so much, it’s not only does it work better than anything else in marketplace. It’s just so easy to deploy. So easy to use, so easy to make. So that’s what a true platform is for us.

Saket Kalia

Yes, absolutely. I mean I’m thinking back to the time of the IPO, when I think George wrote this thing sort of we collect once and we scrutinize multiple times. And so this is really seeing the fruits of that.

Burt Podbere

100% and for us, it sounds easy, right? Yes, sure. Collect it once and then build applications on top of it, not so easy, right? You’ve got to build. We built actually something called our Threat Graph from scratch. And so we have that single lightweight agent that sits on every device, cloud, collects the data and then delivers it to the Threat Graph, seamlessly and Threat Graph allows us to do all the things we need. It’s the brain. It’s the brains behind CrowdStrike.

Saket Kalia

Absolutely. If I tie that philosophy back to results, Burt, I think you and the team have been talking about sort of growth in multiproduct deals. I think the number was 78% growth, right? Last quarter, you correct me there if I’m wrong. Maybe the questions there are what’s driving that growth in your view? Is that new customers that are landing bigger because of this platform, right, as you talked about or are those existing customers that are adding on more as you add on more than the platform?

Burt Podbere

It’s really both, to be fair. So for us, we are landing bigger and you can see that in the numbers we give out adoption and numbers for a module by, you know, by customers in terms of grouping. So customers that have five, six or seven more of our modules are in that 63%, 42% and 26% range, respectively. The 78% is the growth on eight-module adoption. So I know companies that would be really happy with two module, let alone 27%. And so for us, we’d appreciate our customers to make it easier for them to buy consolidate, drive down TCO, get the outcome they’re looking for without the expect. So on the new logo front, we believe that we have a massive opportunity in front of us, but we also think that with existing customers, the — all those products that we come out with, its more available for them to drive down TCO and get the output they need. So it’s winning on both sides, new logo as well as up-flow processing.

Saket Kalia

Yes, absolutely. Maybe just a tactical point just on the expansion. I’ve had companies in the past year the size of that land gets bigger, but then that makes the net retention metric just maybe a little bit tougher to read. Talk to us a little bit about that and how you want us to think about that?

Burt Podbere

You’re thinking about it the right way. It’s a little bit of a noisy number because it could be somewhat misleading, right? We love when customers land bigger, right? And in our April webinar and seminar, we talked about the average number of modules that a customer will buy out of the gate is that new customers will buy 4.8 out of the gate. So if you’re landing bigger, you’re right, you might have some stress along the net new ARR, which isn’t necessarily a bad thing. Conversely, if you’ve got a lot of expansion in a given quarter, and you’re landing less, then the metric goes up. I appreciate both. Both of them work out for me. As long as it’s ARR, right? This is the idea. I said it many times. So we pay our sales on net new ARR. And we pay the same whether it’s on new or expansion. And I think that’s what we’re at the moment.

Saket Kalia

George calls the endpoint business here, right, valuable beach real estate, right, which I really love, right. And he called it that because it’s a critical enforcement point, as you know. I guess the question is, how does CrowdStrike sort of think about that business right now in terms of room for share gain and competitive dynamics? I mean I think I’ve had some folks that have sort of gone back and said, well, hey, they’ll look at historical marketers and say, well, the number one player here in 2013 never got to more than 15% or 20% market share, what other number was? Is that a relative lens? Look at the business here in your view?

Burt Podbere

Yes. So I’ll start with share first and then I’ll go back to how I think about where we can go. So for share, IDC came out and said we’re 18% of the modern import market. The legacy vendors are at 48%. Just on that alone, that’s a tremendous amount of room for us to grow, the new logo, right? Then you have 34% included in there would be the next time we’re also taking a trip. So there’s just a lot of room to go into new logos. We’re still, I call it maybe the second, right? We have so much to go. And then you’ve got the idea of is it the same in terms of apples-to-apples versus 10 years ago when, yes, you’re right, 25% was that high bar. And I go back to and I was talking about earlier just not that. I go back to the fact that in security, we’ve never seen a company that’s a true platform, where it’s not just about the next week mouse trap right, that’s going to be better than the last mouse trap. For us, it’s all about creating this data mode, creating visibility for us to help our customers hinder the breaches from the unknown on those. Never had that before. In the old days, it was significant, right? And what’s the secret base. That means if think about the flu shot, right, if you take a flu shot, you’re trying to protect yourself against the known flu bug, but there are variants not going to stop the variants. The same with the signature-based technology. If we know that there’s something bad, okay, but what about the variants. Yes. So the whole game has changed. When you’re able to actually stop the unknown that’s something wildly different has never been. And that’s why I think that when you think about trying to cap where we can go, it’s really difficult and then you think about a number of solid end points, we call it workloads. In the old days, we used to just try and figure it out through how many laptops there were or what have you. Well, then the cloud came, right? So the amount of workloads is virtually boundless, right? And so we stopped thinking about it in those terms. And so the market has dictated kind of where we can go. And that’s why you’re also seeing the TAM is going where they’re going. The expansion of TAM is huge, and a lot of it has to do with class. So when we think about it, we think that there’s this math opportunity for us. And we’re right down the middle of the fairway to be able to go after to go able to go out. That’s how we think about it.

Saket Kalia

Yes, absolutely. One of the — so thinking about outside of endpoint, I think, one of those modules, right, that have just grown in adoption ever since the acquisition has really been this identity module, which has been still adding to the business. And I feel appreciate the team has almost compared identity to EDR in terms of its potential breadth of usage, which is saying a heck of a thing, right, because EDR market is big. Why do you think Identity is doing so well? And how is it sort of adding to deal size?

Burt Podbere

So it’s a great question. I love the question. So identity. So I’ll tell you where we are, where we strategize identity and where we’re not — where we don’t play. So what we don’t play is the creation of the identity. That’s Microsoft. They’ll create the identity. We don’t play there. Then there’s the management of the identity. That’s the Oktas and the Pings, identity brokers. We don’t play there either. Where we do play is securing that identity. And so what does that mean? That means we are the ones who are looking where Identity is going, lateral movement with an integer. So for example if you, Saket, if you’re at your desk and somehow somebody is able to grab your credentials. And they log in as Saket. Well, we already know where Saket is going. And all of a sudden, if we see that Saket is trying to go into areas that he’s never gone before. Okay, for instance. And then if he’s trying to access files that are completely outside of finance, you might have a two-tier authentication to make it really impossible to come in. Even if somebody stole your , and that’s what our identity does. Today, the number of incidents that involve identity are greater than anything else. 80% of all instances are identity. Think about it, 80%. So this is why we think about identity. That’s pretty much as open as AV was way back in the day. I think the market size is the same. It’s not even bigger. And so the beauty of our identity problem is that it is we purchased the company, and we were able to take the technology and put it on our agent, right? So again, it goes back to 1.8 and it took really two years to get that out. It’s hard to smash these together, really, really hard. But we said we’re not going to do it in two. So now fast forward, not only is identity in offering, but it’s an offering in our complete offering because our managed service. So now you can buy the original managed service, which had a bunch of different applications and you can add identity to it, all seamlessly, all in the process of a big red line. So that’s why we think identity has so much potential. And we stated not last quarter but the quarter before, a million dollar range, going around 20%. In different times. That’s an IPO in and of itself.

Saket Kalia

Right. I mean you mentioned how identities including the complete solution. So I mean from a deal size perspective, identity is a pretty nice add well, right?

Burt Podbere

Absolutely. It’s meaningful customers. I think every customer should of ours should have that module, only 9% do. So we’ve got not only going after new logo for identity, we’ve got a long way to go in terms of helping customers think through purchasing identity and our last dated customer count was over 29%.

Saket Kalia

29%. That’s got a lot of room. I’d love to shift to another opportunity that was just still front and center at the Falcon conference, right, which you tell George and the team were excited about, and that is really disrupting the SIM market. And maybe just to give you another comparison. I mean, I think George compared them to the likes of legacy AV, right, with just recent M&A in the space. So maybe the question for you, Burt, is what are you seeing in terms of, of course, the competitive product here is or the product we’re competing with this Logscale. What are you seeing in the Logscale activity? And do you feel appreciate you have the go-to-market investments ready to really drive more pipeline?

Burt Podbere

Yes, that’s a good question. George, is very proud of that acquisition. We did that about two years ago, it provided logging as well as XDR, on the basis of our XDR platform. So it was a great acquisition for us. Again, we took our time to evolve it and make sure it was ready to go to market. So a couple of things, there. One, when we bought it, the reason we were interested in going into that space was twofold. One, there was a tremendous amount of dissatisfaction from customers with that all. And a lot of it wasn’t necessarily the tech, but it could have been related to pricing, packaging. And so there was just a tremendous amount of factor. And we thought there was an opportunity to go into that market and fulfill our customers. And then two, we thought there was a better way. We thought there was a way to buy some technology. We looked at a lot of different technologies. And in this notion of an index free type of technology where you can query and you get back your answer in fact what you were able to do with the legacy SIMs was important to us. So we decided to buy it. It took us a while to, not a while, it took us a standard amount of time to go and smash agents and everything together, but we came out with it today. We announced that business [Technical Difficulty]. So we have been in that. We have been saying, hey, this is a team, and this is a product that can really take off We all kind of know TAM appreciate you left because there’s no really identity player out there is what we do. Go ahead.

Unidentified Analyst

Question on the [Technical Difficulty] for the back end for EDR. And how does the Cisco acquisition kind of impact that relationship? Does that speed up you advance into a single data lake or through those two?

Burt Podbere

You read my mind. I was just getting there. So some good questions there. So for us to be super clear, we use very, very, very limited capacity on the observation. That’s it. It’s not really kind of a program that we use for. On the other hand, that will be part of our data. That’s going to be the XDR takes over for everything else. It’s obviously first-party ingestion as well as third-party ingestion. That’s the key for us. Today, for our customers, they’re getting free first-party ingestion, right? So when we announced that our user forums and all customers who are on the Falcon platform are getting first-party ingestion as part of offering, no extra charge. That’s a big deal. They’ll be paying for third-party ingestion, and that’s based on the number of connectivity, connections they have because there’s a lot of areas where you can pull data from. So we’ve got to build all the connections that and we’ve done a really good job in terms of number. So that’s how we think about the SIM, and you talked about the acquisition. I consider that acquisition all right for us. It’s going to take a while for that to unrattle and to be integrated into Cisco. And I think that to do it at that scale is really, really important.

Unidentified Analyst

[Technical Difficulty]

Burt Podbere

It’s included. That’s the XDR piece. So for us, that acquisition was, as I said, for us, there’s a lot of disruption, a lot of — we’ve gotten two things. A lot of customers coming over and saying, well, we actually want to be part of the platform, right. And number two is we’re getting a lot of resumes. A lot of folks want to come over to us from Splunk. And that’s a good thing, right? So that’s what I think, that’s what George is really excited about.

Saket Kalia

Yes. Yes, absolutely. I want to tie — thanks for the question, by the way. I want to tie some of this back to — going back to Falcon. I think a really big point, right, which is — as I think about — a lot of these businesses sort of contribute to a long-term target of $10 billion in ARR. Maybe first of all, can you just remind us what you said the timing, right, of that ARR target? And then secondly, we’ve talked about log sales. We talked about the identity, we put the cloud on CNAPP as well. If I call these sort of these platform businesses, how much can these platform businesses sort of contribute part of that $10 billion? Sorry, a lot there. Does that make sense?

Burt Podbere

Yeah, I got it. But thanks. So, yes, at Falcon, we were talking about $10 billion sort of an illustrative view. And then advocate illustration about how do we get there, right? So in some of those businesses so cloud, we see cloud something that they can make, because there’s no one out there. We’re taking just share, greenfield for us. We believe that can be a $2 billion to $3 billion business — in that same time frame, we gave to $10 billion, which is five to seven years. When you think about Identity and LogScale, we thought about those businesses being in the $1 million to $1.5 billion. So that’s how we thought about it. And then I also gave an illustration of some of the modules that we have in, whether it’s NextGen, Falcon, OverWatch. So we kind of laid it out, right? And for us, we think that today, there are three businesses that can likely IPO in a different market. We talked about one identity, cloud could be another one. with our product to cloud and then LogScale. Not today, maybe 25, you can ask the other question. But that’s — all of those have a potential to be really good big. And we haven’t even talked about some of the newer modules that we announced at Falcon, which can be equally a bit. So there’s a tremendous amount of upside in terms of product offering. And then you go in to go to market, and I think we have some potential also in the international space, so anyway a lot there.

Saket Kalia

Yes, absolutely. One of the things, I think we were — personally I was so enthralled with the $10 billion target. One of the things that I think was really interesting was just taking some of those numbers, the diversification of the business as you sort of see it down the road. I mean it’s basically 50%, roughly round numbers, 50% coming from those kind of platform business and the other 50% sort of coming from endpoint, that’s very powerful. That’s interesting. That’s the risk.

Burt Podbere

So today, though, when — so there was an evolution, I think I mean we came out to disrupt the AV market, we think we were successful there and we were known as an endpoint company. And then we added more and more technologies and we continue that growth and expansion of how people think about us to a true security platform. And today, it’s another evolution, which is adjacencies to security as well. So it’s really becoming more of the security platform. And that allows for the diversification, right? And who wins? The customer, because all of a sudden, they’re going to be able to exchange some of the legacy stuff, whatever it is that they’re using with us, because it is leading edge and not only a leading edge, but when you combine all the different technologies together, we’re lowering the customers more because of the functionality, less cost. Sounds appreciate that old commercial taste great.

Saket Kalia

Absolutely. I want to touch on a topic very near and dear to all of us, right, which is the 30% free cash flow margins, right? So not only have we grown and diverse it, we’re doing it very profitably, right? One of the questions in billings is just such a big contributor to cash flow. I want to make sure we just asked a question here in a public forum. We don’t handle the business billings, right? I think you said that ever since the IPO, right? We measure ARR. But as we think back to last quarter, was there anything that you want us to consider when thinking about the billings growth, a lot of folks look at billings growth and ARR growth don’t always align, right? Is there anything that you want us to kind of think about what that metric maybe last quarter, sounds great, open-ended question?

Burt Podbere

And so thanks for bringing it up. So billings, as you said, that’s not how we run the business. So billings, some other companies, typically, you see hardware companies where they don’t disclose bookings, they’ll use billings as a proxy, not us. We use ARR as we talked about. But billing does have an impact on cash flow, for sure. So billings can be — billings could be impacted by many things. Duration for example, payment terms that we give to our customers and appreciate this we might have certain customers that we have flexible billing programs with. And so all that can be impacted in terms of how the billings number comes out. And for us, whether it was billings or calculated billings, short-term, long-term RPO, they’re all up year-over-year, right? So we do look at it, right? And I do look at with my team from a cash flow perspective. But I always go back to, hey, look, for example with you for the year, for fiscal year four, you’re talking about 30% of free cash flow, right? We’ve done all our calculations currently, and that’s — that’s what we were comfortable about disclosing to everybody. And regardless of — there’s not enough moving that happens internally to advance that mile, right? That’s how I think about it.

Saket Kalia

Right. I want to continue on this cash line of question, but maybe before we do that, any questions here from the audience? Maybe on a related point, just given the cash flow generation, great thing to say here this next range, I mean, CrowdStrike built up over $3 billion in cash, right? I mean, maybe strategically, how do you — how do we think about capital allocation, right? Or maybe just the packing order, right, of uses of cash, whether that’s M&A, whether that’s share buyback, how does the company think about that?

Burt Podbere

Yes, it’s a great question. So for us, we’re really proud of the fact that we’ve got a really strong balance sheet and we want to put it to work, right? And what do I mean by that M&A. M&A is something that we’ve had success with. We’ve talked about a few of them. There’s going to be more technologies out there where it makes sense for us to purchase as opposed to build. And we’ll do that. And I’m looking forward to the years to come as we I expect that more companies — more technologies are going to come out that are going to be really suitable for our platform. The cash enables us to do it, right? Cash right now is king, right? So as valuations of private companies come down a little bit and a little bit of that makes it more attractive for us. And so cash is one area that we can leverage to be able to acquire companies. And that’s the overall thinking. From the CFO, I work really tightly with our DevOps, sorry, our corporate Dev team, who you know and they’re quite good. We’ve had success with M&A. We’re going to continue that strategy. Generally, it’s, good tech to people right? ARR is not really part of that equation, and it’s worked, right? It’s — you’re seeing companies out there that are able to buy good tech to good people, put it on their distribution and off you go, right? It’s Bionic, right? That’s right. We’re excited about Bionic, our latest acquisition that’s in the cloud application space. We already had technology in the cloud that protected the infrastructure, thinking about that as the house. And Bionic was the technology that we use to protect in the house. The chairs, TV sets, the entertainment units. So we’re really excited to be able to bringing to market those two things together, which is a big deal. Those are the two things by far outweigh anything else is in the cloud.

Saket Kalia

Absolutely. Maybe last question here in a couple of minutes that we’ve got. I guess the macro backdrop is something that’s impacted all my coverage companies, whether security and the appreciate. And so maybe the question for you here is, and I think we just finished up our Q3. What’s your latest thinking on the macro backdrop as you think about strategize for next year? And is there anything that you learned this year through this kind of years tough macro that you want to keep in mind for next year. Similarly, open-ended question.

Burt Podbere

Yes. That’s a good one. So for us, the assumption is that the macro isn’t going to get any better. That’s it. Whether it does or not, I don’t know. You guys pick. Some people say it’s going to be a soft landing. Some people say it’s a hard landing. Who knows? I don’t have the crystal ball for that one. Having said that, there were learnings this year, right? A big one that it’s not really learning if you really have to do better, which was get in front of those deals faster. That’s one. Also dealing with people appreciate me, right? The CFO knows. It’s hard, right? So the sales team is smart. They try to leverage myself in terms of to reach out, other CFOs and try to turn those CFOs into CFO. Yes, CrowdStrike is the right answer for you. Here’s the ROI. Here’s why. It’s a very different conversation CFO to CFO versus CFO versus salesperson. It’s a very different conversation. And so I do get a lot involved in quite a few as you know, yes. And so for me and for the team, those are taking. And I’m trying to train the sales team by not only just me talking, but I’ll bring in other CFOs, you have one here at your conference, Kelly from Zoom. We invited her to [indiscernible] to talk to the sales team about how she thinks about purchasing different technology. And what she thinks about in terms of how do we approach a CFO. So not just my words, but words from a customer as well as from a CFO that I deeply respect.

Saket Kalia

Excellent. Well, so much more fun things to talk about with CrowdStrike, but we’re going to have to end it there. Burt, CrowdStrike team, thanks so much for the time. Really appreciate it. Thanks.

Burt Podbere

Thank you, Saket. As always. Thank you.