CrowdStrike Seeks $100 Million U.S. IPO

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About: CrowdStrike Holdings (CRWD), Includes: BB, CARB, CBLK, FEYE, PANW, SYMC
by: Donovan Jones
Summary

CrowdStrike has filed to raise $100 million in an IPO, although the final amount may differ.

The firm provides endpoint security software and services to enterprises.

CRWD is growing revenue and gross profit rapidly; it has a high and accelerating net dollar-based retention rate.

However, the firm is still producing heavy losses.

Quick Take

CrowdStrike Holdings (OTC:CRWD) has filed to raise gross proceeds of $100 million from a U.S. IPO, according to an S-1 registration statement.

The firm provides AI-powered cloud endpoint security services to enterprises.

CRWD is growing rapidly and has produced impressive metrics, although the firm has not turned toward profitability.

Company & Technology

Sunnyvale, California-based CrowdStrike was founded in 2011 to provide cloud-based endpoint security solutions that protect virtual, on-premise, and cloud environments on a variety of endpoints, including desktops, servers, laptops, Internet of Things [IoT] devices, and virtual machines.

Management is headed by Co-Founder, Director, and CEO George Kurtz, who has previously served in various positions at McAfee, including WW Chief Technology Officer and EVP.

CrowdStrike has developed the Falcon platform that enables the company to provide cloud subscription-based endpoint security services.

Below is a brief overview video of the Falcon platform’s offerings:

Source: CrowdStrike

The platform works by tightly integrating CRWD’s intelligent lightweight agent and a ‘cloud-based, dynamic graph database’ named Threat Graph.

The intelligent light agent’s task is to offloads computationally-intensive tasks to the cloud while keeping detection and prevention capabilities local as they are necessary on the endpoint.

Using AI algorithms and graph analytics to the data streamed from endpoints, the Threat Graph technology continuously looks for malicious activity - it “processes, correlates, and analyzes over one trillion endpoint-related events per week in real time and maintains an index of these events for future use.”

Investors in CrowdStrike included March Capital Partners, Accel, CapitalG, Institutional Venture Partners, General Atlantic, InstantScale Ventures, Telstra Ventures, Cloud Apps Capital Partners, and Warburg Pincus among others. Source: Crunchbase

Customer Acquisition

The primarily markets its products through a direct sales team that leverages the company’s established network of channel partners to scale and maximize effectiveness.

CRWD recently announced a strategic technology and go-to-market partnership with Dell that would allow the tech giant’s customers to easily integrate the Falcon platform into their purchase of Dell hardware.

The company believes it also strengthens its market position through its ‘technology alliance partners’ that have permission to embed, deliver, or build applications with analytics and data from CrowdStrike’s Falcon platform.

Sales and marketing expenses as a percentage of revenue have been dropping significantly, per the table below:

Sales & Marketing

Expenses vs. Revenue

Period

Percentage

FYE Jan 31, 2019

69.1%

FYE Jan 31, 2018

87.8%

FYE Jan 31, 2017

101.9%

Sources: Company registration statement andIPO Edge

The sales efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales & marketing spend in the previous period, was a strong 1.3x in the most recent year, as shown in the table below:

Sales & Marketing

Efficiency Rate

Period

Multiple

FYE Jan 31, 2019

1.3

FYE Jan 31, 2018

1.2

Sources: Company registration statement and IPO Edge

Average Revenue per Customer has been uneven, per the table below:

Average Revenue Per

Customer

Period

ARPC

Variance

FYE Jan 31, 2019

$99,294

3.8%

FYE Jan 31, 2018

$95,614

-18.4%

FYE Jan 31, 2017

$117,211

Sources: Company registration statement andIPO Edge

CRWD has produced a high and growing dollar-based net revenue retention rate:

  • 2017: 104%
  • 2018: 119%
  • 2019: 147%

A 2019 rate of 147% is one of the highest net retention rates I’ve seen and indicates the company’s services are producing customer satisfaction and that the sales team is expanding its revenue share within the same cohort of customers.

Market & Competition

According to a 2019 market research report by Market Study Report, the global endpoint security market is projected to reach $7.5 billion by 2024, growing at a CAGR of 7% between 2017 and 2024.

”Endpoints are considered to be the weakest links in network security; hence, securing them plays a critical role in effectively strengthening the overall network.”

Additionally, growing in number and increasingly complex malware attacks force antivirus/antimalware solutions providers to constantly update their detection tools with the latest security patches.

Major competitors that provide or are developing endpoint security solutions include:

  • McAfee

  • Symantec Corporation (SYMC)

  • Cylance (BB)

  • Carbon Black (CBLK)

  • Palo Alto Networks (PANW)

  • FireEye (FEYE)

  • F-Secure (DTV.F)

  • Webroot (CARB)

Source: Sentieo

CrowdStrike believes its solution “benefits from crowdsourcing and economies of scale, which we[CRWD] believe enables our AI algorithms to be uniquely effective.”

Financial Performance

CrowdStrike’s recent financial results can be summarized as follows:

  • Strong topline revenue growth

  • Increasing gross profit and gross margin

  • Increasing operating losses

  • Decreasing cash used in operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

FYE Jan 31, 2019

$ 249,824,000

110.4%

FYE Jan 31, 2018

$ 118,752,000

125.1%

FYE Jan 31, 2017

$ 52,745,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

FYE Jan 31, 2019

$ 162,586,000

153.0%

FYE Jan 31, 2018

$ 64,266,000

243.0%

FYE Jan 31, 2017

$ 18,739,000

Gross Margin

Period

Gross Margin

FYE Jan 31, 2019

65.08%

FYE Jan 31, 2018

54.12%

FYE Jan 31, 2017

35.53%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

FYE Jan 31, 2019

$ (136,864,000)

-54.8%

FYE Jan 31, 2018

$ (131,440,000)

-110.7%

FYE Jan 31, 2017

$ (90,556,000)

-171.7%

Net Income (Loss)

Period

Net Income (Loss)

FYE Jan 31, 2019

$ (140,077,000)

FYE Jan 31, 2018

$ (141,343,000)

FYE Jan 31, 2017

$ (108,352,000)

Cash Flow From Operations

Period

Cash Flow From Operations

FYE Jan 31, 2019

$ (22,968,000)

FYE Jan 31, 2018

$ (58,766,000)

FYE Jan 31, 2017

$ (51,998,000)

Sources: Company registration statement and IPO Edge

As of January 31, 2019, the company had $191.7 million in cash and $358.6 million in total liabilities.

Free cash flow during the twelve months ended January 31, 2019, was a negative ($58.8 million).

IPO Details

CRWD intends to raise $100 million in gross proceeds from an IPO of its Class A common stock, not including customary underwriter options.

Class B shareholders will be entitled to ten votes per share vs. one vote per share for Class A shareholders.

This is a way for founders or existing investors to maintain voting control even after losing economic control.

The S&P 500 Index no longer admits firms with multiple share classes into its index.

Per the firm’s latest filing, it plans to use the net proceeds from the IPO as follows:

We currently intend to use the net proceeds we receive from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, research and development, general and administrative matters, and capital expenditures, although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions, products, or businesses that complement our business, although we have no present commitments or agreements to enter into any such acquisitions or investments.

Management’s presentation of the company roadshow isn’t available yet.

Listed underwriters of the IPO are Goldman Sachs, J.P. Morgan, BofA Merrill Lynch, Barclays, and 13 other firms.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.