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 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.

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. 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.

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 amidst the rapidly evolving macro. To achieve this, some customers signed contracts that have multi-phase subscription…

Thank you, George, and good afternoon, everyone. As a quick reminder, unless otherwise noted, all numbers, except revenue mentioned during my remarks today are non-GAAP. Before we get started, I will note that the results we are reporting today include the acquisition of Reposify, which was de minimis to revenue and ARR, contributing less than $1 million to Q3 ARR. In the quarter, ending ARR grew 54% year-over-year. Net new ARR grew 17% year-over-year to $198.1 million. Given the elongated sales cycles due to macro pressures in smaller non-enterprise accounts that George discussed, the composition of net new ARR in Q3 was weighted more heavily toward our $1 million-plus customer cohort with no outsized contribution from any one deal. Our dollar-based net retention rate was above our benchmark and consistent with Q2, maintaining the highest level since Q3 in fiscal 2021. Gross retention also maintained its record level, demonstrating our strong commitment to stopping the breach, delivering value to customers and restoring trust to the security posture of companies worldwide. As George mentioned, we are also seeing more customers standardize on the Falcon platform and adopt more modules. We believe these trends will create an enduring business opportunity for the years to come. Moving to the P&L. Total revenue grew 53% over Q3 of last year to reach $580.9 million. Subscription revenue grew 53% over Q3 of last year to reach $547.4 million. Professional services revenue was $33.5 million, setting a new record for the ninth consecutive quarter and representing 46% year-over-year growth. In terms of our geographic performance in Q3, we continue to see strong growth in the US at 46% and international revenue growth at 72% year-over-year. Third quarter total and subscription non-GAAP gross margins remained relatively consistent at 75% and 78%, respectively. Total non-GAAP operating expenses in…

Thank you. [Operator Instructions] And our first question comes from the line of Saket Kalia with Barclays.

Okay. Great. Hey, guys. Thanks for taking my questions here. A lot to unpack. George, maybe for you, I was wondering if you could dig just one level deeper into any competitive data that you've reviewed kind of looking back in the quarter. Do you feel like any big competitors here like Microsoft or perhaps even smaller next-gen competitors are having an impact? Burt, if I could squeeze a housekeeping question in as well. Clearly, ARR is the metric that you manage to. But maybe for everybody's benefit, can you also talk to how RPO and ARR growth might have different drivers?

Yes. Thanks, Saket. So again, if you look at what we've seen and what we've commented on, the inherent demand for our products remain strong. Obviously, there's an increase in the macro headwinds. We talked about some of the smaller customers having elongated sales cycles. We saw 11% increase in days to close. And those are delayed deals, not lost deals. And on the enterprise, again, we're seeing consistent win rates. They remain high. And in fact, in the smaller customers, we've actually seen them significantly improved quarter-over-quarter. So from our standpoint, and we look at this very closely, as you might imagine, the landscape remains favorable to us. I really don't see another true consolidator like Falcon. And customers are looking for technologies that reduce costs, reduce complexities, actually work and stop breaches, and that's what we're delivering. So again, when we look at the competitive landscape, it remains favorable to us. And as we pointed out, we saw increased macro headwinds, and that's what we talked about. So I'll turn it over to Burt.

Thanks, Saket. So first, big picture, when we think about CRPO, we think that as a noisy metric. And it's really not designed to match or correlate with ARR given the fact that ARR is a normalized annual number. And what do I mean by a noisy metric? Well, what I mean by that is there are several positive trends in our business that can create headwinds on duration relative to prior periods and not necessarily fully captured in CRPO. Some examples would include, for us, more one year deals compared to prior periods. In software, it's difficult for multiyear lands to renew as one year deals. And as renewals become a bigger portion of the business, which for us it is, this creates a headwind to CRPO. And given where we are with respect to our high gross retention rates, one year deals provide us the opportunity to expand within the customer to drive bigger bundles. Two, with the expansion and cross-sell sold co-terminus to existing contracts, these are often less than one year in duration. So our expansion business has been -- as our expansion business has been increasing, as evidenced by our net new retention rate, this would have pressure on our CRPO. And finally, on duration, we do have some usage-based deals. It could be MSSPs, the vast majority of MSSPs or uses based, and those are built monthly. And as MSSPs become a more rapidly growing part of our business, that's going to impact cRPO as well as noncommitted consumption billings in cloud. And then finally, just to comment on ARR. You pointed out that's how we run our business. ARR, though, is really an X-ray into the contracts themselves. And as we view that as the most important -- or most transparent metric into the outlook for our business, that's the one where we're focused on. So, hopefully, that gives some more clarity on how we think about cRPO and ARR.

Thank you. And our next question comes from the line of Rob Owens with Piper Sandler.

Good afternoon. Thanks for taking my question. Wondering if you guys could compare and contrast what you saw domestically versus internationally. And a little surprising to see international actually strengthen based on growth rates and the US fall off. So if you could provide a little clarity there, that'd be great. Thanks.

Hey, Rob, this is Burt. Thanks for the question. So, in general, we saw the macro hit all the geos. But as we think about our split between United States and internationally, obviously, the United States is the biggest portion overall of our business. So any impact to ARR will generally be driven from that sector.

Thank you. One moment, please. And our next question comes from the line of Sterling Auty with MoffettNathanson.

Yes. Hi, guys. And thank you for the extra commentary on macro and next year, in particular. My question is really, how do you think about those macro headwinds manifesting themselves in terms of net dollar retention or expansion rates versus the growth rate in new customers? Is one side going to be more particularly hit versus the other as it unfolds over the next several quarters?

Thanks, Sterling. So, for us, the good news is that we have a very healthy installed base. And we feel that we've got great opportunities in that traditional land-and-expand model. And we saw that in the ratios that we saw. Having said that, we still feel that there's a tremendous opportunity in new logos. We think that the opportunity for us to go and capture some of those new logos really has that -- goes to our model that we started and talked about since day one. So today, we still think about tremendous opportunity in the land-and-expand model, as evidenced by our dollar-based net retention rates, but also in terms of the net new logos that we have the opportunity to go capture. We talk about the TAMs that we've seen ever increasing from IDC and the fact that we've just been able to add new modules at a nice clip. We feel that we have a great opportunity to go after those new logos as well.

Thank you. And our next question comes from the line of Joel Fishbein with Truist.

Hi. Thanks for taking my question. George, you bought Reposify, external tax service management. A lot of customers were talking about it positively at the Analyst Day, or the user conference. Love to hear -- you said, this is going to be launched this year. Wanted to see if there's any initial indication of interest there. And how do you think that'll trail or attract in terms of demand?

Yes. We've seen tremendous interest since the acquisition. We announced that at Fal.Con. Customers are looking to understand their exposures externally. And as they move more and more to the cloud, a lot of their exposures are really configuration and policy-driven. So it's a fantastic add for us. It fits very nicely within our platform. It ties into what we're doing on the vulnerability management and risk side. And overall, we're really excited about it. And customers are not only looking at it for themselves, but also looking at it from a third-party risk perspective and leveraging it across their supply chain in terms of making sure that their suppliers are secure and not putting customers at risk. So, so far, very positive feedback and we're excited to get the product launched and bring it to market.

Thank you. And our next question comes from the line of Hamza Fodderwala with Morgan Stanley.

Hi. Good evening. Thanks for taking my question. George, a question for you. I think it's pretty clear that, the macro is going to impact pretty much every company, security not excluded from that. I'm curious how you're thinking about balancing sort of growth and profitability from here because on the one hand, clearly, growth has been slow for CrowdStrike and for everybody else. But on the other hand you've got this big market opportunity in front of you as an emerging consolidator in cybersecurity. Do you feel like this is a time to maybe continue to invest as maybe others are going to struggle more, they don't have that free cash flow generation that you do, or do you feel like this is a time to maybe show a little bit more leverage? Just curious, how you're thinking about that?

Well, great question, Hamza. And it's always been a balanced growth approach, and it's never been a growth at all costs. And I think we've shown that with our performance and track record. And we continue to play the long game. But if you put things into perspective, we're a Rule of 83 last quarter. I mean, you think about the growth and the cash flow generation at scale at $2 billion plus ARR is pretty remarkable. We actually see this as a great opportunity for CrowdStrike as we go forward as smaller competitors fall by the wayside, as private companies look for exits we think it's a very attractive opportunity for us with our balance sheet, almost $2.5 billion in cash. And at the end of the day, as these macro trends evolve, we see a great opportunity for us now into the future to continue to consolidate customers as well as other technologies that might fit within our platform. So that's the way we look at it, balanced investment and, again, a focus on making sure that we're delivering cash flow for our shareholders.

Thank you. And our next question comes from the line of Andrew Nowinski with Wells Fargo.

Great. Thank you for taking the question this afternoon. So total ARR of $2.3 billion, growing 54% is still absolutely amazing, I was – and it's at scale. But I was wondering, were you surprised that the net new logos that you added were down 9% this quarter?

Thanks, Andy. So when we think of the net new logos, it really corresponds to what we talked about in terms of what we saw in that SMB space. The SMB space is the one that drives the velocity of our net new logos. And as we talked about, we saw an 11% increase in our sales cycle in the SMB space. And that actually equated into $15 million in terms of deals in that space that could push out. And so when you think about 15 million in that space and what it means in terms of logos, where you can do the math, it's a pretty big number. So that's how we think about net new logos corresponding to what we saw in net new ARR from the SMB space. So from that perspective, we weren't surprised at the end of the day when we saw that what happened with respect to the increased sales cycles and the amount of money that got pushed out in the SMB space.

Thank you. And our next question comes from the line of Jonathan Ho with William Blair.

Jonathan, are you there? Operator, maybe we can move to the next question.

Certainly. And our next question comes from the line of Matt Hedberg with RBC Capital Markets.

Great. Thanks for taking my question. George, for you. You've obviously been running -- you've been in sort of the security industry for a long time. When you see macro headwinds like this pop up, are there things that you all can do from a sales perspective to accelerate cycles, like going at customers sooner than you'd normally do? Just anything tactically that you do in times like this? And has anything changed competitively in the assets kind of the smaller side of the business that you play in?

Sure. So let me take the latter question first. As I mentioned, we actually saw our win rates go up in the down-market SMB space. So I think we continue to do well there. And as Burt talked about, deals getting pushed out from that segment, we saw the impact of that. But when we think about what we can do and what we continue to focus on, obviously, execution is really important to us. And getting ahead of the lengthy sales cycles that you see like in the enterprise with all the various approvals and legal that you have to go through compliance, privacy, and it's just making sure that you have all of those checked off to try to fit the deals in the kind of a normal cycle that you would expect. And it just -- it takes more work and effort, and we continue to focus on full reviews of the pipeline and making sure that we're working with not only our internal sales teams, but also our partners in leveraging that vast partner network that we have. And that's been the focus. So again, as you pointed out, I've been through multiple sales cycles, economic cycles, if you will, in security. And as I said in an earlier question, I do think it's a great opportunity long-term as we push through the macro headwinds.

Thank you. And our next question comes from the line of Tal Liani with Bank of America.

Hi. I hope for better news today after the win in soccer, but it's okay. We'll take what you have. I want to ask about budgets. So we're working off 2022 budgets now, and we see lengthening sales cycle in the low end of the market. The question is as we go into 2023 and the new budgets are set, which is around January, what's the risk that we're going to see similar behavior or larger companies work off budgets and are less sensitive to kind of quarterly fluctuations? And if you don't mind, just to touch on, no one asked about pricing and about quarter linearity, which are two important trends? Thanks.

Yes. Sure. I'll take the first part of that. When we think about budgets, again, all the feedback that we've seen is that budgets are not in the enterprise getting cut. There's so many mandates around security. And just as customers move to the cloud, what they are looking to do, though, is optimize that spend and consolidate. So they may not be spending as much money with a whole bunch of vendors, and they're looking to consolidate with companies like CrowdStrike. We spent a lot of time on selling the value. And when we think about this, and we talked about this in the past, Tal, is the consolidation of agents. It's a huge pain point for customers, the complexity of the cost. So all the conversations that I'm having with CEO, all the way down, has been around how do we help consolidate the cost, because they're going to spend the money, they'd rather spend it with fewer vendors, and how do they get a better outcome. And that's, I think, where CrowdStrike shines. And in some cases, that may take a little extra work, because we're upsizing some deals, and we've got to go through more approvals and go through more of the value selling. But again, that's what we're focused on. So, obviously, we'll monitor the environment and see if there's any changes. But in all the conversations that I've had, security remains still top of mind and top of budget for enterprise customers.

I'll take the second part, Tal. So, first, on pricing, what I can comment on is that a couple of things. So one is, we see that discounting is consistent with Q2. We didn't see any change there. There were no additional escalations, to George and I, for outsized discounting on deals. Number two is, we've seen ASPs be consistent. So -- and that drives the point home about just our overall platform play and our ability to sell value. And I think that enterprise sales cycles increased a bit in Q2, and Q3 was consistent with that level. So I think that, when you think about linearity, to the second part of your question, I think that's how I think about that. We did talk about on -- for pricing anyway. When we do talk about net new ARR, I did talk about in the prepared remarks about how we think about up to 10% headwinds going into Q4 from Q3, and that's just to coincide with some of the headwind activity that we saw accelerated at the end of this quarter. So that's how we think about that.

Thank you. And our next question comes from the line of John DiFucci with Guggenheim.

Thanks for taking my question. You said in the prepared remarks -- you talked about large customers pursuing multiphase subscriptions. Just maybe if we can dig into that a little bit. How long do you expect that ramp period to be? And do you have commitments for the ramp parts of the deal or just verbal intentions?

Thanks, John. So I'll take the second part first. So we do have commitments from those deals. They're signed deals. Just that when we think about structure, we have this phase start date with respect to the subscriptions. So that's how we think about those multiphase deals. And then, I think that, when we think about those multiphase deals and the patterns that we've seen, I think that we're going to see something consistent with what we've seen in Q3. I think that more of those larger enterprise deals, they're going to sign those deals. They're going to look at their budgets. So they're going to look at their OpEx, and they're going to say, okay, well, this makes sense if we turn it on at this point, which could be a date post the quarter end. But the deals then -- I think the most important part about your question is that, the deals are locked in, and that's what we saw in Q3, and we anticipate that in Q4.

Thank you. And our next question comes from the line of Brad Zelnick with Deutsche Bank.

Well, great. Thank you so much for fitting me in, guys. Burt, your comment saying that you expect no budget flush this Q4 is like telling a kid Santa Claus isn't coming for Christmas. And I think you guys are the only ones explicitly saying this, and I'm guessing it's because you're being more prudent and maybe more transparent than others. But I'm also wondering how much of it is pipeline versus conversion rate assumptions that inform your perspective. And I guess, maybe asked a little bit differently, how is your forecast methodology adapting to the environment and the assumptions that you're inputting into it in Q4? Thanks.

Yeah. So really, I want to attack that question from the standpoint of – it starts from the fact that, we did see record pipeline again going into the quarter. So I think it goes back to what we've seen this quarter both on the SMB and in the enterprise space. I think we're going to see the consistent themes that the macro is driving. I think we're going to see the SMB space. We're going to see deals continue to be pushed out. And on the enterprise, we're going to see more multiphase deals. So that's how I think about the quarter. And I guess the one thing that I want to add is that it is important that we are continuing to drive top of the funnel. And we've got a lot of programs that are focused in on that, and it's just going to be one of those things that we have to just overcome the macro.

Thank you. And our next question comes from the line of Fatima Boolani with Citi.

Good afternoon. Thank you for taking my questions. Burt, to your prepared commentary around some of the flexibility that you're introducing with respect to contract negotiations, particularly on the invoicing front, wondering if you can share a little bit more detail with respect to how some of those engagements are becoming more flexible and sort of the implications on collections activity. I can appreciate you shared preliminary fiscal 2024 guidance with us on a number of those fronts, but just to get a little bit more detail as to how some of these changes in business activity behavior from customers is influencing how you're doing negotiations? And on a related matter, as the business does become more and more renewal, does some of the leverage in the model start coming from maybe changed incentives to your sales team around renewal business maybe getting a lower threshold of quota payment versus net new business, which is clearly becoming a little bit more challenging to do in this environment? Thank you.

Fatima, good questions. So I'll take them both. So with respect to structure, there are two things that come to mind. One is obviously on the enterprise deals and the phased subscription start dates that will obviously impact billings and cash. The second one is flexibility on when those payments become due. So we're working with our customers to meet their budgets, to meet their time lines, and we've been flexible with respect to that. And of course, that will have an impact on cash as well. But overall, I still see – because of our business model and our strong business model and consistent Visma hasn't changed. I think that we've got this great opportunity to be comfortable in terms of what I talked about on the prepared remarks. And from a cash flow standpoint, we see a path to 30% free cash flow margin next year. And I think that just goes back to the strength of the model and the fact that we've got this business that is really durable. And with respect to how I see the big picture, I think that the things that we're doing with respect to structure really talks to the partnering with respect to our customers. And that was well appreciated well back in the – when the pandemic forfeit. It's being appreciated now in a macro with the headwinds that we all have. So, we think we're still very excited about the opportunity to be able to partner with our customers. And then second, with respect to how we think about compensating our sales team and in light of our renewal business becoming larger and larger, I think that the good news there is that when you think about renewal business, the actual cost that it is to continue to generate net new ARR from an existing client is definitely lower than to go out -- with respect to going out and getting a new logo. So I think there is some leverage to that. So that's why I think that we're in a really good spot with respect to me talking about leverage for next year. But thanks for the question.

Thank you. And our next question comes from the line of Alex Henderson with Needham & Company.

Great. Thanks. I was hoping if we could talk a little bit about the cloud segment of the market not necessarily in terms of your rate of growth per se, but rather what you're seeing in terms of company's willingness to accelerate or decelerate their progression to the cloud workloads. And within that context, what kind of share do you think you're picking up, or are you gaining share in that -- in those workloads that are moving? Thanks.

Yes. Thanks. Obviously, customers are going to flex what they put in the cloud, and sort of the cloud growth is what it is in terms of the macro cloud growth. In terms of what we see in our cloud workload protection, we continue to win in those areas. We win because we've got a combination of both workload protection as well as cloud security posture management and a full suite of protection capabilities. And we have more and more customers that continue to leverage our technologies as they migrate to the cloud. So they're still migrating to the cloud. They're leveraging our technologies as it's all integrated. And in terms of our cloud workload protection across the board, it's certainly been very, very strong. So that's what we've seen in our business. And obviously, there's a broader cloud theme in the environment, and customers are going to choose when and how they migrate. But we are there for them, and we continue to win in those environments.

Thank you. And our next question comes from the line of comes from the line of Roger Boyd with UBS.

Great. Thanks for taking my questions. Burt, just to follow-up on multi-phase subscription start dates. I just want to unpack the behavior there a little bit. It sounds like it's mostly a cash flow consideration by customers, but are there any other factors driving this behavior, whether it's resource constraints, timing of road maps or just practice more care on aligning the end and then start dates of third-party solutions being consolidated on the Falcon platform? And just a follow-up. I think you mentioned that these are confirmed deals. So I just want to make sure that that is showing up. Those deals are showing up in RPO. Thanks.

Yes. Thanks, Roger. So to answer your -- the first part of your question, so I think the biggest driver is that OpEx. They're looking at starting those subscription dates at staggered times, what makes sense for them. They've got to align their resources on their end and making sure that they have the right folks looking at it. And I think for us, the good news is that those deals are confirmed. They are locked in. We signed the deal. Some might be deployed now, some might be later. And they will be in the RPO calculations. Thanks for the question.

Thank you. And our next question comes from the line of Joe Gallo with Jefferies.

Hey, guys. Really appreciate the question. George, appreciate your comments on F 3Q and 4Q macro. Based on your conversations with customers, what is their view on 2023 cyber budgets as they start to think about them? Are they expecting near-term alleviation with a quick Band-Aid rip-off, or is this more of a long-term new normal that we might see for the next year or so?

Well, as I mentioned earlier, we haven't seen any customers come back and say, hey, our budgets are cut next year. We just haven't seen it. And as I mentioned, they're looking to consolidate. They're obviously looking to deploy those resources wisely and do it with fewer vendors and get better outcomes. So, again, that's an area where I think we have tremendous strength. But nothing in my conversations -- and as you might imagine, I talked to a lot of customers all over the globe and prospects. Nothing has come back that said they're spending less on security next year. They're deploying to the cloud. They're adding capabilities. There is a whole slew of compliance requirements that are coming in around the globe that will drive additional spend. And, again, they want to do it in a way that they get the most bang for their buck in a consolidated fashion. And that's exactly what we've seen, and we haven't seen anything to deviate from that.

Thank you. And that concludes our question-and-answer session. I would now like to turn the call back over to George Kurtz for any closing remarks.

I wanted to thank all of you today for your time, and we certainly appreciate your interest and look forward to seeing you at our upcoming investor events. Thank you, and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.