CrowdStrike, a leading player in the cybersecurity industry, recently took center stage at Citi's 2024 Global TMT Conference. The company's Chief Financial Officer, Burt Podbere, engaged in an insightful conversation with Fatima Boolani, providing a comprehensive update on CrowdStrike's current position, recent challenges, and strategic initiatives. This post delves into the key takeaways from the conference, offering a detailed analysis of CrowdStrike's response to recent incidents, its innovative customer engagement strategies, and its ambitious plans for future growth.
The Incident: Response and Recovery
One of the most pressing topics addressed during the conference was CrowdStrike's response to a recent outage incident. Podbere provided a candid account of the company's actions in the immediate aftermath and the ongoing efforts to rebuild customer trust.
Immediate Response
In the wake of the incident, CrowdStrike prioritized transparency and accountability. The company swiftly mobilized its resources to get affected customers back online. Podbere emphasized the importance of taking ownership of the situation, noting that this approach was crucial in maintaining long-term customer relationships.
"We did, I think, the best we could in terms of coming out and being transparent about it, taking ownership. And I think that went a long way with respect to customers, certainly in the long term."
Giro Lino
Root Cause Analysis and Remediation
CrowdStrike conducted a thorough root cause analysis (RCA) to identify the source of the problem. The issue stemmed from a configuration change, not a code alteration. Specifically, a set of 21 policy changes were validated individually, but when sent to the agent, which was expecting only 20, it resulted in system failures.
"It was absolutely a configuration change, not a code change. Configuration is just another word for a policy change. And so what happened was there was a validation of all the policy changes in -- 21. There were 21 of those and each one of them was validated for logic and everything else, and they all passed individually. However, when the 21 were sent to the agent, the agent was only expecting 20 and so it didn't know how to handle the 21st and that's what brought the blue screens."
In response, CrowdStrike implemented more rigorous processes for configuration changes, mirroring the stringent procedures already in place for software updates. This includes giving customers more control over when to apply configuration updates, enhancing overall system resilience.
Customer Impact and Business Continuity
Despite the challenges posed by the incident, CrowdStrike demonstrated remarkable resilience in its business operations. Podbere revealed that the company still achieved 11% growth in net new Annual Recurring Revenue (ARR) for the quarter ending July 31, even though the incident occurred on July 19. This performance underscores the company's ability to maintain business momentum in the face of adversity.
"We gave out a number of $60 million of deals that we had targeted to closing the quarter that got delayed for future quarters. And so it would have been -- the number that we would have posted would have been beyond what we had disclosed at the end of the quarter, right?"
However, the incident did have some impact on the company's financial outlook. CrowdStrike disclosed that approximately $60 million worth of deals targeted for closing in the quarter were delayed to future quarters due to the incident.
Customer Commitment Package (CCP): A Strategic Response
In response to the incident, CrowdStrike introduced a Customer Commitment Package (CCP), a multi-faceted initiative designed to reinforce customer relationships and demonstrate the company's dedication to its user base.
Key Features of the CCP
- Additional Products: Offering customers free access to additional CrowdStrike products for a specified period.
- Training Opportunities: Providing enhanced training resources to help customers maximize the value of CrowdStrike's solutions.
- Flexible Payment Terms: Adjusting payment schedules to accommodate customer needs.
- Extended Contract Durations: Offering longer contract terms to provide added value.
Podbere emphasized that the CCP is not a one-size-fits-all solution but rather a customizable framework tailored to each customer's specific needs and circumstances. This bespoke approach allows CrowdStrike to address individual customer concerns effectively while maintaining a structured program.
"It's not one-size-fits-all. But it's there as a tool for the sales team to start the dialogue. And that's what we're trying to achieve today, is start a dialogue, right? Let's move it away from all the heated discussions that we had in the first couple of weeks and move it into a business discussion as opposed to legal and everything else."
Financial Implications of the CCP
The introduction of the CCP has led to some short-term financial adjustments. CrowdStrike revised its revenue guidance downward by approximately $110 million, with $60 million directly attributed to the CCP. The remaining $50 million accounts for factors such as extended sales cycles and increased scrutiny from potential customers.
"On the ARR side, again, I tried to quantify it to the extent I can. I don't have the visibility that I had before the incident because we're doing all these new programs and I just don't know enough. But I estimated based on the number of customers I have, we try to generate how much each customer -- an average value type of thing."
Podbere acknowledged the challenge in providing precise visibility into the financial impact of the CCP, given its recent implementation and customizable nature. However, he expressed confidence that this strategic move would yield long-term benefits in customer retention and expansion.
Falcon Flex: The Future of Licensing
A significant portion of the conference discussion centered on CrowdStrike's innovative Falcon Flex licensing program, which Podbere described as "the future" of the company's go-to-market strategy.
Key Aspects of Falcon Flex
- Flexible Consumption: Customers can commit to a total contract value and then draw down on that commitment as needed, similar to a cafeteria-style approach.
- Mid-cycle Adoption: Allows customers to activate CrowdStrike products at any point during their contract, aligning with their budgetary cycles and existing vendor commitments.
- Reduced Friction: Eliminates the need for renegotiation when customers want to adopt additional CrowdStrike technologies.
- No Annual Minimums: Provides customers with the flexibility to allocate their spending across the contract duration without strict annual requirements.
"Think of Amazon and think of giving a commit and then being able to draw down on that commit like cafeteria-style. So they're able to -- the elegance in something like that is that the customers get to pick and choose what they want to use, when they want to use it, right?"
Strategic Benefits of Falcon Flex
Podbere highlighted how Falcon Flex serves as an ideal vehicle for implementing the Customer Commitment Package. By offering certain products at a $0 value for a limited time within the Flex framework, CrowdStrike can seed its customer base with additional products, potentially leading to increased adoption and revenue in subsequent contract periods.
"We want to seed our customer base and new customers with more products, right? We want to seed them to do that. And the easy way to do it is in a Flex licensing agreement where we've got a price list for each of the products. And two of them, because we're in negotiations, might have -- one of them might have a 0 [ net ] to it for a year."
This approach not only addresses immediate customer needs in light of the recent incident but also sets the stage for future growth. Podbere anticipates an acceleration in the back half of the next year as these introductory offers convert to paid subscriptions.
Competitive Landscape and Market Positioning
The conference provided insights into CrowdStrike's perspective on the competitive landscape and its strategic positioning in the cybersecurity market.
Technological Differentiation
Podbere emphasized CrowdStrike's technological advantages, citing positive assessments from industry analysts regarding the product's effectiveness, efficiency, manageability, and scalability. He noted that the company's integrated platform approach, with 28 different modules (up from 9 at the time of IPO), provides a compelling value proposition compared to solutions requiring multiple agents from different vendors.
"We have 28 different modules today. It's come a long way. And the beauty, believe it or not, not only the technology is going to help us get us there, Flex. The Flex licensing, the go-to-market is just as important as the technology in this case."
Response to Competitive Moves
Acknowledging that competitors have become more aggressive in their market approaches, Podbere framed CrowdStrike's CCP and Flex initiatives as both offensive and defensive strategies. These programs allow CrowdStrike to compete effectively on pricing and flexibility while leveraging its technological strengths.
"There's been a very wide variety of responses from some of our competitors. Some are jumping on it in a very awkward way and some are taking a different road and working with us, and it's a bigger industry problem we're solving."
Market Opportunity
Despite recent challenges, Podbere reaffirmed the significant market opportunity for CrowdStrike. He noted that approximately 50% of the market still relies on legacy technologies, presenting a substantial addressable market for CrowdStrike's modern cybersecurity solutions.
"We still think we have this opportunity to go after and procure new business, new logos as well as all the things we talked about in terms of the CCP to give our current base excitement to continue with us, to stay with us."
Financial Outlook and Long-Term Goals
Throughout the conference, Podbere provided insights into CrowdStrike's financial performance and long-term objectives.
Short-Term Impact
While acknowledging the short-term financial impact of the incident and subsequent CCP implementation, Podbere expressed confidence in the company's fundamental business model and unit economics. He noted that these strong foundations provide the flexibility to navigate current challenges while investing in future growth.
"The good news is we've built a really strong model with strong unit economics. And so we have some degree of opportunity to move those along the way we need to in the short term, and we've talked about that."
Mid-Term Expectations
Podbere anticipates a reacceleration of business growth in the back half of the next year. This projection is based on the expected positive outcomes of the CCP and Flex licensing programs, as well as the natural lifecycle of customer engagements initiated during this period.
"Midterm, it really all goes back to the fact that we're going to -- we plan on reaccelerating the business in the back half of next year. And then a lot of the good things happen with that, right? You get back to unit economics that drive margin back to the way they were."
Long-Term Targets
CrowdStrike maintains its long-term goal of achieving $10 billion in Annual Recurring Revenue (ARR) by the end of 2031. Podbere expressed optimism about reaching this target, potentially even accelerating the timeline if certain emerging technologies outperform expectations.
"When you look at the long term in terms of our target models, the $10 billion that we've put out there, we kept it within the range at the end of 2031, that's when we're going to achieve the $10 billion in ARR. We didn't change that range."
Key Growth Drivers
Several product areas were highlighted as potential significant contributors to future growth:
- Identity Protection: Already demonstrating strong performance and market traction.
- Next-Generation SIEM (Security Information and Event Management): Representing a substantial market opportunity.
- Cloud Security: Identified as a critical battleground with significant growth potential, leveraging CrowdStrike's unique position offering both agent-based and agentless solutions.
"I think there's a bunch of different acts that can get us there. People talk about second act, third -- I think we had 5 different acts, right? Identity could be one of them, Next-Gen SIEM. Cloud could be really big, right?"
Emerging Products and Innovation
Podbere noted that emerging products, including those acquired through M&A activities, are expected to play a crucial role in driving future growth. He emphasized CrowdStrike's commitment to continuous innovation, driven by customer feedback and market demands.
"The reason we've been successful is we listen to our customers and tell us, 'Hey, you should have this.' And we're going, 'Okay, we're going to build that.' And so we've been really, really good and on point in that."
The Role of Falcon Flex in Long-Term Growth
Podbere drew parallels between the potential impact of Falcon Flex and the success of CrowdStrike's Complete offering (managed services). He envisions Flex becoming ubiquitous across the customer base, facilitating easier adoption of new products and fostering longer-term commitments from customers.
"Flex is the future. 100%. My goal is to have every customer on Flex. It's better for our customers, right? And then it's good for us because we get this long-term commitment."
Operational Focus and Investment Priorities
The conference provided insights into CrowdStrike's operational focus and investment priorities as it navigates current challenges and prepares for future growth.
Continued R&D Investment
Despite short-term margin pressures, Podbere emphasized CrowdStrike's commitment to maintaining robust investment in research and development. This focus on innovation is seen as critical to maintaining the company's technological edge and addressing evolving customer needs.
"We're not cutting to save a penny on the stuff because that's the bloodline of our business..."
Customer Engagement and Retention
CrowdStrike has intensified its customer engagement efforts, with Podbere likening the current approach to "touching 100 customers in 2 days" compared to previous goals of "100 customers in 100 days." This heightened focus on customer relationships is aimed at reinforcing loyalty and driving expansion within the existing customer base.
"We want to make sure that our customers stay with us. We want to do right by them. We want to do all the right things with them, take care of them."
Balancing Short-Term Needs and Long-Term Vision
While addressing immediate customer concerns through the CCP, CrowdStrike remains focused on its long-term strategic objectives. Podbere expressed confidence that the company's current actions would "pay dividends beyond what we expected" in the long term.
"We anticipate that if we do everything right by the customer in the short term, it's going to pay dividends beyond what we expected, certainly in the long term."
Market Education and Expansion
CrowdStrike continues to invest in market education, particularly around the benefits of its modern, cloud-native architecture compared to legacy security solutions. This effort is seen as crucial in capturing the significant portion of the market still relying on older technologies.
"There are still a lot of customers out there that don't have CrowdStrike that are facing risks with respect to being breached. And so we have, I think, it's still around 50% of legacy technology out there that we've all seen what's happened when you have a legacy technology in terms of the news and what's been breached."
Conclusion
CrowdStrike's participation in Citi's 2024 Global TMT Conference provided a comprehensive look at the company's current position, strategic initiatives, and future outlook. Despite facing challenges from a recent incident, CrowdStrike has demonstrated resilience and adaptability, implementing innovative programs like the Customer Commitment Package and doubling down on its Falcon Flex licensing model.
The company's leadership expressed confidence in its ability to navigate short-term headwinds while maintaining focus on long-term growth objectives. With a strong technological foundation, a growing portfolio of products, and a flexible go-to-market strategy, CrowdStrike appears well-positioned to capitalize on the expanding cybersecurity market.
As the company moves forward, key areas to watch include:
- The uptake and long-term impact of the Falcon Flex licensing model.
- The performance of emerging products, particularly in identity protection, SIEM, and cloud security.
- The company's ability to execute on its reacceleration plans in the latter half of the next fiscal year.
- Progress towards the ambitious $10 billion ARR target by 2031.
CrowdStrike's response to recent challenges and its strategic pivots offer valuable insights into the company's resilience, adaptability, and long-term vision. As the cybersecurity landscape continues to evolve, CrowdStrike's ability to balance customer needs, technological innovation, and financial performance will be crucial in determining its future success in this highly competitive market.
