As the going gets tough, cybersecurity companies are looking to upsell


CrowdStrike Holdings Inc. warned three months ago about longer buying cycles for security software, a problem that has also struck its rivals, but the cybersecurity company now says that it has managed to combat that weakness by selling more into its current customer base.

reported record results and topped Wall Street expectations with its outlook Tuesday. That performance arrived one quarter after CrowdStrike’s stock logged the worst one-day percentage drop its history after executives warned of slowing subscriptions amid macro headwinds and longer customer buying cycles.

CrowdStrike’s leaders pointed to two ways that they have overcome the macroeconomic issues: A new focus on the small- to medium-business market, where recession fears are more acute when it comes to spending, as well as “upselling” products to current customers.

Guggenheim analyst John DiFucci, who has a buy rating and a $147 price target, said CrowdStrike “was still above the crowd in a difficult environment.” The analyst said that while CrowdStrike’s new annual recurring revenue, or ARR, only rose 4%, “it was positive growth, unlike most of our coverage universe in this period.”

Read: These ‘Three Horsemen’ of cybersecurity most likely to weather slowing demand, Morgan Stanley says

CrowdStrike’s ARR, a software-as-a-service metric that shows how much revenue the company can expect based on subscriptions, grew 48% to $2.56 billion from the year-ago quarter, while the Street expected $2.52 billion.

“The soft macro backdrop is obvious when considering the accelerating declines in new ARR for most of our coverage universe, but CrowdStrike continues to grow its new business through both add-on sales into its existing customer base and through new logos,” DiFucci said. “The company has demonstrated its resilience and pivoted quickly to the midmarket and SMB, and this has driven new signings as more sophisticated large-enterprise customers seem to have become more deliberate in IT purchases across the software space (i.e., longer sales cycles).”

CrowdStrike was only the latest cloud-software company to underscore the strength of its ecosystem, in that current customers were the main drivers of growth in the form of upsells and renewed subscriptions. That’s been how vendors are still snagging deals in a cost-conscious environment as businesses slow spending amid a looming recession.

The model has supported identity-management software company Okta Inc.
 which said the bulk of its business was in upsells and cross-sells to established customers, and Wall Street said the company was “partially out of the woods.” To varying degrees, that’s the same story coming out of other cybersecurity companies like Palo Alto Networks Inc.
and Zscaler Inc.

From late February: Palo Alto Networks stock jumps as ‘budget scrutiny’ for cybersecurity favors large platforms

CrowdStrike said subscription customers with five or more, six or more, and seven or more modules grew 52%, 62% and 75% year-over-year, respectively. The company added that 62% of customers have five or more subscriptions, while 22% have seven or more.

Citi Research analyst Fatima Boolani, who has a buy rating and a $155 price target, said the results and outlook should “not only tamp down market saturation, pricing/discounting pressure fears against a more vocal Microsoft
but also refocus investor energy on tangible tech/wallet consolidation potential, emerging module penetration runway, and still-open market share capture scope — achievable profitably at industry-best unit economics and free cash flow conversion.”

UBS analyst Roger Boyd, who has a buy and $165 target price, said CrowdStrike reported “clean results in a tough environment,” and that the fourth quarter was “a step back in the right direction.”

“CrowdStrike is doing a good job at creating more at-bats in a more uncertain environment,” Boyd said, adding that the fourth-quarter results, “give us confidence that CrowdStrike can execute through, and with more conviction in low-30%s growth.”

CrowdStrike shares rose 3.2% to close Wednesday at $128.92, while the S&P 500 index
ticked 0.1% higher and the tech-heavy Nasdaq Composite Index
gained 0.4%. CrowdStrike shares are down 17.8% over the past 12 months, while the ETFMG Prime Cyber Security ETF 
is down 15.2%, and the First Trust Nasdaq Cybersecurity ETF
is off 12.6%.

Over the past 12 months, the iShares Expanded Tech-Software Sector ETF
has fallen 7.9%, the Global X Cloud Computing ETF
has dropped 9.4%, the First Trust Cloud Computing ETF
has fallen 19.6%, and the WisdomTree Cloud Computing Fund
has sunk 20.2%.

Of the 45 analysts who cover CrowdStrike, 40 have buy ratings and five have hold ratings, along with an average target price of $167.83.

For more: Cloud software is a ‘fight for a knife in the mud,’ and Wall Street is souring on the one sector that was winning

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