Cybersecurity Companies Are Looking For Upsells As Times Become Tougher

As companies get more cautious about costs and the economy soured, CrowdStrike has been touting its efforts to sell more products to its existing customers.

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Several months ago, CrowdStrike Holdings Inc. warned that its customers were experiencing longer buying cycles for their security software, a problem the company has also faced with its rivals. But the cybersecurity company now claims to have overcome that problem by selling more to its existing customers.

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A record set of results and a strong outlook were reported by CrowdStrike CRWD, +3.19% on Tuesday. After CEOs warned of slowing subscriptions amid macro headwinds and longer customer buying cycles, CrowdStrike's stock logged its worst one-day percentage drop in history a quarter ago.

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In order to overcome the macroeconomic issues, CrowdStrike focuses on the small- and medium-sized business sector, where recession fears affect spending more than in larger companies; they also offer existing customers merchandise "upselling".

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"CrowdStrike was still above the competition in a difficult environment," said Guggenheim analyst John DiFucci, who rates the stock at $147. Despite CrowdStrike's new annual recurring revenue only rising 4%, the analyst said it was positive growth, unlike most of our coverage universe during this time period.

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The company's ARR, a measure of its subscription-based revenue, increased 48% to $2.56 billion in the latest quarter, compared with $2.52 billion expected by analysts.

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As a result of the general macroeconomic situation, there is a decline in new ARR that is accelerating in the vast majority of our coverage universe, but CrowdStrike continues to grow its new business via both attrition into its existing client base and through add-on sales to its existing client base, DiFucci said. There has been a noticeable improvement in new business signings as a result of the company's ability to pivot quickly to the midmarket and small and medium business market. This has resulted in larger enterprises spending more deliberate time on their IT investments across the software space (i.e., longer sales cycles).

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There are only a few cloud-software companies that have demonstrated the strength of their ecosystem in terms of upsells and renewed subscriptions, such as CrowdStrike, and this shows the power of the ecosystem. As businesses tighten their belts amid a looming recession, vendors are still conducting deals in a cost-conscious environment and snagging deals despite slow spending in a cost-conscious environment.

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Identity-management software company Okta Inc.’s model has been supported by the model. A company like OKTA, +0.63% said most of its revenue came from upsells and cross-sells, and Wall Street said the company was “partially out of the woods.” Palo Alto Networks Inc., for example, also told similar stories in varying degrees.. A company like Panawa Inc., +0.63%. Another company like Zscaler Inc. ZS, -2.49 percent.

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The share price of Palo Alto Networks rose in late February as 'budget scrutiny' favors large platforms in cybersecurity

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There were 52% growth among subscribers with five or more modules, 62% growth among subscribers with six or more modules, and 75% growth among subscribers with seven or more modules, according to CrowdStrike. It was also announced that 62% of the company's customers have five or more subscriptions, while 22% have seven or more subscriptions.

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A buy rating and $155 price target were given to Citi Research analyst Fatima Boolani, who emphasized that the results and outlook will "not only dampen the worries of market saturation and pricing/discounting pressure against a more vocal Microsoft MSFT, -0.18%, but also refocus investor attention on technology/wallet consolidation opportunities, emerging module penetration runways, and still-open market share acquisition opportunities — all at industry-best unit economics and free cash flow conversions."

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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.”

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“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.”

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CrowdStrike shares rose 3.2% to close Wednesday at $128.92, while the S&P 500 index SPX, +0.14% ticked 0.1% higher and the tech-heavy Nasdaq Composite Index COMP, +0.40% gained 0.4%. CrowdStrike shares are down 17.8% over the past 12 months, while the ETFMG Prime Cyber Security ETF  HACK, -0.39% is down 15.2%, and the First Trust Nasdaq Cybersecurity ETF CIBR, -0.12% is off 12.6%.

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Over the past 12 months, the iShares Expanded Tech-Software Sector ETF IGV, +0.23% has fallen 7.9%, the Global X Cloud Computing ETF CLOU, -0.23% has dropped 9.4%, the First Trust Cloud Computing ETF SKYY, +0.20% has fallen 19.6%, and the WisdomTree Cloud Computing Fund WCLD, -0.21% has sunk 20.2%.

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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.