The Ratings Game: As the going gets tough, cybersecurity companies are looking to upsell

by | Mar 8, 2023 | Stock Market

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. CrowdStrike
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 t …

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