CRWD Earnings Preview: The Aftermath of the July outage

As CrowdStrike Holdings, Inc. (CRWD) prepares to report its Q2 FY25 earnings on August 28th, the market's focus is squarely on how the company will navigate the aftermath of the significant outage that occurred in July. This incident, which impacted millions of devices globally, has cast a shadow over what has traditionally been a robust earnings track record for CRWD. Analysts expect the company to report earnings per share (EPS) of $0.97 on revenue of $958.7 million, slightly below the lower end of the company's guidance. The upcoming report is not only a financial checkpoint but also a crucial moment for management to address lingering concerns from the outage.

Historically, CRWD has consistently outperformed Wall Street expectations, beating both revenue and EPS estimates in every quarter since its IPO in 2019. This consistent outperformance has earned the company a reputation for reliability in the cybersecurity sector. However, this quarter presents a unique challenge as the July outage has introduced new uncertainties. Analysts are approaching this earnings report cautiously, with consensus estimates reflecting a conservative outlook. The expected revenue of $958.7 million is just above the low end of CRWD’s guidance range, and the EPS forecast of $0.97 is slightly below the guided range of $0.98 to $0.99, indicating tempered expectations.

The outage on July 19th, which caused significant disruption, will be a central topic during the earnings call. Despite CRWD's efforts to provide transparency through a Root Cause Analysis (RCA) report earlier this month, concerns about the company’s ability to manage and prevent such incidents in the future remain. Recent reports of cloud service issues in Europe, although possibly unrelated to the outage, further exacerbate these concerns. Investors and analysts alike will be keen to hear how the company plans to mitigate the reputational damage and address any potential financial liabilities stemming from the event.

In addition to the outage, key metrics to watch in the upcoming report include net new Annual Recurring Revenue (ARR) growth, module adoption rates, and Free Cash Flow (FCF) generation. Historically, Q2 has been a weaker quarter for CRWD, and there is an expectation that net new ARR growth could drop from the 22% seen in Q1 to low double digits. However, strong module adoption, particularly among customers adopting five or more modules, could be a positive sign if it continues despite the recent negative sentiment. Investors will also be looking for updates on operating leverage, which management previously indicated would materialize more in the second half of FY25.

The legal and financial implications of the outage are another area of concern. While CRWD’s standard license agreements may limit its liability, the uncertainty surrounding potential claims and the outcome of ongoing negotiations with affected customers adds an additional layer of risk. Analysts have mixed views on the potential financial impact, with some believing that CRWD's financial obligations will be limited and manageable, while others caution that the competitive and legal impacts could be more significant than anticipated.

The market's reaction to the earnings report will likely hinge not only on the financial results but also on the guidance and commentary provided by management. Given the premium valuation of CRWD, with a Price-to-Earnings (P/E) multiple over 50x, any sign of weakness or uncertainty could lead to further pressure on the stock. Conversely, clear communication of a path forward, particularly in terms of mitigating the impacts of the outage and sustaining long-term growth, could help stabilize investor sentiment.

In summary, CRWD's Q2 earnings report will be a critical event for the company as it seeks to reassure investors and maintain its strong market position in the wake of a challenging incident. The focus will be on how well the company addresses concerns related to the outage, delivers on key financial metrics, and sets expectations for the future. With analysts taking a cautious stance, CRWD has an opportunity to exceed these tempered expectations and restore confidence in its ability to deliver consistent growth and resilience in the face of adversity.