Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended January 31, 2022, filed with the SEC. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading Special Note Regarding Forward-Looking Statements following the Table of Contents of this Quarterly Report on Form 10-Q. You should review the disclosure under Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Our fiscal year end is January 31, and our fiscal quarters end on April 30, July 31, October 31, and January 31.

Overview

Founded in 2011, CrowdStrike reinvented cybersecurity for the cloud era and transformed the way cybersecurity is delivered and experienced by customers. When we started CrowdStrike, cyberattackers had an asymmetric advantage over legacy cybersecurity products that could not keep pace with the rapid changes in adversary tactics. We took a fundamentally different approach to solve this problem with the CrowdStrike Falcon platform – the first, true cloud-native platform capable of harnessing vast amounts of security and enterprise data to deliver highly modular solutions through a single lightweight agent. Our pioneering platform approach keeps customers ahead of attackers by automatically detecting and preventing threats to stop breaches.

We believe our approach has defined a new category called the Security Cloud, which has the power to transform the cybersecurity industry the same way the cloud has transformed the customer relationship management, human resources, and service management industries. Using cloud-scale AI, our Security Cloud enriches and correlates trillions of cybersecurity events per week with indicators of attack, threat intelligence and enterprise data (including data from across endpoints, workloads, identities, DevOps, IT assets and configurations) to create actionable data, identify shifts in adversary tactics and automatically prevent threats in real-time across our customer base. The more data that is fed into our Falcon platform, the more intelligent our Security Cloud becomes, and the more our customers benefit, creating a powerful network effect that increases the overall value we provide.

Our Go-To-Market Strategy

We sell subscriptions to our Falcon platform and cloud modules to organizations across multiple industries. We primarily sell subscriptions to our Falcon platform and cloud modules through our direct sales team that leverages our network of channel partners. Our direct sales team is comprised of field sales and inside sales professionals who are segmented by a customer’s number of endpoints.

We have a low friction land-and-expand sales strategy. When customers deploy our Falcon platform, they can start with any number of cloud modules and easily add additional cloud modules. Once customers experience the benefits of our Falcon platform, they often expand their adoption over time by adding more endpoints or purchasing additional modules. We also use our sales team to identify current customers who may be interested in free trials of additional cloud modules, which serves as a powerful driver of our land-and-expand model. By segmenting our sales teams, we can deploy a low-touch sales model that efficiently identifies prospective customers.

We began as a solution for large enterprises, but the flexibility and scalability of our Falcon platform has enabled us to seamlessly offer our solution to customers of any size. We have expanded our sales focus to include any sized organization without the need to modify our Falcon platform for small and medium sized businesses.

A substantial majority of our customers purchase subscriptions with a term of one year. Our subscriptions are generally priced on a per-endpoint and per-module basis. We recognize revenue from our subscriptions ratably over the term of the subscription. We also generate revenue from our incident response and proactive professional services, which are generally priced on a time and materials basis. We view our professional services business primarily as an opportunity to cross-sell subscriptions to our Falcon platform and cloud modules.

Certain Factors Affecting Our Performance

Adoption of Our Solutions. We believe our future success depends in large part on the growth in the market for cloud-based SaaS-delivered endpoint security solutions. Many organizations have not yet abandoned the on-premise legacy products in which they have invested substantial personnel and financial resources to design and maintain. As a result, it is difficult to predict customer adoption rates and demand for our cloud-based solutions.

New Customer Acquisition. Our future growth depends in large part on our ability to acquire new customers. If our efforts to attract new customers are not successful, our revenue and rate of revenue growth may decline. We believe that our go-to-market strategy and the flexibility and scalability of our Falcon platform allow us to rapidly expand our customer base. Our incident response and proactive services also help drive new customer acquisitions, as many of these professional services customers subsequently purchase subscriptions to our Falcon platform. Many organizations have not yet adopted cloud-based security solutions, and since our Falcon platform has offerings for organizations of all sizes, worldwide, and across industries, we believe this presents a significant opportunity for growth.

Maintain Customer Retention and Increase Sales. Our ability to increase revenue depends in large part on our ability to retain our existing customers and increase the ARR of their subscriptions. We focus on increasing sales to our existing customers by expanding their deployments to more endpoints and selling additional cloud modules for increased functionality. Over time we have transitioned our platform from a single offering into highly-integrated offerings of multiple SKU cloud modules.

Invest in Growth. We believe that our market opportunity is large and requires us to continue to invest significantly in sales and marketing efforts to further grow our customer base, both domestically and internationally. Our open cloud architecture and single data model have allowed us to rapidly build and deploy new cloud modules, and we expect to continue investing in those efforts to further enhance our technology platform and product functionality. In addition to our ongoing investment in research and development, we may also pursue acquisitions of businesses, technologies, and assets that complement and expand the functionality of our Falcon platform, add to our technology or security expertise, or bolster our leadership position by gaining access to new customers or markets. Furthermore, we expect our general and administrative expenses to increase in dollar amount for the foreseeable future given the additional expenses for accounting, compliance, and investor relations as we grow as a public company.

Key Metrics

We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, formulate business plans, and make strategic decisions.

Subscription Customers

We define a subscription customer as a separate legal entity that has entered into a distinct subscription agreement for access to Falcon platform for which the term has not ended or with which we are negotiating a renewal contract. We do not consider our channel partners as customers, and we treat managed service security providers, who may purchase our products on behalf of multiple companies, as a single customer. While initially we focused our sales and marketing efforts on large enterprises, in recent years we have also increased our sales and marketing to small and medium sized businesses.

The following table sets forth the number of our subscription customers as of the dates presented:

			As of July 31,
			2022						2021
Subscription customers			19,686						13,080
Year-over-year growth			51		%				81		%

We added 1,741 and 3,361 net new subscription customers during the three and six months ended July 31, 2022, respectively, for a total of 19,686 subscription customers as of July 31, 2022, representing 51% growth year-over-year. We added 1,660 and 3,184 net new subscription customers during the three and six months ended July 31, 2021, respectively, for a total of 13,080 subscription customers as of July 31, 2021, representing 81% growth year-over-year.

Annual Recurring Revenue (“ARR”)

ARR is calculated as the annualized value of our customer subscription contracts as of the measurement date, assuming any contract that expires during the next 12 months is renewed on its existing terms. To the extent that we are negotiating a renewal with a customer after the expiration of the subscription, we continue to include that revenue in ARR if we are actively in discussion with such an organization for a new subscription or renewal, or until such organization notifies us that it is not renewing its subscription.

The following table sets forth our ARR as of the dates presented (dollars in thousands):

			As of July 31,
			2022						2021
Annual recurring revenue			$	2,139,906					$	1,344,451
Year-over-year growth			59		%				70		%

ARR grew to $2.1 billion as of July 31, 2022, of which $218.1 million and $408.6 million was net new ARR added for the three and six months ended July 31, 2022, respectively. ARR grew to $1.3 billion as of July 31, 2021, of which $150.6 million and $294.4 million was net new ARR added for the three and six months ended July 31, 2021, respectively.

Dollar-Based Net Retention Rate

Our dollar-based net retention rate compares our ARR from a set of subscription customers against the same metric for those subscription customers from the prior year. Our dollar-based net retention rate reflects customer renewals, expansion, contraction, and churn, and excludes revenue from our incident response and proactive services. We calculate our dollar-based net retention rate as of period end by starting with the ARR from all subscription customers as of 12 months prior to such period end, or Prior Period ARR. We then calculate the ARR from these same subscription customers as of the current period end, or Current Period ARR. Current Period ARR includes any expansion and is net of contraction or churn over the trailing 12 months but excludes revenue from new subscription customers in the current period. We then divide the Current Period ARR by the Prior Period ARR to arrive at our dollar-based net retention rate.

Our dollar-based net retention rate was above 120% as of July 31, 2022. Our dollar-based net retention rate can fluctuate from period to period due to large customer contracts in a given period, which may reduce our dollar-based net retention rate in subsequent periods if the customer makes a larger upfront purchase and does not continue to increase purchases.

Our dollar-based net retention rate has varied from quarter to quarter due to a number of factors and we expect that trend to continue. In addition, we have seen strong success with our strategy to land bigger deals with more modules, and we are also seeing an acceleration in our acquisition of new customers. While we view these two trends as positive developments, they have a natural trade off on our ability to expand business with existing customers in the near term.

Components of Our Results of Operations

Revenue

Subscription Revenue. Subscription revenue primarily consists of subscription fees for our Falcon platform and additional cloud modules that are supported by our cloud-based platform. Subscription revenue is driven primarily by the number of subscription customers, the number of endpoints per customer, and the number of cloud modules included in the subscription. We recognize subscription revenue ratably over the term of the agreement, which is generally one to three years. Because the majority of our subscription customers are billed upfront, we have recorded significant deferred revenue. Consequently, a substantial portion of the revenue that we report in each period is attributable to the recognition of deferred revenue relating to subscriptions that we entered into during previous periods. The majority of our customers are invoiced annually in advance or multi-year in advance.

Professional Services Revenue. Professional services revenue includes incident response and proactive services, forensic and malware analysis, and attribution analysis. Professional services are generally sold separately from subscriptions to our Falcon platform, although customers frequently enter into a separate arrangement to purchase subscriptions to our Falcon platform at the conclusion of a professional services arrangement. Professional services are available through hourly rate and fixed fee contracts, one-time and ongoing engagements, and retainer-based agreements. For time and materials and retainer-based

arrangements, revenue is recognized as services are performed. Fixed fee contracts account for an immaterial portion of our revenue.

Cost of Revenue

Subscription Cost of Revenue. Subscription cost of revenue consists primarily of costs related to hosting our cloud-based Falcon platform in data centers, amortization of our capitalized internal-use software, employee-related costs such as salaries and bonuses, stock-based compensation expense, benefits costs associated with our operations and support personnel, software license fees, property and equipment depreciation, amortization of acquired intangibles, and an allocated portion of facilities and administrative costs.

As new customers subscribe to our platform and existing subscription customers increase the number of endpoints on our Falcon platform, our cost of revenue will increase due to greater cloud hosting costs related to powering new cloud modules and the incremental costs for storing additional data collected for such cloud modules and employee-related costs. We intend to continue to invest additional resources in our cloud platform and our customer support organizations as we grow our business. The level and timing of investment in these areas could affect our cost of revenue in the future.

Professional Services Cost of Revenue. Professional services cost of revenue consists primarily of employee-related costs, such as salaries and bonuses, stock-based compensation expense, technology, property and equipment depreciation, and an allocated portion of facilities and administrative costs.

Gross Profit and Gross Margin

Gross profit and gross margin have been and will continue to be affected by various factors, including the timing of our acquisition of new subscription customers, renewals from existing subscription customers, sales of additional modules to existing subscription customers, the data center and bandwidth costs associated with operating our cloud platform, the extent to which we expand our customer support and cloud operations organizations, and the extent to which we can increase the efficiency of our technology, infrastructure, and data centers through technological improvements. We expect our gross profit to increase in dollar amount and our gross margin to increase modestly over the long term, although our gross margin could fluctuate from period to period depending on the interplay of these factors. Demand for our incident response services is driven by the number of breaches experienced by non-customers. Also, we view our professional services solutions in the context of our larger business and as a significant lead generator for new subscriptions. Because of these factors, our services revenue and gross margin may fluctuate over time.

Operating Expenses

Our operating expenses consist of sales and marketing, research and development and general administrative expenses. For each of these categories of expense, employee-related expenses are the most significant component, which include salaries, employee bonuses, sales commissions, and employer payroll tax. Operating expenses also include an allocated portion of overhead costs for facilities and IT.

Sales and Marketing. Sales and marketing expenses primarily consist of employee-related expenses such as salaries, commissions, and bonuses. Sales and marketing expenses also include stock-based compensation; expenses related to our Fal.Con customer conference and other marketing events; an allocated portion of facilities and administrative expenses; amortization of acquired intangibles; and cloud hosting and related services costs related to proof of value efforts. Sales and marketing expenses also include sales commissions and any other incremental payments made upon the initial acquisition of a subscription or upsells to existing customers, which are capitalized and amortized over the estimated customer life. We also capitalize and amortize any such expenses paid for the renewal of a subscription over the term of the renewal.

We expect sales and marketing expenses to increase in dollar amount as we continue to make significant investments in our sales and marketing organization to drive additional revenue, further penetrate the market, and expand our global customer base. However, we anticipate sales and marketing expenses to decrease as a percentage of our total revenue over time, although our sales and marketing expenses may fluctuate as a percentage of our total revenue from period to period depending on the timing of these expenses.

Research and Development. Research and development expenses primarily consist of employee-related expenses such as salaries and bonuses; stock-based compensation; consulting expenses related to the design, development, testing, and enhancements of our subscription services; and an allocated portion of facilities and administrative expenses. Our cloud platform is software-driven, and our research and development teams employ software engineers in the design, and the related development, testing, certification, and support of these solutions.

We expect research and development expenses to increase in dollar amount as we continue to increase investments in our technology architecture and software platform. However, we anticipate research and development expenses to decrease as a percentage of our total revenue over time, although our research and development expenses may fluctuate as a percentage of our total revenue from period to period depending on the timing of these expenses.

General and Administrative. General and administrative expenses consist of employee-related expenses such as salaries and bonuses; stock-based compensation; and related expenses for our executive, finance, human resources, and legal organizations. In addition, general and administrative expenses include outside legal, accounting, and other professional fees; and an allocated portion of facilities and administrative expenses.

We expect general and administrative expenses to increase in dollar amount over time. However, we anticipate general and administrative expenses to decrease as a percentage of our total revenue over time although our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period depending on the timing of these expenses.

Interest Expense. Interest expense consists primarily of interest expense from amortization of debt issuance costs, contractual interest expense for our Senior Notes issued in January 2021, and amortization of debt issuance costs on our secured revolving credit facility.

Other Income, Net. Other income, net, consists primarily of income earned on our cash and cash equivalents, if any; gain on strategic investments; and foreign currency transaction gains and losses.

Provision for Income Taxes. Provision for income taxes consists of state income taxes in the United States, foreign income taxes, including taxes related to the intercompany sale of intellectual property from the Humio acquisition during the first quarter of fiscal 2022, and withholding taxes related to customer payments in certain foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our U.S. federal and state and UK deferred tax assets that we have determined are not realizable on a more likely than not basis.

Net Income Attributable to Non-controlling Interest. Net income attributable to non-controlling interest consists of the Falcon Funds’ non-controlling interest share of mark-to-market gains and interest income from our strategic investments.

Results of Operations

The following tables set forth our condensed consolidated statements of operations for each period presented (in thousands, except percentages):

			Three Months Ended July 31,												Change $						Change %						Six Months Ended July 31,												Change $						Change %
			2022						2021												2022						2021
Revenue
Subscription			$	506,199					$	315,836					$	190,363					60		%				$	966,021					$	597,064					$	368,957					62		%
Professional services			28,954						21,854						7,100						32		%				56,966						43,469						13,497						31		%
Total revenue			535,153						337,690						197,463						58		%				1,022,987						640,533						382,454						60		%
Cost of revenue
Subscription			120,087						75,993						44,094						58		%				228,029						140,896						87,133						62		%
Professional services			20,480						14,439						6,041						42		%				39,370						28,041						11,329						40		%
Total cost of revenue			140,567						90,432						50,135						55		%				267,399						168,937						98,462						58		%
Gross profit			394,586						247,258						147,328						60		%				755,588						471,596						283,992						60		%
Operating expenses
Sales and marketing			224,766						153,861						70,905						46		%				418,298						288,992						129,306						45		%
Research and development			137,864						90,455						47,409						52		%				261,263						168,635						92,628						55		%
General and administrative			80,263						50,345						29,918						59		%				148,217						92,719						55,498						60		%
Total operating expenses			442,893						294,661						148,232						50		%				827,778						550,346						277,432						50		%
Loss from operations			(48,307)						(47,403)						(904)						2		%				(72,190)						(78,750)						6,560						(8)		%
Interest expense			(6,335)						(6,296)						(39)						1		%				(12,633)						(12,526)						(107)						1		%
Other income, net			11,107						619						10,488						1,694		%				14,319						5,387						8,932						166		%
Loss before provision for income taxes			(43,535)						(53,080)						9,545						(18)		%				(70,504)						(85,889)						15,385						(18)		%
Provision for income taxes			4,778						4,238						540						13		%				8,218						54,300						(46,082)						(85)		%
Net loss			(48,313)						(57,318)						9,005						(16)		%				(78,722)						(140,189)						61,467						(44)		%
Net income attributable to non-controlling interest			972						—						972						—		%				2,086						2,178						(92)						(4)		%
Net loss attributable to CrowdStrike			$	(49,285)					$	(57,318)					$	8,033					(14)		%				$	(80,808)					$	(142,367)					$	61,559					(43)		%

The following table presents the components of our condensed consolidated statements of operations as a percentage of total revenue for the periods presented:

			Three Months Ended July 31,												Six Months Ended July 31,
			2022						2021						2022						2021
			%												%
Revenue
Subscription			95		%				94		%				94		%				93		%
Professional services			5		%				6		%				6		%				7		%
Total revenue			100		%				100		%				100		%				100		%
Cost of revenue
Subscription			22		%				23		%				22		%				22		%
Professional services			4		%				4		%				4		%				4		%
Total cost of revenue			26		%				27		%				26		%				26		%
Gross profit			74		%				73		%				74		%				74		%
Operating expenses
Sales and marketing			42		%				46		%				41		%				45		%
Research and development			26		%				27		%				26		%				26		%
General and administrative			15		%				15		%				14		%				14		%
Total operating expenses			83		%				87		%				81		%				86		%
Loss from operations			(9)		%				(14)		%				(7)		%				(12)		%
Interest expense			(1)		%				(2)		%				(1)		%				(2)		%
Other income, net			2		%				—		%				1		%				1		%
Loss before provision for income taxes			(8)		%				(16)		%				(7)		%				(13)		%
Provision for income taxes			1		%				1		%				1		%				8		%
Net loss			(9)		%				(17)		%				(8)		%				(22)		%
Net income attributable to non-controlling interest			—		%				—		%				—		%				—		%
Net loss attributable to CrowdStrike			(9)		%				(17)		%				(8)		%				(22)		%

Comparison of the Three Months Ended July 31, 2022 and 2021

Revenue

The following shows total revenue from subscriptions and professional services for the three months ended July 31, 2022 as compared to the three months ended July 31, 2021 (in thousands, except percentages):

			Three Months Ended July 31,												Change $						Change %
			2022						2021
Subscription			$	506,199					$	315,836					$	190,363					60		%
Professional services			28,954						21,854						7,100						32		%
Total revenue			$	535,153					$	337,690					$	197,463					58		%

Total revenue increased by $197.5 million, or 58%, for the three months ended July 31, 2022 compared to the three months ended July 31, 2021. Subscription revenue accounted for 95% of our total revenue for the three months ended July 31, 2022, and 94% of our total revenue for the three months ended July 31, 2021. Professional services revenue accounted for 5% of our total revenue for the three months ended July 31, 2022, and 6% of our total revenue for the three months ended July 31, 2021.

Subscription revenue increased by $190.4 million, or 60%, for the three months ended July 31, 2022 compared to the three months ended July 31, 2021, which was primarily driven by a combination of the addition of new customers and the sale of additional endpoints and modules to existing customers. As of July 31, 2022, we had a total of 19,686 subscription customers, which represents 51% growth from July 31, 2021.

Professional services revenue increased by $7.1 million, or 32%, for the three months ended July 31, 2022, compared to the three months ended July 31, 2021, which was primarily attributable to an increase in the number of professional service hours performed and an increase in services offerings that are not based on billable hours.

Cost of Revenue, Gross Profit, and Gross Margin

The following shows cost of revenue related to subscriptions and professional services for the three months ended July 31, 2022 as compared to the three months ended July 31, 2021 (in thousands, except percentages):

			Three Months Ended July 31,												Change $						Change %
			2022						2021
Subscription			$	120,087					$	75,993					$	44,094					58		%
Professional services			20,480						14,439						6,041						42		%
Total cost of revenue			$	140,567					$	90,432					$	50,135					55		%

Total cost of revenue increased by $50.1 million, or 55%, for the three months ended July 31, 2022 compared to the three months ended July 31, 2021. Subscription cost of revenue increased by $44.1 million, or 58%, for the three months ended July 31, 2022, compared to the three months ended July 31, 2021. The increase in subscription cost of revenue was primarily due to an increase in cloud hosting and related services cost of $23.5 million driven by increased customer activity; an increase in employee-related expenses of $9.7 million, driven by a 43% increase in average headcount; an increase in stock-based compensation expense of $2.0 million; an increase in depreciation of data center equipment of $2.0 million; an increase in allocated overhead costs of $2.0 million; an increase in depreciation of internal-use software of $2.0 million and; an increase in software licenses and maintenance of $1.1 million.

Professional services cost of revenue increased by $6.0 million, or 42%, for the three months ended July 31, 2022, compared to the three months ended July 31, 2021. The increase in professional services cost of revenue was primarily due to an increase in employee-related expenses of $3.7 million, driven by an increase in average headcount of 46%; an increase in stock-based compensation expense of $1.1 million; and an increase in consulting expense of $0.7 million.

The following shows gross profit and gross margin for subscriptions and professional services for the three months ended July 31, 2022 as compared to the three months ended July 31, 2021 (in thousands, except percentages):

			Three Months Ended July 31,												Change $						Change %
			2022						2021
Subscription gross profit			$	386,112					$	239,843					$	146,269					61		%
Professional services gross profit			8,474						7,415						1,059						14		%
Total gross profit			$	394,586					$	247,258					$	147,328					60		%

			Three Months Ended July 31,												Change %
			2022						2021
Subscription gross margin			76		%				76		%				—		%
Professional services gross margin			29		%				34		%				(5)		%
Total gross margin			74		%				73		%				1		%

Subscription gross margin was relatively flat for the three months ended July 31, 2022, compared to the three months ended July 31, 2021.

Professional services gross margin decreased by 5% for the three months ended July 31, 2022 compared to the three months ended July 31, 2021. The decrease in professional services gross margin was primarily due higher employee-related expenses and higher stock-based compensation expense during the three months ended July 31, 2022 compared to the three months ended July 31, 2021, partially offset by an increase in the number of professional service hours performed and an increase in services offerings that are not based on billable hours.

Operating Expenses

Sales and Marketing

The following shows sales and marketing expenses for the three months ended July 31, 2022 as compared to the three months ended July 31, 2021 (in thousands, except percentage):

			Three Months Ended July 31,												Change $						Change %
			2022						2021
Sales and marketing expenses			$	224,766					$	153,861					$	70,905					46		%

Sales and marketing expenses increased by $70.9 million, or 46%, for the three months ended July 31, 2022 compared to the three months ended July 31, 2021. The increase in sales and marketing expenses was primarily due to an increase in employee-related expenses of $34.3 million, driven by a 42% increase in average headcount; an increase in stock-based compensation expense of $15.3 million; an increase in marketing programs of $9.4 million; an increase in allocated overhead costs of $4.7 million; an increase in travel expenses of $3.1 million; an increase in company events expenses of $1.2 million; and an increase in employee health insurance of $1.1 million during the three months ended July 31, 2022.

Research and Development

The following shows research and development expenses for the three months ended July 31, 2022 as compared to the three months ended July 31, 2021 (in thousands, except percentage):

			Three Months Ended July 31,												Change $						Change %
			2022						2021
Research and development expenses			$	137,864					$	90,455					$	47,409					52		%

Research and development expenses increased by $47.4 million, or 52%, for the three months ended July 31, 2022 compared to the three months ended July 31, 2021. This increase was primarily due to an increase in employee-related expenses of $24.1 million, driven by a 48% increase in average headcount; an increase in stock-based compensation expense of $14.2 million; an increase in allocated overhead costs of $3.9 million; an increase in company events expenses of $1.9 million; an increase in cloud hosting and related services cost of $1.8 million; and an increase in travel expenses of $1.5 million; partially offset by an increase in software capitalization of $3.5 million.

General and Administrative

The following shows general and administrative expenses for the three months ended July 31, 2022 as compared to the three months ended July 31, 2021 (in thousands, except percentage):

			Three Months Ended July 31,												Change $						Change %
			2022						2021
General and administrative expenses			$	80,263					$	50,345					$	29,918					59		%

General and administrative expenses increased by $29.9 million, or 59%, for the three months ended July 31, 2022 compared to the three months ended July 31, 2021. The increase in general and administrative expenses was primarily due to an increase in stock-based compensation expense of $22.6 million; an increase in employee-related expenses of $5.2 million, driven by a 50% increase in average headcount; an increase in allocated overhead costs of $1.2 million; an increase in legal expenses of $1.2 million; and an increase in facilities expenses of $1.1 million; partially offset by a decrease in consulting expenses of $3.6 million during the three months ended July 31, 2022.

Interest Expense and Other Income, Net

The following shows interest expense and other income, net for the three months ended July 31, 2022 as compared to the three months ended July 31, 2021 (in thousands, except percentages):

			Three Months Ended July 31,												Change $						Change %
			2022						2021
Interest expense			$	(6,335)					$	(6,296)					$	(39)					1		%
Other income, net			$	11,107					$	619					$	10,488					1,694		%

Interest expense consists primarily of interest expense from the amortization of debt issuance costs, contractual interest expense, and accretion of debt discount for our Senior Notes issued in January 2021.

The increase in other income, net for the three months ended July 31, 2022 compared to the three months ended July 31, 2021 was primarily due to an increase in interest income of $6.9 million, driven by an increase in market interest rates; an increase in mark-to-market adjustments of $1.9 million for our strategic investments; and a net increase of $1.7 million from fluctuations in foreign currency transaction gains.

Provision for Income Taxes

The following shows the provision for income taxes for the three months ended July 31, 2022 as compared to the three months ended July 31, 2021 (in thousands, except percentage):

			Three Months Ended July 31,												Change $						Change %
			2022						2021
Provision for income taxes			$	4,778					$	4,238					$	540					13		%

The increase in provision for income taxes of $0.5 million during the three months ended July 31, 2022 compared to the three months ended July 31, 2021 was primarily attributable to increases in pre-tax foreign earnings.

Comparison of the Six Months Ended July 31, 2022 and 2021

Revenue

The following shows total revenue from subscriptions and professional services for the six months ended July 31, 2022 as compared to the six months ended July 31, 2021 (in thousands, except percentages):

			Six Months Ended July 31,												Change $						Change %
			2022						2021
Subscription			$	966,021					$	597,064					$	368,957					62		%
Professional services			56,966						43,469						13,497						31		%
Total revenue			$	1,022,987					$	640,533					$	382,454					60		%

Total revenue increased by $382.5 million, or 60%, for the six months ended July 31, 2022 compared to the six months ended July 31, 2021. Subscription revenue accounted for 94% of our total revenue for the six months ended July 31, 2022, and 93% of our total revenue for the six months ended July 31, 2021. Professional services revenue accounted for 6% of our total revenue for the six months ended July 31, 2022, and 7% of our total revenue for the six months ended July 31, 2021.

Subscription revenue increased by $369.0 million, or 62%, for the six months ended July 31, 2022 compared to the six months ended July 31, 2021, which was primarily driven by a combination of the addition of new customers and the sale of additional endpoints and modules to existing customers. As of July 31, 2022, we had a total of 19,686 subscription customers, which represents 51% growth from July 31, 2021.

Professional services revenue increased by $13.5 million, or 31%, for the six months ended July 31, 2022 compared to the six months ended July 31, 2021, which was primarily attributable to an increase in the number of professional service hours performed and an increase in services offerings that are not based on billable hours.

Cost of Revenue, Gross Profit, and Gross Margin

The following shows cost of revenue related to subscriptions and professional services for the six months ended July 31, 2022 as compared to the six months ended July 31, 2021 (in thousands, except percentages):

			Six Months Ended July 31,												Change $						Change %
			2022						2021
Subscription			$	228,029					$	140,896					$	87,133					62		%
Professional services			39,370						28,041						11,329						40		%
Total cost of revenue			$	267,399					$	168,937					$	98,462					58		%

Total cost of revenue increased by $98.5 million, or 58%, for the six months ended July 31, 2022 compared to the six months ended July 31, 2021. Subscription cost of revenue increased by $87.1 million, or 62%, for the six months ended July 31, 2022 compared to the six months ended July 31, 2021. The increase in subscription cost of revenue was primarily due to an increase in cloud hosting and related services cost of $46.3 million, driven by increased customer activity; an increase in employee-related expenses of $19.4 million, driven by a 47% increase in average headcount; an increase in stock-based compensation expense of $4.3 million; an increase in depreciation of data center equipment of $3.9 million; an increase in allocated overhead costs of $3.8 million; an increase in depreciation of internal-use software of $3.8 million; an increase in amortization of intangible assets of $2.1 million; an increase in software licenses and maintenance of $1.9 million; and an increase in hardware maintenance of $1.3 million.

Professional services cost of revenue increased by $11.3 million, or 40%, for the six months ended July 31, 2022 compared to the six months ended July 31, 2021. The increase in professional services cost of revenue was primarily due to an increase in employee-related expenses of $6.7 million, driven by a 46% increase in average headcount; an increase in stock-based compensation expense of $2.1 million; an increase in consulting expense of $1.5 million; and an increase in allocated overhead costs of $1.1 million.

The following shows gross profit and gross margin for subscriptions and professional services for the six months ended July 31, 2022 as compared to the six months ended July 31, 2021 (in thousands, except percentages):

			Six Months Ended July 31,												Change $						Change %
			2022						2021
Subscription gross profit			$	737,992					$	456,168					$	281,824					62		%
Professional services gross profit			17,596						15,428						2,168						14		%
Total gross profit			$	755,588					$	471,596					$	283,992					60		%

			Six Months Ended July 31,												Change %
			2022						2021
Subscription gross margin			76		%				76		%				0		%
Professional services gross margin			31		%				35		%				(4)		%
Total gross margin			74		%				74		%				0		%

Subscription gross margin was relatively flat for the six months ended July 31, 2022 compared to the six months ended July 31, 2021.

Professional services gross margin decreased by 4% for the six months ended July 31, 2022, compared to the six months ended July 31, 2021. The decrease in professional services gross margin was primarily due to higher employee-related expenses and higher stock-based compensation expense during the six months ended July 31, 2022 compared to the six months ended July 31, 2021, partially offset by an increase in the number of professional service hours performed and an increase in services offerings that are not based on billable hours.

Operating Expenses

Sales and Marketing

The following shows sales and marketing expenses for the six months ended July 31, 2022 as compared to the six months ended July 31, 2021 (in thousands, except percentage):

			Six Months Ended July 31,												Change $						Change %
			2022						2021
Sales and marketing expenses			$	418,298					$	288,992					$	129,306					45		%

Sales and marketing expenses increased by $129.3 million, or 45%, for the six months ended July 31, 2022 compared to the six months ended July 31, 2021. The increase in sales and marketing expenses was primarily due to an increase in employee-related expenses of $65.3 million, driven by a 42% increase in average headcount; an increase in stock-based compensation expense of $24.6 million; an increase in marketing programs of $14.7 million; an increase in allocated overhead costs of $8.3 million; an increase in company events expenses of $5.6 million; an increase in travel expenses of $4.7 million; and an increase in employee health insurance of $2.0 million during the six months ended July 31, 2022.

Research and Development

The following shows research and development expenses for the six months ended July 31, 2022 as compared to the six months ended July 31, 2021 (in thousands, except percentage):

			Six Months Ended July 31,												Change $						Change %
			2022						2021
Research and development expenses			$	261,263					$	168,635					$	92,628					55		%

Research and development expenses increased by $92.6 million, or 55%, for the six months ended July 31, 2022, compared to the six months ended July 31, 2021. This increase was primarily due to an increase in employee-related expenses of $45.7 million, driven by a 50% increase in average headcount; an increase in stock-based compensation expense of $30.5 million; an increase in allocated overhead costs of $7.5 million; an increase in company events expenses of $2.6 million; an increase in cloud hosting and related services cost of $2.4 million; an increase in travel expenses of $2.3 million; an increase in employee health insurance of $1.7 million; and an increase in software licenses and maintenance of $1.2 million; partially offset by an increase in software capitalization of $4.7 million during the six months ended July 31, 2022.

General and Administrative

The following shows general and administrative expenses for the six months ended July 31, 2022 as compared to the six months ended July 31, 2021 (in thousands, except percentage):

			Six Months Ended July 31,												Change $						Change %
			2022						2021
General and administrative expenses			$	148,217					$	92,719					$	55,498					60		%

General and administrative expenses increased by $55.5 million, or 60%, for the six months ended July 31, 2022 compared to the six months ended July 31, 2021. The increase in general and administrative expenses was primarily due to an increase in stock-based compensation expense of $42.0 million; an increase in employee-related expenses of $10.0 million, driven by a 54% increase in average headcount; an increase in allocated overhead costs of $2.3 million; an increase in facilities expenses of $2.3 million; and an increase in legal expenses of $1.1 million; partially offset by a decrease in consulting expenses of $7.5 million during the six months ended July 31, 2022.

Interest Expense and Other Income, Net

The following shows interest expense and other income, net for the six months ended July 31, 2022 as compared to the six months ended July 31, 2021 (in thousands, except percentages):

			Six Months Ended July 31,												Change $						Change %
			2022						2021
Interest expense			$	(12,633)					$	(12,526)					$	(107)					1		%
Other income, net			$	14,319					$	5,387					$	8,932					166		%

Interest expense consists primarily of interest expense from the amortization of debt issuance costs, contractual interest expense and accretion of debt discount for our Senior Notes issued in January 2021.

The increase in other income, net for the six months ended July 31, 2022 compared to the six months ended July 31, 2021 was primarily due to an increase in interest income of $7.6 million, driven by an increase in market interest rates; and a net increase of $1.5 million from fluctuations in foreign currency transaction gains.

Provision for Income Taxes

The following shows the provision for income taxes for the six months ended July 31, 2022 as compared to the six months ended July 31, 2021 (in thousands, except percentage):

			Six Months Ended July 31,												Change $						Change %
			2022						2021
Provision for income taxes			$	8,218					$	54,300					$	(46,082)					(85)		%

The decrease in provision for income taxes of $46.1 million during the six months ended July 31, 2022 was primarily driven by the intercompany sale of intellectual property from Humio during the six months ended July 31, 2021.

Liquidity and Capital Resources

Our primary sources of liquidity as of July 31, 2022, consisted of: (i) $2.3 billion in cash and cash equivalents, (ii) cash we expect to generate from operations, and (iii) available capacity under our $750.0 million senior secured revolving credit facility (the “A&R Credit Agreement”). We expect that the combination of our existing cash and cash equivalents, cash flows from operations, and the A&R Credit Agreement will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Our short-term and long-term liquidity requirements primarily arise from: (i) business acquisitions and investments we may make from time to time, (ii) working capital requirements, (iii) interest and principal payments related to our outstanding indebtedness, (iv) research and development and capital expenditure needs, and (v) license and service arrangements integral to our business operations. Our ability to fund these requirements will depend, in part, on our future cash flows, which are determined by our future operating performance and, therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control.

Since our inception, we have generated operating losses, as reflected in our accumulated deficit of $1.0 billion as of July 31, 2022. We expect to continue to incur operating losses for the foreseeable future due to the investments we intend to continue to make, particularly in sales and marketing and research and development. As a result, we may require additional capital resources in the future to execute strategic initiatives to grow our business.

We typically invoice our subscription customers annually in advance. Therefore, a substantial source of our cash is from such prepayments, which are included on our condensed consolidated balance sheets as deferred revenue. Deferred revenue primarily consists of billed fees for our subscriptions, prior to satisfying the criteria for revenue recognition, which are subsequently recognized as revenue in accordance with our revenue recognition policy. As of July 31, 2022, we had deferred revenue of $1.8 billion, of which $1.4 billion was recorded as a current liability and is expected to be recorded as revenue in the next 12 months, provided all other revenue recognition criteria have been met.

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts.

Cash Flows

The following table summarizes our cash flows for the periods presented (in thousands):

			Six Months Ended July 31,
			2022						2021
Net cash provided by operating activities			$	424,863					$	256,008
Net cash used in investing activities			(140,099)						(426,121)
Net cash provided by financing activities			43,327						38,799
Net change in cash, cash equivalents and restricted cash			323,761						(131,557)

Operating Activities

Net cash provided by operating activities during the six months ended July 31, 2022 was $424.9 million, which resulted from a net loss of $78.7 million, adjusted for non-cash charges of $357.3 million and net cash inflow of $146.3 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $234.0 million in stock-based compensation expense, $77.6 million of amortization of deferred contract acquisition costs, $34.1 million of depreciation and amortization, $8.2 million of amortization for intangibles assets, $4.5 million of non-cash operating lease costs and $1.6 million change in deferred income taxes, partially offset by $4.1 million change in the fair value of strategic investments. The net cash inflow from changes in operating assets and liabilities was primarily due to a $314.8 million increase in deferred revenue and a $5.7 million increase in accrued expenses and other liabilities, partially offset by a $108.9 million increase in deferred contract acquisition costs, a $50.7 million increase in accounts receivable, net, an $11.0 million increase in prepaid expenses and other assets, and a $4.7 million decrease in operating lease liabilities.

Investing Activities

Net cash used in investing activities of $140.1 million during the six months ended July 31, 2022 was primarily due to purchases of property and equipment of $118.3 million, capitalized internal-use software and website development costs of $13.2 million, and purchase of strategic investments of $7.8 million.

Financing Activities

Net cash provided by financing activities of $43.3 million during the six months ended July 31, 2022 was primarily due to proceeds from our employee stock purchase plan of $34.4 million, proceeds from the exercise of stock options of $4.9 million, and $4.0 million of capital contributions from non-controlling interest holders.

Supplemental Guarantor Financial Information

Our Senior Notes are guaranteed on a senior, unsecured basis by CrowdStrike, Inc., a wholly owned subsidiary of CrowdStrike Holdings, Inc. (the “subsidiary guarantor,” and together with CrowdStrike Holdings, Inc., the “Obligor Group”). The guarantee is full and unconditional and is subject to certain conditions for release. See Note 4, “Debt”, in our Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, for a brief description of the Senior Notes.

We conduct our operations almost entirely through our subsidiaries. Accordingly, the Obligor Group’s cash flow and ability to service the notes will depend on the earnings of our subsidiaries and the distribution of those earnings to the Obligor Group, whether by dividends, loans or otherwise. Holders of the guaranteed registered debt securities will have a direct claim only against the Obligor Group.

Summarized financial information is presented below for the Obligor Group on a combined basis after elimination of intercompany transactions and balances within the Obligor Group and equity in the earnings from and investments in any non-guarantor subsidiary. The revenue amounts presented in the summarized financial information include all of our consolidated revenue, and there are no intercompany revenue from the non-guarantor subsidiaries. This summarized financial information has been prepared and presented pursuant to Regulation S-X Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and is not intended to present the financial position or results of operations of the Obligor Group in accordance with U.S. GAAP.

Statement of Operations			Six Months Ended July 31, 2022
			(in thousands)
Revenue			$	1,022,987
Cost of revenue			285,723
Operating expenses			839,415
Loss from operations			(102,151)
Net loss			(109,947)
Net loss attributable to CrowdStrike			(109,947)

Balance Sheets			July 31, 2022						January 31, 2022
			(in thousands)
Current assets (excluding intercompany receivables from non-Guarantors)			$	2,871,134					$	2,499,941
Intercompany receivables from non-Guarantors			41,952						11,900
Noncurrent assets			1,298,168						1,201,620
Current liabilities			1,590,484						1,363,873
Noncurrent liabilities (excluding intercompany payable to non-Guarantors)			1,254,683						1,165,807
Intercompany payable to non-Guarantors			255,857						276,919

Strategic Investments

In July 2019, we agreed to commit up to $10.0 million to a newly formed entity, CrowdStrike Falcon Fund LLC (the “Original Falcon Fund”) in exchange for 50% of the sharing percentage of any distribution by the Original Falcon Fund. In December 2021, we agreed to commit an additional $50.0 million to a newly formed entity, CrowdStrike Falcon Fund II LLC (“Falcon Fund II”) in exchange for 50% of the sharing percentage of any distribution by the Falcon Fund II. Further, entities associated with Accel also agreed to commit up to $10.0 million and $50.0 million, respectively, to the Original Falcon Fund and the Falcon Fund II (collectively, the “Falcon Funds”), and collectively own the remaining 50% of the sharing percentage of the Falcon Funds. Both Falcon Funds are in the business of purchasing, selling and investing in minority equity and convertible debt securities of privately-held companies that develop applications that have potential for substantial contribution to us and our platform. We are the manager of the Falcon Funds and control their investment decisions and day-to-day operations and accordingly have consolidated each of the Falcon Funds. Each Falcon Fund has a duration of ten years and may be extended for three additional years. At dissolution, the Falcon Funds will be liquidated and the remaining assets will be distributed to the investors based on their respective sharing percentage.

Contractual Obligations and Commitments

Contractual Obligations

During the six months ended July 31, 2022, there were no significant changes to our contractual obligations under our non-cancelable real estate arrangements or our debt obligations related to the Senior Notes, as presented in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2022.

We have non-cancelable data center commitments totaling $124.0 million as of July 31, 2022, of which $84.9 million is due in more than 12 months. We also have non-cancelable purchase commitments with various parties to purchase products and services entered in the normal course of business totaling $118.4 million as of July 31, 2022, of which $100.0 million is due in more than 12 months. We expect to fund these obligations with cash flows from operations and cash on our balance sheet.

The contractual commitment amounts above are associated with agreements that are enforceable and legally binding. Obligations under contracts, including purchase orders, that we can cancel without a significant penalty are excluded.

Other Obligations

In October 2021, we entered into a new private pricing addendum with Amazon Web Services (“AWS”), which provides us with cloud computing infrastructure. Under the new pricing addendum, we committed to purchase a minimum of $600.0 million of cloud services from AWS through September 2026. As of July 31, 2022, we have utilized $158.4 million of this commitment. We expect to meet our remaining commitment with AWS.

As of July 31, 2022, our unrecognized tax benefits included $2.8 million which were classified as long-term liabilities due to the inherent uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits.

Indemnification

Our subscription agreements contain standard indemnification obligations. Pursuant to these agreements, we will indemnify, defend, and hold the other party harmless with respect to a claim, suit, or proceeding brought against the other party by a third party alleging that our intellectual property infringes upon the intellectual property of the third party, or results from a breach of our representations and warranties or covenants, or that results from any acts of negligence or willful misconduct. The term of these indemnification agreements is generally perpetual any time after the execution of the agreement. Typically, these indemnification provisions do not provide for a maximum potential amount of future payments we could be required to make. However, in the past we have not been obligated to make significant payments for these obligations and no liabilities have been recorded for these obligations on our condensed consolidated balance sheets as of July 31, 2022 or January 31, 2022.

We also agreed to indemnify our directors and certain executive officers for certain events or occurrences, subject to certain limits, while the officer is or was serving at our request in such capacity. The maximum amount of potential future indemnification is unlimited. However, our director and officer liability insurance policy mitigates our exposure. Historically, we have not been obligated to make any payments for these obligations and no liabilities have been recorded for these obligations on our condensed consolidated balance sheets as of July 31, 2022 or January 31, 2022.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based upon our financial statements and notes to our financial statements, which were prepared in accordance with GAAP. The preparation of the financial statements requires our management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates and judgments on our historical experience, knowledge of factors affecting our business and our belief as to what could occur in the future considering available information and assumptions that are believed to be reasonable under the circumstances.

The accounting estimates we use in the preparation of our financial statements will change as new events occur, more experience is acquired, additional information is obtained and our operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these estimates.

There have been no significant changes in our critical accounting policies and estimates during the six months ended July 31, 2022, as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended January 31, 2022, filed with the SEC on March 16, 2022.

Backlog

We enter into both single and multi-year subscription contracts for our solutions. We generally invoice our customers at contract signing prior to commencement of subscription period. Until such time as these amounts are invoiced, they are not recorded in deferred revenue or elsewhere in our condensed consolidated financial statements, and are considered by us to be backlog. As of July 31, 2022, we had backlog of approximately $661.7 million. We expect backlog will change from period to period for several reasons, including the timing and duration of customer agreements, varying billing cycles of subscription agreements, and the timing and duration of customer renewals. Because revenue for any period is a function of revenue recognized from deferred revenue under contracts in existence at the beginning of the period, as well as contract renewals and new customer contracts during the period, backlog at the beginning of any period is not necessarily indicative of future revenue performance. We do not utilize backlog as a key management metric internally.

Seasonality

Given the annual budget approval process of many of our customers, we see seasonal patterns in our business. We expect these seasonal variations to become more pronounced in future periods, with net new ARR generation being greater in the second half of the year, particularly in the fourth quarter, as compared to the first half of the year. In addition, we also experience seasonality in our operating margin, with a lower margin in the first half of our fiscal year due to a step up in costs for payroll taxes, new hires, and annual sales and marketing events. This also impacts the timing of operating cash flow.

Employees

As of July 31, 2022, we had 6,250 full-time employees. We also engage temporary employees and consultants as needed to support our operations. None of our employees in the United States are represented by a labor union or subject to a collective bargaining agreement. In certain countries in which we operate, we are subject to local labor law requirements which may automatically make our employees subject to industry-wide collective bargaining agreements. We have not experienced any work stoppages, and we consider our relations with our employees to be good.

Corporate Information

Our principal executive offices are located at 206 E. 9th Street, Suite 1400, Austin, Texas 78701 and our telephone number is (888) 512-8906. Our website address is www.crowdstrike.com. Information contained on, or that can be accessed through, our website does not constitute part of this Quarterly Report on Form 10-Q.

Recently Issued Accounting Pronouncements

See Note 1, “Description of Business and Significant Accounting Policies”, of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, for more information about the impact of certain recent accounting pronouncements on our condensed consolidated financial statements.