In this podcast, Motley Fool analyst David Meier and host Mary Long discuss CrowdStrike's earnings and a tender offer from Monster Beverage.
Motley Fool analyst Asit Sharma catches up with John McCool, chief platform officer at Arista Networks. They discuss Arista's role in the AI race, how competition fuels innovation, and what's next for the cloud-based networking company.
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This video was recorded on June 5, 2024.
Mary Long: The Falcon has landed. You're listening to Motley Fool Money. I'm Mary Long, joined today by David Meier. David, thanks for hanging out with me this morning.
David Meier: Thank you for having me. I can't wait.
Mary Long: You've said we've got a lot to talk about so we can get right to it. CrowdStrike, the cybersecurity company, reported their earnings after the bell yesterday. This morning, the stock is up nearly 10%, and here's why. Revenue's growing over 30% a year, bottom line also improving, free cash flow, and free cash flow margin also up. I see a lot of green here, David. Is there anything not to like about this report?
David Meier: No. It was awesome.
Mary Long: Next question.
David Meier: Next question. No, there really isn't. One thing we should also point out is management increased their revenue guidance for the year above and beyond what they beat during this quarter and what they're expecting next quarter. It is very clear not only are good things happening today, they expect good things to happen tomorrow. If there's one quibble, maybe we could have, it's that first quarter net new annualized recurring revenue only grew at 22% relative to 30% top-line growth. But like I said, that's just a quibble. It was awesome.
Mary Long: Only 22%. [laughs] Nearly every analyst on this call, it's almost funny. As soon as they start asking questions, everyone prefaces their question with congratulations, and gives accolades to management team on this report. That's in part because CrowdStrike has such impressive results, but also because competitors that have reported in the past few weeks have had more of a mixed bag. Palo Alto Networks, for instance, they grew revenue but had slow billings growth. When you line CrowdStrike up against other companies in this space, what is CrowdStrike doing that the others aren't?
David Meier: There is some macroeconomic uncertainty out there that affects everyone. But what CrowdStrike is doing is they are getting their message out effectively to buyers and potential buyers, and those people are coming to the platform in a big way. I normally don't like to do this but I think the CFO summed it up perfectly in the call when he said this, I'm going to read it really quickly. "Customers are embracing CrowdStrike's platform strategy more than ever, as evidenced by the number of deals with eight or more modules, which grew 95% over Q1 of last year." This is me interjecting, that could be from a small number but that's still impressive. To continue, "Subscription customers with five, six, or seven or more modules grew 65, 44%, 28% of subscription customers, respectively; and the number of deals involving Cloud Identity or Falcon Next-Gen SIEM modules more than doubled year over year. Additionally, our dollar based gross and net retention rates were consistent with our expectations, as we are executing well across landing, retaining and expanding our customers." That says it all. They have a cybersecurity technology platform that works, and people want to be a part of it. They come to the platform and they're just not leaving. To caveat, let's say competitors aren't going to be sitting still, but right now, CrowdStrike is really driving things in the cybersecurity market.
Mary Long: I know you're not a salesperson, but if you were a CrowdStrike salesperson, how are you getting more people to come to the platform? Do you just say, hey look, talk to existing customers, that speaks for itself?
David Meier: Within the call, they said that actually some of that is just inbound traffic. Meaning, there are customers out there that they say aren't happy with some of their products, and they're like, "Hey, CrowdStrike's doing well. Let's give them a call." That's the salespersons dream. I don't have to reach out to people. However, again, if you have a set of technologies that are working, and people know about them, and you're getting the message out there, that's the marketing, that's the sales messages, they have the relationships with people. They're probably reaching out to a lot more within their customer relations. Who else can I reach out to? It's all working for them right now as evidenced by the phenomenal financial performance that they're putting up.
Mary Long: I was talking to Tim Beyers about sales force last week, and one of the things that we saw in that call was management saying they had slower revenue growth and they were attributing that to the fact that so many companies are reevaluating every dollar, and they're looking at their budget. You see the opposite of this in this report with management saying companies are really doubling down on cybersecurity spend. That all goes to just another point in the column that you were just pointing out of everything seems to be going well for CrowdStrike right now.
David Meier: Just to reiterate what you've said, I follow a lot of different companies in the software market. You're exactly right. They're all saying that budgets are tight, sales cycles are elongating, the macro is creating some uncertainty, not everybody wants to buy. Now, CrowdStrike is bucking that trend. Again, I think it goes back to they have a product that works. They know how to message it, and there's probably plenty of word-of-mouth marketing that they're getting for free from their current customers. As a result, more and more people are coming to the platform and they're retaining them and upselling them, so it's all good for CrowdStrike right now.
Mary Long: I counted almost 50 uses of some version of the word consolidate throughout this call. Why is consolidation so central to CrowdStrikes story and the success that we've seen today?
David Meier: That's a great observation and a great question to follow it. The cybersecurity market is huge, and it's filled with lots of different players, lots of different vendors. Some of them have niche technologies or perform this task well. Only a few have actually really tried to become one stop shops, and a big one that's done it over the past decade is Palo Alto Networks. What's been happening or what I've been seeing over the past few years is that older established companies have been combining together. One example would be Cisco buying Splunk in moves that are more oriented toward trying to become a one stop shop model. We have CrowdStrike, which started as an endpoint security vendor, they've made some acquisitions over the years as well, and they've developed new technologies to expand their base to get into Cloud security, data security, identity security, things that are adjacent to the endpoint. They think, as a result of customers telling them that they would like an alternative SIEM product, SIEM stands for security information and event management. The management team says, hey, there's latent demand out there. In fact, it's that inbound calls that I talked about earlier. Hey, do you have this? Would you develop it? They're using that as a signal to say, ''Hey, we have to put our foot on the accelerator of becoming more of a one stop shop''. The idea is, if they can do that better than the legacy vendors out there, more and more people will come to the platform. They'll be able to take additional market share away from those vendors. Once the folks come onto the platform, they'll be able to capture more share of wallet for those customers because right now, CrowdStrike customers are delighted. They love what they're getting from the platform. I think it's actually really smart of management to be saying, ''Hey, this is the time''. If there are market forces out there that are saying people are trying to combine together in order to protect their market share as opposed to grow it, now is the time for us to go on the offensive, and that's exactly what they're doing.
Mary Long: Another word you would catch a lot of mentions of if you tuned into this call or read through the transcript, would be Falcon. For listeners that are unfamiliar with the ins and outs of cybersecurity platforms, what is Falcon, and what makes it so sticky?
David Meier: Yes. Very simply, Falcon is the name of CrowdStrikes cybersecurity platform. As a customer, you can come in, you can evaluate what they offer, and then you can decide, what products on the platform do I need and would like to activate? Then in order for customers to get access to those, they have to put together a subscription via a contract, so there's a certain amount of dollars they're willing to buy for a certain amount of time. Customers right now believe they are getting lots of bang for their bucks. They're getting excellent return on investments because that's essentially what this is. They're outsourcing the investment of their cybersecurity to CrowdStrike, and they expect a return on that. Right now, as a result of all this, that's why the platform is attracting more and more customers, as well as retaining them.
Mary Long: One of the things that George Kurtz said on the call is that, "When a platform delivers real value, you don't have to give it away''. That just puts a bow on everything that we've discussed this morning of, when you have a product that the quality of which speaks for itself, you have pricing power, and you can retain your customers. That seems to be exactly what CrowdStrike is doing here.
David Meier: That quote is just money. [laughs] That quote is so good because it's exactly right. There are many times in the competitive situation, some people might be fearful. We got to continue to do better, we got to give our customers more in order to retain them. If you've demonstrated it, they're not leaving. [laughs]In some respect, no matter what price you charge, although there are definitely limits out there.
Mary Long: There's not really a smooth way to make this transition, so I'm just going to do it. We're going to move from cybersecurity to energy drinks. We're going to move to energy drinks because Monster Beverage initiated a tender offer for its shares through a modified Dutch auction. This is a one time event, and it happens outside of the normal flow of share repurchases. That offer actually ends today, but I wanted to hit on it because it's a unique circumstance and thought it might be an interesting thing to dive into here. David, let's start with the basics. How is a Dutch auction different from regular buybacks?
David Meier: Sure, that's a great question. In a regular share repurchase plan, the company hires an investment bank to go out and purchase shares in the open market, just like any one of us do. They have a brokerage account and they're buying shares and using the company's money that they have designated for the buyback to purchase those shares. You're at the mercy of whatever the market is offering your shares at, and it changes over time. Some days, as a fictitious example, some days you'll get them at 100, some days, you'll get them at 95, some days you'll get them at 105. That type of a thing. What the Dutch auction, and in this case, the modified Dutch auction. What that does is that says, ''Hey, I, Monster, I'm willing to buy shares between the prices of, in this case, $53 and $60, and here's what you have to do in order for me to buy your shares''. You have to tell me, one, how many shares you're willing to sell to me, and two, what price would you like. Essentially, what this modified Dutch auction does is it creates an order book, very similar to what a broker or an investment bank is doing when they try to match buyers and sellers. Rather than the price fluctuating, what they do is they look at this order book, and from the lowest price up, they see what price will actually clear all the shares. Meaning, let's say you have a million shares that you're trying to sell, some are at 53, some are at 53.50, 54, etc. What's the single price where I'm willing to buy back all the shares or said differently, customers or investors are willing to sell their shares to me? Instead of share price fluctuating, that's the price that everyone gets. If you were willing to sell your shares at 53 and you get, let's say, 56 for them, you've come out ahead. But if you were willing to sell them at 60, you're a little behind. That's essentially what it does. It makes the process a little more orderly, and it sets a single price for all the shares to clear based on the order book that they've generated.
Mary Long: The idea behind this offer with Monster is that it will allow co-CEOs, Hilton Schlosberg and Rodney Sacks, to cash out on some of their equity in the company. We at the Fool like to see internal ownership. [laughs] Is the flip of that when co-CEOs publicly want to sell shares, does that become a red flag, a yellow flag?
David Meier: I'm going to say no flag.
Mary Long: No flag.
David Meier: No flag. Not in this no. Context is everything because you're exactly right. You know what? Generally speaking, within the market, if they were trying to sell shares into the open market, people would go, ''My gosh, they know something. They're the owners and founders and co-CEOs. They know something. Why are they selling? We must sell''. In one respect, the reason that they did the Dutch auction was actually to promote an orderly sale. We also have to remember, Schlosberg and Sacks, they've been with this company since 1990. This is a way for them to sell shares from their estates, which, as I checked beforehand, they had over 58 million shares in this dual trustee account, so they're offering up a little over 20 million shares. They're not quite selling half. It's a little more than a third of their stake. It's not like they don't own it, but within the marketplace, they have communicated to say, this is what we're doing, we're offering this many shares. This is why we're doing it, to help with estate planning because we're getting older. People are more likely to go, that makes sense, and they're doing it separately from the normal buyback process so that if you as an investor want to take advantage of it, you can. You can sell right along with them. Again, I don't see this as a flag. You go back to the Peter Lynch quote, ''You can sell for many reasons but there's only one reason you buy''. I think that's true. Anybody can sell for any reason, and they're doing it. I would believe what they're saying from estate planning sense. They've done quite well since [laughs] investing in this company.
Mary Long: David, thanks so much for talking through these two companies with me today. Always a pleasure to chat with you.
David Meier: Thank you for having me.
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Mary Long: If you're building an AI product, your customers need a fast, reliable way to connect to the data centers where those products live. Up next, full analyst Asit Sharma speaks with John McCool, Chief Platform Officer at Arista Networks, for a closer look at a company with a pick and shovel approach to the AI feud.
Asit Sharma: John, I'd like to ask you about one of the opening remarks in Arista's recent earnings call earlier this month. Longtime CEO Jayshree Ullal said, and I'm quoting here, "Amidst all the network consolidation, Arista is looking to establish ourselves as the pure play networking innovator for the next era, addressing at least a $60,000,000,000 total addressable market in data driven client to Cloud AI networking." Now, that last bit is sort of a new term for me. Can you explain this concept of client to Cloud AI networking?
John McCool: Sure. I think with all the consolidation that we've seen in the industry, I think we took a step back and realized that we're one of the few still just focused on the network from a pure play perspective. We wake up every day thinking about how operators will run their networks, what information they get to run those networks effectively and to keep them secure. While Arista started and its heart was in the data center, both on the enterprise and the Cloud side, over the last decade, we've really built out the portfolio to do data center interconnect with routing capability, routing out to end users, campus access products, so everything you need to connect your client from wherever you are, from a mobile perspective, into the network, to the data center, to your AI assets, that's Arista.
Asit Sharma: I'd like to move on to a very interesting topic for many of our listeners today, which is competition that Arista faces. For those who have followed the company for a long time, there are some familiar names that you all have competed with, very successfully. I might add. Cisco, Juniper Networks, and the like. But at least in one part of your business, there's a competitor that those who don't follow the tech landscape as closely may not be aware of, and that's in Nvidia. Of course, what I'm referring to is a computer networking communication standard, that's called InfiniBand that's promoted by Nvidia through its acquisition, a few years ago, of a company called Mellanox. Now, Arista Networks has long backed the defacto computer network and communication standard called Ethernet. Many of us are familiar with that name, I myself remember those days of plugging my computer into the Ethernet port to get a faster bandwidth. I was just curious, if we could talk a little bit about this. In general, I hear InfiniBand being praised for its low latency as a standard, but it also has limitations. Ethernet has a much higher bandwidth ceiling, you mentioned 800 gigabyte port speeds. I don't think that InfiniBand quite reaches those speeds as yet. It's curious if you could walk us through these two competing standards.
John McCool: Sure. Maybe I'll give it a little more context on this setup here. What's happening as folks are building out AI, they're putting together clusters of GPUs in their networks. We refer to the connections to those GPUs as a front end network and a back end network. If you're interacting with AI and either typing something or submitting some drawing or video that's going to be rendered or changed by an AI cluster, it goes through the front end network and goes into that cluster, and then cluster starts operating on that information with a high-performance communication from GPU to GPU. It's not one single GPU that's doing the AI, if you will. It's an entire cluster, and the workload between those GPUs is very intense, and you have a very expensive endpoint in that GPU that you're very interested in keeping fed with data and information to get your best utilization out of that asset, if you will. That's the context. What is the back end network for GPUs? Nvidia has integrated their GPUs with InfiniBand, and we'll offer that as a design reference or stack, if you will, to build out a GPU cluster, and Ethernet is increasingly viewed as an alternate to that technology. Just some facts on InfiniBand itself. It was created by a group for high performance computing. At the time, a number of companies were frustrated that Ethernet was only one gig per second, and saw an opportunity to move to 10 gig, and InfiniBand encompassed this 10 gig interface. The first to do that, as well as get a better support by doing DMA or direct memory access from computer to computer on the host side called RDMA. Those two innovations as well as a credit based congestion control for InfiniBand were very important in those early HPC clusters. Ethernet doing what Ethernet does, which is basically evolving as a community to take on new use cases and increase levels of standardization said, well, we could do 10 gigabit. Also, we could take this RDMA construct and run it over Ethernet, and developed a technology called Rocky Version 2, RDMA over converged Ethernet, and basically do a similar function than InfiniBand. Time has gone on. Those capabilities are still in Ethernet today, and we've had many customers deploy AI on top of Ethernet as the back end and it's performed extremely well.
Asit Sharma: Interesting how two worthy rival standards can promote innovation as one seeks to leapfrog the other. I wanted to ask you a bit about hardware requirements from the aspect of development. How you think about routers and switches in this new age where the AI data center is driving a lot of the thinking around networking? For a long time, you all have had many advantages versus competitors. You have a great product, robust development. As we've talked about, you offer a way for developers to have a lot of control over their network. What's changing as you in charge of platform here at Arista, look out over the landscape? What's different today than it was before generative AI burst onto the scene?
John McCool: Let me start with maybe one thing that is the same or continuing because of AI. We've always focused on these Cloud networks, which always drove the highest performance networking, 100 gig moving to 400 gig. CPUs continue to drive performance, but not to the extent and weight that we see these GPUs. The concern about stalling and not utilizing your assets well is driving a hyper focus to the next generation with 800 gig and folks are very excited about seeing that technology. Certainly, it would have happened at some point with the traditional data center, but the GPUs are really putting that performance aspect front and center. The second piece that is different or changing is, because of those speed increases, we typically just would worry a little bit about power, but mostly about signal integrity and the integrity of the boards. Thermal power and being able to deliver power is becoming a key focus for our customers. Not just for the network, but these GPUs themselves, and then how they power and cool their data centers is becoming an increasing focus for customers across the board. Our teams are spending a lot of time on this generation, but also thinking two generations out around how we will cool and power the next generation networks.
Asit Sharma: That's so interesting to hear you say that, because it seems that every tech business that we study that's involved in this ecosystem, from Microsoft on down to small start-ups are grappling with this same problem. It affects everyone. You all have made such a successful transition into the new data center and new modes of networking. As the person in charge of platform at Arista, what in your mind is the single most important thing for the business to focus on in terms of strengthening the platform over the next five years?
John McCool: I think the breadth of the use cases that we now serve and are going to continue to serve increases. In my role developing the hardware platforms, the breadth of those platforms from the highest end GPU AI-centric devices that interconnect the largest scale is at one extreme, and on the opposite extreme, the access point that goes into some remote site that someone has, and being able to operate the consistency of those in the same manner through a single operating system with a single management stack becomes the challenge. Basically, it's physical network is the infrastructure for these additional two layers to run across, independent of size and scale, and that's the challenge that our team's lining up to execute on the next ride.
Mary Long: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.
