Morning Note: Market news and updates on CrowdStrike and Ferguson.

Market News

Ahead of today’s testimony from Federal Reserve Chair Jerome Powell, US equity markets saw some profit taking: S&P 500 (-1.0%), Nasdaq (-1.7%). Powell is expected to reiterate the lack of urgency to cut rates. The reason is that the economy’s in a “good place,” and there’s still some way for inflation to get to 2%, Bloomberg Economics said. The 10-year Treasury currently yields 4.15%, while gold remained well supported at $2,132 an ounce.

This morning in Asia, markets were mixed: Nikkei 225 (flat); Hang Seng (+1.9%); Shanghai Composite (-0.3%). The Bank of Japan will probably need at least nine years to normalise its balance sheet in the earliest-case scenario, former exec Kenzo Yamamoto said.

Ahead of today’s Budget, Sterling trades at $1.2714 and €1.1703 and 10-year gilt yields are back to 4%. The FTSE 100 is currently trading 0.3% higher at 7,664.

Donald Trump took a clear victory to the Republican nomination, winning every Super Tuesday state that had been called, except for Vermont, which Nikki Haley took. Joe Biden took all states up for grabs, making his rematch with Trump all but certain.

Brent slipped to $82 a barrel. Chinese hydrogen stocks gained as Beijing urges faster development, while nuclear stocks jumped on its strategic sector development plan.

Source: Bloomberg

Company News

Last night, CrowdStrike Holdings released results for the financial year ended 31 January 2024 which highlighted an exceptionally strong and record fourth quarter. The group provided new guidance for the current financial year (FY2025) above current market forecasts. In response the highly-rated shares were marked up by a further 24% in after-hours trade.

CrowdStrike is a US-listed cybersecurity technology company with annual revenue of more than $3bn. The CrowdStrike Falcon platform protects customers against cyber-attacks across on-premise, virtualised, and cloud-based environments running on a variety of endpoints such as laptops, desktops, servers, virtual machines, and Internet of Things devices.

The CrowdStrike Threat Graph aggregates security data across its customer base, using advanced AI techniques to create a security solution able to constantly adapt to new threats and attacks. As the company grows, its access to security data will also grow, enhancing its competitive position. The AI-native Falcon XDR platform has become the cybersecurity consolidator of choice.

The business is well placed to benefit from secular trends, such as digital and security transformation, cloud adoption, and a heightened threat environment, which the current geopolitical uncertainty has clearly exacerbated. The 2024 CrowdStrike Global Threat Report highlighted a surge in adversaries leveraging stolen identity credentials. However, at present, Cloud Security Spend is only around 1% of Cloud IT Spend, well below what is considered necessary.

The group offers more than 20 cloud modules via a software as a service (SaaS) model that spans multiple large security markets, including corporate workload security, security and vulnerability management, managed security services, IT operations management, and threat intelligence services. The group continues to add new modules organically and via M&A. The success of the group’s platform strategy and its growing brand leadership have led to a groundswell of customers turning to CrowdStrike as their trusted security platform of record.

In the year to 31 January 2024, total revenue grew 36% to $3.06bn, a touch ahead of the company’s guidance range which had been raised during the year. The group ended the year on a strong note, with Q4 revenue up 33% to $845m, better than the $839m expected by the market.

Annual subscription revenue grew by 36% to $2.9bn, while professional services grew 43% to $185m. Q4 subscription revenue grew by 33% to $796m. Annual Recurring Revenue (ARR) increased 34% to $3.44bn as of 31 January, of which a record $282m was added in final quarter. The company’s vision is to reach $10bn in ARR over the next five to seven years.

The company announced the general availability of CrowdStrike Falcon Data Protection, Charlotte AI, and Falcon for IT. It also recently agreed to acquire Flow Security, the industry’s first and only cloud data runtime security solution.

Gross retention rates remain high, while the number of subscription customers that have adopted five or more modules, six or more modules, and seven or more modules increased to 64%, 43%, and 27%, respectively, as of 31 January.

The business has strong operating leverage, with subscription gross margin moving up from 78% to 80% in the year, and achieved vastly improved operating profitability, rising from $356m to a record $660m. EPS rose from 154c to 309c, well above the company guidance of 280c-284c. Q4 EPS doubled to 95c, well above the 82c market forecast. The group generated record free cash flow of $938m (up 39%) and ended the year with cash and cash equivalents of $3.47bn.

CrowdStrike has issued guidance for FY2025, with the estimates reflecting the group’s technology advantage and strong industry tailwinds combined with a pragmatic view of current macroeconomic conditions. The group expects revenue of $3,925m-$3,989m (up 29% at the midpoint) and EPS of 377c-397c. This is up 25% at the midpoint and well ahead of current market forecasts of 375c.

Source: Bloomberg

Yesterday lunchtime, Ferguson released results for the three months to 31 January 2024, the second quarter of its financial year to 31 July 2024, and maintained its full-year guidance. In response to this update, the shares were little changed in yesterday’s session.

Ferguson (formerly Wolseley PLC) is a leading specialist distributor in North America, providing expertise, solutions and products from infrastructure, plumbing, and appliances to HVAC, fire, and fabrication. The group sells to customers across residential, commercial, and industrial sectors, with revenue derived from a mix of new construction and repair, maintenance, and improvement (RMI). The business is exposed to several positive structural trends, such as an ageing population, smaller households, and the ageing of housing stocks, which drive demand for new housing and remodelling. The market for the group’s products is exposed to the economic cycle, in particular levels of activity in new construction and property repair. In FY2023, Ferguson generated sales of almost $30bn, versus an estimated market opportunity of $340bn.

The company reports in US dollars and has its primary share listing in the US. It is now domiciling the ultimate parent company in the US, with the change to be effective in August.

During the latest quarter, the group was faced with tough year-on-year comparables. Revenue fell by 2.2% to $6,673m. On an organic basis, sales fell by 3.7%, an improvement from the previous quarter. The decrease was driven by a decline in residential sales with a smaller decline in non-residential sales. As expected, weakness in certain commodity categories drove modest overall price deflation of approximately 2% as the group lapped strong inflation comparables.

The largest business, the US (95% of revenue), fell by 3.7% in organic terms, with adjusted operating profit down 9.3% to $525m. Residential end markets, which comprise just over half of US revenue, remained subdued, while non-residential end markets, showed comparative resilience. Commercial activity was flat, while industrial was more pressured. In Canada, revenue fell by 3.3%, with profit falling from $14m to $9m.

The group’s gross margin was up 20 basis points to 30.4%, driven by strong price contribution. The adjusted operating margin fell by 70 basis points to 7.8%, in the group’s seasonally lightest quarter with fiscal year to date operating margin of 9.0%. As a result, operating profit fell by 11% to $520m, while EPS was down 9% to 174c.

The group continued to invest for organic growth, with capital expenditure guidance maintained at $400m-$450m. Free cash flow fell from $936m to $699m and the group ended the quarter with financial gearing of 1.1x net debt to EBITDA, at the bottom end of the target range of 1.0x-2.0x. The group has continued to consolidate its markets with two bolt-on acquisitions during the quarter.

The group declared a quarterly dividend of 79c, an increase of 5%. A similar rise at the full-year stage would generate a yield of 1.6% at the current share price. Considering its prospects and strong financial position, the company is currently buying back its shares, having bought $142m in latest quarter, leaving around $285m remaining under the current programme.

Looking forward, current open orders and sales per day trends support management’s expectation of improvement through the balance of the year. FY2024 guidance has been reiterated: net sales to be broadly flat and an adjusted operating margin of between 9.2% and 9.8%.

Source: Bloomberg