CrowdStrike settles lawsuit as it preps for IPO

May 28, 2019 View comment (1)
Wall Street will soon be getting a new cybersecurity debut that is now relieved of any major lawsuits.

Cybersecurity software developer CrowdStrike revealed its S-1 earlier this month, but one major issue the company was facing was still up in the air until late last week: a two-year lawsuit against research firm NSS Labs over test results for one of CrowdStrike's products.

A settlement has now been reached in the dispute; this likely comes as a relief for CrowdStrike, which has a history of losses in a now-familiar IPO pattern on Wall Street. Founded in 2011, the Bay Area-based company posted a net loss of $140.1 million on $249.8 million in revenue for the year ended January 31, 2019, up from a $135.5 million net loss on $118.8 million in revenue for the previous year.

Here's a look back at the company's fundraising history:
  • February 2012: $26 million Series A at a $51 million valuation
  • August 2013: $30 million Series B with a $170 million valuation
  • July 2015: $100 million Series C with a $700 million valuation
  • May 2017: $100 million Series D with a $1.0 billion valuation
  • October 2017: $25 million Series D1 with a $1.1 billion valuation
  • June 2018: $200 million Series E with a $3.3 billion valuation

A lengthy legal saga

In 2016, CrowdStrike contracted with NSS Labs to test its Falcon endpoint security software. The contract was later revoked, however, reportedly over concerns of the research firm's testing quality. Specifically, CrowdStrike alleged that the testing process was falsely flagging "legitimate" software, such as Skype and Firefox, as malicious, according to ZDNet. CrowdStrike also alleged that NSS pursued an unauthorized copy of its software through a reseller, which the cybersecurity company claims ultimately tainted the final results, labeled as "incomplete," again per ZDNet.

In February 2017, CrowdStrike filed its lawsuit and sought an injunction to prohibit the results from being released. Its request for a restraining order was denied citing a lack of evidence it would be materially harmed, with the judge noting at the time that the company could instead seek to recover damages resulting from the fallout of the report's release.

The conflict continued to escalate, and in September 2018, NSS filed an antitrust suit against CrowdStrike, Symantec and ESET, claiming they were conspiring to restrict independent product testing.

A confidential settlement has now been reached for an undisclosed amount. What is readily visible, however, is a statement from NSS extending a "sincere apology" to CrowdStrike and retracting its "inaccurate" test results.

Looking ahead to the public market

Settling its lawsuit has afforded CrowdStrike some relief from what would have weighed on investors in its upcoming public debut.

While the company continues to grow its net losses alongside revenue growth, there has been a strong push for increased marketing and customer acquisition efforts. For the year ended January 31, 2019, the company reported spending $172.7 million on sales and marketing expenses, sharply up from the $104.3 million spent in the previous year.

Although the company is in the red, CrowdStrike possesses a large amount of potential in the form of increasing its customer count. Each customer is highly valuable, as its $219 million in revenue was delivered largely from a small user base of only 2,516 paying subscribers for the year ended January 31, 2019. This represents a 103% YoY growth from the 1,242 customers it reported a year prior.

In this aspect, it makes sense the company would be spending so heavily on marketing, as it stands to easily make that back should it acquire even a comparatively small amount of new, paying customers.

The company plans to trade on the NASDAQ under symbol "CRWD." Pricing has not yet been announced, with Goldman Sachs, J.P. Morgan, Bank of America Merrill Lynch and Barclays as named underwriters.

Featured image via Vladimir_Timofeev/iStock/Getty Images Plus

Related content