CrowdStrike outage puts its financial reporting under scrutiny, too
CrowdStrike’s disastrous software update ought to put its financial reporting, not just its product issues, under an unwelcome spotlight. Take, for instance, a self-defined measure that the cybersecurity giant calls “annual recurring revenue," or ARR. This isn’t revenue using that term’s standard definition under accounting rules, but it is among CrowdStrike’s most prominent headline numbers and one on which management has trained investors and securities analysts to place great emphasis.
It also looks uniquely suspect following the global outage that CrowdStrike caused. ARR is a nonstandard accounting term used by a lot of software-as-a-service companies without a common definition for what it means. A simple example would be a customer with a $3 million, three-year contract.
The ARR in year one for that customer would be $1 million. Some cybersecurity companies say they use ARR to help determine executive pay, but don’t show a number for it in their regular financial reports. Some companies say the “A" in ARR stands for “annualized" instead of “annual." Others, including CrowdStrike, say the “A" stands for “annual" but then define it as “annualized." What is more, some count only contracts still in place in their ARR, while others in certain circumstances may include some contracts that have expired.
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