Cloudflare reported Q1 2024 revenue of $378.6 million, a 30% year-over-year increase.
Added 122 new large customers, with a total of 2,878, marking a 33% increase year-over-year.
Large customer revenue contribution rose to 67%, up from 62% the previous year.
Operating profit reached $42.4 million, indicating an operating margin of 11.2%.
Q1 2024 saw a free cash flow of $35.6 million.
Gross margin improved to 79.5%, exceeding the target range of 75% to 77%.
Dollar-based net retention rate remained steady at 115%.
Strategic and Operational Updates
Cloudflare’s go-to-market team is undergoing enhancements to build a world-class enterprise sales organization.
The appointment of Mark Anderson as President of Revenue has led to a 56% increase in applicants for strategic account and enterprise sales positions in March versus February.
Cloudflare continues to focus on moving upmarket and enhancing operational efficiency.
The company is investing in new product categories, including AI, while maintaining disciplined capital expenditure and cash flow management.
Customer Growth and Market Expansion
Achieved significant customer wins across various sectors, including government, technology, financial services, and energy, showcasing Cloudflare’s expansive platform and security offerings.
Highlighted partnerships and expanded relationships with major customers, demonstrating Cloudflare’s capability to land-and-expand.
Financial Guidance and Outlook
For Q2 2024, revenue is projected to be between $393.5 million to $394.5 million with operating income expected in the range of $35 million to $36 million.
Full-year 2024 revenue forecast is set at $1.648 billion to $1.652 billion, with operating income anticipated between $160 million to $164 million.
Diluted net income per share for the full year is expected to be $0.60 to $0.61.
While optimistic about long-term growth, Cloudflare remains cautious in the short-term due to macroeconomic and geopolitical uncertainties.
Product and Innovation Focus
Cloudflare Workers platform reached over 2 million active developers.
Launched several new products, including a serverless SQL database and AI capabilities, enhancing Cloudflare’s offerings in the rapidly evolving technology landscape.
Question and Answer
Cloudflare’s Progress in the SASE Market
Question
How is Cloudflare making progress in the SASE (Secure Access Service Edge) market and gaining market share?
Answer
Cloudflare’s SASE platform, built on its existing network, offers a comprehensive solution with both forward and reverse proxy products, making it highly compelling in the marketplace.
The company’s focus on performance, with a significantly faster SASE platform than competitors, is a key differentiator.
Cloudflare’s next-generation SASE platform is winning customers due to its ability to improve user experience and efficiency.
Billing Trends and Usage-Based Pricing Model
Question
How should investors interpret billings trends in the context of Cloudflare’s expanded usage-based pricing model?
Answer
Q1 billings were impacted by the timing and structure of large deals, particularly in the federal and commercial sectors, leading to some noise in quarter-to-quarter comparisons.
Cloudflare’s business is becoming more complex due to the mix of usage-based and traditional subscription models, but the company remains pleased with its overall performance.
Workers AI and AI Applications
Question
Can you provide examples of AI applications being built on Cloudflare’s Workers AI platform and explain why developers are choosing this platform?
Answer
Examples of AI applications built on Workers AI include image classification and keyword generation for an e-commerce platform, 3D model generation for a drone startup, video description, transcribing, and translation for public platforms, food image generation for an online food ordering company, image enhancement for photo and video editing platforms, song generation in multiple languages, and enterprise summarization tools.
Developers choose Cloudflare’s Workers AI platform for its performance, cost-effectiveness, and global distribution, which enables better user experiences and efficient task execution.
Considerations for Annual Outlook and Go-to-Market Changes
Question
Is Cloudflare factoring in any conservatism into its annual outlook due to potential go-to-market changes as a result of recent hires and the evolving market landscape?
Answer
Cloudflare’s approach to guidance is thoughtful and prudent, considering both tailwinds and uncertainties in the market, including potential risks associated with go-to-market transformations.
Federal Business and Market Penetration
Question
Can you provide an update on Cloudflare’s federal business, including the level of penetration and the impact of recent wins?
Answer
Cloudflare’s federal business is driven by its strong product offerings, certifications, and partnerships, as well as its reputation as a trusted and reliable partner to government agencies.
The company’s federal business has been bolstered by its response to the increasing cybersecurity threats, its FedRAMP certification, and its involvement in initiatives such as the Athenian project and Project Safe Schools.
AI CapEx Efficiency and Multi-Tenant Use of Equipment
Question
How does Cloudflare approach AI CapEx efficiency, particularly in the context of expanding GPU capacity to multiple locations?
Answer
Cloudflare’s high-margin Zero Trust and SASE products generate significant cash flow, which is then invested in areas such as AI, without requiring a proportional increase in CapEx.
The company has made strategic decisions, such as reserving space and equipment for future AI deployments, and has a unified network architecture that allows for flexible and efficient CapEx deployment.
Cloudflare’s approach to selling AI workloads, rather than renting out full machines, enables higher utilization rates and cost efficiency.
The company’s focus on inference tasks, which do not require the most cutting-edge GPUs, allows for smarter choices in GPU vendors and workload optimization.
Talent Acquisition and Retention in the AI Field
Question
How is Cloudflare navigating the competitive landscape for AI talent, and is the company experiencing any challenges in hiring and retaining engineers?
Answer
Cloudflare is seen as an attractive destination for top talent across various fields, including AI, due to its innovative culture, focus on solving complex problems, and commitment to making a positive impact.
The company has not observed an increase in regrettable attrition and remains in a strong position to attract and retain top talent.
Sales Productivity and the Impact of New Hires
Question
How is Cloudflare managing sales productivity as it accelerates new hires, and are these new hires expected to contribute to faster growth in the future?
Answer
While Cloudflare aims to hire experienced talent to shorten the time to productivity, there is still a ramp-up period associated with new hires, particularly as the company expands into larger and more complex accounts.
Enterprise Sales Strategy and the Role of Mark Anderson
Question
What stage is Cloudflare at in building its enterprise sales capabilities, and how will Mark Anderson’s expertise contribute to this effort?
Answer
Cloudflare is still in the early stages of becoming a leader in enterprise sales, with a focus on understanding customer needs, building strategic relationships, and expanding its product offerings.
Mark Anderson’s experience and leadership will be instrumental in driving the company’s growth in the enterprise market and establishing Cloudflare as a trusted partner for large organizations.
Macroeconomic Concerns and Investment Prudence
Question
Are there specific macroeconomic factors contributing to the cautious outlook, and how is Cloudflare balancing investment and prudence in this environment?
Answer
While there is no single factor causing concern, increased geopolitical uncertainty and potential changes in buying behavior are contributing to a more cautious approach to investments.
Cloudflare is committed to being prudent and responsible with investor capital and is closely monitoring the evolving macroeconomic landscape.
Nephila Acquisition and Multi-Cloud Networking
Question
How does the recent Nephila acquisition, focused on multi-cloud networking, align with Cloudflare’s Zero Trust and SASE services, and what are the key drivers behind this deal?
Answer
The Nephila acquisition enhances Cloudflare’s networking and security capabilities by making it easier for customers to connect to multiple cloud providers and leverage the company’s Zero Trust and SASE services.
The acquisition was driven by the need to provide seamless and secure connectivity across multiple clouds, and the Nephila team’s expertise and familiarity with Cloudflare’s platform reduced the integration and technical risks.
CapEx Requirements for High-Growth AI Applications
Question
If high-growth AI applications, similar to CoPilot, were to emerge on Cloudflare’s platform, would this significantly increase CapEx requirements?
Answer
While the company may need to spend more on GPUs in absolute terms, the efficiency of its architecture and the ability to optimize GPU investments based on a wide range of use cases allow for cost-effective scaling and alignment with revenue growth.
Cloudflare’s focus on adoption and building a rich ecosystem on its platform takes precedence over immediate revenue generation, and the company is well-positioned to support the potential rapid growth of high-demand AI applications.
Cloudflare’s Unique Position in Serverless and Low-Latency Market
Question
Are there any competitors emerging in the global serverless and low-latency market, and how does Cloudflare’s position in this space contribute to its long-term growth potential?
Answer
Cloudflare believes it holds a unique position in the serverless and low-latency market, with no direct competitors offering a similar combination of capabilities and scale.
The company’s diverse product portfolio, including stable, high-margin businesses and high-growth opportunities in areas like Zero Trust, SASE, and Workers, allows it to continuously expand and innovate across multiple S curves, ensuring long-term growth and market leadership.
Comparison with Hyperscale Cloud Providers and Revenue Growth Outlook
Question
Can you explain the discrepancy between Cloudflare’s outlook and the accelerated growth of hyperscale cloud providers, particularly in the context of being an on-ramp to these platforms and your positive business momentum?
Answer
The difference in revenue growth rates between Cloudflare and hyperscale cloud providers is primarily attributed to the nature of their business models, with Cloudflare’s subscription-based model offering more stability compared to the usage-based models of hyperscalers.
Additionally, Cloudflare’s focus on adoption and the early stage of monetization for AI products contribute to a more gradual acceleration in revenue growth.
