Cloudflare Q1 2024 Earnings Review
$NET Q1'24 Results:
Financial Results:
↗️$378.6M rev (+30.5% YoY, +32.0% LQ) beat est by 1.5%
↗️GM* (79.5%, +1.7%pp YoY)🟢
↗️Operating Margin* (11.2%, +4.5%pp YoY)
↗️FCF Margin (9.4%, +4.6%pp YoY)
↗️EPS* $0.16 beat est by 23.1%🟢
*non-GAAP
Key Metrics
➡️DBNR 115% (115% LQ)
↗️RPO $1.34B (+40.0% YoY)🟢
➡️Billings $388M (+24.0% YoY)🟡
Customers
➡️197,138 customers (+17.0% YoY, +7347)
➡️2,878 $100k+ customers (+33.0% YoY, +122)
Operating expenses
↗️S&M*/Revenue 41.4% (40.1% LQ)
↘️R&D*/Revenue 15.5% (16.4% LQ)
↘️G&A*/Revenue 11.4% (11.5% LQ)
↘️Net New ARR $65M ($107 LQ)
↗️CAC* Payback Period 34.0 Months (18.3 LQ)
Dilution
↘️SBC/rev 20%, -1.1%pp QoQ
↘️Basic shares up 2.5% YoY, 0.0%pp QoQ
↗️Diluted shares up 4.2% YoY, +0.5%pp QoQ
Headcount
➡️3,704 Total Headcount (+9.0% YoY, +22 added)
Guidance
↗️Q2'24$ 393.5 - $394.5M guide (+27.7% YoY) beat est by 0.1%
➡️$1,648.0 - $1,652.0M FY guide (+27.2% YoY) in line with est
Key points from Cloudflare’s First Quarter 2024 Earnings Call:
Financial Highlights:
Cloudflare reported a revenue of $378.6 million for Q1 2024, up 30% year-over-year.
The company added 122 new large customers, increasing the total to 2,878, which is a 33% year-over-year increase.
Large customer revenue contribution rose to 67%, up from 62% in Q1 of the previous year.
Leadership Changes:
Mark Anderson has joined Cloudflare as the President of Revenue to drive the next phase of growth. His experience and track record are expected to strengthen the company's go-to-market (GTM) strategies and execution.
GTM Improvement:
Cloudflare is focusing on refining its GTM operations, especially targeting large enterprise customers. The company is adding senior leaders and investing in sales productivity improvements. The recent appointments and leadership changes aim to transform Cloudflare into a strategic vendor for major enterprises globally.
The hiring rate is robust with over 350,000 applicants in Q1, driven by the company’s strong market positioning and innovative projects.
Zero Trust and Cybersecurity:
Cloudflare continues to expand its Zero Trust and cybersecurity offerings. The company highlighted several large deals, including with a Fortune 100 financial services company and a major new logo win with another large financial institution, emphasizing its strength in providing resilient and efficient cybersecurity solutions.
AI Developments:
Cloudflare has been actively developing and deploying AI capabilities across its global network, with the launch of products like Workers AI. This has included partnerships and integrations, such as with Hugging Face for deploying AI models. Cloudflare aims to make AI inference more accessible and cost-effective through its distributed network.
New Products:
The launch of new products like Cloudflare Workers, D1 (a serverless SQL database), and innovations in AI (like GPU deployment across its network) are highlighted as key growth drivers. These products are designed to meet the evolving needs of developers and enterprises efficiently.
Enhancing Multi-Cloud Networking for Security:
The acquisition of Nefeli by Cloudflare is highlighted as a strategic move to bolster its multi-cloud networking capabilities, which can directly enhance security measures. This acquisition aims to simplify the connectivity across different cloud environments, which is vital for maintaining robust security standards and ensuring seamless protection across various platforms.
Leveraging Serverless Architectures for Improved Observability:
Cloudflare has integrated serverless solutions like Baselime to enhance observability on their platform. This enables detailed insights into application performance without the need for traditional server-based infrastructure.
Customers:
Examples of customer wins mentioned include the National Cyber Security Centre of the UK and a leading technology company with a $40 million contract.
The narrative showcases Cloudflare's ability to increasingly serve as a strategic vendor to Fortune 500 companies, suggesting a strong market penetration and expansion strategy, particularly in securing and enhancing enterprise-level engagements.
Future Outlook:
Despite short-term uncertainties, Cloudflare is optimistic about the long-term opportunities. The company plans to continue investing in its go-to-market efforts, engineering excellence, and disruptive new products that offer significant value to customers.
Cloudflare highlighted its role in cybersecurity, suggesting resilience in its business model amidst global challenges.
Management comments on the earnings call.
Leadership Changes and GTM Improvement
Matthew Prince: "Looking forward to the next seven years, we will continue to be the best in the world in engineering and product, but we'll add to that world-class sales and marketing."
Mark Anderson: "The thing that surprised me the most getting in the trenches is just how incredible the product is. We've got some great people, great experiences, and gosh, I can see the early results, but I'm now planning to step on the gas, building and enabling this team that can take Cloudflare's best-of-breed products to every single enterprise everywhere in the world."
Zero Trust and Cybersecurity
Matthew Prince: "We were able to build our SASE platform on top of Cloudflare's existing network. And the advantage of that is that it means that you get a true platform, not only do you get those forward proxy products, but a lot of times we're bundling in our reverse proxy products. And that total solution is extremely compelling in the marketplace and it's something that no other SASE vendor can match."
On Government Contracts and Security:
Matthew Prince: "Last year, we achieved FedRAMP certification. That's opened a lot of FedRAMP-- excuse me, of federal deals to us. I think we've always had a great relationship with a lot of the members of the federal government. I think the thing which is hard to appreciate that, as I talk to our federal customers, is how much they appreciate that when they ask us to help with something, we step-up and help."
Observability:
Matthew Prince: "Baselime that we acquired is again giving serverless observability to our platform. That's one of the number one things that developers on our platform are looking for. And again another time where we found someone who's using our own platform in order to build out a great observability platform there."
AI
Matthew Prince: "We're ahead of schedule rolling out GPUs across our network and now have them running in more than 150 cities globally, making us what we believe is the most widely distributed AI cloud by a huge margin."
Macro Environment
Matthew Prince: "The short-term is uncertain, the long-term is bright, and so in the medium-term, we're going to keep our hands firmly on the levers of our business and thoughtfully invest in our go-to-market efforts in great engineering and in destructive new products that deliver incredible value to our customers."
New Products
Matthew Prince: "The last few months were incredible for the entire workers ecosystem. First, we crossed over 2 million active developers building applications on Cloudflare Workers."
Future Outlook
Matthew Prince: "I've never been more excited about the future for Cloudflare, the Internet, and us users who will get to enjoy the benefits of all of this innovation in so many aspects of our lives."
Customers
Matthew Prince: "Some of the benefits of a world-class leader are hard to measure in the short-term, but I'll give you one that can be clearly measured and it stood out to me. The number of applicants for strategic account and enterprise sales positions increased 56% in March versus February following Mark Anderson's appointment."
Thoughts on Cloudflare ER $NET:
🟢Pros:
+ Revenue rose by +30.5% YoY; according to Q2 guidance, revenue growth will stabilize
+ RPOs are growing +40% YoY faster than revenue
+ Company increasing margins and profitability
+ Gross margin in record level
+ Strong number of total customers added
+ DBNR stabilizing at 115%
+ GTM (Go-To-Market) strategy improvement (increased spending for S&M)
+ Zero Trust secured several strong contracts
🔴Cons:
- Diluted shares count rose by 4.2% YoY
🟡Neutral:
+- 122 new $100k+ customers added, better than 1Q 2023 (+114)
+- SBC/rev 20%
+- Billings are growing slower than revenue
+- FY revenue growth guidance hasn’t increased