Tag: NET (Page 1 of 2)

Following a disappointing Q1 earnings report highlighted by challenges in the go-to-market effort, Cloudflare demonstrated renewed momentum in Q2. The sales reorganization is progressing well. Large enterprises expanded spend, adding to multi-product subscriptions across several categories. In parallel, profitability measures continue to improve with growing operating margin and cash flow.

With a mission statement to help make a better Internet, Cloudflare’s product strategy is grounded in disruption. By owning and operating a network of data centers in 300+ cities worldwide, Cloudflare enters product categories with the assumption that they can deliver better service than incumbents through lower cost, improved performance and greater customization.

This messaging appears to be resonating with new enterprise customers. In Q2, Cloudflare landed their largest Zero Trust deal to date, pushing paid seats in a single customer deployment past 25,000. A critical requirement to land new enterprise Zero Trust deals is to have existing ones as reference customers. Several major Zero Trust customer wins in Q2 may provide the tipping point for future large enterprise adoption.

The developer platform (Act 3), is starting from a smaller base, but is experiencing rapid growth. The number of Worker applications reached 10M in Q2, quadrupling since Q3 of 2022. R2 usage accelerated to 85% sequential growth in Q2, up from an impressive 25% q/q rate in Q1. These products are showing up in new customer wins, contributing to near record additions of $100k, $500k and even $1M ACV customers.

As part of Investor Day, the leadership team showed how Cloudflare’s largest customers are also those adopting multiple product subscriptions. Similar to peers in software infrastructure that report on customers paying for 4+, 6+ and even 8+ products, Cloudflare is demonstrating that an expanding product offering can drive incremental revenue. Over the last four years, the attach rates for customers with 8+, 9+ and 10+ product subscriptions have more than doubled. These customers now contribute the majority of Cloudflare’s annual revenue.

For fast-growing start-ups establishing a software and security stack from scratch, Cloudflare’s platform appears particularly appealing. This is evidenced by the rapid uptake from many of the leading AI companies. As developer-led organizations, Cloudflare’s bottoms-up sales motion naturally resonates. A new CRO with enterprise sales experience will help Cloudflare win business where a top-down approach is needed as well.

After setting an optimistic target for full year 2023 revenue growth in early February, Cloudflare management was forced to reset guidance lower after sales cycles unexpectedly elongated in March. While this can be attributed to exogenous effects like banking turmoil and macro conditions, investors are left guessing whether the Q1 results were a one-time speed bump or a precursor to further deceleration in growth.

This dilemma would be difficult to reconcile had we been left with just the Q1 report. That earnings call conflated a few contributors to the underperformance, including longer customer sales cycles and a restructuring of the GTM team. Fortunately, Cloudflare leadership scheduled an Investor Day a week later, which provided a much clearer picture of the performance drivers and a better understanding of Cloudflare’s plan to address these challenges.

Stepping back, Cloudflare’s history and future growth are grounded in disruption. An investment in Cloudflare represents a bet that their architecture choices and platform strategy will allow them to penetrate new markets through lower cost, better performance and a more robust feature set. They have applied these architectural advantages to pursue an enormous addressable market, representing some of the fastest growing segments of software and security infrastructure.

Cloudflare’s elevated valuation relative to peers hinges on the market’s assumption that Cloudflare will continue to innovate and increase enterprise adoption of their newer product categories like Zero Trust, network services and a distributed developer platform. Rapid expansion in these areas will offset the gradual decay of growth rates in their traditional product offerings like DDOS, application security and CDN.

Expectations for Cloudflare’s Q3 2022 report were high, particularly following their strong Q2 earnings. As macro headwinds weighed on the quarter’s performance, NET sold off following the report. While I don’t see anything troubling in the results within the context of the flagging IT demand environment, the market’s reaction is understandable given uncertainties going forward. Downward pressure on NET was exacerbated by a general sell-off in software companies, following underperformance from SaaS mainstays like Atlassian.

In this post, I will cover the highlights from Cloudflare’s Q3 results, focusing on growth drivers, profitability measures, customer activity and product highlights. I will tie this commentary back to the general thesis for investment in Cloudflare, concluding that the broader story hasn’t changed. Additionally, our partners over at Cestrian Capital Research recently published a review of the earnings report, including financials and technical analysis. Interested readers can check out that coverage for another point of view, as they consider an investment in NET.

After promoting 20 products and enhancements to general availability during GA Week, Cloudflare rolled through Birthday Week with even more announcements. The pace of product execution is staggering. As is typical with Birthday Week, we got a view into what to expect next from the Cloudflare product team, along with some interesting new go-to-market programs. These were all couched under Cloudflare’s mission to help build a better Internet, with a thoughtful balance of monetized and free services.

As with GA Week, I was impressed by the breadth of announcements. These spanned multiple product categories and several stand to leapfrog product capabilities forward, potentially ahead of competition. We are also seeing more examples of disruptive pricing models, where Cloudflare is leveraging their massive network scale and ownership of infrastructure to undercut competitive offerings. They appear poised to capitalize on their long time investments in data centers and global network capacity.

To get caught up on Cloudflare’s announcements from GA Week, readers can check out my prior coverage. For Birthday Week, Cloudflare provided a treasure trove of information through their blog, Cloudflare TV and press releases. This content was consolidated into a Birthday Week landing page and a handy end-of-week listing of all announcements.

In this post, I’ll try to review all the major announcements from Birthday Week and provide some perspective on what each implies for Cloudflare’s business growth. Our partners over at Cestrian Capital Research recently published an update on Cloudflare, including financials and technical analysis. Interested readers can check out that coverage as they consider an investment in NET.

After a break of just a few months, Cloudflare scheduled two of their Innovation Weeks back to back. The first was dubbed GA Week and brought a number of beta products to general availability. This served to clear the decks for Birthday Week, which is when Cloudflare traditionally introduces their next wave of future products. While expectations are always high, Cloudflare really delivered A LOT.

They announced so much, that I have to break my coverage into two posts and limit the depth to the major announcements. I consolidated all the GA Week news into this blog post summarizing the major changes, including perspective on what this means for Cloudflare’s evolving product offering. As I write this, Birthday Week is ongoing, delivering even more exciting announcements. I plan to cover that as well and will publish a summary sometime next week.

Cloudflare (NET) announced Q2 FY2022 earnings on August 4th, demonstrating better than expected resilience to the macro backdrop, in contrast to many software infrastructure peers struggling with more acute softening of demand. Cloudflare beat revenue projections for Q2 and raised estimates for the remainder of the year. More significantly, they demonstrated a renewed commitment to deliver positive free cash flow, reversing the backsliding in Q1’s report. Growth in large customer additions hit a new record, illustrating Cloudflare’s ability to cross-sell their product suite to enterprises across multiple categories. While DBNRR ticked down a point, leadership is committed to crossing the rarefied threshold of 130%. The market favored the results as the stock popped 27% the following day.

I will share a summary of my reactions to the report, structured around financial performance, product activity and Cloudflare’s broader strategy. I won’t rehash all of the metrics, as those are readily available online in the earnings report and Investor Presentation. Additionally, investors new to the Cloudflare story can catch up on the narrative through my prior coverage.

Contributing to the collective good isn’t a metric that we investors often include in our analysis of companies. This is what I generally label as “karma” – a bucket of activities taken on by companies (some more than others) that don’t appear to be directly related to a business goal. As investors, these activities may help us feel good about our companies at a superficial level, but can also raise questions about financial discipline. For some investors, these activities evoke visceral responses like “this is a business, not a charity.”