Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Cloudflare Inc (NET, Financial) achieved $401 million in revenue for Q2 2024, marking a 30% year-over-year increase.
- The company added 168 new large customers, bringing the total to 3,046, also a 30% year-over-year increase.
- Gross margin was 79%, above the long-term target range of 75% to 77%.
- Operating profit was $57 million, representing an operating margin of 14.2%.
- Strong free cash flow of $38.3 million was generated during the quarter, ahead of expectations.
Negative Points
- Dollar-based net retention rate decreased to 112%, down 3 percentage points quarter-over-quarter.
- The IT-buying environment remains challenging, requiring significant effort to secure deals.
- Revenue recognition from pool of funds deals can be non-linear and may ramp over time, causing potential lumpiness in financial results.
- Network CapEx is expected to increase in the second half of 2024, reaching 10% to 12% of revenue for the full year.
- Sales and marketing expenses remain high, although they decreased as a percentage of revenue from 41% to 37% year-over-year.
Q & A Highlights
Q: Matthew, what are some of the most important changes Mark Anderson and the broader team are implementing to drive sales productivity improvements?
A: Matthew Prince, CEO: The real changes started even before Mark joined us, with better operational metrics, training, and performance management. Mark has accelerated this by hiring excellent leaders, which has up-leveled our team and improved productivity. We’ve never had a product or demand problem, and now we have the discipline and execution to match.
Q: Thomas, you noted that DNR ticked down three points sequentially. Does the raised full-year revenue guidance imply DNR has bottomed, or could it see further pressure?
A: Thomas Seifert, CFO: The decrease was driven by slower net expansion and large pool of funds deals. These deals are beneficial but create noise in metrics like DNR, deferred revenue, and current RPO. While they generate lumpiness, they are healthy for the business and indicate strong customer commitment.
Q: Matthew, given the recent CrowdStrike ID outage, did Cloudflare assist customers due to your cloud connectivity capabilities?
A: Mark Anderson, President-Revenue: We offered to help CrowdStrike directly. More generally, customers are focusing on resilience and not being sole-sourced on any one vendor. This opens opportunities for us as a second provider, and our superior performance often leads us to become the primary choice.
Q: Matthew, how are customers balancing tight IT budgets with the potential total cost of ownership savings by moving to Cloudflare?
A: Matthew Prince, CEO: It continues to be a challenging IT-buying environment, but security remains a priority. Customers are consolidating multiple vendors into Cloudflare, which offers a comprehensive solution for network performance, security, and reliability. This consolidation is beneficial in tight budget environments.
Q: Can you comment on how customers might be using OHTTP to preserve data privacy and the revenue opportunity there?
A: Matthew Prince, CEO: OHTTP disassociates IP addresses from identities, enhancing privacy. It requires an independent third-party, and Cloudflare is often chosen due to our privacy focus and technical expertise. This technology is seeing increasing use cases, especially as AI develops and privacy regulations tighten.
Q: Given the substantial raise to your operating margin for this year, how are you thinking about operating leverage next year?
A: Thomas Seifert, CFO: We have been good stewards of investors' capital and will continue to balance growth and operating leverage. While I won't give specific guidance for next year, we will maintain our philosophy of investing in Cloudflare for the best returns while driving operational excellence.
Q: How do you think about the inference opportunity overall when considering hyperscale clouds, the Edge network, and Edge devices?
A: Matthew Prince, CEO: Inference will primarily happen on devices and at the network edge. Cloudflare aims to handle inference tasks close to the end user, providing performance and regulatory compliance advantages. This positions us well against traditional hyperscale public clouds.
Q: How should we think about the business impact and revenue elasticity of more pay-as-you-go and consumption payment modalities?
A: Matthew Prince, CEO: We aim to be the network for all our customers, solving all their network-related problems. This comprehensive approach offers substantial opportunities. While price increases have been limited, our focus on high ROI and efficiency allows us to maintain healthy margins and deliver strong returns.
Q: What momentum are you seeing in the public sector, especially ahead of the federal fiscal year close and the upcoming election?
A: Matthew Prince, CEO: Federal has been a strong point for us, especially with FedRAMP certification. Our Athenian project, which provides free services to election administrators, has built trust and goodwill. This mission-driven approach resonates with public servants and drives our success in the federal sector.
Q: How much are you leaning into SASE deals where Workers is also involved, and how is the competitive landscape shifting?
A: Matthew Prince, CEO: We provide a comprehensive solution that includes SASE and Workers. While Workers isn't the primary reason for SASE deals yet, it adds significant value. The competitive landscape is shifting towards more integrated solutions, and our broad platform offers a strong advantage.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
