Release Date: November 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Cloudflare Inc (NET, Financial) achieved a revenue of $430.1 million in Q3 2024, marking a 28% year-over-year increase.
- The company added a record 219 new large customers, bringing the total to 3,265 large customers, also up 28% year over year.
- Gross margin remained strong at 78.8%, above the long-term target range of 75% to 77%.
- Free cash flow was $45.3 million, exceeding expectations while investing in network enhancements.
- Cloudflare's go-to-market transformation reached a critical inflection point, with improvements in sales productivity and a focus on enterprise sales.
Negative Points
- Dollar-based net retention decreased to 110%, down 2 percentage points quarter over quarter, due to a shift to pool of funds deals.
- Some larger deals in the US slipped out of the quarter, attributed to transitional changes under new sales leadership.
- Sales cycles lengthened during the quarter, impacting short-term revenue recognition.
- The IT spending environment remained cautious, with customers emphasizing cost efficiency and ROI.
- Despite improvements, the sales capacity in North America was constrained, affecting the ability to close larger deals.
Q & A Highlights
Q: Matthew, what is your outlook on the external business environment, and can you provide more details on the US-based deals that slipped?
A: Matthew Prince, CEO, noted that the macro environment appears slightly improved, with strength in Europe and Asia. North America has leveled off to slightly improved. The focus is on internal execution improvements, particularly in North America, where sales productivity is expected to increase significantly in Q1 2025.
Q: How are the pool of fund deals impacting net revenue retention (NRR) and revenue?
A: Thomas Seifert, CFO, explained that pool of fund deals now represent 10% of new ACV booked, which pressures NRR in the short term but reduces friction for customers. This trend is expected to continue for the next two to three quarters, providing long-term expansion opportunities.
Q: Can you provide more color on the AI landscape and feedback on Workers AI?
A: Matthew Prince highlighted the rapid adoption of Workers AI, with significant performance improvements and cost efficiency for customers. Cloudflare's ability to deliver inference close to users and achieve higher GPU utilization rates is a key differentiator, leading to increased customer interest and contracts.
Q: What direction does CJ Desai want to take Cloudflare's product development?
A: Matthew Prince emphasized CJ Desai's focus on enterprise needs, ensuring Cloudflare's product and engineering teams deliver enterprise-class features. Desai's leadership is expected to drive significant innovation and product development, enhancing Cloudflare's offerings for large enterprise customers.
Q: How important is Workers in the overall platform shift and adoption?
A: Matthew Prince stated that Workers is in the early stages of its growth curve, driving adoption and excitement among developers. It often leads to broader platform adoption, with customers using up their pool of funds quickly due to the innovative capabilities Workers offers.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
