Q2 2024 Summary
Published Feb 19, 2025, 3:04 AM UTC- Strong Sales Execution and Productivity Improvements: Cloudflare delivered another double-digit year-over-year improvement in sales productivity during the second quarter, despite challenging macroeconomic conditions. This improved productivity is helping with accelerated sales cycles and improved close rates , demonstrating effective execution and the positive impact of leadership changes, including the contribution of Mark Anderson and other go-to-market leaders.
- Growing Adoption of Developer Platform: The Cloudflare Workers developer platform is experiencing significant growth, with active developer accounts increasing 20% quarter-over-quarter. This indicates strong developer interest and adoption of Cloudflare's platform, potentially leading to future growth opportunities as more applications are built on Workers.
- Increasing Large "Pool of Funds" Deals Indicate Platform Trust: Customers are increasingly signing large "pool of funds" deals, with four of the top ten customers now using this model. These deals often involve customers consolidating multiple vendors in favor of Cloudflare's comprehensive solutions, leading to higher total contract values, better expansion capabilities, and longer contract durations. While these deals may introduce some lumpiness in financial metrics, they are a positive indicator of customer trust and long-term growth potential.
- Challenging IT Spending Environment Expected to Continue: Cloudflare's management acknowledges that the IT spending environment continues to be challenging and expects this trend to persist over the coming quarters, stating that their "crystal ball still shows that it's challenging flooding for the overall IT environment over the quarters ahead."
- Decreasing Dollar-Based Net Retention Rate: The company's dollar-based net retention rate decreased by 3 percentage points sequentially to 112%, driven by slower net expansion in larger customer cohorts and changes in deal structures. This indicates that existing customers are expanding their spend at a slower rate, which may negatively impact future revenue growth.
- Revenue Recognition and Deferred Revenue Lumpiness Due to Pool of Funds Deals: The shift towards large, long-duration pool of funds deals introduces lumpiness in revenue recognition, deferred revenue, and current Remaining Performance Obligations (RPO). Management noted that these deals will "make the business a little bit more lumpy," affecting financial metrics and potentially making revenue less predictable.
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DNR Decrease Impact
Q: Has DNR bottomed or will it decrease further?
A: Thomas Seifert explained that DNR (Dollar-based Net Retention) ticked down 3 points sequentially due to net expansion and the impact of large pool of funds deals, some of which are between $40 million to $60 million in total contract value. Four of their top ten customers are now pool of funds customers. These deals affect revenue recognition and DNR, causing some noise and lumpiness in metrics. While beneficial for the business, DNR may still experience some pressure due to these factors. -
Operating Margin Outlook
Q: Expect operating margin expansion next year?
A: Thomas Seifert refrained from providing guidance for next year but emphasized they have been good stewards of investors' capital and will continue balancing growth and operating leverage. The substantial raise to operating margin guidance this year demonstrates their commitment to efficient growth. -
Pool of Funds Deals Impact
Q: How do pool of funds deals affect RPO?
A: Thomas Seifert noted that four of their top ten customers are now on pool of funds contracts, averaging around $50 million in total contract value. These deals impact RPO (Remaining Performance Obligations) and deferred revenue differently due to monthly billing and longer durations, often over three years. While they create lumpiness in metrics, they result in higher total contract values and are healthy for the business. -
IT Spending Trends
Q: Thoughts on IT spending amid tight budgets?
A: Matthew Prince acknowledged a challenging IT buying environment but highlighted that security remains an area where companies continue to invest. Cloudflare benefits by offering must-have security solutions that help customers consolidate vendors and reduce costs. They saw the largest net customer additions as a public company, driven by customers consolidating behind Cloudflare's comprehensive platform. -
Pricing Strategy Impact
Q: Effects of recent price increases?
A: Matthew Prince stated that while they implemented a price increase on their pay-as-you-go business about a year ago, it is a relatively small part of their business. The increase was well received, with minimal churn and customers acknowledging the added value. Enterprise customers did not experience dramatic price increases, and they continue focusing on delivering high ROI solutions while maintaining healthy gross margins around 78% to 79%. -
Workers Platform Growth
Q: Which products stood out this quarter?
A: Matthew Prince highlighted the Workers developer platform as a standout, noting a 20% increase in active developer accounts quarter-over-quarter. Developers are increasingly building applications on Workers, and partnerships like the one with Meta to deploy the latest versions of Llama have accelerated this growth. -
Edge AI and OHTTP Opportunity
Q: How are customers using OHTTP for privacy?
A: Matthew Prince explained that OHTTP helps disassociate user IP addresses from identities, enhancing data privacy. The protocol requires an independent third party, positioning Cloudflare as a preferred partner due to their commitment to privacy. Initially built for limited use cases, its adoption is growing, especially as AI development raises privacy concerns. -
Public Sector Momentum
Q: Momentum in federal space before elections?
A: Matthew Prince noted strong and continued momentum in the federal sector, driven by their FedRAMP certification and commitment to supporting critical infrastructure like elections. While they offer services like the Athenian Project pro bono to support democracy, this goodwill has positively influenced their reputation and relationships with public sector customers. -
Inference Opportunity Evolution
Q: Thoughts on inference opportunity and edge network?
A: Matthew Prince believes inference tasks will primarily occur on devices and networks like Cloudflare's edge network. Approximately 50% of inference tasks may happen on devices, with the remainder handled by networks close to end-users to ensure performance and comply with privacy regulations. This positions Cloudflare to capture a significant portion of inference workloads. -
CrowdStrike Outage Benefit
Q: Any benefit from CrowdStrike outage?
A: Matthew Prince stated that while they offered to help CrowdStrike during their IT outage, Cloudflare does not have a product that directly competes or replaces CrowdStrike. However, the incident highlights the importance of resilience, and customers are seeking to avoid sole reliance on any one vendor. This opens opportunities for Cloudflare to be a secondary vendor, especially as they often outperform competitors when placed side by side. -
Competitive Landscape Shift
Q: Seeing shifts in competitive landscape?
A: Matthew Prince mentioned that customers are attracted to Cloudflare's comprehensive solutions, allowing them to replace multiple vendors. While SASE is a new category and customers are still getting up and running, over time, Cloudflare's secure, reliable, fast, and programmable network offers a competitive advantage difficult for point solution vendors to match.