Q3 2024 Earnings Summary
- Cloudflare has reached a key inflection point in its go-to-market transformation, with net sales capacity having bottomed out, and expects sales activity and ACV to improve moving forward. Sales productivity increased by 22% year-over-year in Europe and 40% over the past 3 quarters in Asia, and similar improvements are anticipated in North America. ( , )
- Cloudflare's innovative products, such as R2, D1, and Workers, are enabling customers to build complex applications, including AI workloads. This positions Cloudflare as an attractive platform for AI inference as models become more demanding, driving adoption and potential growth. ( , )
- Cloudflare anticipates significant growth in its public sector business, leveraging its FedRAMP certification and strong relationships. The company expects the public sector to reemerge as a major driver of growth, with no roadblocks to winning more federal business. ( )
- Cloudflare is facing execution challenges in its largest market, North America, impacting sales productivity and potentially delaying revenue growth acceleration. The CEO mentions that they have room to improve internal execution in North America and are working on rolling out improvements from Europe and Asia to the U.S. market.
- The shift to 'pool of funds' contracts is putting pressure on short-term financial metrics such as net retention rate (NRR), committed remaining performance obligations (CRPO), and revenue recognition, which could negatively affect near-term financial performance. The CFO acknowledges that 'pool of funds' deals are pressuring NRR and CRPO in the short term and expects this to continue for the next 2 to 3 quarters.
- Cloudflare's public sector business has not been a standout performer in 2024, potentially indicating slowing growth in that segment. The CEO notes that while the public sector continues to perform, it hasn't been a standout star compared to the previous year.
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Revenue Growth Timing
Q: When will revenue growth accelerate again?
A: Thomas explained that revenue, being a lagging indicator, is expected to accelerate after bottoming out. They've reached an inflection point in net sales capacity, a leading growth indicator, which should translate into increased ACV and future revenue growth. He noted that APAC revenue was up 38%, demonstrating successful conversion and transition in that region. -
AI Inference Deals
Q: Can you provide color on AI inference growth and Workers AI?
A: Matthew highlighted that their AI platform is gaining traction rapidly. A leading AI company signed a $7 million 1-year contract to move their inference to Cloudflare's platform, achieving better performance and higher ROI compared to managing it themselves on hyperscale public clouds. Cloudflare's ability to deliver inference close to users and achieve higher GPU utilization allows customers to save costs. -
Sales Capacity Improvements
Q: Was there a pronounced impact from sales pushouts this quarter?
A: Matthew noted that they had to cut deeper in North America than initially expected, affecting capacity. However, they foresee an inflection point starting in Q1, with capacity ramping up as new hires reach productivity. They've made productivity gains in other regions and are now applying that to North America, anticipating future growth. -
Workers Adoption Growth
Q: How important is Workers in platform adoption?
A: Matthew stated that Workers is in the early stages of its growth curve but experiencing steeper growth than imagined. While not yet optimizing for revenue, Workers drives platform adoption, with customers often using up their entire pool of funds due to enthusiasm for building new tools on Workers. -
Impact of CJ Desai Hire
Q: What's the impact of CJ Desai on product development?
A: Matthew expressed that CJ brings a strong focus on the enterprise, crucial as they build out a go-to-market team for large deals. CJ excels at delivering enterprise-class features, and Matthew is excited about upcoming developments under CJ's leadership. -
Pool of Funds Impact
Q: How should we think about the impact of pool of funds deals?
A: Thomas mentioned that pool of funds deals reached 10% of the quarter's share. While they pressure NRR and potentially revenue in the short term, they reduce friction for customers consuming their products. This impact is expected for the next 2 to 3 quarters but provides upside from expansion opportunities. -
Public Sector Performance
Q: Can you update us on public sector performance?
A: Matthew said that the public sector was strong in 2023 but hasn't been a standout recently. They're nurturing relationships and expect it to reemerge as a growth driver. Their work during elections has been appreciated, and they anticipate the public sector to continue being a growing part of the business. -
Advancing AI Models Impact
Q: How will advancing AI models affect your architecture?
A: Matthew explained that Cloudflare excels at distributing complex tasks across their network. Even with models requiring multiple machines, they've efficiently split tasks to achieve higher utilization. Their ability to move data faster and more securely enables them to handle the increasing demands of advanced AI models. -
Customer Financing Demand
Q: Are customers seeking financing assistance?
A: Matthew stated that they do not provide customer financing. As a SaaS provider, customers pay as they consume, and there's not significant demand for financing assistance. -
R2 and D1 Contribution
Q: How are R2 and D1 contributing to AI growth?
A: Matthew noted that R2 is instrumental in AI workloads, serving as a gateway for customers by moving large datasets to where there is excess GPU capacity. This helps win more AI workloads, especially in inference. D1, being a traditional SQL database, is less directly involved in AI.