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Cloudflare, Inc. (NET)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 revenue was $459.9M, up 27% YoY; non-GAAP operating income was $67.2M (14.6% margin), and non-GAAP diluted EPS was $0.19, while free cash flow was $47.8M (10% margin) .
  • Large customer mix strengthened: revenue from large customers rose to 69% and $1M+ customers reached 173 (47% YoY); dollar-based net retention improved sequentially to 111% .
  • 2025 outlook aims to reaccelerate growth: Q1 revenue $468–$469M and FY revenue $2.090–$2.094B; network CapEx planned at 12–13% of revenue to support Workers AI inference demand .
  • Consensus estimates from S&P Global were unavailable due to request limits; results exceeded company’s prior Q4 guidance (revenue $451–$452M, non-GAAP EPS $0.18) which implies a beat vs guidance; consensus comparison cannot be provided . S&P Global consensus data unavailable.

What Went Well and What Went Wrong

What Went Well

  • Record growth in $1M+ customers (173, +47% YoY) and stronger large-customer mix (69% of revenue); close rates and sales cycles improved into Q4. “We saw record growth in our largest customers… closing the year with 173… more than half… in Q4 alone.” .
  • Go-to-market execution: double-digit YoY increases in sales productivity for five consecutive quarters; ramped AEs trending up; enterprise sales hiring up 84% YoY. “Net sales capacity turned the corner exiting 2024… capacity and ramp reps begin to meaningfully accelerate.” .
  • AI momentum: Workers/Workers AI cited as “killer application” for inference and agents; notable customer wins (Fortune 100 $20M, leading AI $13.5M, retailer $10.8M) and strong ROI positioning. “The killer application for Cloudflare Workers is turning out to be AI… agents… best price performance for AI inference.” .

What Went Wrong

  • Gross margin contracted to 77.6% (down 120 bps QoQ and 130 bps YoY) as paid traffic mix increased allocations to cost of goods sold; free cash flow margin declined to 10% from 14% in Q4’23 .
  • Variable revenue/consumption remains new with limited historical seasonality; management maintained prudence for Q1 despite strong Q4 signals .
  • Continued near-term headwinds to DNR from pool-of-funds contracts (revenue recognition shape change), though trend is stabilizing at 111% .

Financial Results

MetricQ4 2023Q3 2024Q4 2024
Revenue ($USD Millions)$362.5 $430.1 $459.9
GAAP Gross Margin (%)77.0% 77.7% 76.4%
Non-GAAP Gross Margin (%)78.9% 78.8% 77.6%
GAAP Operating Income (Loss) ($M)$(42.8) $(30.8) $(34.7)
Non-GAAP Operating Income ($M)$39.8 $63.5 $67.2
GAAP EPS (Diluted) ($)$(0.08) $(0.04) $(0.04)
Non-GAAP EPS (Diluted) ($)$0.15 $0.20 $0.19
Operating Cash Flow ($M)$85.4 $104.7 $127.3
Free Cash Flow ($M)$50.7 $45.3 $47.8
Free Cash Flow Margin (%)14% 11% 10%

Segment/Geography Mix (Q4 2024):

RegionQ4 2024 Revenue Mix (%)
U.S.50%
EMEA28%
APAC14%

KPIs (Q4 2024):

KPIQ4 2024
Paying Customers~237,700
Large Customers (> $100K ARR)~3,500; +232 added in Q4
$1M+ Customers173; +55 in 2024
Revenue from Large Customers69%
Dollar-Based Net Retention111% (up 1ppt QoQ)
Remaining Performance Obligations (RPO)$1.687B; +12% QoQ, +36% YoY
Current RPO (% of total)70%
Cash, Cash Equivalents, and AFS Securities$1,855.9M (12/31/24)
Network CapEx (2025 plan)12–13% of revenue

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($M)Q1 2025—$468.0–$469.0 New
Non-GAAP Operating Income ($M)Q1 2025—$54.0–$55.0 New
Non-GAAP Diluted EPS ($)Q1 2025—$0.16 (≈362M shares) New
Effective Tax Rate (%)Q1 2025—21% New
Revenue ($M)FY 2025—$2,090.0–$2,094.0 New
Non-GAAP Operating Income ($M)FY 2025—$272.0–$276.0 New
Non-GAAP Diluted EPS ($)FY 2025—$0.79–$0.80 (≈366M shares) New
Revenue Mix TimingFY 2025—H2 weighting +40–50 bps vs FY 2024 New
Network CapEx (% of revenue)FY 2025—12–13% New

Note: Prior Q4 2024 guidance was $451–$452M revenue and $0.18 non-GAAP EPS; actuals exceeded these ranges .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2024, Q3 2024)Current Period (Q4 2024)Trend
AI/Technology InitiativesQ2: “crossing $1.6B annualized revenue… strong execution” with innovation; Q3: exceeded expectations, transformation inflection point Workers/Workers AI as “killer application” for inference/agents; multi-tenant GPU efficiency; AI Gateway 10x price/perf gains; anchor in inference vs training Accelerating focus on inference and agentic workloads
Go-to-Market ProductivityQ2: double-digit YoY improvement in sales productivity ; Q3: go-to-market inflection, record large customer adds Five consecutive quarters of double-digit productivity increases; enterprise AE hiring +84% YoY; capacity turning higher Strengthening; capacity ramp into 1H25
Pool-of-Funds DealsNot highlighted in Q2 PR; Q3 transformation context ~9 percentage points impact; platform adoption; incentive shift to consumption recognition Growing adoption; influences revenue recognition
Regional TrendsNot quantified in Q2/Q3 PR U.S. 50% (+23% YoY), EMEA 28% (+27%), APAC 14% (+39%) APAC outperformance; balanced growth
Regulatory/Public Sector—Pursuing FedRAMP High; IRAP in AU; ENS in Spain; >40 U.S. federal agencies served Expanding compliance to unlock gov. demand
SASE/Zero Trust—Competitive displacements from “first-gen” providers; unified platform ROI and network performance Gains via platform wins and bundle ROI
DNR/Customer Health—DNR stabilized at 111% despite pool-of-funds headwinds Stabilizing sequentially
Developer Platform Adoption—3M+ developers; examples across finance/medicine/CRM/media; internal agents improve ops Rapid adoption supports platform flywheel

Management Commentary

  • CEO: “We saw record growth in our largest customers… closing the year with 173… more than half… in fourth quarter alone. I’m proud of… innovation, especially in AI… well-positioned… to reaccelerate Cloudflare’s growth.” .
  • CEO on AI: “The killer application for Cloudflare Workers is turning out to be AI… agents… serverless architecture… pay-per inference model… faster performance and lower prices for customers and higher margin and less CapEx for us.” .
  • CFO: “Fourth quarter gross margin was 77.6%… decrease… due to higher paid vs free traffic mix… network CapEx represented… 10% for the full year… expect network CapEx to be 12%–13% of revenue for full year 2025.” .
  • CFO: “Remaining performance obligations… $1.687 billion… current RPO 70%… guidance… Q1 revenue $468–$469M, FY revenue $2.090–$2.094B; diluted EPS $0.16 for Q1 and $0.79–$0.80 for FY.” .

Q&A Highlights

  • AI inference at the edge: DeepSeek highlights efficiency; Cloudflare expects commodification/open models and sees edge inference/agents as the bigger opportunity. “We can deliver the best price points… relatively low CapEx… relatively high margin… Workers is inference and agents.” .
  • Pool-of-funds construct: ~9 percentage points activity in Q4; emphasis on turning pools into consumption with comp aligned to recognized revenue .
  • FedRAMP High approach: Designed to avoid network fragmentation; comply while preserving unified architecture; growing U.S. and international public sector traction .
  • Go-to-market incentives/territories: Shift comp from ACV to revenue consumption; disciplined territories; recognition for top performers; avoid disruptive changes .
  • SASE/Zero Trust competitive wins: Displacing first-gen vendors on performance, reliability, and platform breadth; bundling forward/reverse proxy drives ROI .

Estimates Context

  • S&P Global consensus data was unavailable due to daily request limits; therefore consensus comparisons cannot be provided. S&P Global data unavailable.
  • Company guidance for Q4 2024 was revenue $451–$452M and non-GAAP EPS $0.18; actuals were $459.9M and $0.19, representing beats vs guidance .
  • Following Q4, management set Q1 2025 and FY 2025 guidance with H2 weighting higher than FY 2024 by 40–50 bps and increased network CapEx for AI inference capacity .

Key Takeaways for Investors

  • Strengthening large-customer mix and record $1M+ adds underpin durable growth; near-term revenue recognition will be shaped by expanding pool-of-funds platform deals .
  • AI inference momentum on Workers/Workers AI is a key narrative/catalyst, with differentiated utilization economics that may support margins despite higher network CapEx in 2025 .
  • Gross margin compression in Q4 reflects paid-traffic mix shifts; management asserts underlying network economics unchanged—watch margin trajectory vs GPU investment ramp .
  • APAC growth (+39% YoY) and public sector progress (FedRAMP High “In Process”, ENS, IRAP) expand TAM and de-risk go-to-market in regulated verticals .
  • Guidance implies FY 2025 reacceleration with H2 weighting; track ramped AE capacity and consumption of pool-of-funds to validate revenue trajectory .
  • Free cash flow remains positive (10% margin in Q4); investing for AI capacity may pressure margins near term—monitor FCF conversion and CapEx discipline .
  • Without consensus data, use company guidance beats as a proxy; as estimates update post-call, expect upward revisions in revenue and potentially EPS if consumption trends materialize. S&P Global data unavailable.