Stepping back a bit from the second-guessing of by how much our companies have historically beaten/will beat their prior growth guidance (which I find less relevant tbh as none of us represents the market’s view, so why bother with this game? Still, for completeness’ sake, they came in on the penny with what I was “expecting” fwiw - ”I’m pencilling in closer to $195m” - they came in at $194), let’s look at what is actually going on in the business?
I see the following:
The fastest annual and Q4 yoy growth in revenue of the last 4 years.
2017 - 18 : 43% full-year yoy | 43% Q4 yoy
2018 - 19 : 49% full-year yoy | 51% Q4 yoy
2019 - 20 : 50% full-year yoy | 50% Q4 yoy
2020 - 21 : 52% full-year yoy | 54% Q4 yoy
The first quarterly free cash flow positive result in the company’s history: $8.6m
Very strong, and improved margins with gross margin coming in at 79%, operating margin at 1% for the second quarter in a row - essentially planned to be around break-even - and net income positive. They are following the Amazon playbook.
Strong RPO growth and exceptional current RPO growth
- RPO came in at $624m, which is up 14% qoq and 63% yoy
- cRPO was $480m, up 17% qoq and 67% yoy which is an acceleration vs prior quarters and represents the highest proportion of run-rate revenue of the last 3 years, at 62% vs 57% in 2020 and 53% in 2019.
This is pretty significant as it’s essentially revenue already in the bag. So Cloudflare’s revenue in the bag is the highest it’s ever been as a % of what they did in the last quarter.
NRR the highest it’s ever been, at 125%, up 1%pt vs prior q and 6%pts vs a year ago.
Good customer growth and excellent large customer growth
Total customers grew 26% yoy to 140k, and ARPU was up 22% yoy continuing a steady multi-quarter upward march indicative of larger customer success.
Further proof comes from large customer numbers that they’ve broken out for the first time. Customers with ARR >$100k was up 70% yoy (to 1416), >$500k up 70% (to 121), and $1m up 75% (to 56).
Great traction with new products addressing adjacent, TAM-expanding markets
Zero trust, R2, email security all highlighted as having good customer traction with concrete numbers quoted: zero trust actual large customer wins highlighted, 200k domains signed up for email security, 9000 sign-ups for R2 beta.
Strong guidance for next year with room to beat and raise indicating a confident team executing very well.
They guided for $931m revenue for 2022, up 42% yoy which means they will in all likelihood breach $1bn in revenue next year, still growing at >50%. And they indicated that they will return to FCF positive territory in the second half of the year, after spending a bit more in the first half of the year.
Massive secular tailwinds and well positioned to capitalise on them: digital transformation, security, government. I think we all know these issues; no need to spell them out again. But suffice to say Cloudflare and the trust they seem to engender is exceptionally well placed to capitalise on these multi-year tailwinds.
Strong, founder-led team
Matthew Prince again impressed. The word that keeps on popping into my head is “headboy”. And I loved another description I read on SA calling him a master “humble-bragger”. Gotta love that. He’s good and knows how to market - to his customers, his employees and his investors, among others probably.
All in all therefore a consistent and steadily accelerating hyper-grower with an ever increasing TAM who has now reached the point of not burning any more cash. A great position to be in when you have $1.8bn of cash on hand for tuck-in acquisitions.
-WSM
(Long NET)