While Cloudflare was not spared from the difficult Q4 that SaaS experienced (evident with their 0.1% beat), there is ample evidence for better days ahead.
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SALES MOTION
- I was impressed to see RPO growth of 45% YoY. This represents a sequential add of $76M, which is practically equal to Q4’21 (before interest rate hikes, recessionary fears, and war). It is worth noting that the proportion of cRPO is declining (77% in Q4’21, 75% in Q3’22, and 74% in Q4’22), which may suggest that customers continue relying on Cloudflare albeit pushing projects down the road
-Despite that, Cloudflare added a healthy 170 enterprise customers; coincidentally the same number that they added in Q4’21. I was pleased to see evidence of their top-down sales motion, evident by their breakdown of >$500k and >$1M customers for the first time (growing at 83% and 52% respectively)
-It does look like the ‘expand’ is taking a bigger hit though, with DBNR nudging down to 122% on a quarter that typically ticks up
Key Takeaway #1: I am more surprised with the growth in RPO and enterprise customers, than the decline in DBNR. Looks like Cloudflare is combatting its customers’ scrutiny with a successful sales motion.
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OPERATIONS
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I’m glad to continue seeing Cloudflare grow their FTEs prudently to prioritize efficiency and a “do more with less” mentality. Headcount only grew by 36 sequentially
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We’re starting to see the fruits of efficient growth, with non-Gaap OpExpenses growing 30% YoY (notable slowdown from 46% in Q4’21)
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Stock-based comp rose 23%, consistent with the prior 5 quarters
Key Takeaway #2: All of these activities are starting to translate to the bottom line, with 12% FCF margin and 6% non-Gaap OpIncome margin
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FUTURE OUTLOOK
Here’s where it gets really interesting. Over the past few years, Cloudflare’s FY initial revenue growth guidance (that is, the guidance reported in Q4 for the following year) has looked as follows.
2020: 37%
2021: 38%
2022: 42%
2023: 38%
Now, let’s include their actual revenue growth.
2020: 50% (9.7% beat)
2021: 52% (10.7% beat)
2022: 49% (4.8% beat)
2023: ?
Key Takeaway #3: Assuming Cloudflare beats its FY guidance by 3%, it would maintain this year’s 42% YoY growth rate next year! I encourage anyone to correct me because this seems too good to be true in the environment we’re in. It even makes me concerned that management is guiding so aggressively, yet they indicated:
“We’re not relying on any improvement in sales and marketing efficiency or any rebound in the economy as we look at the year ahead and formulate our guidance.”
“In our guidance, we have not factored in any improvement in the macroeconomic environment or from our go-to-market initiatives…We have seen the increase in sales cycle which we observed in the second half of last year, continue in 2023 and therefore incorporated close rates to low recent historical lows”
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Conclusion: If we give management the credibility they deserve (they’ve never missed a revenue estimate), I see Cloudflare becoming an epitome of the type of companies that led to the creation of this board. Consistent, profitable growth at scale while innovating ruthlessly.
-RMTZP