I completely agree, rmtzp. This is where I am getting caught up. For the first time, I am having a hard time believing Matthew Prince and am hesitant to trust Cloudflare’s full year guidance. Forget beating guidance, I personally am struggling to see how they will meet their FY guidance following the Q1 guide.
Here is where my head’s at when thinking through FY 23:
I don’t see how someone can assume Cloudflare is going to beat their Q1 guide by 3-4% like they did in quarters past considering they beat their midpoint guidance by 0.3% and 1.1% the last two quarters. With this in mind, I am assuming another sub 1% beat next quarter and expect revenue of ~$292M.
There is some seasonality at play - Q1 is always Cloudflare’s weakest so I would argue it is safe to assume their quarterly growth rate will accelerate the following quarters. The question is, what is a reasonable expectation?
For now, I am using 8.2% as a fair estimate for Cloudflare’s quarterly growth rate in quarters 2-4. This would be the exact growth rate Cloudflare has achieved the last two quarters. I would argue this might even be aggressive considering Cloudflare’s sequential revenue growth has decelerated for three straight quarters and next quarter will be their weakest ever my a wide margin. Additionally, every other SaaS company we have heard from is telling us next year will be more challenging and to expect slower growth.
Regardless, if we assume Cloudflare will produce $292M in revenue next quarter and then grow 8.2% sequentially for the remainder of the year, they would produce $1,320M in revenue for the FY, $10M short of the low end of their guidance.
Does this add up to anyone? Perhaps I am in the minority here, but I have a difficult time seeing Cloudflare suddenly accelerate in Q2 and hold that rate steady for the following quarters. Management claims they are not relying on any improvement in the economy but their guidance indicates the exact opposite.
I have owned Cloudlfare for nearly three years and never doubted management but this guidance seems wildly aggressive based on their current business trends. I struggle to see how they can claim this is conservative, especially when you consider the market will expect them to beat and raise each quarter. Cloudflare is an innovation machine, and I have no concerns about them in the long-term, but this initial FY guidance does not compute for me.
Do others see it differently? Do you expect Cloudflare to actually accelerate their sequential growth rate in 2023? I don’t see it happening with the challenging macro conditions and for that reason, I trimmed part of my position this morning at $63.
Rex