@rmtzp, I like the way you go about it.
Regarding #5 and #6. When assessing their full year guide back in February, I don’t think anyone of us saw in a future bank run that would lead to the third-largest bank failure in United States history. I mean, let’s take a part of Thomas Seifert’s statement from their Q4 call and add two fictional paragraphs (highlighted):
Before moving to guidance for the first quarter and full year, I would like to begin with our expectations and the provisions we have factored into guidance. We performed rigorous scenario analysis across multiple vectors from pipeline and ACV growth to productivity in order to understand both our company’s specific opportunities as well as the risks from the current economic uncertainty. In our guidance, we have not factored in any improvement in the macroeconomic environment or from our go-to-market initiatives.
We have also not factored in that in March, two weeks from now, there will be three bank failures over the course of five days. One of them will be Silicon Valley Bank, which will have a significant effect on SMBs and the entire startup ecosystem. We estimate that neither the Fed or the U.S Department of the Treasury are aware that this will happen, and that the government will scramble to take extraordinary measures to mitigate the fallout from these events. While we have looked at the soon to be created Bank Term Funding Program, we have not yet included it in our scenario analysis.
Also, we haven’t factored in a couple of black swan events in the back-half of 2023 that we know about.
Is it realistic to expect Cloudflare to have that kind of visibility? Do we expect events like these to have zero impact for a company catering to who knows how many businesses?
With regards to guidance and “what happened”, we have an excellent data point: The Morgan Stanley Technology, Media & Telecom Conference, where Keith Weiss had an interview with the CFO. This was March 8, i.e. just before the collapse of SVB. It gives a snapshot, and also context for the question asked by analyst Weiss during the Q1 call about “I don’t quite get what changed in Q1 in the timeframe in which it changed.”.
Here’s one relevant part from March 8:
Thomas Seifert
Well, we tied to, as always, when we give guidance, we try to be prudent and take into account what we know and what we control. So they are, on the one side, the improved fundamentals, but there is the uncertainty of that, how is the pipeline ultimately translating into revenue.
I think we thought on the earnings call, we actually feel better about the year than the risk in the short term. And I think that hasn’t changed. So we see good traction with the products, especially with the new product, pipeline is healthy and so on, but we deal with the uncertainty of seeing the inflection in the fundamentals really turning into revenue. So I think it’s unchanged from what we – how we talked about it in the earnings call.
For the year, we feel we’ve done our job. Contrary to what people expected, we think there’s probably more risk in the short term than there is in over the course of the year, but we’ll work our way through it..
(@MAS4R: You might want to a look at the interview, since you were concerned about them not breaking down their revenue. TL;DR = They want to do that and they’re working on it.)
With the events that since unfolded, with significantly increased uncertainty and unpredictability, they decided to adjust the guidance for the full year.
Note the highlighted paragraph from March 8 about “more risk in the short therm than…”. In my view, they have a strong pipeline, and value proposition, that just keeps getting better. From the Q1 call:
The reacceleration of our new business pipeline during the second half of 2022 continued again this quarter, and we meaningfully exceeded our pipeline plan for the second quarter in a row."
And for context, from March 15 and March 28 (source here, and here):
The Cloudflare Channel Partner Network contributed to the significant market traction we’ve seen for Cloudflare One, including partner-sourced pipeline for Cloudflare One growing 240% from Q1 through Q4 of 2022.
Cloudflare One services have seen the fastest adoption among our customers, with a 3x increase in partner bookings and a 70% YoY increase in transacting partners.
On the flip side, we have this from their Q1 call:
But some of the times where people are initiating a new large project around moving to a Zero Trust environment or something else that would be a larger initiative that the sales cycles on those projects are extending beyond where they were before.
In my view, all this explains “what happened”, why they guided like they did, and why they’ve now de-risked their full year guide. What’s changed is that macro has become a lot more unpredictable, especially in the short term.
My gripe and frustration with the earnings call was Matthew Prince’s prepared remarks/riddle. His style of using metaphors and tie everything into a single piece really blew up this time.
In any case, for some reason they scheduled their earnings a week earlier than usual, and will have their Investor Day tomorrow. I’m gonna go out on a limb and guess that we’ll have the exact percentage of revenue contribution from large customers by then.
Edit: Percentage of revenue from >100k ARR customers in Q1 was 62%. (Source: Investor Day - Investor session slides.) I recommend watching the webcast(s).
There’s a couple hours behind this post, so I hope someone will find it useful.
(Disclosure: I (still) have an outsized position in NET, added to it, and intend to add to it.)
