Cloudflare Q1 23 quarter spells trouble ahead

Cloudflare reported their Q1 23 results yesterday and sadly on initial look things don’t look great.

When they released Q4 22 results, they guided to
Q123 rev of 290 - 291m
FY23 rev of 1330 - 1342m

This was in the context of prior beats but their Q123 guidance is not looking great:
FY23 DOWNGRADED to 1280-1284m implying just 31% growth just a few months later which is a huge concern. If they cant forecast 3 months out how much can we trust their FY23 guide now?
To make matters worse they were on 20x EV/S (LTM) multiple before the AH drop, 12x is probably the max anyone would pay now given the mediocre 31% FY guide with so much uncertainty.
Clearly the results and guide are not great so market reaction with be revelatory on how the participants are positioned - not too optimisitc and long a few shares of NET but luckily cut most of my position a few weeks back.


If read the earnings call transcript, will know where the problem lies. Because I have read them, I have decided to increase my buying.

If our SaaS company does not experience the same situation as NET, then it is a problem with NET. On the other hand, if the same situation occurs, then it is not a problem.


If we could get certainty that this is all macro-related, then I’m not worried. And in fact it seems all macro-related, as I didn’t perceive any serious business problems in the call (except the lengthening of the sales cycle, which is definitely macro-related). Yes, they decreased their yearly guidance and that bothered me (it never happened, but it might be reasonable that the year guidance you give out at the beginning of the year might need some refinement, especially in times like these). But they essentially met their guidance for the quarter, with strong gross margins, a positive operating margin (record, in fact), and positive FCF. They added 114 big customers and Prince listed a number of new contracts that have been signed in the Q, some of them for several millions. Also, average revenue per customer is in line with the prior quarter (even slightly higher). The only other negative besides the year guidance is the NRR that dropped a few percentage points to 117%.
I think that this is a unique business, whose products/services are a must-have for customers, led by a capable management team and a visionary CEO.
If I could, I would buy more, as I’m sure this is temporary, like pretty much everything we’re seeing these days.


I will try to succinctly offer two points and will then shut up on the matter:

–NET makes less on its supposedly rich portfolio of top-notch products than ZS does on zero trust alone. So if its new products are that great and the revenues that tiny, they must grow hugely regardless of macro or at the very least be able to say “our commodity CDN business is under pressure, but all these new revenue lines are growing X, Y, Z %” . They are saying none of that. Trying to offer illustrative examples vs ZS which really illustrates nothing per se. If NET had at least twice its current quarterly revenues, the macro explanation would be a lot stronger IMO. But off a tiny base for their most promising products, there has to be something to boast about.

–The opening salvo by the CEO was among the very worst I have heard in my admittedly only 3.5 years as investor, rivaling some 2020 FSLY calls.

And let me ask you this, is a visionary CEO one who:
–attacks a rival with generalities only to be countered with specificity by said rival (late 2022);
–decides to talk up AI in the midst of an investor euphoria (early 2023) about it and a mediocre company performance (everybody who cared knew years ago that both NET and FSLY would benefit from AI)
–decided to scapegoat a portion of his workforce (spring 2023) as if that does not reflect directly on them;
–was completely blindsided by Q1 trends and unable to pinpoint a specific issue (compare and contrast to AYX). EDIT: even though people (other than me) on this board immediately called out the guidance as very optimistic.

I am not interested enough to do it, but if one thinks that the CEO is visionary, they may also want to double-check that NET actually developed certain products before fintwits were saying on TWTR that they should.

I wish we had a dislike button here to see how many I get :grinning:

  • “We now have 4.92 million Workers applications running on our platform, up 146% over the last 6 months”
  • “30,000 paying customers have activated R2 and are storing more than 7 petabytes of data, up 25% quarter-over-quarter”

You mind pointing me to this exchange?


I agree with a lot of points made for the CEO of Cloudflare - I think you are spot on and he failed to walk the walk , turned out to be just talk and now blaming Sales force!
I think we have seen this script before I.e Fastly!!!


The problem with Net is the Macro, it isn’t anything they are doing. Their big customers are pulling back and trying to save money. It is evident by their DBNR slipping to 117%. With this downturn in the economy this is going to go on for a couple of quarters and the reason that Net can’t see that far out…is because Nobody including the big Cloud companies can see that far out. This isn’t FSLY in a boom market stumbling, this is everyone stumbling. After all that is what a recession does.

Q420 Q121 Q221 Q321 Q421 Q122 Q222 Q322 Q422 Q123
119% 123% 124% 124% 125% 127% 126% 124% 122% 117%



My problem with NET is that their last Earnings call was positive and they zoomed forward when other SaaS struggled. This call was completely 180 degrees out of phase, taking down forward looking guidance. How could Prince have been so wrong in just a few months? That’s led me to take them way down in my portfolio. Everyone was being cautious when Prince was being confident and now the opposite?


I wholeheartedly agree with @MFChips and @MAS4R. The longer version will be out later today or tomorrow anyway, but here’s my concluding thought on NET:

“After all Prince’s recent bragging about NET’s visibility advantages, I can’t call this quarter anything other than an epic fail in both numbers and narrative. Hindsight is always 20/20, but the customer adds and declining NRR never suggested the acceleration needed to meet the FY guide. It was all based on the belief and trust that management knew what it was talking about when stating the initial figure. That trust is now gone as far as I’m concerned. Not to mention the fact that lowered guide might still be tough to meet given the declining trends. It’s never a good sign to say I’m hoping we’ve gotten our worst report of the season out of the way early, but there you have it. Ugh.”


Several people have posted here its all the Macro. They were VERY clear that the issues were not only the macro but also with their GTM. Sales staff and holding sales accountable had not been a focus and now that the macro makes it tougher, this is being exposed.

Yes, sales can be fixed. Is it a certainty it will be? I’m more of a wait and see some evidence first.

Next, 7 peta-byes is not a lot. To put this into perspective, over a decade ago, I worked for a company that got bought out by Salesforce (of course, 2 months after I left, DOH!!). That company had peta-bytes of data in their databases.

I make some assumptions here but we don’t get specific numbers on everything so hopefully I’m close.

I think SASE growth for them is closely aligned with their Channel Partners. I think this because they’ve talked about this GTM strategy being top down and have even talked about using some ZS partners in this area. If this assumption is accurate, it means SASE revenue is currently 14% of total revenue and growing 68% YoY & 12% QoQ and likely to slow down to high 50s low 60s YoY next quarter.

Second, I think the biggest AI advantage NET will get is thru usage of their R2 storage. It was very interesting they said the 7 PB grew 25% QoQ and later said AI workload usage is growing over 20% QoQ. For reference, on the Q3 call, they said they have over a PB of data or something like that. Also, January announcement about a deal with PLTR to use R2.

In any case, I really like a lot of things going on but the GTM issues scare me. I like that they have identified this problem and are taking steps to fix it. I’m going to wait for signs of improvement though and have closed this position.

Another takeaway… IF they are accurate and the GTM is a big reason for their issues, then that is good for the rest of our companies; hopefully the Macro isn’t as bad…


But it was precisely the GTM team that Prince praised a quarter ago. New GTM leader and Prince stated how he was sort of embarrassed to learn how poor their GTM strategy was prior. That gave me confidence. Now he’s saying GTM is the problem!

And quarter after quarter they have been so consistent and this report is just a bizarre datapoint.

This is not the Matthew Prince that I held so highly. I’m not out, but it has gone from 17% to 12% (Took some profits off the table prior to ER) to now 5.5%.


“et tu, brute.”

Disappointing Q for sure. This is the first revenue miss for a company I’ve owned in a long time. I’ve trimmed but not exited (mainly because I don’t know where to put it). On the CC, it was mentioned a few times that the long sales cycle are temporary and that guidance was conservative: “Also, we believe that currently depressed close rates and elongated sale cycles are temporary in nature, we cannot predict when the increasing caution is exhibited by the customers during the first quarter will recover. As such, we have assumed these headwinds, which identified in the month of March will persist through the end of the fiscal year.”

The most interesting thing to me relates to the AMZN debacle. For those that don’t know, AMZN reported a great Q but then said on the CC that they saw things really slowing in April. Cloudfare had a little different take: “The early reads that we’re seeing are not that we’re – again, it doesn’t feel like it’s getting significantly worse, but we don’t also see things getting significantly better.”

Cloudfare usually sees things early b/c of the nature of their business so maybe this is a signal of a bottom? I do think that, if macro improves, then all these tech companies will rise in unison. Just not sure when that will be or what to do in the meantime.

Hang in there.
Long NET


From Conference Call which sums it up very nicely.

Keith Weiss

I think a little dense here, I’m not quite getting what happened in the quarter. When I think through like some of the explanations that you guys are giving, the banking crisis was in the first 2 weeks of March. You guys tend to have a pretty linear business. So like I would have expected the comment to be only closed like 15% of our business in the last 2 weeks, if that was what the impact was.

And then like with the salespeople, if they hadn’t been productive for a while, there’s nothing really incremental there. And you guys have been – and Matthew, you called out a weaker macro last year, and you were one of the earlier ones to say, hey, listen, it is an area environment out there, but you guys were able to operate really effectively all throughout 2022, and you bring to market a really good ROI focus and a really good cost like value proposition, like I don’t quite get what changed in Q1 in the time frame in which it changed?

Matthew Prince

Keith, I think that as we’ve put a floodlight on it, the biggest thing that changed is sales cycle length, more than 25%. And so that pushed back a lot of what was happening in the quarter. We would typically see about half of our business close in the last month of the quarter. I think the fact that you had the uncertainty around the bank. And again, it wasn’t just customers of SVB or Credit Suisse, but it was entire spaces where purchasing departments really said – I mean they got very nervous regardless of who they were banking with.

And we just saw more companies push pause on that. That pushed a lot of our business into the last half of March and it pushed some of our business outside of the – of closing within the quarter. And so what we don’t know is whether March is the new reality, in which case, again, I think we want to be very prudent as how we think about the business going forward or if the world will snap back fairly quickly. The early reads that we’re seeing are not that we’re – again, it doesn’t feel like it’s getting significantly worse, but we don’t also see things getting significantly better.

But that, again, as we’ve sort of shown a floodlight on what was it that changed what changed is a material change in the length of the sales cycles, the win rates didn’t change, but the close rates did.

Managers that blame the team just seem weak. This is Prince’s fault.



In the coming days, other companies will announce their performance and we can observe if other companies have similar comments. If any company has the same problem, then it is not just a problem with NET.


EDIT: I posted this before reading through all of the posts on Stocknovice’s portfolio thread that was apparently discussing Cloudflare’s sales over there. These align really well with what @jonwayne235 posted towards the end, here: Stocknovice's April 2023 Portfolio Review - #31 by jonwayne235. Now I feel like I need to go look through some other company’s reviews / Blind / reddit threads…

ORIGINAL POST: Out of curiosity, I hopped onto Cloudflare’s Glassdoor reviews to see if there was anything interesting about the sales org since it’s been a point of focus after the earnings.

This one from February calls the sales org “JV”, talks about giving away 60% of the best features for free, and discusses how a lot of the companies they were selling to are struggling in this economy (crypto, VC-funded, Saas).

Here’s another interesting snippet from April 13th, calling out the lack of territories and accounts.

This one is from the day of earnings (not sure if posted before or after the release), but it discusses how the “freemium” pricing makes it difficult to sell to enterprise customers.

This one after the earnings call mentions “Big changes happening in the org”, but doesn’t expand beyond that.

And finally, the most recent one discusses lack of sales org vision and organization and lack of reps hitting quota, meaning the “big changes” probably have a ways to go.

As someone who held a sizeable NET position into earnings and then trimmed it by ~1/3 after the earnings call, I’m not sure how these make me feel. On the one hand, it speaks to their product quality that they could achieve the revenue growth they have while having what sounds like a really poor sales operation + pricing strategy, but on the other hand, it sounds like a lot of work is needed to actually get things turned around and develop a mature GTM strategy.

Based on the fact that it’s still priced as a rapid grower with minimal profitability and quite a bit of work ahead, I’ll probably maintain a position but continue to trim until I feel more comfortable about their pricing and sales strategy.


I did a quick look at Cloudflare’s pricing tiers: Our Plans | Pricing

There is no support from Cloudflare for the free tier - you’re stuck with the documentation and the community forums only. I can’t imagine any business that needs Cloudflare’s products being content with that, unless it’s doing something that doesn’t generate income for the company.

As such, I don’t understand the sales force grumbling about Cloudflare’s freemium model. I’ve worked at companies that had a policy of no unsupported third party code/libraries precisely because they wanted to ensure that if something went wrong they could hold someone accountable. And at least for open source one could assign internal engineers to debug issues - with Cloudflare’s free tier that wouldn’t be possible.

My view remains that Cloudflare should be losing only a very tiny proportion of actual achievable income to its free tier. If anything, the free tier encourages development groups to use Cloudflare for its experiments, prototypes, internal projects, etc., which makes it somewhat of a no-brainer to then buy Cloudflare projects for anything that actually brings in income to the company. Only the most risk taking companies, or companies that don’t understand the lack of support for the free stuff, should be staying on the free tier, and a decent salesperson should be able to outline the benefits of going to a paid plan.


Putting the sales drama aside, I think there are a lot of ‘truths’ we can agree on. The side we’re on depends on how much weightage we attribute to these – but here are my thoughts on Cloudflare’s earnings.

On the one side…

Truth #1: We’re in a difficult macroeconomic environment where making predictions is very complex.

Truth #2: Cloudflare was one of the first SaaS companies to set guidance for the year, prior to SVB defaulting.

Truth #3: Cloudflare had endured only a modest deceleration compared to SaaS peers during 2022.

Truth #4: We don’t know if Cloudflare will be the only high-growth SaaS to restate guidance quite yet.

On the other side…

Truth #5

Cloudflare had a weak Q4, “beating” their guidance by 0.1%. That means they were $200k away from missing their guide. If the quarter was a day shorter, or a couple of sales reps got sick, they would have missed their guide. This was a perfect wake-up call for management to re-evaluate their guidance so that this wouldn’t happen again – but then what happened?

Truth #6

Cloudflare set out a very aggressive guidance. It was remarkably stronger than any of its peers. There were several people that questioned Cloudflare’s ability to meet that guidance, citing them here to highlight why I consider this as “truth” rather than an “opinion”.

@MajorFool20 called it out perfectly here “Does this add up to anyone? …I struggle to see how they can claim this is conservative…this initial FY guidance does not compute for me”

@LisaOnCloud9 called it out here “Maybe they know something we don’t? Maybe, some positive trends are baked in after all? I don’t know, but I have a hard time to believe that Prince would risk missing their guidance for the first time in history for a quick win” this quarter.”

I called it out here, “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”

And then we had @ZoroSGInvesting tweet about it, along with Buck and Forrest and Alex and others.

So this is what bothers me – those of us that believed that “management was seeing something we weren’t” were wrong! It was actually the exact opposite – we were seeing something management wasn’t. And that should NOT happen, regardless of the environment.

Truth #7

Cloudflare stopped reporting the exact percentage of revenue contribution from large customers. I echo @stocknovice’s concerns here. Why the sudden stop? There’s a reason why someone at Cloudflare told someone to remove this metric. And as I’ve pointed out, that was my main thesis for the supposed growth endurance.

So where does that leave us?

For Cloudflare – those willing to accept the new guidance have to acknowledge that it still requires a relative acceleration. It’s not like the restated guidance was a sandbag to refrain the possibility from missing again. Put simply, Cloudflare added ~$15.5M of net new revenue in Q1, which represents ~5.6% QoQ growth. To meet their FY guidance, they have to add >$20M in net new revenue for the next 3 quarters (~7% QoQ).

For SaaS – there are too many unknowns until more companies start reporting. Will companies that guided more conservatively fair better (marking Cloudflare as a company-specific event)? Or will even the “conservative” guides start to seem aggressive? Let’s remember that Cloudflare was the first SaaS company to warn of macro issues a year ago. We’ll start finding out soon…



This. And extremely well stated.

I would have saved myself a lot of time on that other thread if I had just been able to articulate this thought that clearly. Thanks for putting it together.


@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.)


I think we are seeing seat-based SAAS take a hit on a lag vs consumption-based. Based on CFLT & DDOG’s (and even BILL’s) earnings reports last week it seems they were, while not good relative to prior reports, not getting worse.

Confluent’s CEO noted the difference between consumption and seat-based on their CC:

It’s possible to optimize the use of any SaaS product, right? And this shows up quicker in products that have a consumption revenue model. It shows up that very quarter. But obviously, companies are going through and cutting seats and looking at who really needs the access to that tool and of course, all the layoffs and any other trimming of staff slow down to seat-based models , doing exactly the same way. So yes, I think there’s optimization happening everywhere, you just see it faster in the consumption models.

**Jamin Ball had a post a couple months ago where he compared consumption-based vs seat-based. In short:

" Hypothesis A : Consumption takes a hit first, with the hit to seat based coming on a lag. But ultimately both hitting a similar low before re-accelerating

Hypothesis B : Seat models also decelerate on a lag, but relative to consumption models don’t decelerate as much. Coming out of the down market they reaccelerate, but not as much as consumption models"

We’ve seen the consumption-based companies take a hit first (DDOG, SNOW, MDB) and now perhaps we’ll see the seat-based companies take a hit while the optimization of the consumption-based companies bottoms out. Will ZS, CRWD, etc report something similar to Cloudflare? Will they lower FY guidance? SNOW lowered FY guidance, but did it one quarter earlier than NET. DDOG and MDB guided very low to begin with.