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…
-RMTZP