Cloudflare Q120 recap

NET - Q120

Investor Presentation:…
Fool recap (Rossolillo):…
CC transcript:…

Revenue 91.3M +47.8%

  • Int’l +52% (52% of ttl)
  • US +44% (48% of ttl)
    Adj Gross Margin 78.3% +150bps
    Adj Gross Profit 71.5M +50.8%
    Adj Op Loss -14.4M (vs -16.1M)
    … margin -15.8% (vs -26.1%) +1030bps !!
    Adj Loss -12.3M (vs -16.0M)
    Opex 85.9M +35%
    CFFO -14.3M (vs -9.7M)
    … margin -15.7% (vs -15.7%)
    FCF -30.6M (vs -22.1M)
    … margin -34% (vs -35.8%)
    Cash 588M
    Custs 2.8M +40%
  • Paying Custs 89.2K +21%
    – Custs >100K 556 +65% !!
    Empl 1368 +43%
    $NER 117% -100bps
  • Cloudflare for Teams made free for 6mo (til 9/1/20)

  • giving each new Teams cust a free 30 minute one-on-one onboarding session [wow, compare to Zscaler’s complex implementation]

  • dedicated resources to help pandemic focused agencies start new web/app projects

  • have seen sales cycle increasing a bit

  • 133 customers in March asking for leeway, way less in April

  • network speed has improved; firewall team made improvements to shave 40% off processing time of each request

  • saw more traffic growth in 12 weeks of pandemic than over TTM

  • has seen Internet traffic nearly double thru Mar/Apr vs start of year

  • had delays in hiring in Q1, expect pace to quicken in Q2 to fill backlog

  • doubled demand seen in edu, kid, parenting content, while sports, travel and RE declined

  • expected decline in pay-as-you-go (monthly) SMB customers [a small portion of rev], but it had strongest YoY growth its seen

  • “largest telemedicine provider in US” used Cloudflare for Teams to allow remote working in stay-at-home over their highly confidential & regulated communications - CIO stated “I wish we had done this years ago after seeing how easy it was”

  • food delivery company switched to Cloudflare Workers (edge computing) from AWS in $600K a year deal in Jan, for being faster, more robust, and more cost effective – then spend nearly doubled (+$500K) under pandemic

  • strong growth in Europe +58%, after field sales investment there last yr

  • 8500 edge servers in 200 cities across 95 countries

  • 99% of internet-connected developed world pop is within 100ms

  • avg of 45.1B cyber threats blocked each day

  • TAM growing from 32B to 47B in 2022 with positive trends: serverless, IoT, 5G

  • over 1000+ custs are now on Cloudflare for Teams

New partnership w/ JD Cloud, adding 50 cities a year, total 150 POPs in China:…

My stance: Cloudflare keeps on keepin’ on, with their consistent delivery of near 50% growth the past few Qs. Operational leverage is starting to show with a 10pp gain, while cash flow margins are stand-still. I bought in Feb and have done very well with it, but competitor FSLY has done even better. I have since moved a large portion of this position into Fastly after their guidance gave a +17pp rev growth rate swing (38% last Q to projected 55%, likely more), leapfrogging NET’s 48%.

Cloudflare was very disruptive in the CDN industry with their flat-rate pricing (mostly – some things like Workers, their edge compute platform, are priced on usage brackets based on volume). They stated that they saw more usage growth in 12 weeks of pandemic than over TTM. But unfortunately, the mass uptick in traffic ( and the associated expenses that brings) did not show up in their revenue, since only a small portion of their products are usage-based. So now FSLY is getting all the market’s attention as it leapfrogs NET’s growth rate due to being heavily usage-based. So unfortunately, it appears Cloudflare’s past go-to-market successes and disruptive pricing have now hindered it the past few months during this massive “fast-forwarding” of digital transformation efforts at enterprises.

Through it all, they continue to work on their platform, improving speeds and expanding the reach of their edge network. They admit their systems have been stressed, but they have been making continual improvements. [Wrote this before the outage earlier this week but enough words have been spilled on that.]

CEO: “… Our firewall team released a series of improvements that shaves 40% of the processing time off every request. That means we are doing full deep packet inspection and threat analysis in a fraction of a millisecond at a tremendous scale. It also means that our network has actually gotten faster during this crisis while, at the same time, requiring less hardware.”

But step back and let’s think about them through the lens of the pandemic and the rush to work-from-home. Cloudflare made an incredibly respectable move that showed they are NOT trying to profit off these confusing times. They decided to make their brand-new Cloudflare for Teams cybersecurity product entirely free until September. [If you don’t recall, this product is direct competitor to Zscaler ZIA + ZPA.]

They forecast that next Q will be impacted a bit, especially as they rush to hire & onboard more now that a new normal is established. So with that, I think this quarter will be “ho-hum” one with 40-45% growth and no positive movement on margins. But once Sept 1 rolls around and those 1000+ customers start getting billed for Teams, we will see a huge improvement in the growth rate and margins from there.

I don’t see any customer counts in my Zscaler earnings notes. Forbes claimed in March 2019 that they had 3250, so lets say 4000 now a year+ later [if anyone has an accurate number in the past few months, please share]. Zscaler does not expose their per-user pricing, while Cloudflare says it be charging $3-5/user for Access (Gateway pricing has not yet been announced).

So it looks like Cloudflare is going to tack on 1/4 of Zscaler’s business in one more quarter. Zscaler earned 110.5M this Q, so let’s just completely rough guess, rounding down a bit for likely cheaper pricing and possibly fewer users, and take a stab that we’ll see add’l 10-15M rev from that (and likely will be growing more than rest of biz). Since Sept would contribute only one month to Q3, let’s say +3% rev boost in Q3 and +10% rev in Q4 from Teams. We’ll see in 3 and 6 more months!

Unrelated note: If you want to read a crazy story about one of the NET founders (their tech wizard), this Wired article is… sad.…

long NET


Hi muji,

thanks for fantastic write up.

On your comparison with ZS, my understanding is that ZS is going after much larger customers… and NET is going after much smaller customers… the ratio of revenue per customer may look right at 10/1 for ZS vs NET… but it does not have to be… it is quite possible that it is more skewed… e.g. 20/1 or even higher…
Just looking at your data above, NET has 89K paying customers but only 500+ of them are at $100K+ rate… Of ZS 4K customers, I suspect very few below $100K…

so I would think 1000 free customers for Cloudflare for Teams could just be a rounding error in the big picture… I would not pin my hopes on that calculation…

What would be interesting if we see that Cloudflare for Teams customer count increases to 10K during this quarter… that would be meaningful.

am I missing something?


Well, that Wired piece on Lee Holloway is… Depressing.