This company is not talked about much anymore, but I still own it and it is my second largest stock holding after TTD. I’m attaching a link to another summary from Brad below for the latest ER.
Items I found most interesting:
Revenue growth has slowed to 32% YoY. Significantly down from the consistent 50% they used to have.
FCF % for Q3 for the last 4 years has been -15.7%, -1.8%, +6.5%, and now 10.4% in the latest Q. Solid improvement.
There was an interesting summary of their AI strategy. I don’t understand it, so I’m not going to attempt to summarize it. I would be interest to know if any technical people have opinions on this.
This was a record quarter for new deals worth $500,000 or $1 million in annual revenue. Seems pretty good considering the economic environment.
Improvement in sales rep performance. (Remember when the CEO threw them under the bus). Seems like the replacements are getting the job done.
Forward P/S is around 12% - 14%. This makes me a little nervous. Still has a premium price - but kind of a bargain when you consider the P/S used to be over 50. (Oh how things have changed).
Unable to write (type…) a long, detailed insight… so here is summary in few bullets.
AI inference software (which is what is used in actual application… training is preparation version) can be compressed and implemented in “relatively” lower compute power chip…
Thats why you see iphone has AI accelerator (to use face detection) and new laptops coming up which will almost allow people to have entire chatGPT like capability on the laptop (can be offline… no cloud needed)…
Now think of use cases which need real time connection and much higher compute than a laptop but much less than cloud… e.g. interactive gaming… say Apple’s new vision pro… this is where Cloudflare GPU based AI will shine… it provides much more compute power than a laptop but much less compute power than MSFT Azure… but enough of it for interactive gaming and most importantly offers less latency (= faster response time) than Azure… will also be an order or two orders of magnitude cheaper than Azure…
this area will be huge… not just gaming… many industrial, construction and logistics networks will use this capability (imagine Samsara using Cloudflare)…
Thats the thesis in nutshell… hope that makes sense.
I’m pleased with the results they posted, while revenue was only a slight beat, operating income came in at double what they expected. A lot of metrics and commentary are showing the power of their model to scale. Usage on the variable revenue is picking up, enough to mention it’s a trend.
Here’s what they guided for and what they realized.
Q3’23
Revenue 330-331M → 335 Operating income 20-21M → 42.5
Net income 0.10 → 0.16
FY guidance was raised slightly
Revenue 1.283-1.287B → 1.286-1.287
Operating income 81-85M → 110-111
Net income 0.37 → 0.45-0.46
Some other standouts,
DBNRR ticked back up 1% to 116%
FCF margin of 10.4%, “This is a business that can generate significant cash and in 2023 we expect we will generate more than $100 million in FCF, well ahead of our original goal”
Announced Workers AI to put powerful AI inference within milliseconds of every Internet user. Believes inference is the biggest opportunity in AI.
Added a record number of net new customers yoy spending more then 500k and 1M
3Q operating margin was 12.7% an increase of 690 basis points year over year. “These results highlight our ongoing focus on becoming more productive and doing more with less, given that operational excellence is a long term competitive advantage.”
Positively surprised with R2 product, customers love they take their data and training sets and move it wherever GPUS are available around the world
We realized there is significant scalability and efficiency in the business model
We’re hearing in markets outside the USA they have felt left behind in the AI space, European regulation on AI with keeping data local is real differentiation
Cloudflare is incredibly good as a routing and scheduling engine, that’s how we are able to deliver the very high gross margins that we have compared with some others in the space… we get much higher utilization and pass onto customer
We’ve seen some strength in Q3 from variable revenue, enough to make a correlation or a trend… first signs are encouraging
Seeing strength around network security and Zero Trust products
Seeing more and more people want to buy the entire Cloudflare platform
If you take all other Zero Trust vendors and add up all their traffic, we could add them to Cloudflare’s network with significantly increasing underlying COGS of delivering that traffic