Cloudflare results - My Thoughts

Cloudflare results, my thoughts

Cloudflare is becoming a high confidence company for me. I’ll tell you some of the reasons that it has become my second largest position. Here are some results from the most recent quarter, as announced in November. It was an amazing quarter. Read it and pay attention! :

First of all , they have had three separate “Announcement Weeks” in the past two months or so, in each of which they announced a dozen or so sparkling new products or enhancements. It was quite amazing. You might want to read stocknovices post: https://discussion.fool.com/cloudflare39s-crushing-it-34646557.a…

Then their quarterly results:

Revenue, up 54%, and accelerating from 48% sequentially and from 48% a year ago.

Remaining Performance Obligations, or RPO was up 25% SEQUENTIALLY(!!!) and up 81% yoy. (This is subscription revenue backlog).

Adj operating loss was 4% of revenue, improved from a loss of 24% a year ago.

Adj net loss was less than a third of the loss from a year ago

Adj EPS was -2 cents, improved from -16 cents

Operating cash flow was $2 million, up from a LOSS of $17.8 million a year ago.

Free cash flow was negative 16% of revenue, improved from negative 45% a year ago.

They have over a billion in cash.

Conference Call notes, paraphrased and shortened in places

About half of our new revenue in the quarter came from new logos and about half from expanding relationships with our existing customers.

None of our customers account for more than 5% of revenue. And our top 20 customers remain well under 20% of total revenue.

We’ve been able to hire great people. In Q3, we had over 60,000 applications and extended offers only 0.4%. We are able to attact and retain the best.

Seeing so many businesses struggling with the shift to remote work, in the spring we had decided to make Teams free through Sept 1st. We had thousands of companies ranging from small businesses to Fortune 500 corporations take us up on our offer. Over the course of Q3, we began conversations with all of them to transition from the free offer to becoming paying customers. We are happy with how that went. 75% of these customers have already transitioned from free to paid accounts. For some, who are still struggling because of COVID, we allowed them to continue with the free offering until they can get their feet back under them. Teams is a very high margin product for us, so this doesn’t cost us much.

I think we’re just scratching the surface on use cases. Most use cases today focus on performance. Over time, I expect those use cases will pale in comparison to what is a much bigger opportunity, helping customers manage the challenges of compliance. As governments around the world increasingly insist on data localization and data residency, sending all your users data back to AWS feeds for processing will become unacceptable.

Their CEO said, “Sometimes you hit on all cylinders. We had one of those quarters”.

Saul here: My feeling is that this is an awesome company that is moving successfully into many areas and doesn’t have all its eggs in one basket. I am amazed with it.

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Saul, I am another one of those newbies to this board and learnt immensely over the last 8 months through this knowledge community. Thanks to you and the many other contributors here!

I would like to understand why does NET deserve your second largest position ahead of DDOD.

NET posted 54% revenue growth in Q3 and could get to around 60% growth in the next year if it does very well with the adoption of the array of new product launches it announced recently.

DDOG on the other hand had some Covid headwind and still posted 61% growth in Q3 and more likely get to around 70% growth and potentially more in the next 3-4 quarters as things inch towards normalcy. DDOG is also much closer to profitability than NET is and its pace of sequential revenue growth is also getting closer to pre-covid levels as you pointed out in the DDOG thread.

I understand valuation should not be the primary criteria for stock selection, but just for the record,
NET is not priced cheaply either (P/S: 65) as compared to DDOG (P/S:55).

Is it that you positioned yourself before the recent rally in NET and it organically became your second largest position or are you genuinely more confident on the execution from NET over DDOG ?

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I would like to understand why does NET deserve your second largest position ahead of DDOD.

NET posted 54% revenue growth in Q3 and could get to around 60% growth in the next year if it does very well with the adoption of the array of new product launches it announced recently.

DDOG on the other hand had some Covid headwind and still posted 61% growth in Q3 and more likely get to around 70% growth and potentially more in the next 3-4 quarters as things inch towards normalcy. DDOG is also much closer to profitability than NET is and its pace of sequential revenue growth is also getting closer to pre-covid levels as you pointed out in the DDOG thread.

I understand valuation should not be the primary criteria for stock selection, but just for the record,
NET is not priced cheaply either (P/S: 65) as compared to DDOG (P/S:55). Is it that you positioned yourself before the recent rally in NET and it organically became your second largest position or are you genuinely more confident on the execution from NET over DDOG ?

Good questions, wizchintan. I have a couple of answers:

1 - Cloudflare has gone straight up in price while Datadog fell off some, so Cloudflare grew its position size organically.

2 - Right now Cloudflare is hitting it out of the park, with a cornucopia of new products and enhancements, and has been accelerating its growth rate. Datadog’s growth rate has been decelerating. I believe it’s due to the slowdown in the Covid 2nd quarter which is hiding its true growth, but that’s just my belief and I have to see if it turns out to be true when they lap that 2nd quarter. For now I have to go with the accelerating growth rate over the decelerating one. But I did have an 18.6% position in Datadog as of Friday’s close, which is not chicken feed, and I did add some this morning.

Hope this helps,

Saul

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