NET Earnings Call -My Notes

NET Q121, May 6, 2021
Analyst Q/A
Matthew Prince, CEO
Thomas, CFO

Moving onto DDOG call now, so please note these are not yet spell checked/formatted…

Q Go to market, winning great enterprise contracts. Changing anything in your execution formula?

A Last year were very well served w/o having to go see people in person. What’s changing is that they continue to bring in the best field sales to service the larger customers. Seeing an incredible number of candidates. +200,000 people applied last year and they’re investing by going where the customers are with a very data-driven approach. Allowed them to sell new logos. Expanding platform is allowing them to sell more to their existing customers. Becoming one of their customer’s critical platforms.

Q RE: Multi-product sales and top 4 modules/products now vs. what you have now that can grow into a top 5 module.

A Customers want fast and secure and want next generation corporate network. If you look at their products, they don’t care where their customer starts w/ their products and then their land and expand takes off and they sell more to them over time. Teams network in one unified package is where they’re headed.
Matthew is excited about Cloudflare for Workers and Cloudflare Teams and Page is where they see them growing. Their customers are really starting to use this and rely on these services.

Q RE: NVDIA partnership and speed, what is the importance of this partnership.

A Want to become the most powerful development platform and not the most powerful edge platform. Being able to do AI and model mapping so it’s incredibly performant, that’s why w/ Bot Mgg, they can bring cloudflare workers platform the preeminent development platform.

Q Success for Bot Mgt. –expand on this.

A Get into the market quickly and improve over time. Get feedback from developers quickly and then improve it so they’re adopting. 10’s of thousands of developers are signing up for this per quarter and it makes their platform stickier and stickier. How can they take the developers and customers they have and create an successful, ROI-driven experience for them.

Q Duration is increasing again, is it because of larger customers
Matthew, what are your risks?

A 12-13 month durations for their agreements
Regulatory risks/environment is getting much more complicated data locality and data residency is making people keep their AI in whatever country in which it’s originating. This allows them to think about how they can help customers meet the requirements they must meet. Data labeling capabilities within Cloudflare Workers is taking off because of complicated regulatory requirements across the global environment. Larger customers are very attracted to this capability of Cloudflare Workers.

Q Supply Chain Question

A Just in time delivery allows them to take advantage of being nimble and flexible during unprecedented growth during Covid. Flexibility on platform to not be dependent on any one chip provider. ARM based chip detectors processing user requests to switch between chip vendors AMD and Intel. Engineering this flexibility into their system allows them to be very nimble as they build out their network. NET is less exposed to problems as a result.

Q Huge bredth of products. Turing products into features and how NET thinks of this?

A Co’s that get to the next phase can turn features into feature licenses to solve a large set of needs. As NET competes with companies that do one thing well, NET can give customers a whole series of capabilities. Selling against companies who sell only zero trust products, NET can provide several other items in other words a whole platform rather than cobble together individual software solutions aka a Frankenstein approach of selling services as a company who has acquired several companies and having to cobble them together when they go to market.

Q Operationally or execution wise, what allowed you to get the results you’ve achieved.

A First, a lot of companies are forced to sell an emu, (bird) that cannot fly, aka go to the cloud. So a lot of the companies who were redesent to go to the cloud in the past are experiencing headwinds. Being in the cloud has been a huge advantage for NET as compared to their competitors. NET is hiring the best people and it’s showing up in their results and in their execution/performance.

Q TAM – is breakdown a valid way to express it or what?

A NET thinks of TAM differently. 50% falls into security and 50% into liability and performance bucket. Cloudflare One is the big driver for NET.

Q How you reach the coding community. How many coders are in your system, number of developers, rate of growth, etc.

A NET is in a very different business than FSLY and Akamai, and they have a lot of respect for them. NET doesn’t see FLY in deals and they’re in more of a media-based focus. Seeing a increase in growth of the number of developers. They have a developer relations team that is constantly communicating with developers. Lots of Fortune 500 enterprises are adding NET’s Workers capability to their stack. CEO believes that NET will eventually become a platform where another company can launch a $1B platform on the NET platform.

Q Do you see yourself going back to Dev Ops?

A There are places where they believe they should partner and play well in the eco-system. NET wants to be good partners in the Dev Ops space. They’re better partners with endpoint security (CRWD) and Identity security (OKTA).

Q Which products grew more than expected?

A Not breaking out revenue on a product basis. Will not give guidance based on a product basis. It’s not how they see their business as compared to others who provide only one single product.

Q Bot Mgt is up over 400%.

A Don’t talk about their specific numbers for NET’s features.

Q How do you think about hiring more sales resources and when can that start to come down? What are your thoughts on cash balance? M&A?

A Cash is not burning a hole in their pocket. RE: M&A, they have a natural bias towards organic growth of capabilities vs. buying capabilities. As long as their investment gets rewarded with superior ROI, they’ll keep doing what they’re doing in terms of strategy.

Q Globalization of product and taking 4 products.

A Whenever selling to Fortune 500 companies, they’re both in the US and international. NET was basically an international company since they day they launched. NET has the 50/50 that resonates around the world. If you’re a Fortune 500 company, you need to have a company that can serve you wherever you are or are doing business. Having over 200 locations around the world makes NET very attractive to Fortune 500 companies.

Q If you’re at ½ of 1% of your TAM, how do you feel about this
Also talk about DBNR.

A NET’s R&D was designed to walk and chew gum at the same time. 90% of R&D is focused on going deep on any of the features they’ve launched. In order to build out their functionality. The power of that is that doing so has power across all of their platforms. 10% of their organization is devoted to inventing the future, so they’re constantly expanding their TAM. When they do expand the TAM, that’s the team who’s doing that. Make products that dramatically impact the TAM and the company is designed to do this and is doing this. What you see today is hard and focused work that started well over a year ago from this group.

Additional remarks from CEO and CFO
Revenue growth +51% Y/Y
Added new customer , crossed 4M, added 117 customers greater than $100K. Revenue from large customers is more than ½ their revenue. 88% of customers use 4 or more modules/services.
DBNRR 123%. Not usage based, rather based on selling their broad platform to customers. Since not based on usage based, their ability to sell more is not slowing down.
A majority of the ecommerce platforms are powered with Cloudflare.
What he worries about?
• Uptick in security and NET specifically
• Team and culture –Employees’s future of work.
• Regulatory risk
Doubling down on actively hiring employees and keeping their existing employees happy.
Both US and international experienced significant growth
Customer metrics –added 6000 free and paying customers. Increase of 46% Y/Y.
119,200 paying customers (34% Y/Y growth in customers.)
$1M customers is fastest growing customer group.
Customer acquisition cost is trending favorably.
1,931 employees in NET.
Will continue to ramp up their large enterprise sales focus.
$1B cash on the balance sheet.
FCF is slightly negative, but this can be changed any time they decide to flip the switch.
Expect to see some level of variability in operating cash flow.

8% of revenue was in riskier verticals in previous quarters and has gone down to 7% Q1 2021
Customers are making longer term
RPO is strong at $439M or 14% sequentially or 88% Y/Y.
Revenue of $140.5 to $146M next quarter
Expect annual revenue of $612M-$616M for this year or a gain of +/-46%

Hope this is helpful information. Thank you to Saul and everyone for making this such a fantastic board!