The following are my notes from the NET earnings call, and specifically from the analyst Q/A portion of the call.
NET Analyst Question and Answer - Q3 22
CEO – Matthew Prince
CFO -Thomas Seifert
Q Customer growth?
A How can customers consolidate their vendors. $500K and $1M group of customers are growing faster than their smaller customers.
Q Where is the slowdown small, medium or large customers?
A Depends which segment you look at.
Q Fortune 500 penetration will get to 100% How do you balance what you do w/ the hyper-scalers
A NETs approach is to start from the inside and work its way out vs. the hyper-scalers doing it the other way. NET wants to be the link that links company’s offices. Parts of companies can live inside of NET. Increasingly seeing customers growing the place where companies can grow. Those applications for compliance, performance or reliability reasons, that’s where NET wants to live. Organically w/o M&A, NET believes it can reach $5M. NET sees themselves as the glue between the hyper-scalers. The hyper-scalers don’t need to fail for NET to succeed.
Q Are customers looking to lock into NET for short term or long term contract commitments?
A NET is flexible either way and it’s a big lever they have.
Q When you acquired Area 1, how is where they can take you going and how are you doing against Palo Alto or Zscaler?
A Area 1 is a natural gateway and a threat intelligence team and a great way to attract customers and a deeper and more thorough understanding of what their channel team can do for them. Area 1 email security allows customers to naturally turn to NET for other services. When a customer is considering a zero trust solution, when NET is being considered against Palo Alto and Zscaler, CEO loves their win rates and ability to compete.
Q Are you seeing rationalization around expansion and how will this play out mechanically in the next few quarters?
A If you’re purely usage based model, it’s an area customers are looking to save $. If you’re a seats based model, people are less likely to cut $. While NET offers both, they see it as an expansion driver and not having a problem offering both scenarios. Less about their customers saying how can we use less of you, and instead customers are saying the opposite.
Q Future optimization
A Rule of 40 is pretty compelling to CEO. If they’re growing north of 40%, then they can deliver on the enormous opportunity. They have the levers to optimize how they manage the business. Today, they’re still operating above the rule of 50.
Q Security services is getting stronger in light of macro.
A NET has been consistent talking about macro pressures in the last 3 quarters. Digging down into security business, when Russia invaded Ukraine, security companies thought it would be a tailwind, and that is not what happened. However in the last couple of months, they’ve started to see a lot more cyber attacks coming out of Russia and other countries. It’s actually been showing up in Q3 rather than in Q1 like everyone thought. Not seeing a big change in how consistently they’ve talked about this at NET.
Q What’s implied in the caution in your outlook? Do you expect to see the macro backdrop or stay where it is?
A Subscription based model, much of what they saw in Q3, they anticipate much of the same in Q4. Have not anticipated an improvement and there’s nothing that signals that it will get better any time soon.
Q Provide color around pipeline of renewals.
A Don’t think they’ve seen an uptick in overall churn. Haven’t changed how they’ve handicapped the renewal forecast. They bill monthly and not annually and so they don’t see a massive influx of $ in 1 quarter in an annual scenario of billing.
Q Customers aren’t buying firewalls.
A Had a series of head fakes from the hardware security vendors. In the grand course of history, you can’t solve these problems by shipping someone a box and artificial incentives. This is good for NET.
Q Pricing strategy and trade down to customers that have better TCO. What’s rationale?
A Pay as you go is small and less than 20% of revenue. The value they see in pay as you go is that pay as you go customers turn into their largest customers, used it as an individual/person, fell in love with NET and became a champion who advocated for NET when they went to a large company. That’s their secret sales force.
Q DBNER
A It’s a compete number and a true number. The KPI’s they shared, these coerts art growing.
Q M&A environment. Given the cash you have are there opportunities to add scale, etc?
A Different companies are built differently. NET is more like an Apple who grew organically than a CISCO who grew by acquisition. NET is typically against M&A due to the benefits of efficiency. That’s not to say they won’t acquire a company with a great product and a great team of people.
Note: I may have missed a couple of questions at the beginning of the Cloudflare call while I was on the BILL earnings call.
I hope this is helpful information for everyone. Nice to be on the newly formatted message boards and appreciate the new, modern features and benefits.
sjo