NET - My Notes / Thoughts / Opinions

NET Quarter 3, 2021 (Q321)

Conference Call Highlights

CloudL posted a great summary of the Q and A :…

Our average contracted customer now spends over $100,000 annually with us, up from an average of $72,000 when we went public just over two years ago.

Our dollar-based net retention remained strong at 124%

It was also a milestone quarter because we reached profitability, delivering a positive operating margin and EPS

As long as we can achieve extraordinary growth, we anticipate that we will pour our profits back into our research and development and sales and marketing machine. We are nowhere close to being out of ideas from new products to build for customers to buy them.

General conversation about “innovation release” - Speedweek and Birthday Week. Several products were released that enhanced speed, zero trust, all around delivery network, and products that “we think of as innovative gifts back to the internet” …. These weeks don’t just deliver new products, they’re also some of the most effective marketing we do to attract new customers. During Birthday Week this year, for example, our organic inbound leads spiked nearly tenfold.

Our strategy has always been to get these products to market early and then relentlessly iterate to improve them until they’re best-of-breed and significant new lines of business for us.

One of our secrets to success is our broad customer base that we have millions of customers. Many of whom use our services for free means that we have an eager pool excited to test new features before they’re released.

Not everything will be a runaway success, but this is the fertile soil from which innovative new products spring so readily.

While last year, the seasonality of summer seemed to disappear as people canceled vacations and worked without a break, this year, much of the world came out of lockdown in apparent desperate need of a vacation. July and August were quieter than normal, and the quarter ended up being more back-end loaded than we usually see.

IT organizations now seem to have returned ready to roll up their sleeves and modernize their stacks for a post-COVID world. October started out very strong.

That same week, one of the largest video conferencing services came under attack and onboarded on to Cloudflare, signing an $8 million annual deal. They pushed a lot of traffic. And we believe we are the only network provider with the scale and agility to have been able to onboard them over a weekend…. On top of that, were confident over time well save them more in other providers network bandwidth fees than we charge them ourselves, which is a totally magical experience and the recipe for a very sticky customer relationship.

We delivered another excellent quarter, driven by record large customer addition, which continues to outpace top line revenue

You may recall, in third quarter 2020 with a onetime benefit of $1.9 million related to a customer renewal, excluding this onetime benefit, our year-over-year revenue growth would have been 53.5%

The U.S. represented 53% of revenue and increased 53% year-over-year. EMEA represented 26% of revenue and increased 62% year-over-year. APAC represented 14% of revenue and increased 25% year-over-year.

Third quarter gross margin was 79.2% , representing an increase of 120 basis points sequentially

Now that we’ve achieved breakeven, we intend to reinvest excess profitability back into the business for growth.

Free cash flow was negative $39.7 million or 23% of revenue compared to negative $17.9 million or 16% of revenue.

RPO, came in at $545 million, representing an increase of 13% sequentially and 60% year-over-year. Current RPO was 75% of total RPO.

MY Summary

I really enjoy listening to NET’s calls. I really get the feeling that when Prince says they are going to build a better internet, he is more excited about the innovation and improvements than the dollar signs. He spent more time talking about the developments and products companies used and the reasons why they chose Cloudflare products than the revenue they brought in.

I really like how Cloudflare deploys new products, by building a massive free user base and quickly allowing them to beta test a product while they refine on the fly. Which seems to allow for a faster turn time from idea to sold product. Earlier it was hard to rectify the customer numbers with the revenues, but as time passed it began to make sense. This marked the first quarter of profitability and combine that with their growth that is strengthening – I think NET is a good formula for good results for the foreseeable future.

I like the RPO numbers Y/Y wise it was down to 59% from 77% in the prior quarter. (just a side note from me, a little rabbit hole - it’s important to understand how certain numbers are represented and what they are meant to represent. A famous quote goes, “There are three types of lies, ‘lies, damned lies, and statistics’.” I could have easily said NETs RPO is down 1800 base points. It still would be true numerically, but one way is quite a bit more shocking than the other, even though they’re saying the same thing. ) This quarter was bound to have a larger drop in RPO Y/Y because Q320 was such a stellar quarter for their RPO ($69 for 25%, sequential), also worth noting this is partially due to Q120 not being so great with only 28 adds. If they do the exact same RPO Add in Q421 that they did in Q321 the Y/Y will only shrink 1.5%. If they do the same sequential growth to RPO it will increase again. This means that I am paying attention to the sequential RPO.

I would like to see FCF improve more but I am not concerned, it was -23% of revenue this quarter. There was $29.4M cash outflow related to the repurchase of 2025 convertible senior notes, which I personally don’t have any heartache over, but someone may prove me wrong.

Q	 RPO 	 RPO % 	 Seq 	 Seq% 
Q121	439	88%	55	14%
Q221	484	77%	45	10%
Q321	545	59%	61	13%
Q421-1	606	58%	61	11%
Q421-2	616	60%	71	13%

<Regarding Q4 Scenarios outline below – I am not trying to say with certainty that a company will do ‘x’ in revenue. I am trying to objectively see if what I think/expect is reasonable and/or safe. The whole reason I started this exercise was from getting burned with a few companies before I realized what I needed them to do far exceeded what they probably would do, but I’ll call it what it is, a guess (hopefully educated).

To Maintain Status Quo I am hesitant to call this a status quo, because the sequential revenue quarterly add would go down for the first time. However, the revenue growth Y/Y increases and the TTM % stays relatively flat with a slight increase but the TTM seq % goes to a highest level in 4 quarters (only talking .2%). I do expect the TTM sequential percent to start ticking up for a quarter or two, just because we are out of the two quarters in 2020 that were holding it down. What I infer from this is that NET does not have to beat by much to show accelerating growth, which makes the Q1 guide important (but the next quarters guide can always tank earnings just as bad as a miss).

To Beat Using Past Beats, there are two different ways that I can see doing this. Either take a average for the last four quarters which would be 4.9% or say over the last two years they have beat around 6%. I think more recent is better, but I am going to leave Q420 out and just use a 2021 average. Although the sequential growth ticks up again the Sequential growth % ticks down.

To Continue Sequential Growth % at the same rate as Q3 I am not putting this outside the realm of possibility. I believe this achieves optimism without being unrealistic. If Q3 was a quieter quarter than normal and they are seeing strength going into Q4 as stated in the call… then it reasons that Q4 would be >= Q3 in terms of strength.


$172.35M off a guide of $166 for a beat of 3.8% - Resulting in 51% Y/Y growth. That is 21.93 sequentially for an increase of 13.1% on the quarter.

TTM revenue was $588.8 – Resulting in 51.3% Y/Y. That is $58.2 sequentially for an increase of 11% on the quarters TTM. Interestingly NET’s TTM sequential growth % has been very stable for the past 4 quarters (10.8, 10.9, 11, 11) Which helps explain the relatively flat (not bad) acceleration in TTM growth.

Q	Rev	Rev %	Beat	Seq	% seq
Q121	138.06	51.3%	5.4%	$12.13	9.6%
Q221	152.42	52.8%	4.0%	$14.37	10.4%
Q321	172.35	51.0%	3.8%	$19.93	13.1%
Q421	185.00	46.9%	0.0%	$12.65	7.3%*Guided

Q      Sales (TTM)     TTM %      Seq       Seq %
Q121	477.9	      51.0%      46.8       10.9%
Q221	530.6	      52.1%      52.7       11.0%
Q321	588.7	      51.3%      58.2       11.0%
Q421	647.8	      50.3%      59.1       10.0% *Guided


This is what I meant when I said relatively flat - Ended Q221 with an overall TTM acceleration of 0.95%. This decreased to 0.5% in Q321. Only 5 total data points so they are weighted heavier on the overall TTM acceleration. At Q421 guide overall TTM acceleration would be 0.05%. Individual Quarter rates are as follows:

Q121	0.78%
Q221	1.12%
Q321	-0.77%
Q421	-1.05% *Guided

Customer Data

Total paying customers came in right in line, but the sequential number was a little lower, but this was addressed in the conference call with July and August being quieter than normal, to which they attributed to people traveling again. If that is true then Q4 should come in strong, and that also means Q3 of 2022 should have larger % jump on the Y/Y unless it becomes normal, but we’ll see…

Q	Tot Cust   T Cust%	T Seq	T Seq%
Q121	119206	    33.6%	8023	7.2%
Q221	126735	    31.8%	7529	6.3%
Q321	132390	    31.1%	5655	4.5%

Large Customers have sequentially increased every quarter starting with Q420. I am really wanting to see this come in at 16% in Q421, which would be 31 more than Q321.

Q	L. Cust	L %	L Seq	L Seq%
Q121	945	70.3%	117	14.1%
Q221	1088	71.1%	143	15.1%
Q321	1258	70.9%	170	15.6%

Q421 Thoughts

At the guide NET is looking at quarterly revenue Y/Y growth to be 46.9%, sequential growth to be $12.7 for 7.3% on the quarter. TTM to be at 50.3% and 10% sequentially.

The guide isn’t bad, but I wouldn’t be very excited about them if they came in at the guide. If this were to happen, then the optimism shared by executives just isn’t translating to revenue. However, the deceleration rate in TTM slows down from a delta of -1.9% to -.3%. To use my car analogy from CRWD – the car went from 70 to 65 faster than it went from 65-60. I also believe this whole scenario doesn’t match the narrative from the conference call or the net changes in customer metrics and RPO.

To <Maintain Status Quo I am putting them at needing $191.66 in revenue for a 3.6% beat.

Q	Rev	Rev %	Beat	Seq    % seq
Q121	138.06	51.3%	5.4%	$12.13	9.6%
Q221	152.42	52.8%	4.0%	$14.37	10.4%
Q321	172.35	51.0%	3.8%	$19.93	13.1%
Q421	191.66	52.2%	3.6%	$19.31	11.2%

Q	Sales(TTM)   TTM %	Seq TTM	Seq %
Q121	477.9	    51.0%	46.8	10.9%
Q221	530.6	    52.1%	52.7	11.0%
Q321	588.7	    51.3%	58.2	11.0%
Q421	654.5	    51.8%	65.7	11.2%

To Beat Using Past Beats, I am putting them at needing $193.14 in revenue for a 4.4% beat.

Q	Rev	Rev %	Beat	Seq    % seq
Q121	138.06	51.3%	5.4%	$12.13	9.6%
Q221	152.42	52.8%	4.0%	$14.37	10.4%
Q321	172.35	51.0%	3.8%	$19.93	13.1%
Q421	193.14	53.4%	4.4%	$20.79	12.1%

Q	Sales(TTM)   TTM %   Seq TTM	Seq %
Q121	477.9	     51.0%	46.8	10.9%
Q221	530.6	     52.1%	52.7	11.0%
Q321	588.7	     51.3%	58.2	11.0%
Q421	656.0	     52.2%	67.2	11.4%

To Continue Sequential Growth % at the same rate as Q3 I put them at needing $199.62 in revenue for a beat of 7.9%.

Q	Rev	Rev %	Beat	Seq Growth	% seq
Q121	138.06	51.3%	5.4%	$12.13	9.6%
Q221	152.42	52.8%	4.0%	$14.37	10.4%
Q321	172.35	51.0%	3.8%	$19.93	13.1%
Q421	199.62	58.5%	7.9%	$27.27	15.8%

Q	Sales(TTM)   TTM %  Seq TTM   Seq %
Q121	477.9	     51.0%   46.8     10.9%
Q221	530.6	     52.1%   52.7     11.0%
Q321	588.7	     51.3%   58.2     11.0%
Q421	662.4	     53.7%   73.7     12.5%

Post Q321 Headlines

Not all headlines are meaningful

Positive / Negative Talley – 6 Positive / 2 Negative [I think moving forward I’m going to count analyst downgrades a negative but any upgrade won’t be considered – kind of like a reverse NPS calculation, it’s a work in progress].

Last 30 Days 67% Positive: 4 Positive / 2 Negative

1.(+) 12/17/21 Cloudflare Publishes Its First Annual Impact Report

2.(-) 12/14/21 *Cloudflare shares are trading lower after JP Morgan downgraded the stock from Neutral to Underweight and lowered its price target from $212 to $144. [More JPM nonsense]

3.(-) 12/12/21 Homeland Security Warns Of Critical Flaw In Widely Used Software By Apple, Cloudflare, Minecraft (NET addressed this in their blog, I believe it was resolved quickly, but nonetheless this is the headline)

4.(+) 12/10/21 Cloudflare Joins Microsoft 365 Networking Partner Program; Optimizes Cloudflare’s Zero Trust Network for Microsoft Customers

5.() 12/9/21 Cloudflare Initiated at Buy by DZ Bank

6.(+) 12/8/21 Cloudflare Acquires Zaraz to Boost Website Speed and Security Without Sacrificing Privacy

7.() 12/7/21 Cathie Wood to Launch a New ETF. It Tracks a Transparency Index. [NET is a top 5 in that ETF].

8.(+) 12/6/21 Cloudflare Expands Its Zero Trust Platform; Announces New Firewall Capabilities to Help Customers Leave Their Hardware Behind

9.(+) 11/15/21 Cloudflare Makes it Easy for Developers to Build Any Application on Its Industry-Leading Serverless Platform

10.(+) 11/10/21 Cloudflare and Oracle Join Forces to Help Eliminate Data Transfer Fees and Ease Path to Multicloud

11.() 11/5/21 Cloudflare Is Maintained at Buy by Needham

12.() 11/5/21 RBC Capital Maintains Outperform on Cloudflare, Raises Price Target to $220


A nice twitter thread by the CEO, giving a glimpse at how he builds his team:…

“Just sent the last @Cloudflare employment offer of 2021. I still personally send all the offers out because nothing is more important than hiring. Some numbers: We received more than 200,000 applications. We extended 1,455 offers. And we had a 92% offer acceptance rate.

But hiring is a team sport. It’s part of everyone’s job at @Cloudflare. To get to those 1,455 offers, our team spent 23,919 hours interviewing candidates. When people ask how we innovate so quickly the answer is actually really simple: we hire the best and it take a lot of work.

And we’re not slowing down in 2022! We’ve learned a lot through the pandemic and are confident that we can build an even more diverse and productive team (on every dimension) if we open up roles to being remote. So, wherever you are, know: we’re hiring!

One last thing. The two characteristics we most look for (regardless of the team) are: curiosity and empathy. We’d take those over education, experience, GPA, IQ or anything else.

We have people with multiple Ph.Ds working alongside people who didn’t finish high school. The more diverse a team is the more likely it is to win (for the same reasons you want diversity in your stock portfolio and we worry about the rhinos).

So, please, if you’re curious (a good student) and empathetic (a good teacher), regardless of your background, where you live, or whether you think you fit whatever you perceive the “mold” at @Cloudflare to be, we hope you’ll apply to join us in 2022.”

Those look like really, really incredible hiring statistics especially in today’s tech worker shortage.

The only disagreement I have, of course, is his comment that stock portfolio diversification is how you win, coming from Saul’s board, and we can’t forget that Prince’s networth is concentrated entirely in NET!


Hi Jonwayne235.
Boy am I glad to see this post, not only for it’s content but because it’s the first post I have received on the board since the 28th. I thought everybody moved to someplace else and I didn’t get the word.
Thanks for all your contributions and Happy and Prosporus New Year.
Now you can delete it.