NET Q1 Financial Results

https://cloudflare.net/news/news-details/2022/Cloudflare-Ann…

-First quarter total revenue totaled $212.2 million
-Dollar-based net retention of 127%

It looks like they are maintaining incredibly consistent growth. I don’t see a slow down here.

Here is what I see at first glance. Note: I estimated that for Q2 they would beat their guide by the same amount they beat Q1 by (3%).


	Q1 2021	Q2 2021	Q3 2021	4Q 2021	Q1 2022	Q2 2022 est
Revenue	138.1	152.4	172.3	193.6	212.2	234.3
YoY	51.3%	52.9%	50.9%	53.8%	53.7%	53.8%
QoQ	9.7%	10.4%	13.1%	12.4%	9.6%	10.4%

The 2022 QoQ growth rates for Q1 and Q2 est appear to closely match 2021 Q1 and Q2. I guess people expected to see revenue growth accelerate more? Who knows. For me I feel just as good about this company as I did yesterday. I plan to keep my allocation the same and maybe add more shares since it is on sale for a reason that I can’t see. I haven’t had the time to dig into cash flow and customer counts yet but I don’t feel any impulse to do anything after my first read through of their results.

I am continually baffled trying to understand what the expectation was for the people that sell a stock like this down 10-15% after hours?? Stay strong. Even 50% growth compounds amazingly fast in the long run. Time is on our side, it merely requires patience (and fortitude).

Crammarc
Long NET (7%)

72 Likes

Great post, Crammarc.

I’d add to incredibly consistent growth, incredibly consistent leadership - same team in place from start, incredibly consistent messaging - to build a better Internet (faster, safer, more reliable/trusted) and incredibly consistent innovation to walk the talk on vision.

Literally the same company from 30 to 220 to 65. I love this company so much I swapped out my BILL for it, taking tax benefit on Bill to add more. Prince to me is best of the best. Every time something happens on the Internet - an outtage, war knocks it down in country or other major software fails, Cloudflare rolls out a blog post or social media posts which articulates what happened and have built a brand that makes them appear to be on a great throne overlooking, protecting global communication. It’s really something.

I held through 220 cause I just can’t see selling this one and my only fear is I get dumb enough to think I can time it and sell high next time. This one anchors my port for decades - if I could sign contract saying I can’t sell it until 2042 I’d do it. In fact I might even pay for that feature. Only thing that could affect that is if leadership changes.

BD

38 Likes

BroadwayDan,

I couldn’t agree more. I feel ridiculous saying this but I felt breathless after reading Prince’s opening remarks in the Q1 earnings. I’ll put some of the best quotes from the whole earnings call below:


“We closed our largest acquisition ever in the quarter, buying Area 1 Security for $162 million. We have a very high hurdle rate for acquisitions being strongly biased toward internal development but Area 1 technology and team are special. We started out as a customer. I remember shortly after we implemented their solution, writing to our Chief Security Officer to ask if something was wrong, I hadn’t seen any phishing reports in a few weeks, where usually our team would report double digits per day. It turned out Area 1 and their incredible email security tech was the answer. By the way, if you’re still seeing phishing messages in your own box, tell your IT team to call us. We now have a great solution. Over the last few years, the customer of Area 1, we got to know their team…We extended offers to all the Area 1 team, and even in this hot labor market, 98% of them chose to join Cloudflare. And I’m not giving up hope on that last one Area 1 team member who hasn’t yet. I think that says something about how good it fit the two companies are together, the technologies and the culture.”

"A large Indian media platform chose Cloudflare over Zscaler and Palo Alto Networks for their zero-trust network. They signed a $150,000 deal for 5,000 seats. They appreciated how much more tightly integrated our solutions were than the competition. We are going head-to-head with Zscaler and Palo Alto Networks more and more, and we like our win rates when we do."

"A Fortune 1000 gaming company signed a $3.3 million three-year contract. I love this story. They were using AWS but found their security couldn’t prevent the attacks they were seeing. After struggling to keep their application online, AWS’s team eventually told them, “You should just use Cloudflare.” And so they did."

“At Cloudflare, our global network serves as an early warning sensor for what’s happening across the Internet. In the month leading up to Russia invasion, we saw characteristics cyber probing and other warning signs that were similar to what we’ve seen in Georgia and Crimea years earlier. Concerned, we’ve briefed Western government and offered our services to critical infrastructure providers and government institutions in Ukraine well before the physical invasion began. Many organizations there took us up on our offer of protection. One of the stories of the war has been the relative lack of cyberattacks. That’s not exactly accurate. There have been attacks. However, the number that have been successful are thankfully few. I’m proud of the role that Cloudflare has played to that end.”

"I think that if you study developer platforms, for them to really reach escape velocity, takes between eight and 12 years. And so Workers was launched in late 2017, so we’re continuing to develop it. We’re on that curve. I think the thing that has surprised me is that we’re seeing very big companies with very sophisticated development teams getting excited about and realizing that Workers is a solution for a lot of the problems they have."


I posted this (https://discussion.fool.com/net-34908728.aspx) a few months back and nothing has changed except that my conviction continues to grow. I find it very difficult to find flaws with this company when looking at the whole package of leadership, moat, market adoption, market potential, best-of-breed tech, etc.

PS his comments about 98% of the workers accepting the Cloudflare offer is a HUGE testament to their culture. I am an engineer and the job market is absurd right now with people moving around for raises and flexibility across the board.

Junomean2
Long NET

36 Likes

I agree the quater was consistent - in my view that’s what investors are paying for with NET “consistancy” and “durability”. I added to my position in AH.

But there are certainly some things I will be watching out for going forward:

  1. Growth in “total paying customers” looks healthy; they addded 14k customers this Q to bring total customers to 154,109 - which is 29% YoY growth and 10% QoQ growth. However there was a noticable slow down in the growth of large customers (ARR>100K) this Q coming in at 8.5% QoQ growth which is the lowest QoQ growth in past 8 quaters (Q1, 2020, QoQ growth in large customers was 5,7%. (On the other hand there are now ‘12’ customers which provide ARR>5million). Next quater I would like to see a reacceleration in the growth of large customers (ARR>100K).

2.Slow down in RPO growth (57.1% YoY, down from 63% YoY in Q4; and 10,3% QoQ down from 14,5% QoQ in Q4) - based just on these numbers alone it indicates a slow down in future revenue growth (RPO is best indicator of future revenue growth https://discussion.fool.com/making-sense-of-rpo-arr-and-deferred…). On the other hand NET have many new and new-ish products and the usage is growing, which I expect can drive future revenue growth - so based on this I am hoping to see reacceleration of RPO and cRPO next quater.

  1. FCF margin was -30,3% (in Q4 FCF margin was +21%) - I was not happy to see FCF go negative, but this was due to some tax withholding of 30M. I will be looking to see a return to poitive FCF next quater.

MoneySpin
Long Net (10%, and way underwater!)

6 Likes

They won’t have positive FCF next quarter. We all need to make sure we don’t let our own expectations stray from what management says. Whether you agree with how Cloudflare is handling their business or not, they have been extremely transparent about this quarter and what will likely happen next quarter too.

Q4 2021 Earnings
“We know this is a business that can generate significant cash flows when we want. In the short term, we expect we’ll see negative cash flows for the next two quarters as we invest in our network and redesign our physical offices for a post-COVID world. But by the second half of the year, we forecast we’ll be free cash flow positive. We admire and seek to emulate other companies that came before us and had significant cash flows while holding operating margins at breakeven.”

Q1 2022 Earnings
“The decrease in cash flow was primarily related to a unique withholding tax payment of approximately $30 million. As mentioned last quarter, we expected to see some cash flow variability in the first half of 2022, but we continue to expect to return to positive free cash flow in the second half of this year.”

17 Likes

Hi Jonomean2,
Yes you are correct; I will be watching for postive FCF in second half of year, which of course is the quater after next and not the next quater.

Thanks for pointing out my error.