NET Q2 '21 Earnings Call -My Notes

Cloudflare (NET) Q2 ’21 Earnings Call & Analyst Q/A
8/5/2021 4:00 Central

Q Large federal deal stands out, please talk about how extensive the public sector is from federal to state and local.
A Completion of Fed Ramp certification is anticipated in 1st half of 2022. Investing in GSI’s such as Accenture and their own team. During last 10 years, they’ve built relationships with the Federal Government that are now really paying off. They expect to leverage this credibility into a significant number of customers in other sectors.

Q in 2nd half, guidance is decelerating. Please address this.
A 3rd quarter last year takes into account a large customer win during the 3rd quarter from last year. This is the most significant guidance they’ve ever issued as a company.

Q Are there 1 or 2 things that are really surprising you as the leader of NET?
A The team is paramount to continuing to grow. The caliber of their R&D and sales teams are amazing. Companies are simply collections of people. Their people want to spend their time building a better internet. Matthew Prince, CEO is very proud of their team and their people.

Q Traffic is already coming in through Cloudflare but expand on
A Apple: 2 hobbiests (developers) Wazniak and Gates went to Benrock for the first infusion into NET. NET has now surpassed the returns that Benrock received from funding Apple.
Matthew was at a small group of technologists, NET was the smallest company at the event, and Tim Cook, CEO of Apple was talking about privacy as a basic human right. That is also a value that NET espouses and NET is a huge Apple fan.

Q Talk about premium customers
A Purpose of them is to innovate as quickly as they can as a company to accommodate the ability to serve large customers. What’s different about NET is that they’ve used data to grow their company and build out their infrastructure and move up to be able to service larger customers. NET has used data from their existing customers to be able to invest behind the growth curve instead of after the growth curve.

Q What is total customer count (free and paying)?
A NET is pausing this for this quarter and will be bringing it back in the future. Did not feel that this statistic was representative. They continue to see significant growth into the future and will express it in a way that is a better way to express it.

Q Billings related to Cloudflare, is RPO the preferred metric?
A RPO is a better indicator that is certainly the number that they are focusing on (77%). Billings can be an arbitrary metric depending on the number of billings during a certain quarter.

Q Long term investment trajectory and what areas will you lean into the most?
A Continue to invest in sales and marketing and continue to think about how as they grow, they will have the team in place to service their customers. They believe marketing and sales matters to serve large and small customers alike.
R&D is the other area. Cloudflare runs on innovation and they have a number of new products they plan to release and CEO does not see this slowing down any time soon. Iterate quickly across their customer base so when they take it to their largest customers, it’s battle tested.

Q Net Dollar Retention. Please talk about how you can improve it and where it can go. Also can your competitors pivot to compete against you and which are you most concerned about?
A With carriers, they’ve had partnerships with many of them and deploy into the carrier’s relationship. Have a very symbiotic relationship with them.
Net dollar retention, they focused on it and they’ve driven it by new products. Since they don’t have a usage based model, they have a subscription model and it’s driven it. Bundling products will continue to drive it. Not satisfied with where it is, and think they’ll be able to improve it.
CFO said DBNER is a lagging indicator, so everything you see has already happened.

Q Provide insights re: criteria when you take Workers to market.
A Launched in 2017 and seeing very very very large companies embrace it. Been hesitant to break out the revenue because it’s a larger part of how they sell their services. It’s margin acreative and cost effective. Don’t think of themselves as competing with the niche edge computers, they think of themselves as the large cloud providers.
Regulatory and compliance concerns in EU are becoming very very complex. This is the tip of the iceberg. India, Israel and China are putting together requirements to keep their workers in their country. NET is on a path to be in virtually every country in the world to accommodate this. This is the killer feature that distinguishes Workers from any other competitors.

Q Please focus on the DEV OPS metrics to qualify/quantify this.
A More than 50,000 developers wrote code and developed an application. The retention of these developers continue to deliver more and more and sophisticated applications. Whoever has the most developers wins. Already the fastest re: adoption. Need to continue to invest to develop their platform.

Q TAM with all their new product launches?
A At last investor day, they updated that +88% of their contracted customers are using 4 or more of their products and 79% are using 5 or more.
50% of initial revenue comes from security, 25% from reliability and 25% from compatibility. It’s difficult to compete with NET once a customer has purchased or started using NET.

Q Zero trust as a driver. Does Cloudflare for Teams compete at an enterprise level?
A Yes, government workers and many other companies are now focused on zero trust. Where they continue to invest is being top right on Gartner and Forester’s score card quadrant.

Q Margin acreative?
A Yes, even at 78% margin.


CEO Remarks:
Won US Government contract but it will not provide significant revenue in 2021. To accommodate this win, which they anticipated, they had to spend significant expenditures. CEO anticipates reaching break even in Q1 2022. Since NET sees their current runway as very long and they are at the early stages of the TAM, the company anticipates making significant expenditures, and they are looking at this for the long-term and not the short term. CEO anticipates that he will be getting a lot of questions from shareholders about this.

3 of the 4 largest Crypto currency exchanges use Cloudflare.

CEO sounded VERY confident and passionate about his remarks and was not stuttering one bit. With all the eco-friendly initiatives, the CEO said that NET DEEPLY believe in their mission to build a better internet.

We had an absolutely tremendous quarter. Thank you to all our amazing employees for making it happen.

CFO Remarks:
Increase of 32% of customers Y/Y

Increase of 71% Y/Y of large customers

DBNER was 124%

Making significant investments in go to market in large customer segment.

34% increase Y/Y in hiring new employees.

Net loss in the quarter was ($.02)/share

Expect to see continued variability in working capital in the future.

Raising outlook for quarter and Y/Y:

Expenditures in network and engineering began in the 1st quarter and 2nd quarter and is anticipated to continue in the 2nd half of the year.

Anticipate using 100% renewable energy in the future and are committed to their inclusion and diversity initiatives.

Hope this is helpful information. Best wishes to everyone for continued success!