Thoughts on NET post cc

Cloudflare has proven to know their business better than any company we know. Their guide beats have made them very very predictable… UNTIL THIS QUARTER.

I think perhaps the Macro hit them a bit harder than they expected this Q but fully expect that they’ve re-calibrated and expect their beat numbers to be more in-line with their recent historical average of a bit above 3% rather than the most recent of a bit above 1%

Disappointed about NO WORD OR QUESTION about FEDRamp. Second, felt like UPSELL was the theme of the prepared statements and some of the questions.

LOVED the insight into what sales changes they made at the beginning of the year as they saw Macro issues. Basically, focusing on UPSELL. The deals they highlighted also showed this. They were all either upsell deals or deals closed with lots of upsell opportunity

A couple Q’s ago, the theme was SECURITY SECURITY SECURITY. In Q’s on Macro, indicated security NOT slowing down and in some places PICKING UP! ( $ZS, $S). “Zero Trust is very much going to be the story of the next few years to come”

Astutely commented on their biggest hurdle to faster zero trust growth and their explanation matches up well with what $PANW & $ZS say on their reports. Most competitive deals are just those two. $NET needs to raise awareness in their offering.

Companies need to know they’re a player in the space. Leveraging channel partners for now and one of the main reasons for selecting the new Chief Revenue Officer is this area.

R2 is GA with a petabyte so far & was only live a very short time of the quarter.

I love their strategy to sell a product to a company, prove themselves, then expand to other products… very similar to DDOG IMO.

How much did this affect top line this quarter?
“new accounts because we bill all in U.S. dollars. That is putting some pressure, especially outside of the United States. And we are making concessions in order to accommodate what are the foreign exchange pressures that are there.”

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Thank you for your insights. In this macro environment most if not all of the companies we follow are going to take a hit. The question is, are these still the best of the best high growth companies? Is the slow down due to a fundamental business problem or changing thesis? Is the company coiling up ready to spring when the macro turns? I read through NET’s 10Q and earnings transcript and here are a couple of thoughts.

From the 10Q, how is macro affecting the sale’s cycle:

During the first half of this year, potentially as a result of these various macroeconomic impacts on our customers, we experienced a lengthening of the sales cycle for our large customers, a slowdown in our pipeline of potential new customers, and a lengthening of the timing of payment from some of our customers. During the third quarter of 2022, the timing of customer payments rebounded and the new customer pipeline improved from last quarter, however, our sales cycle for large customers continued to lengthen. In addition, during the second and third quarters of 2022, we experienced a higher level of churn in our paying customer base due to pay-as-you-go customers converting to our free plans.

So no customers are leaving, they are not losing deals. Big deals are taking longer to close, but it seems the sales cycle has stabilized otherwise.

From the earnings call, comments on DBNRR:

Our dollar-based net retention was 124%, representing a decrease of 200 basis points sequentially and consistent year-over-year. The decline was primarily driven by less net expansion. We have not seen elevated churn.

Again customers are not leaving the platform, they are slowing expansion.

And can I just quickly clarify with Thomas? With the slowdown that you’re seeing, did you see that more pronounced in small and mid- versus large? Or do you see it against SMID and large?

I see, you see – in each one of the segments you mentioned, you see some impact. We talked about pay-as-you-go down trading to free, staying at our customer, staying on the platform but downgrading. We see elongated sales cycles at the very high end in the very large customer cohorts. And we see the expansion in the mid-market segment slowed down a bit. Churn?

They didn’t churn off, but the expansion was a bit harder. So it really depends on what segment you look at.

If appears that customers are not leaving the platform, that new customer pipeline is rebounding, but expansion of existing customers is where the slow down is happening. As FinallyFoolin noted, it seems that they saw this coming and modifies the sales strategy to combat this.

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