Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Cloud Fair Q3, 2019 earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session, we'll need to press star one on your telephone.
If you require any further assistance. Please press star zero I would now like they have the conference over to your speaker today, Jay Snowden head of Investor Relations. Thank you. Please go ahead.
Thank you for joining us to discuss cloud flares financial results for the third quarter of 2019 with me on the call her Matthew prints co founder and CEO Michelle's out when co founder and CEO and Thomas Seifert CFO .
Now everyone should have access to our earnings announcement. This announcement may also be found on our Investor Relations website. In addition, we have also posted to our website supplemental financial and keep business metrics information.
I remind you that we'll be making forward looking statements during today's discussion, including but not limited to the company's anticipated future revenue financial and operating performance non-GAAP gross margin non-GAAP net loss from operations and net loss per share shares outstanding operating expenses free cash flow non-GAAP effective tax rate.
Dollar based not retention rate paying customers large customers. These statements. Another comments are not guarantees of future performance, but rather are subject to risk and uncertainty some of which are beyond our control. Our actual results may differ significantly from those projected or suggested and any forward looking statements. These forward looking statements apply.
As of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after our call.
For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition. Please see our filings with the Securities and Exchange Commission.
Well as in today's earnings release, unless otherwise noted all numbers, we talk about today other than revenue will be on an adjusted non-GAAP basis.
Current and prior period financials disgust are reflected under AOCI success ex please refer to our earnings release on our Investor Relations website for a reconciliation of GAAP to non-GAAP financial measures for historical periods. The GAAP to non-GAAP reconciliations can be found in the supplemental financial information referenced a few moments ago. We would also like to inform you.
We will be participating in the Jeffrey Cyber Security conference in San Francisco on November 12.
RBC Global Technology Conference in New York City on November Twentyth, and the Wells Fargo TMT Summit on December 3rd in Las Vegas, now I'd like to turn the call over them out you. Thank you Jason and thanks to all of you on the phone for what is Kloppers first quarterly earnings call as a public company well. This is our first earnings call since our IPO, it's actually far from cloud.
Blair's first earnings call I believe this is technically our 13th earnings call. Since July of 2016, we called practice earnings calls every quarter scripted recorded complete with queuing <unk> guidance and a press release rewrote, but never actually put on the wire.
So while we admittedly have some butterflies as we step onto this larger stage the process of getting ready for this call has felt on surprising unpredictable, which is exactly how we aim to run class source business, we had a great quarter. Our Q3 revenue finished at $74 million growing 48% year on year importantly, nearly all of our.
<unk> revenue is subscription based which provides predictability as we think about headcount investment and capital outlay. We also posted a gross profit margin of 79%. We believe our continued gross margin strength is evidence of the underlying efficiency of our network and the broad set of services delivered across our unified platform.
I'm joined today on the phone by Michelle Thomas and Jason, but I wanted to take a second to acknowledge and thank all the employees a club where they are designing engineering marketing selling and running the products that allow us to drive our business. We couldn't do this without the entire team supporting us for many of the investors and analysts style.
Dan we've gotten to know you over the years, but some of you maybe new to classify our story to that end in case, you're not familiar I wanted to take some extra time to walk through who we are and what we do.
Traveler launch in 2010 with a mission to help build a better internet at the time, we thought a paradigm shift I teams around the world, we're going through as they move from on premise hardware and software that they bought to services in the cloud that they rented.
As we watch packaged software turn into south applications and physical servers migrate to instances in the public cloud it became clear that it was only a matter of time before the same happened to network appliances.
Firewalls network Optimizers load Balancers and the myriad of other hardware appliances. The previously provided security performance and reliability would inevitably turned into cloud services.
To be the provider and that could meet the I.T. security performance and reliability needs in the cloud, replacing all the Bandaid network hardware boxes of the past, we need to build our own efficient global network and we've done that today, our network spans 194 cities in more than 90 countries worldwide. Our network is.
Within less than 100 milliseconds I've, 99% other developed world Internet connected population and as we continue to expand our network, we're able to drive down or operating costs increased the performance of our service globally and make our products and better for all our customers.
Porton late we designed our network with a new type of software architecture, we referred to as Serverless practically that means every server in our network can deliver every cloud flare product and service.
Engineers can develop new features and solutions quickly and efficiently without having to worry about waiting for new custom hardware to be deployed and without having to manage or think about vms or containers to give you. Some sense of the developer efficiency. Our surplus platform allows we rolled out 122, new features in Q3 alone.
And that doesn't count all the lines of code. Our users are deployed directly into our network themselves with workers are edge computing platform.
Our strategy is to get to market quickly with early adopters gather feedback from those first customers and then it or a quickly to move up market, serving larger and larger enterprises overtime. That's why it's powerful do we have a broad set of total customers more than 2 million across our free and paying segments, which provide a test bed to build great pride.
Products and meet the needs of the largest enterprises.
Today, we count more than 10% of the fortune 1000, as paying customers and last quarter, our large customer account those customers that spend more than $100000 per year with us increased 71% year on year to 475.
I'm thankful to all our customers, who entrust us with their business I wanted to walk through a handful of customer wins for the quarter to give you a sense of how we're both winning new logos and expanding our relationship with our existing customers, let's start in Europe .
In Q3, we signed a new customer that is a large European stock exchange digital transformation was a top priority for them and they were looking to move more of their operations the cloud and away from on premise hardware like many companies going through this transition the challenge. They faced was they weren't all in one world or another cloud flip.
Provided a perfect solution to help them ensure that they have a consistent control plane across both their on premise and cloud applications.
As is common they didn't come to us for just one use case, but sought the power of cloud players platform and a number of our security and performance products I was particularly pleased to see them adopt two of our newer products workers in access with workers. They were able to deploy custom sophisticated code directly into our net.
Work to route requests between their new public cloud deployments and their legacy on premise infrastructure. This enabled a new digital currency application. They launched in addition, they use classical or access to replace their hardware VPN and allow them to manage who had access their application in a scalable efficient way can.
I didn't even on the theme of digital transformation, we work with a fortune 500 industrial company with close ties to the financial services industry a division within the company had signed up for one of cloud players pay as you go services by coming to our website and entering a credit card our systems flagged our sales team that this was a large potential prospects we approach.
Stem to see a cloud players network and better serve them.
The one use case for a particular client of there's quickly led to an opportunity to help protect and secure many of their financial services clients. We signed a three year deal with an annual contract value over $300000 and we expect that we'll be able to expand the relationship as we introduce them to more products on cloud players platform.
Expansion is a critical part of our strategy and once the customer adoption any part of cloud players platform. It is usually as easy as a single click in a dashboard to enable more product and grow the value of the relationship to great. Examples from Q3 first is a large industrial distributor in the automotive space They had been a cost.
Number of our core security and performance products for about a year. They came to US originally because they wanted a single control plane across all their digital properties. In Q3, we were able to expand their use across more of their portfolio. It's more than doubled their annual spend with us powerfully they were able to leverage workers are edge computing.
Platform to solve some custom traffic routing issues. They didn't have a good solution for before as customers adopt more of our products and especially as they write custom code on our workers platform. It deepens, our relationship with us and increases the stickiness of our platform.
We saw another great expansion deal with a large European pharmaceutical company. They have been using cloud flair to protect and accelerate their internet properties large European and pharmaceutical is another way of saying that this is a customer that will put you through your regulatory and compliance paces and they did when they first became a customer back in Q4 2018.
But now that we've demonstrated the cloud flare platform can meet their requirements. They were eager to see what else we could do for them.
In particular their corporate VPN with a point of pain. They like nearly every other company we talk to you hated their on premise VPN solution.
In Q3, they adopted access signing a deal with us to purchase 25000 seats for their employees partners and contractors around the world.
This allows them to manage access to their applications through a consistent user interface, while leveraging the global cloud player network to ensure fast secure performance around the globe. I think this is a great example of how winning the trust of a customer in one area of our platform allows us to expand and sell more solutions across cloud players into.
Our platform I'm, especially excited about access and think you'll be hearing more and more about it on future calls.
Finally, I wanted to tell you about a free customer our entire team is incredibly proud of as we are flying back to San Francisco in the middle of our IPO Roadshow I got an email from our team they've been contacted by Wikipedia about whether they could onboard with cloud flare Wikipedia was facing a massive cyber attack targeting their entire network infrastructure.
And they didn't know who else could help.
We completed the sixth largest website on the internet and a very sophisticated technical operation.
Even with the help of many partners we compete it wasn't unable to stop the attack they were facing we immediately agreed to donate services.
Michelle Thomas Jason and I watch from the plane spotty Wi Fi as over the course of a few hours our team worked with theirs to get Wikipedia fully onboarded onto our Magic Transit service, which protects not just their website, but their entire network infrastructure, we stopped the attack and Wikipedia came back online worldwide.
I'm proud of this story for several reasons first Wikipedia represents the best of the Internet and that we were able to ensure that remained accessible directly fulfills our mission of helping build a better internet.
Second that we could react quickly and solve this customer's problem in a matter of hours from first contact to the attack fully mitigated speaks to the power and flexibility of our service finally, it illustrates the efficiency of our network, we could donate services to the sixth largest website in the world and know that because we built such an efficient network. It.
It would build incredible goodwill and brand equity without having a measurably negative impact on our financials that seems like inappropriate segue to turn it over to Thomas who will walk through our financial results for the third quarter Thomas taking away.
Thanks, Matthew and thanks again for everyone for joining us.
I'll start by providing a pre overview of all financial model and then I'll go through our third quarter results before moving onto our guidance for the fourth quarter and full year 2019.
We provide cloud based network services through a highly efficient global cloud platform, we generate nearly 100% a far revenue from subscriptions across two different go to market motion.
Our pay as you go customers typically pay with a credit card on a monthly basis.
Our contracted customers, which consist of customers that signup for enterprise plan have contracts that range from one to three years and the typically build on a monthly basis.
Recognize the revenue ratably over the life of the contract.
Now onto the ditto.
Total revenue for the quarter was $73.9 million, representing an increase of 48% over the same period last year.
Topline growth was driven by strong customer demand both in terms of new customer acquisition and growth was in the installed base.
We exceeded 77000 paid customers up 26% year over year, and reflecting a net add of roughly 2200 customers over the quarter.
We now have 475 customers with more than $100000 of an annualized billings, representing 71% year over year growth and the net add over 67 of these large customers over the quarter.
Our investment in enterprise go to market. This in the beginning stages, but we are encouraged by the continued progress that we're making.
Q3 dollar based that retention rate was that at 111% dollar based thats retention measure is our ability to retain and expand revenue from existing customers in the prior year period, our measurement net of contraction net of churn and excludes the benefit of free customers that upgrade to a pay.
We continue to see solid customer retention with the opportunity to drive improved expansion in the medium to long term.
As we add more products and functionality to our platform, we see opportunities to drive upsell as customers seek to consolidate to a single platform to meet all the network requirements.
In terms of revenue by geography, the U.S. represents 51% of revenue EMEA was 24% of revenue and Asia Pacific was 19% of revenue.
In Q3 or contract with Baidu was extended through the end of 2000 than 20, we are proud of their relationship with both with this strategic partner through the year.
Network efficiencies a key strengths of our business model, we utilize off the shelf hardware and the signal homogeneous software stack lowering every server to run every cloud flipped service across our platform.
Third quarter gross margin was 78.9%, which represents an increase of 80 basis points sequentially and 92 basis points year over year, we'll continue to drive high quality revenue and use gross margin upside to invest back into the business, we're maintaining our long term gross margin target of seven.
35% to 77%.
Turning to operating expenses, we remain focused on improving the leverage in our business, while balancing our investments for growth. Our total operating expenses grew 7% sequentially and 50% year over year to $76.5 million.
Sales and marketing expenses were $40.7 million for the quarter, representing 55% of total revenue sales and marketing expense increased 14% sequentially and 68% year over year.
Well, we expect to realize leverage in sales and marketing over the long term, we continue to add sales capacity to try for growth and capture the large time in front of US. These investments include key initiatives, such as expanding October footprint and supporting our increasingly successful efforts to move up market.
Our sales productivity per fully ramped rep continues to remain high which gives us additional confidence to continue to invest.
R&D expense was $20.1 million in the quarter, representing 27% of total revenue R&D expense increased 9% sequentially and 40% year over year the growth in R&D expenses, largely due to our continued investment in engineering headcount to and then the functionality of our global cloud.
Platform, we expect to see long term leverage and R&D as we expand our lets spend office over the coming years.
<unk> expense was $15.8 million for the quarter, representing 21% of total revenue and 27% growth year over year the growth in gionee into its investment of headcount infrastructure and other expenses that we have made to prepare for being a public company.
Operating loss in the quarter was $18.1 million, representing an operating margin of negative 25% operating margin expanded sequentially. This quarter up over 300 basis points driven by a combination of a higher gross margin and improved operating leverage within R&D and gionee.
Net loss in the quarter was $18.5 million netlists per share of 16 cents using 118.1 million common shares outstanding on non-GAAP effective tax rate for this quarter was negative 2%.
Free cash flow was negative $33.6 million in Q3 compared to a negative $22.1 million last year free cash flow margin was negative 45%. We ended the quarter with a total head count of about 1200 employees growing 50% year over year.
Lastly, turning to the balance sheet. We ended the third quarter was $645 million in cash cash equivalents and marketable securities.
Were raised $565 million net of fees and expenses and our initial public offering that priced on September 12. This year.
Now moving onto guidance as a reminder, except for revenue. These numbers are all non-GAAP , which exclude stock based compensation expenses are more decision of acquired intangible assets and four net loss per share. It includes a provision for income taxes.
For the fourth quarter, we expect revenue in the range of $78.5 million to $79.5 million.
We expect non-GAAP operating loss in the range of negative 21 to negative $22 million.
We expect non-GAAP net loss per share in the range of negative six to negative seven cents, assuming approximately 295 million common shares outstanding and we expect a non-GAAP effective tax rate of negative 2.1%.
For the full year 2019, we expect revenue in the range of 281.5 million to $282.5 million non-GAAP operating loss in the range of negative 74 million to negative $75 million.
non-GAAP loss per share in the range of negative 49 cents to negative 50 cents, assuming approximately a 146 million common shares outstanding and the non-GAAP effective tax rate of negative 2%.
In closing we had strong execution during our first quarter as a public company and I would like to thank the entire cloud for their team for their hard work. We remain excited about the opportunity in front of off with that I'd like to open it up for questions. Operator, Please poll for questions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad well pause for just a moment's compiled the Q and a roster.
Your first question comes from Sterling Auty from Jpmorgan. Your line is open. Please go ahead.
Yeah. Thanks, Hi, guys. So looking at the traction that you're having in terms of revenue per customer you've had three straight quarters of acceleration. So in other words the amount that customers are paying are growing at an accelerating rate what I'm curious about is how much of that is coming from expansion.
Sales into existing customers versus just naturally moving up market and landing with larger deals right off the bat.
Drilling thanks for the question I think that it's a combination of both of those things no I think when we think about our business. We think about the business as one single funnel and it's sort of like the Mr. Rogers line that everything gross together because we are one piece and so I think we've had success both land.
Adding new customers and you can see that in our large customer growth, but we also are able to expand those existing customers. Both by increasing the number of products that we sell them and we see that our product team is really delivering incredible new ERP.
Products that were able to sell to them.
And expand that way and then also expanding their overall use and so I I think that we see growth on both of those and I think that that's that that's the part of the strength of our overall business.
All right great one follow up for you.
Looking at workers, you've given some examples of what's going on there, but from a high level. How should we think about what is the probably typical application that's perfectly suited for workers rather than a traditional and cloud implementation.
Yes, so workers is our edge computing platform and what's really powerful about workers is that our customers can right in the languages that they already know code and then deploy yet to inside of our network and I think that the workers Tas fall into sort of too.
Broad buckets. The first is that we see that customers are able to fully program and customized all of our existing features in order to meet their specific needs and that powerful because if for example, our firewall doesnt do something that they already that they need they can.
Take that adjust it and really program that functionality and I think thats the simpler use case and they they use case that we're seeing from a majority of the workers adopting customers today, the second bucket, though and I think that bucket that is the long term exciting bucket is that there are customers that are able to build a function.
Validly that just wouldn't have been possible before and so I'd look at a customer that is doing like an AB test platform, where they don't want to deploy a lot of Java script that would run on a client and they can't actually deploy this in some centralized cloud location because they need.
Performance workers in that case provides the perfect environment for you to get that that speed of being close to where the client as well having the resources of a have a fully function feet server and and the ability to deliver across that so we.
Continue to see use cases across and we're proud of the fact that more than 20% of our new enterprise customers have workers attached to their order and so it's driving real use and the applications that are being built within are getting more and more sophisticated overtime.
Got it thank you.
Your next question comes from Heather Bellini from Goldman Sachs. Your line is open. Please go ahead.
Great. Thank you Matthew I, just wanted to follow up a little bit on what you were just talking about with the with the large customers with over 100000 billings noticing that I think it was the largest number of net add in this category that you guys have had since you've been disclosing the data.
A little bit more if you can add some color on what you were just talking about I'm wondering how often that customers might be landing.
Like are you seeing the lands actually get bigger at this point.
People are kind of hanging out around the net maybe 80000 or 90000 billings and then they just haven't expansion and they get over I'm, just trying to get a sense for how we think about this way.
Those customers is there as their breaching that 100000 100000 billings Mark and then I just had a follow up.
Yes, so I think that the reality is that both of those things are true we're seeing many more customers that are landing in starting in the six six and seven figure range.
And I think that our team as our sales and go to market assumptions are maturing there's that theres, a real opportunity to see that as an initial customer, but but again the power of our business is the fact that we think of the business has one continuous funnel and so there's also an opportune.
We need to take a customer from below that large customer count and move move that up. So I think we're seeing success in both of those areas and I'm really proud of our entire sales and marketing team add driving more and more business to larger and larger enterprise customers.
Okay, Great and then one just quick follow up if you don't mind just wondering.
When these customers are starting with the lands are getting our starting at a larger level what are the once the product portfolio that they're typically starting out with.
Yes, I think that it.
Yes, so I think that it really depends on what.
The customer is looking for about 50% of the products that are that that people are landing with our those security products that we have and then about 50% or the performance and reliability products that are there. So if you're a financial institution I think the beat your bias is going to be land.
Adding towards the the security products first if youre someone who is more concerned about you know.
Marketing or a media site that might might be something that lands with more of the performance and reliability piece, but what we've seen successfully is that as we land with that one customer because it is one unified platform, where every one of our applications is delivered across the same network, what that's allowing us.
To do is very easily expand and when we see customers that say I need to just rethink how I'm thinking about my network services and I need a network like cloud flare we win those customers all the time and those are those are some of our favorite customers.
Thank you very much.
Our next question comes from Keith Weiss from Morgan Stanley . Please.
Please go ahead your line is open.
Excellent. Thank you for taking the question and very nice first quarter out of the gate.
I wanted to begin the concerns that equation.
Can you on this kind of line of questioning.
A very impressive another very impressive quarter and kind of large customer ads.
But on the flip side of equation sort of the overall customer base growth.
Those net additions that like 2200.
In line with what we saw last quarter, but definitely down from the rate that we saw last year. So I just want to make sure that I understand this correctly in terms of when when we think about the investment into more into the enterprise business and more into the enterprise distribution motion is this at the expense to some extent that sort of the run rate.
Smaller business or did you go sunedison artico and that sort of lower new customer adds is just kind of more of a lack of scaling issue.
Yeah, Let me get started Keith and then Matthew will follow up I think it's really important for us to read to reiterate that we manage our business across the complete funding of whole customers come to us and you have to look at that number in the context, the larger numbers or total that properties that we protect our up from 20 mill.
$1 to 22.2 million quarter over quarter, our free and paid customers up from 2 million to 2.3 in the lock million customers and the large customer count is up so.
We will see from time to time noise.
Segments, but off of our of our customer portfolio, but overall, it's really important to us how we manage the momentum across the complete funnel and that was particularly strong this quarter again.
As we get pulled up markets.
Our our customer engagements become larger and the momentum on the large customer count itself.
I said before it's been very encouraging the team has done an outstanding job across the three geos in order to achieve.
But we are not diepreye right privatizing one go to market versus the other it's really important to us to keep the momentum across all the funnels we serve.
I think thats exactly right I don't have anything to add but happy to take any follow ups Keith.
Got it.
As a follow up on gross margin side of equation.
Nice gains in terms of the overall gross margins I was hoping that you can give some color on where those are stemming from and sort of how much more is there could go in that regard to.
It should we expect to see further gross margin improvements across the platform.
Yes, what's really important factor.
To raise our guidance that we over the long term that we wanted to stay in the 75.
Person to 77% so and.
And that we are there we will continue to use across margin. This is strategic weapon really to introduce no new products and accelerate growth wherever possible. There was less need of that quarter and in addition to that the infrastructure team has done an outstanding job managing productivity across the network and that leads the real.
The led to that nice performance.
But we will continue with our statement that we use this as a strategic weapon to reinvest in our business. Yes. The only thing I would add is that this really does speak to the power of having a single integrated platform and so as we are able to continue to build out our network.
We think that by being able to deliver the full range of cloud players products crossed that that gives us advantages over other companies that might just be trying to do one product or one solution across across the network and so we I think that what you know just to reemphasize what Thomas.
Ed that gross margin success that we've had makes that's just a more fearsome competitor in in all of the markets that were competing.
Your next question comes from Phil Winslow from Wells Fargo. Your line is open. Please go ahead.
Thanks for taking my question Congrats great first quarter out of the box.
Matthew I just wanted to focus on some of the mirror services, obviously, you're already highlighted cloud for workers, which obviously.
But what are some of the newer services.
In.
Color traction and that's sort of surprised it outside so far this year.
Yes, I think there are two two services that I'd I'd highlight in addition to workers. The first is our access product, which is our zero trust.
Product if you think about cloud flare you can kind of divide our business into to have one half is that.
Products that protect infrastructure and those have been more of our traditional products, but we're increasingly focusing on products that protect teams and access was our first.
Case with that and we've just seen.
Every single I see team that we talk to you know has what they havent companies. They hate their VPN. They it's a pain to manage it slows things down and access as a real solution to that and we're seeing real customer traction and less powerful about that is we're seeing that customer traction from a lot of customers.
We're already cloud flare customers. So it's both an expansion opportunity and for new customers. When we come in with access there also often saying well we'd love to also replace our firewall or some of our other solutions as well. So we see a real symbiotic relationship there and there were that we told the story during.
That prepared remarks about the customer that at a 25000 access seats were seeing wins like that increasing and it's an incredibly exciting opportunity for us and I think somebody that you'll hear a lot more about the second product, which is newer in the market, but has real traction is a product that we.
We call Magic Transit and we all snicker, a little when we say that term because because we couldn't come up with a better name for it because every time, we would turn it on for a customer they'd say why that's like magic and so we finally, just said that that was the case. This is a product that falls in our classic infrastructure protection set of products.
And it's what we deployed in order to protect Wikipedia and what powerful about that is it extends.
The value of cloud players network beyond just.
Hi, guys and web facing infrastructure to total infrastructure of companies, where they can say that their entire infrastructure sits behind behind our network. We're seeing early wins in these cases these tend to be larger customers and they tend to be larger deals and so that's a product that I'm watching very carefully and our team is extremely excited about.
Great. Thanks.
Also warby users so maybe that next quarter that will be highlighted [laughter].
Well and works I think I think if you think about what war bids warp is the largest test bed for a consumer VPN that could hopefully.
Someday make corporate VPN, not Soc, and and I think thats an exciting.
Glad that you are using it and we.
In the not too distant future love to talk with more of the wells team about how we can help.
Ill make your VPN not Soc.
I appreciate that thanks, guys.
Your next question is from Matt Hedberg from RBC capital markets. Your line is open. Please go ahead.
Hey, guys. Thanks, a lot thanks for taking my questions.
Matthew I think roughly today about half your revenues from security the balance from performance and reliability I was just a lot of innovations across your entire portfolio products, but but thinking longer term.
Curious what that mix might look like I mean, do you think it tilts even more towards security over time, just just maybe just high level high level thoughts.
No I think.
Yes.
We are really good add building security products that solve incredibly hard problems and we have the data across the vast set of customers that we that we that we offer to be able to continue to deliver a high quality security products and that's I think a real differentiator for our business, but I think if you think.
Long term.
What we're seeing with the most innovative organizations that we work with is that increasingly the IP functions and the security functions are on a path towards re converging and that the reason why those two function split apart in the past was at some.
Level, because the security products were so complicated and so different to manage.
What what I think is powerful about cloud players that we focused on ease of use from the very beginning and that means that you can not have to trade off between performance insecurity and so I sort of think of security as being table Stakes and it's it's something that people are going to come to cloud flair for a net.
We will continue to be able to drive a lot of of our revenue from but that overtime, what what customers really what is a better internet and a better network to be able to support it and that's what we're building cloud flow to be able to deliver.
Got it makes a lot a sense and then just to circle back on access we hear a lot of good things about it from the market I'm curious when you sell that into an account is that generally.
A greenfield sale is it replacing anything I mean, I know you've mentioned firewalls sort of wondering about like.
You know sort of like just just what does that competitive dynamic for that product look like I guess.
I think usually we're we're replacing hardware which is being retired.
From what our would be a more traditional firewall.
And access today doesn't necessarily solve every need that a enterprise has to completely replace their firewall, but that is that as the direction that that that products roadmap is headed in and it's how we think about it and we think that that's there's a lot.
A lot of on premise firewalls that are out there nobody loves them.
And and we think Theres an opportunity for us to not only make make are the buyers of our products happy, but then make all of their constituent.
Team members happy as well not having to wait to trombone their traffic through a legacy firewall.
Your next question comes from Brent Thill from Jefferies. Your line is open. Please go ahead.
Good afternoon, given the ongoing success I'm curious if you could just help us understand the go to market strategy over the next year and how you're thinking about reshaping direct sales rep investments and maybe from a partnership perspective any.
Real partners have been benefit you in the field. Thank you.
Thanks, Thanks, Matt.
I think that we have.
Continued to execute in what has been cloud players go to market strategy for some time, which as we move up market overtime. So we've begun building out our field sales efforts around around the world hiring seasoned leaders to to run those efforts in markets like New York.
London Munich.
Sydney, Australia, those are places, where we see that effort continuing to expand we're working with great partners that help bring us to market in various areas. So IBCM has been a terrific partner to us for for for a little over two years, now and where and we are excited.
Many of those relationships, but I would say that our efforts around partnerships as an opportunity where we will continue to invest we we hired Matt Harold out at who had run the G suite partnerships out of Google for the last number of years, he's come onboard and we are investing in.
That area and think that especially for some of these new products like access and magic transit like there might be some new opportunities for partners and that's something that I think you'll see us develop over the course of 2020.
And let me make one were quite in that direction, but it's really important.
To reiterate that it for us to manage our go to market across all funnels continues to be important we put out or international footprint, we are getting ready to support a larger and.
In terms of HCV bigger customers structure, but we also need to make sure that we keep the go to market model efficient and that means keeping their small and medium sized customers as well as their pay if you pull customers.
In mind from a from a go to market perspective, so we're not going to disregard one and over emphasis on go to market over the other.
Thank you.
Our next question is from Pat Walravens.
From JMP Securities. Your line is open. Please go ahead.
Oh, great. Thank you and.
Congratulations on the IPO that first quarter in the first public call.
So take that one for you to start so.
Net dollar expansion, what sort of flat sequentially at 111 can you talk a little bit just since.
This is the first time people heard what are the puts and takes on that number and where should we expect it overtime.
Yep.
Let me give you some color I think there first important remark is for us.
Dolan attention, it's a very clean numbers. So its net of contraction that's net of.
Sure and it also excludes the benefit of free customers that upgrade so.
I'd say, it's a very transparent number into an 111% I think is a good achievement for us in our is also a lagging indicator.
Our business started with plans and their pay as you go.
And we moved our itself up market. So the older customer cohorts. The good news is theres still with us they are more difficult to expand and the opportunity to expand outcomes. As we are getting pulled up market the customers become larger and if we were to assume in on those TLR numbers for for larger cut.
Some of the would look significantly higher so.
This number is going to move up over time.
It will be small progress, but consistent and steady progress.
Since we have the or the customer cohorts with us and as I said, it's a lagging indicator of our performance, but the number will go up.
Okay, Great and then Matthew one for you just.
600 million in cash is going to cause some people to wonder what what's your.
He wants to be around M&A, and what sorts of things might you be looking for.
Going forward.
Yes, I think Pat as as as Michelle and I wrote in and Founders' letter in the S. One I think our general bias is toward organic growth of our products.
Internally and I think the thing that we have learned looking at other people in the industry is that if you. If you relied too much on M&A you can lose some of the advantages of a consistent unified platform, but I think there a couple areas that are really interesting for M&A for us. So the first is.
Is that as we see interesting companies start to build functionality on our workers platform that that naturally as a place where we might find some exciting opportunities to be able to take functions that third parties build and integrate them into our core platform and the integration from.
That is much easier than if we were having to integrate to completely desperate networks I'm. The second is that I think that there are areas that are potentially adjacent to where we are where there might be opportunities for us, but we will we will be disciplined as we as we think.
About that.
I think where we are again biased.
Against.
Just just because we have that capital.
To be able to make acquisitions.
Heading in that direction and I think that we want to continue to be good stewards of the capital that we've been interested with add if we make bats.
It should be clear that those were bets that are accretive to add to the opportunity. We have ahead of us.
Our next question comes from Alex Henderson from Needham. Your line is open. Please go ahead.
Thank you very much I'm tempted to bring up one.
One dot one but I think.
Instead focus on Magic transit if I could so.
Obviously is a very disruptive technology and I think it's one of the more interesting ones in your portfolio, but it also looks like it's still needs to be filled out can you talk a little bit about some of the.
Enhancements you expect in what the timing of some of those enhancements are things like policy management and log management things of that sort that.
That will fill out a magic transit and how the what kind of response, you're getting from customers on it.
Yes, the thing that has been consistent Alex across our business I think has than that.
We like to get products out quickly and get people using them.
Quickly and then learn from those places where there might be gaps and move move up market in order to in order to address those gaps and so I think.
The places that you pointed out.
Our areas that where we are actively thinking about and are in our roadmap.
What's been powerful about magic transit, though is that it sense. It relies on the same infrastructure that was already in place that then allows us to tap into some of the policy management and log management that we have four hour to more traditional products and so every.
Time, we improve any one of these products. It makes the overall cloud solar portfolio more and more enterprise ready, what what's I think bend somewhat surprising to our team has been that even though there are still places where that product and the magic transit case.
Can improve that the architecture and the performance and the ability to stop what are just crippling attacks to legacy solutions has been enough that would that were even as we still have worked to complete the product.
In some of the areas you mentioned.
It we're already getting a lot more traction than I think we anticipated with that so much my my my instruction to that team. As is is just continue to run because it's it's a it's a really magical product.
So.
One business model question, if I could so 68% growth in the sales and marketing line year over year, obviously, a little bit ahead of our forecast and I think.
It looks like.
Stepping up to the played on investing to drive penetration can you talk a little bit about the mix of that between how much of its geographic how much of its associated with new sales hires.
The productivity time for those hires to kick in.
Some of the some of the.
Granular stuff that helps us understand how that investments being deployed.
Yes.
We are stepping on each other already so go ahead, sorry that and then then Matthew something in terms of headcount and geographies, it's pretty even spread across the geography. We serve so we're continuing to build out our copel footprint and that takes investment. It's also in terms of sales versus marketing pretty easy.
Some of these spread between.
Marketing and sales head count.
And in terms of productivity numbers Thats one of the KP ice we really monitor carefully is that while we ramp up that we do not lose productivity and.
Our sales Rep Cross.
Activity has been consistently on a very high level and we've been able to maintain that performance. Despite the headcount increase but today, we talk about three months for a rep took at from start to two product is three to six month.
To get to full productivity, yes, and I think that what I would add is there we definitely pulled in some of our investment in sales and marketing and we we have the confidence to do that first for what Thomas said by the fact that as we're growing that team we monitor the productivity of.
Ramped reps very carefully and that has had held very very steady overtime and thats given us the competence to continue to invest the second is just traction with new products, where products like access and and Magic Transit. We're seeing the success that reps are having in the field and those are and that that's giving us the confidence the third.
It is that we've had real success moving up market with larger customers and you can see that from the 71% year over year growth in the 16% quarter over quarter growth of large customers and then the fourth which.
As has been it's harder to sort of.
Measure, but it's been really helpful to US is we added Mark Anderson last quarter to our board marked span.
Some of that Weve admired for a really long time built the sales teams at at five and Palo Alto networks and he's really ban somebody who has helped us think through as we think about our sales investment when is the right time to step on the gas and and when is that I think that all the measures that we looked at it and concern.
Hi, good with.
We became clear that this was this was the right time for us to step on the gas on on sales and marketing.
Our next question comes from diary on Don.
From Evercore. Your line is open. Please go ahead.
Perfect. Thanks, a lot guys I guess two for me as well.
Most of what I look at the midpoint of the revenue guide that you guys have I think it implies year over year revenue growth of about low fortys, 40% to 43% versus the 40, 740% trend Monday of hot for essentially the rest of only part of 2019 in Q3 I'm. Just wondering what are the reasons for the deceleration your or have you already loan to become conservative given the fact, you've been doing this.
The last few years.
Well, we don't yet we want to be predictable and we want to be prudent about how we talk about our business and I think that is what do you also see reflect that in the guidance and over there.
The three practiced over the last couple of quarters certainly helped us.
Get to prudent approach of how we think can communicate or business.
Fair enough and then.
Good.
Great I know you talked a little bit about the service offering initially, but I was hoping you could just talking about how big of opportunity do you think either from a dollar basis all the new customers that you didn't go after us with this offering and then how does that differentiate Dol Youre cloud fair. So were less often worst of something like eight WSS land I guess.
Yeah, I think that.
I think we're all in early days in the Serverless World and what we're seeing primarily from our workers platform. Today is that it is a differentiator that helps us when customers across our broader portfolio and it's also the platform.
We built for ourselves first so that we can develop products like magic transaction access and get those are out in the market as quickly as quickly as we have I think.
Architecturally we've made some decisions that have allowed us to deliver the our workers platform more more efficiently and from a end customers perspective in a much more cost effective way than what ADW asked Lambda does.
And that's largely because lambda is still running within containers and have significant overhead which is on top of it. So I don't think we fully I don't think we fully understand the scale and scope of what that service offering I is going to be and when we were.
We are putting together the S. One for instance, and we are forecasting what our total addressable market was.
We didn't include several us in that at all I think we're still in early innings I think we've built the right architecture to be able to be extremely competitive over the long term and and and I think we're excited that we already have the adoption rates that we do.
Kristina can we take questions from two more analysts please.
Absolutely.
Our next question comes from Joel Fishbein from Suntrust. Your line is open. Please go ahead.
Good afternoon.
One just to follow up with you on this on a large European stock exchange win.
You had could you just talk about the ROI.
You are able to deliver with that opportunity.
Yes, I think in.
In that case, the ROI was replacing a lot of the on premise infrastructure that they had had in place and so I don't have the specific numbers for them in front of me, but it was a very significant win for them.
It allowed them both to retire a significant amount of the legacy infrastructure that they were using to manage their existing hardware spend but equally importantly, it provided a path for them to go from an on premise deployment, where they were spending a.
Significant amount to run and maintain their own servers to shifting to a much more agile cloud deployment and they could do that without having to completely shut down one or turn up the other so cloud solar in that case provides a very good on ramp for companies that are going through a digital.
Patient and that that savings that there are going to be able to achieve over the long term with a much more flexible and agile cloud infrastructure.
We are that were that half that allows them to make that migration and it's.
And they saw that as a huge web.
Thank you and Thomas just a quick follow up with you last quarter.
I guess you you are seeing around the 20% plus attach rate to workers for new customers is that still the case or is that accelerating.
It's a bucket still about 20% math correct me if I'm wrong, that's right that is where.
It has held steady at that number over the over Q3.
Alright, great. Thank you so much.
Most welcome.
Our last question comes from Shaul Eyal from Oppenheimer. Your line is open. Please go ahead.
Thank you so much congrats on the first quarter as a public entity.
John I think we lost you there.
And Christine we might have to go to the next analyst.
Certainly we can go to Edward Parker from BT Archie Your line is open. Please go ahead.
Hey, guys. Just one question for me I wanted to ask about.
Your large enterprise business, obviously, the customer count growth is impressive and you're making a lot of good partners in the enterprise I guess when you speak to large customers that want to adopt cloud flare, but haven't yet for whatever reason I guess what are like the top one or two asked that they have and I guess, what I'm asking or their capabilities that you think you need to build out in order to capture more mission critical work.
Workloads worth it.
As a product where you think you need it and it's just more function of maturing or go to market organization and Youve Angela evangelize in your message.
Yes, I think that.
Our strategy has always been to move up market relentlessly over overtime and I think some of that is exactly building out our go to market function and we've started to invest and.
Specific field reps that have relationships with those large customers that we that we are targeting add a lot of a lot of this is just the.
Awareness of cloud flare and I think that Thats something that we continue to invest and there are places in our in our product where customers give us feedback that we.
With that they need one particular feature or another and I think our product team is very good at prioritizing those requests we just had our connect event.
Two I sold out house in and in New York, We were actually over overcapacity for the entire event. So a number of the people from the cloud flare team volunteered to actually leave the room for the event to make room for the additional customers and.
They enthusiasm across that was was it was it was incredibly high and so I think that they're always things that we're going to be continuing to improve make our product better increase our awareness, but we're in a really in a really great spot I think thats driving what you're seeing in terms of large can.
From our growth 71% year over year is is it something that I'm really proud of in our team is really proud of and and we're at with as much on I'd say, we're just getting started.
Great. Thank you.
There are no further questions at this time.
I'll turn the call back over to Matthew prints for closing remarks.
I appreciate everyone dialing in thank you to the entire class our team for for helping us.
We continue on a great great path and close a terrific quarter and look forward to hearing from you either at the some of the events that were speaking at the industry events and analyst events over the next next few months or or or next quarter and thanks for everyone tuning it.
Ladies and gentlemen, this does conclude the cloud flare Q3 2019 earnings conference call. Thank you for participating you may now disconnect.