Q1 2020 Earnings Call

Our bayes net retention rate free and paying customers and large customers. These statements and other comments are not guarantees a future performance, but rather are subject to risks and uncertainty some of which are beyond our control, including but not limited to the extent and duration of the impact of the covert 19 pandemic and adverse conditions.

In the general domestic and global economic markets are actually results.

Significantly from those projected are suggested in any forward looking statements.

These forward statements supply 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 this call for a more complete discussion of the risks and uncertainties that could impact our future operating results in financial condition. Please see our filings with the Securities and Exchange Commission as well as in today's earnings.

Yes release, unless otherwise noted on numbers, we talk about today or the than revenue will be on in adjusted Noncat basis.

Current and prior period financials discussed are reflected under A.S.C. six six you may find a reconciliation of gap to non gap financial measures in our earnings release on our Investor Relations website.

For historical periods, a gap to non gap reconciliation can be found in the supplemental financial information referenced a few moments ago.

We would also like to inform you that we will be virtually participating in the J.P. Morgan Global Tech Media and Communications conference on May 12th through the 14th and the bear that consumer attack and services conference on June 2nd through the fourth now I'd like to turn the call over to match.

Thank you Jason.

Let me start by saying what feels almost awkward to say given the circumstances.

We had a very strong quarter or Q1 revenues finished at $91 million a 48% you're on year, we posted a gross margin of 78 per cent showing to continue deficiency of our platform. We made substantial progress on our path toward profitability realizing over a thousand basis points of operating Labreck.

Improvement either on year.

That's the easy part.

Dead in our first earnings call. It the public company, we've been practicing mock earnings calls for years, the point that they already feel like business as usual however, as I sat down to write up these remarks I have to confess I struggled because what we're all living through is definitely not business as usual.

So in many ways this isn't going to be a usual earnings call settle in buckle up I wanted to take a bit more time to walk through four areas I've been focused on our team our platform our business and our customers and in particular I wanted to give you more of a sense of what we're seeing not just in the last quarter.

Focusing on March and April as the World reacted to cope with 19.

First our team.

We're very fortunate that the first customer of all of cloud colors products is cloth ourselves. We are digital natives and we're able to use our product like cloud blow for teams to transition to productive and secure remote work or network operations Centre Security operations Center and technical support Center all continued to before.

<unk> securely and reliably staff 24 seven.

But it's not just about technology. It's also an inspiring mission that empowers a team <unk> mission is to help build a better internet at this spend a banking or agricultural crisis, we would likely have felt as powerless as many of our friends and colleagues at other companies do right now.

This was a crisis the caused us all worldwide to lean on the internet more than ever before.

Undoubtedly the Super Heroes of this crisis or the medical professionals and scientists taking care of the sick and searching for a cure to this disease.

But the faithful sidekick, the and man to Captain Marvel has been the Internet and as one of the Guardians of the Internet I'm proud of power team has risen to the occasion to support our customers new and old as they deal with unprecedented challenges I.

I wanted to take this opportunity to think all our team you are working incredibly hard to ensure the internet continues to function, while the world has needed it more than ever before.

Proud of how well you've all kept up our level of productivity and excellence and most importantly honor to see you support each other as well as our millions of customers as we lived through these challenging times together.

Bunnies are really just collections of people and this crisis has reaffirmed to me we have a great seeing.

Second our platform.

The growth in the Internet traffic has been unprecedented.

Across our platform, we saw as much growth in traffic in 12 weeks as we have seen in the previous 12 months.

Flexibility of our platform, where every server in every city can run every classical or service has allowed us to continue to spread load and serve all our customers <unk>.

Stress does make systems better and our engineering team has used this time as a way to make our platform more efficient for instance are firewall team released a series of improvements the shapes, 40% of the processing time off every request that means we are doing full deep packet inspection and threat analysis in a fraction of.

Second at our tremendous scale.

It also means that our network has actually gotten faster during this crisis, while at the same time requiring less hardware.

We expect these and many more innovations will pay dividends to us for years to come.

One of the concerns we had early in the crisis was our supply chain.

Their sources the hardware that powers our network through multiple Odiaum partners. These partners as well as the many component manufacturers. They rely on for parts are largely based in Asia, where the virus first hit.

Beginning in early January in light of the at the time unnamed virus, our infrastructure team thoroughly analyze our supply chain identifying potential bottlenecks.

We moved up some purchases a key components, we thought maybe come constrained this proved <unk>.

Thus far we've been able to continue to receive the equipment, we needed without meaningful delay in order to expand our network. During this time of unprecedented demand.

And the demand has been unprecedented.

We've seen internet traffic use nearly doubled through March and April versus the beginning of the year.

Global traffic has still increasing regionally, we are seeing network traffic plateau.

Different categories of traffic have grown more than others demand for educational and kids content Arts and crafts and parenting content have all more than doubled on the other hand traffic decides about sports scores travel and real estate has declined.

The scale ability and flexibility of our unified platform with its ability to serve our diverse customer base and distribute load globally has served us very well.

Third our business.

I've given you the Q1 highlights, but let me zoom into March and April and give you more granularity in what we're seeing.

Beginning in March we saw a modest object in the length of our average sales cycle that added a few days to our closing deals. However, our average cell cycle still remains well under a quarter and even with the amount of subject is shorter than it was just 12 months ago.

Our sales in March were strong, finishing ahead of our plan.

<unk> was surprising to us was how much of marches business closed in the last week of the quarter.

Our ability to close new business has continued without a break through April and to date, we're attracting well to our plan for new business this quarter.

Are read is that much of the world took a bit of a pause for a few weeks in mid March will companies figured out their remote procurement processes.

Once those were figured out deals for critical services like those cloud we're provides our customers got done.

One more view into what the data are showing.

We track our sales pipeline closely well many things may still impact when rates. We are encouraged that we added more new pipeline in February bend in January more in March than in February and more in April than in March.

I'm proud of our team and while the demanded there we have no intention of slowing down.

Part of the key to our success comes back to our short sales cycle and our ability to sell services without sending account or professional service teams on premise.

Businesses large and small have an acute need for a fast reliable secure network now more than ever.

Hum do every hour of everyday and we can have them up and running as quickly as a few hours or minutes compared to our competitors weeks or months and because of our short sales cycle. We can adapt quickly as we came to understand that certain industries, we're going to be particularly impacted by the current crisis we shifted.

Sales resources to thriving verticals, so our teams could still make their quarter.

When surprised with a quarter was our pay as you go business. This segment is for customers, who sign up with a credit card on month to month agreements and without talking to anyone on our sales team.

Day, it's a small portion of our revenue, but it's our roots, where we started over nine years ago and so it's still very important.

We were concerned this segment, maybe more impacted because of its exposure to small businesses and individual developers tore surprise last quarter. It had its strongest year over year growth in years and it's continued to shows strong growth in April.

That won't make a big difference do our bottom line because it's a relatively small portion of our overall revenue, but I'm proud were still there to serve the small businesses start ups and individual developers who need a service like cloud Blair now more than ever.

Businesses of all sizes and shapes are moving on line to survive and we're helping them.

That's the good news, but it's not all rosy, we are seeing an uptick and requests for concessions Thomas we'll give you more details, but I want it to tell you how we're thinking about those requests.

Based on an analysis of the customer base and the industries that are most impacted we believe the vast majority of our customers will get through that some however may need short term help.

We're using the strength of our balance sheet to help these customers in their time of need filled goodwill and at the same time working out beneficial terms to deep in our relationship over the long term.

We are fortunate that because of the breath of our product offerings deliberate across or unified platform were often able to cost effectively bundle services together and help our customers replace legacy vendors, especially now helping customers save money and simplify their operations leads to a particularly compelling are a lot.

Well.

Titian with their narrower set of offerings does not have this luxury.

Well some hardware vendors may have had a temporary bump this quarter as CIO scrambled to make sure they had enough firewall or VPN capacity. We believe that is short lived.

Those same see <unk> Emailing me, saying, we never want to go through something like this again.

There's a cartoon circulating that asks who led the digital transformation at your company C.E.O.C.G.O. or coven 19.

History may well record this crisis in the last gasp for on premise network hardware.

Similarly, there are a number of cloud providers that only offer limited points solutions are platform strategy has positioned as well for this current moment and we are aggressively leveraging it to take market share.

Being a number of new prospects engage in conversations about to find ways of saving money by leveraging our abbas more cost effective platform.

So that ends as we said before we will continue to use our gross margin as a weapon to gain share.

As an example of that in March we made the call to make cloud flair for teams, which we just launch in January free for any business until September 1st <unk> for teams solved an acute need as companies shifted to 100% remote work and their existing firewall and VPN hardware solutions couldn't keep up.

In the last two months, we've onboarded over a thousand companies on to cloud but for teams.

Since we made it free right now, they're all cost and no revenue.

But we're proud of being there for businesses in their time of neat.

And what we've learned in the last nine years of running cloud Blair is that once you're part of someone's infrastructure, you've inherently build trust and that builds opportunity.

In other words.

While we feel very fortunate with our results in the short term we remain relentlessly focused on the long term. However, make no mistake there will be headwinds in the short term, we are part of the broader economy and as businesses struggle and go out of business.

We will lose some customers, but long-term we believe we are well positioned to be one of the few networks that will help run a large portion of the internet.

So lastly, I wanted to talk about some of our customer wins for the quarter. We had some incredible wins like a credit reporting service that signed a three year deal worth $800000 per year.

Gaming platform with a deal worth over a million dollars per year reinsurance provider, who will pass $750000 over three years to protect their network and the U.S. government agency using a broad set of our platforms features to secure nuclear research for over $150000 per year.

Well, let me focus on some customers that are uniquely relevant to this moment.

One of the largest tele medicine providers in the United States turned to cloud blurs the crisis set in the edges shifts the majority of their positions from clinics, where they have legacy on premise security hardware to their homes, where obviously they did not.

As a highly regulated industry security of patient information is critical they onboarded their positions onto cloud for for teams. So they could keep serving patients.

<unk> said about the experience quote.

I wish we had done that years ago after seeing how easy it was beautiful this is perfect.

On so many levels I love that.

Accompany many of us are relying on to deliver food to our homes, while we shelter and play signed a deal for over $600000 per year in January in March their demand was up so much they increase their deal by more than $500000 per year, one of their goals was to ensure that they could decrease their dependency on Amazon web services. They found <unk>.

It was not only faster and more robust, but also significantly more cost effective.

And they're using club where workers are edged computing platform to solve a handful of development challenges they couldn't it through any other platform.

The on the customers who paid US. We're also proud of the customers doing critical work, we could support through our project Galileo initiative last quarter, we helped ensure fast reliable secure access for projects like Cobin near U. Dot Org project created by Harvard Epidemiologists and software developers to track Tobin 19 hot spots.

Mask, a hero and why dot com, which facilitate a donation of more than 27000 maps to medical professionals in New York City.

Americans Dot org, which is providing emotional support resources and suicide prevention for the millions of lonely people impacted by this crisis eat Cobin 19, now dot org developed by a team of Australian public health and I.T. researchers to track and makes sense of covert 19 symptoms and many many many more.

It is inspiring to our whole team that we were able to lend our technology and expertise to help the true superheroes behind these organizations.

Finally, this is a hard time, no doubt and there will be headwind even for a business like ours, but it's also replete with opportunity my message to our team has been clear iconic companies are borne out of crisis. They take these opportunities to do two things focus and invest.

So we're focusing on the products and innovation that lead to the highest returns and we are investing and building trust hiring the greatest people and establishing ourselves for the long term.

There are a small number of companies that will power the future. The internet, we feel very fortunate very privileged and very lucky to be one of the internet's Guardians during this crisis.

And I'm confident that will serve as well as we strive to build an iconic company over the long term.

That I'll hand, it off to Thomas Tom It take it away.

Thank you enough to you and things are going to everyone quarterly anyhow.

Continued the momentum from 2019 and delivered a strong first quarter exceeding the high end of our revenue guide.

We believe this reflects the critical <unk> customers drunks for him and digitize their business models.

Today I plan to review, our first quarter results.

<unk> 90, and provide guidance for the second quarter and update guidance for the full year or 220.

Turning to our results.

Total revenue for the first quarter crew, 48% he over a year to $91.3 million the growth in revenue was driven by strong customer demand. Both in terms of new logo acquisition. That's the wireless expansion within networks This thing customer base.

That's Matthew mentioned, we've talked to know if it comes strings with okay. If you go business.

Oh pay if you go customers are not committed to a contract but draws are on a month to month subscription plan and predominantly composed of small and medium sized businesses.

I believe the strength from this cohort during a clover pandemics reduce the value of cloud plus Medford and the door ability of all business model.

To provide some additional transparency oh pay US you will customers represent the strong my church, if all paying customer base five contract customers represent the strong maturity of our revenue base.

From a geographic perspective, the U.S. represented 48% of revenue and increased 44% you over a year.

Oh International business <unk>, an increase 52% you over a year.

International crew fourth driven primarily by Europe, which increased 58 per funky over a year, we started making incrementally <unk> investment in Europe last year behind the attraction in our pay US your goal business. We're pleased to see those investments start to take hold specific even from Germany.

And the okay.

The reminder, beginning this quarter, we shifted <unk> K.P. eyes and away from buildings as the basis for or tape yard.

We believe this move to revenue base, K.P.I.s, better aligned with or peer group or public you disclose financial and dollar business model as we continue to scale.

Provided eight quarters of revenue based Historicals full comparison purposes, which can be a reference and this quarter supplemental financial information document on our investor relation website.

We added approximately 250000 total customers during the quarter to exit the corpus roughly $2.8 million total three and paying customers.

Presenting an increase of 40% you know over a year.

We also add it over 5000 paying customers and the first quarter, bringing the total number of paying customers to over 89000.

We remain focused on the expansion was an existing customers and growing or large enterprise customer base and then the the quarter with 566 paying customers with greater than $100000 annualized revenue, which is 65% you over a year.

Oh <unk> attention raid was 100 than 17%, which decrease two person kick wrenchingly and one person q. over a year.

The slides decline with largely driven by higher true and the Asia Pacific region.

The Olympics not for attention measures, our ability to retain them expand revenue from existing customers. The prior year period.

<unk> contraction not sure and exclude the benefit of three customers that upgrade to a paid subscription.

<unk> margin with 78.3% down 40 basis points sequentially end up 150 basis points you over a year.

Network efficiency continues to be the findings strengths of old business model, allowing us to absorb significantly higher rates of traffic and offer are critical solution like log flair for teams to a new customers at no charge through September 1st.

That's what you said previously we'll use our reports margin advantage of a strategic weapon when Oprah <unk> present themselves.

Brings with crises, we're focused on during the right thing for customers today and for business in the long term.

Therefore in second quarter, we expect to see gross margin closer to our long term target of 70, 577%.

Turning to operating expenses.

<unk> on improving the leverage on all business, while balancing investments for growth.

Total operating expenses were $85.9 million for the first quarter pop two per cent answered financially and 35% q. over a year.

Wildly increase though a headphone by 43% you over a year, bringing our total number of <unk> 368, the under the quarter bizarre delay in hiring and Onboarding, which we expect to catch up from the <unk>.

First quarter operating expenses as a percentage of Robbins, you decrease six per cent sequentially and nine per cent you over a year to 94%.

Dolphin marketing expenses for $43.4 million for the courtroom, representing a decrease of one person sequentially and an increase of 42% you over a year.

The sequential decrease was largely due to a swift reduction on travel discretionary marketing spend in response to <unk> 19 pandemic.

South and marketing expenses. It was a per cent rubbing you decrease the 48 person from 49% and the first quarter last year and from 52% loss Walker.

Research and development expenses for a trend $2.5 million from the quarter, representing a decrease of 7% sequentially and an increase of 900 per cent q. over a year.

<unk> revenue decrease to 22% from 28% into one last year and from 26% last quarter.

General and administrative expenses were trying to do $2 million for the quarter, representing an increase of 18 profanity took French Leigh and 40 per cent you over a year.

Sequential and you over your increase towards primarily driven by increased tucked, calling an increase in bed expense primarily to the <unk> 19 impact of $1.2 million.

G.N.A. is the percentage of revenue was 24% representing an increase of two persons sequentially and the decrease of one person you over here.

We continue to see operating leverage in the business as operating margin improved over so I was going basis points, you over a year and 600 basis points sequentially operating loss was $14.4 million and the first quarter compared to $16.1 million in the same period last year.

That's lost in the quarter horse $12.3 million or next lost per share a fourth son.

Oh effective tax rate for Q1 with negative 8%.

We end up the first quarter with $588 million in cash cash equivalent and available for sale insecurities.

Two one free cash flow mega to $30.6 million or 34% <unk> compared to a negative $22.1 million, let's 36% of revenue in the same periods last year.

I mentioned previously we expect to see continue variability in cash flow margins two two ongoing fluctuations in Berkeley in capital and the quotes an hour enterprises.

Before moving to guide them for the second quarter and the full year I would like to begin with our expectations for <unk> related impacts and the associated prohibitions, we factored into guidance.

We performed rigorous analysis on this on both the risk and opportunities in the current environment.

Factored into our <unk>, our customers stuff when facing Oh abuse of corundum prior trends and the customer behaviour via proceed in an hour existing customers and pipeline.

We saw a notable bifurcation across our customer base emerged during the quarter was significant acceleration among certain customers. For example itself cycles that would have taken a quarter to being compressed in today's given an urgent need as well as some pulled back from other customers who are highly affected by qubits related.

<unk>, particularly those in macros sensitive industries, such as transportation hospitality and retail.

However, only approximately 8% or business is associated with highly effective transportation hospitality and retail industries.

During the quarter, we observed and increase I always tell cycle, which was extended by five days and expect similar dynamics to continue and potentially worse than needing to longer lead time deal closures.

I also began to see an uptick in customer contract modification requests, which peaked in March or the 133 customer trust with a notable slow down in April.

[noise] I the reason floated on our guidance assumes these requests will continue and reflect the headwind approximately $2 million in the second quarter.

We are committed to helping our customers through those petroleum shooting times and providing them with increased payments flexibility often in exchange for extended contract duration. We're fortunate that our strong margin profile and balance sheet enables us to provide support our customers Indeed, which we also.

Believe for benefits our shareholders a community over the long term.

Despite used chatrooms remained unique position as a mission critical security in Internet performance partner for our customers were for large and diverse customer base lending customers of all sizes across every industry and all geography with no customer contributing more than 5% of forever.

Mm.

In first quarter, we met or exceeded our new customer H.T.V. and customer renewal targets and our D.S.O.'s trend, it's flat to down through the quarter.

We also think it's important to point out that April <unk> learned from a net you A.C.B. and renewals prospectus.

Since March we've seen organic INBONE <unk> struggle and our customers pipeline has reached the highest level fun that we keep basis.

Turning dog guidance for their second quarter.

We expect driving during the range of $93.5 million from $94.5 million.

Representing an increase of 39% to 40% healed the year.

We expect operating lost in the range of trend email you into $19 million.

<unk> increases primarily to to anticipate that hiring onboarding catch up from Q1 and Covitz related provisions.

We expect and that's lost for share in the range from six to apply person assuming approximately 299 million common shares outstanding it'd be expecting effective tax rate for negative 1.7%.

In light of the rigorous analysis performed we are pleased to reaffirm Howard trendy trendy guidance for revenue operating loss and and that's most per share despite the uncertainty and the <unk>.

And such for the full year 2020, we expect revenue in the range of 389 million. The three <unk> $3 million, representing an increase of 36 to 37 person p. over a year. That's not a reminder, we have for predictable subscription business with strong visibility into near term rabbit.

We expect operating loss and the range of 65 million to $61 million.

And that's lost per share in the range of 21 to 19 sentence, assuming approximately 301 million common shares outstanding and we expect an effective tax rate.

Go to 4%.

Weighing both the headphones and tail when so the current environment. We continue to remain optimistic about the demand for offerings and or longterm opportunity.

While the full impact of the market economy, you from <unk>.

Unfolding, we continue to closely monitor the business environment, and we believe our guidance is appropriate to the prudent.

In closing.

That's when navigate through these uncertain time, you feel very privileged there'll be a mission critical pillar of our customers operation and fortunate to be there for them when they need us most we'd like to think the cloud flare employees or their continued education and resiliency and delivering exceptional service to our customer partners.

And communities and with that I'd like to open it up for questions operator to pull for question.

Oh 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 wheel pause for just a moment chicken barbecue an arrow sure.

Your first question comes from London Sterling on are you from J.P. Morgan in your line is open.

Yeah. Thanks, Hi, guys listen I know, there's a ton of things that you had to get through both one item that wasn't mentioned was you signed another noticeable partnership agreement in China. During the quarter. Just wondering if you can give us some sense of you know what that can mean to your growth in the region moving forward.

Yeah. Thanks Sterling for the for the question. We you know we're we have been operating in China now for five years in partnership with with by you and I think what I've learned in China is that the Chinese Tech community, even though it's a very big country is a very tight knit.

Part of <unk>, very tight knit community and I think that what we really did over the last five years is prove ourselves as a as a as a good partner and so beginning and end 2019, we were approached by a number of different Chinese.

Internet companies, we we want it to diversify the number of partners that we had in China and we were in the fortunate position to be able to choose who we thought would be a great partner going forward and J.D. cloud really fit that bill incredibly well.

So we sign an agreement with them, it's going to take a little bit of time off for us to get that online, but I I'm incredibly excited about it we're adding 50, new cities per year to a a total of 150 Pops a across China that will augment the existing network that we have.

I would buy a with Baidu and I think that there's you know a real opportunity here for us to extend what we think is very unique about class, which was we are one global network that spans the entire world and allows our global customers to manage their traffic both inside and outside.

At five flair to a single user interface, so well I'm excited about this I think it decreases the as for the risk that we had on the on on China in terms of of being dependent on one one provider there and I I, there's a substantial amount of opportunity that this provides as as the world recovers from what we're going through right now.

Yeah. It makes a lot of science and then Thomas one follow up for you. Thank you for the information on the exposed industries like travel.

You made the comments on the pay pay as you go program, but you know a question I get a lot from investors is how should we think about your business as you stratified between exposure to S.M.B. versus mid market versus enterprise, how would you kinda characterizes business that way.

We we pointed out early that we we really manage or go to market across the process of the fundamental we have so there's not really a a focus that shifts from.

Small to medium too big it's really important for the efficiency of our business model and I think this car in crisis shows how important that is to manage across this brockner stuff off the fun at all.

Do we were surprised how how resilient our our pay us to go businesses and some S. you mentioned in his part of the script. It wants to strongest part it it has to hire it had the highest <unk> for four years in the segment and shows how important it as far as to deliver.

Those services towards a small and medium sized companies and also developers so.

They it's really important that we that we can continue to convey the message off managing across the progress of this funnel that is what keeps or <unk>.

<unk> Oh go to market, a mortal efficient and you heard that in my script no. We saw significant strengths in Europe in their in their first quarter. Following the investments reading from event incremental sales investments. We made a at the end of last year and that was based on the strength of low.

Pay if you go business continues to provide us the data we need in order to be to invest behind behind the demand.

Understood. Thank you so much.

Your next question comes from a little Winslow from Wells Fargo. Your line is open.

Thanks, guys or take my question glad to hear the y'all are willing to hopes and true for your family in your your brought her team.

Yeah, Matthew obviously your comment on just this year amount of volume that's going across the Internet and and your network as well and would it be video work from home, it's et cetera. What are we talking about just you have the feud menu of solutions have there been any that stand out to your c. incremental enders, whether you load balancing or go obviously you mentioned teams.

Anything you'd highlight their base onto the environmental machine right now.

<unk> <unk> <unk> I mean, I think that saying there's been the real stand out for for this time as Ben has been clots are for teens <unk> the <unk>.

We couldn't have in some ways gotten more fortunate to have announced that you know in January that was a product that it was new for us was coming to that wasn't a lot of awareness in the market for <unk> as a result, yeah. It made it actually it very easy decision for us to say you know as we were as we were seeing.

<unk> businesses struggle for us to say, let's let's make that that product free through through September 1st and the response was was really overwhelming you know, we we signed up over a thousand businesses to be using clock blur herd scene and what was you know really inspiring for me is.

But are are are are we we wanted to make sure that our main bail team was focused on you know closing the quarter and and onboarding customers onto products that that would generate revenue and we need we stopped strong demand across our entire product Bayes and so you know we had we had people on yeah.

Commonsense finance team on on our customer support team on our engineering team our product team all raising their hands around the world, saying, we'll volunteer to do 30 minute Onboarding sessions with literally that you know over a thousand businesses.

And and so I think that that that that that has raised the awareness of that product very substantially it hit and and and I think that will pay us dividends for for a long time to calm I I think in in terms of the product the generated revenue you know if.

If you think about what cloud player is fundamentally where where what the future. Other network should look like and that network should be resilient. It should be secure it should be reliable and so what we saw was that as more and more of the world shifted to relying on the internet in order to keep.

Their businesses online in order to continue to do their work a modern modern network is what they need it and so that that meant that load balancing firewall security all all of the different assumptions Ah Ah came together and I and I think that what this crisis really illustrated.

You know it really isn't about one product or another customers are looking for a sweet where they can they can sort of say hey, I don't have expertise here I want you guys to have that and and that's why they're that's why they're turning to class there and I think that that our platform strategy really is shown overkill.

<unk>.

Great.

Your next question comes from a line of other ballooning from Goldman Sachs. Your line is open.

Hi, This is Caroline on for how they're thank you again for taking my question Coby on your families are doing Wow I wanted to die of a little bit deeper into then that expansion rate just giving are diverse.

I'm curious how have that retention rates and trendy within your you know the small mid size as well I didn't price customer base and then specifically the weakness in in a pack was that you know was that driven by the I can be customers. I was there you know I changed in church.

Within that within the larger enterprise customers.

Yeah. Thanks for the question, we <unk> I <unk>, so starting with S.M.B. customers globally, you know I I think that looking at our pay as you go beyond that.

That is a route proximate for our S.M.B. customers and I think the thing that we were you know I think pleasantly surprised by what that globally that that segment actually had its strongest gross.

That would that we've seen in in in any period of time, when we had seen customers in that segment.

Who have I <unk>, who has gone from paying customers and and churn what we're not saying is them switching to another solution. We're seeing some instances where companies are going out of business, but but again. This is a very small portion of our overall business.

Even the pay as you go segment is is a relatively small portion.

<unk>, but but what we're more seeing is that they they might just need some relief on their bill and so the number one thing that competes for our sort of pay as you go subscription business is the free version of classifiers products and so we're not losing.

Them on our platform, but we're saying them what they are struggling downgrading that's sad the expansion in the pay as you go business full through new customers as well as our existing customers upgrading to becoming paying customers is the strongest that we've seen a in Q1.

As we've seen in in several years and.

And and and that was I I think that was that very pleasant surprise and I think what that speaks to as even small businesses are looking for ways to continue to operate and that means more and more of them are turning to the internet and and that that has actually been a tailwind.

For us in terms of age that you know I think that where you know we we had just some some churn from some customers that again, we're we're impacted by by various factors of what was going on in Asia.

I again, though I think that there's there's nothing systemic add to that and and in those cases. It's it's you know I I think that that we we see that as a region that we're we're excited about going forward. So I I. It definitely was not an exposure to the S.N.B. market, which was which is what what drove the weakness.

<unk>.

Yea some additional.

Let me if there's something different however, I think it's very important up the first time, we store revenue based in our number at 117% that is what you would expect from you know good performance or do you approve but like them you will see a lot a higher level <unk> larger.

Customer's going to expand their business and they're perfectly linear manner. So that's why you will see some some some some some volatility there this board or if you're hurt from us to from my rubbing your perspective, not so much from a building and A.C.V. perspective, plus also.

A bit more back and loaded as everybody cost towards the end of March and had to figure out how new procurement processes, which looks like that is certainly a reflection in there and the <unk> a regional topic. It's much more a verdict code topics were you know where we talk a couple of customers turn off.

You know that had to high exposure to the vertical said ours in 19.

Hmm.

I'd, probably helpful color and like I guess, they follow up really is.

How do you how do you see the competitive landscape evolving.

I mean are you are you currently <unk> you know more more conversations about replacements the legacy on chronic funders.

For sure where we're hearing that <unk> the.

What what I'm I <unk> see I chose that we've been talking to for a long time and and they they are sort of like yeah. I don't know about the cloud I'm sort of still you know figuring out what my my strategy is going to be I think that that that that the the current crisis has just accelerated everyone knew.

Ah toward the cloud, we're seeing more and more people are turning that that direction and <unk> and again I I think that that we're already starting to have that as a tail when for.

And and I I think that will continue for for quite some time to go there. There are a lot of disco boxes out there odd that that that need to be replaced and I think that we've got very full product suite odd to be able to do that.

We are not what we are not seeing is is a lot again competition that that pulling away. Our businesses. We we we see a very strong growth both with our existing customers and our ability to land new customers and again, I think where where we're trying to be very prudent in terms of understanding the rest.

Is that I I don't think any of us know exactly how long it's going to go on how much it's going to impact that that overall business climate, but I think inevitably as we come out the world is going to look different and it's going to be a world where more and more customers are excited.

To use a solution like clockwork.

Right. Thank you again.

Your next question comes from the line of my Hedberg from RBC capital markets. Your line is open.

Oh, great guys things for taking my questions. Matthew you you <unk> you, obviously have a lot of products that can aid work from home trends, you've talked about them Tonight torturing from a high level can you talk more broadly about your exposure to this particular use case and and how you expect to continue to invest and also benefit from from this long term trend that obviously is changing the way I think.

All of us think about or.

[noise] well you know I think if <unk>.

You know do first of all you know that this is out this is terrible crisis and there are you know we we all have friends, who have been impacted or not able to work right now because their jobs do require them to go and you know restaurant workers and and nail salons in hair hair.

And people <unk> hair.

But I think that.

What what I think we're as a as a society overall fortunate about is that this didn't happen 10 years ago and over the course of the last 10 years, you know we at cloud Flair and lots of other companies have built out cloud solutions.

That can continue to allow people to work and I you know I I've been.

We we classify has traditionally been very much a work from office culture ourselves and you know I was nervous when we switched almost overnight two globally being a work from home culture.

What I've seen is is incredibly encouraging that our productivity is is incredibly high we're getting work time, we're closing deal and and it feels like we not Miss a beat and I think that that's an illustration what.

The business of the future looks like which is how can we think about what are the best aspect of remote work and what are the best aspects of working from offices and I a lot of the reason why we were able to do what we did was that we had the I.T. system in place to be able to support that.

A lot of those were products that we built for ourselves and so I I think having a reliable network, which is fundamentally what it is the classical or provide one that is performance when that doesn't fail. One that is secure no matter why that that is a foundation all.

Aspect of any work from home strategy, and then and and so that that that is our bit.

And then on top of that you know the fact that we've got cloud Clifford teams, which today is is not responsible for a lot of revenue, but boy, they're a lot of interest based on what this is I I think that a solution like that is going to be a part of.

Every company going forward when they make sure that they have the flexibility if ever in the future 100% of their workforce has to work from home because of another another outbreak or more likely because going forward I think that we're all going to realize that the future of <unk>.

Work is going to be a mix of office and and home and I think we've got a a big opportunity to play a role in that not just by providing that foundational secure reliable perform it network, but then to provide additional solutions on top of that that can make.

Working from home fast secure and <unk> and and productive.

That's great and then and maybe as a follow up obviously you have a unique perspective on China.

That's expanding now I'm curious if you can talk about what you're seeing their when people go back to work you know how trends of China opening up might potentially impact and and think about how the rest of the world is going to react to to opening up.

We have an office in Beijing, and so we we were you know very acutely aware of.

This crisis I think maybe earlier than some other companies that might not have exposure to that region. Our team outside of China was was was quick to support our team inside of China, we shifted to an entirely remote work posture there and.

And then what's been interesting is I think it has you know while while they let the way in sheltering in place and and adjusting and that way, they're they're now also leading the way in transitioning back out and so we have a reopened our office in Beijing, we designated that seem.

In terms of a a yellow team in a red team, which are which split it up so that we don't have everyone. In the office everyday were practicing what our appropriate measures and we're watching as that Chinese economy, not and and not just our team, but but teams around the country are coming back online.

And I think that that's part of it China is an enormous mark.

And you know whatever the current concerns are around the virus or the correct concerns around trade tensions over the long term I I think there's there's there's almost no way that that that we don't find ways to reengage with that country and what.

Hi, I'm proud of it that we are the one network that global companies that want to be able to operate inside the China and outside of China, whether they are Chinese base or they are based in the United States or anywhere else.

We help facilitate that movement of bed and then I think especially with the deal that we did with J.D. It you know they are really the on the grounds logistics experts and and I think that that that creates an incredible opportunity for companies that are outside of China to work with.

To be able to market through the the the clouds Blair network, and then work with J.D. as a partner to actually get their goods in the hands of Chinese customers and I think that's.

<unk> well, you've got to invest in things like in network infrastructure well ahead of when this come back but all of the signals that we're seeing our that that you know that that this is going to come back and is obviously going to be a a real a real source of economic growth for the world going forward.

Thank you.

Your next question comes from the line Oh show they all from Oppenheimer. Your line is open.

[noise] Hankies good afternoon, guys. Congrats on the court on the results Matthew or Thomas I know the typically you do not provide the our appeal metric officially on the cold, but any color from a <unk> maybe you have <unk>.

While at the two perspective that will be highly appreciated then I have to follow what.

Yeah normally we don't talk about our appeal, but I think you know given the economic backed off it to it's it's relative for some more transparency.

R.P.O. for us this ah well over 50% for their remaining fiscal year, and trendy guide and so backlog and deferred revenue if they keep in mind that this HM primarily or contract business. So there. The second large contribute to then would be the renewal base, an hour contract business and especially in.

Or pay as you go business, what's your heard from out to us.

Perfectly it's a exceptionally strong in the in the first quarter. So if you add those too with together you probably already at 70% or slightly above and then new A.C.V.S. is literally the smallest contributor and that's why we confidently can say based on 100% subscription business that the visibility.

<unk>, especially near term revenue is is pretty solid hmm.

Understood. Thank you for the color and also when we think about those views thousands a team businesses that joined during the quarter. If if we <unk> this number into a subscribers what could.

That what could that be like is the 1 million 2 million 3 million whatever company you can show with us will be greatly appreciated. It also if I can kind of stick. Another one what would you think there'd been newer rate as we start thinking about 2021.

Oh, those 1000 team businesses once they <unk>.

What's this renewal rate Mike to look like down the road. Thank you for that.

It's a shot so no I I.

Go ahead.

No no go ahead, I guess I may.

Yeah.

Coordinating in our in our independent sheltering in place. So we're we're <unk>, we're so mastering the <unk>.

We're not we don't know what what that thousand businesses, there's going to turn into a exactly you know I'm optimistic as I said in my remarks that once your part if somebody's infrastructure that build that builds a relationship and builds trust and and that will build business for us, but I think we're trying to.

Be very conservative.

Because we don't know exactly what that will what that will turn into and so I I think that we're we're not we're not forecasting revenue based on that Ah right now and <unk> and I think we'll we we'll know a lot more when we get to when we get to September.

<unk>.

Yeah, I'd, let nature was underlined that he had been very conservative in our assumption. So how much revenue from go derived from this business <unk>. There remained for the remainder of the year, but in general or or cross dollar retention is in the in the nineties.

Across all paying customers.

Mmm.

Thank you for that Thomas Matthew Good luck.

Thank you.

You are next question comes from the line of Joel Fish Fine from some trust your line is open.

Thank you in a great.

Execution this quarter Max Matthew I'm her yet.

I have one <unk> ongoing comments I mean ongoing gave us a lot of very good metrics on your your guidance I wanted to ask you you know what kind of testing didn't do to look at what you know how the downside risk was obviously you have most of your business subscription and you talk about the trunk.

Pipeline, but I'd love to hear that and I have one quick call up for you as well.

Yeah, let me collect the started here I I think we really you know we didn't want we did not want to just assume that an automatic recovery would happen in their in their in the second quarter. So we really wanted to especially test the downside risk and then we we D.M.D. impact the the uncertainty or run.

<unk> might have so we both Joe probabilistic models, and we use Monte Carlo simulation.

To to understand.

Especially our exposure to verdict close and industries that suffered into 2000 and and and 2008 crisis, we modeled against the those default rates.

He looked at customer size, we looked at conversion rate, so and run I dunno million cellphone suddenly life and runs a a rounded really understand the test the downside.

Not wanting to assume you know just in a an automatic recover being the second half.

Yeah.

Okay, and I guess as a call up you know I guess, yeah. <unk> April track, you know ahead of plan and so.

And it sounds like you know the trends are that it <unk> things record cracking a little bit better than that is as far as I could you know with.

I guess, what the message that we're supposed to have now.

I think you know there's a lot of uncertainty in front of US we wanted to be appropriate to leave prude and and how we think about the remainder of the year. You know we have more visibility in the near term and I think that this reflect that.

In the guidance for the second quarter and there are some more uncertainty in the in the second Huh and then there, especially there we bonded to understand the downside and and I think this this is prudent in a situation like this.

And yeah, the student guidance, whether America year.

Alright, and then my from for me is real quick on on the <unk>. They were flat actually which is good for your you know customers are actually pairing I'm, assuming that you're gonna <unk> <unk> <unk> <unk>, you know crack up as we move forward you know on extended payment terms.

<unk>, we we <unk>, we have been conservative to know a modeling we have not seen any optic in April either.

Okay, well frankly that was great.

Operator can we take one more question please.

Certainly your final question comes from a line of Keith wife's from Morgan Stanley airline is open.

Excellent. Thank you guys for for squeeze them in nephew, one for you and and one for Thomas the the opportunity that you're describing around really.

Tantalizing, the the shift towards Ah security into it across this environment, how do you way. The fact that a a lotta people just had to double down on their common vendors just because it was a crisis mode. They had to pull whores firewall spending with that didn't come to see versus the ability to get these guys in the.

Going forward base.

No I I think that's I I, it's it's worth.

It's worth probing that I I will say that I know I've been spending a lot of my time talking to see I. You know very large you know fortune 50 institutions and that hasn't.

Hasn't band wide a concern that any of them have brought up I think that they've made decisions to.

Two two bandaid their way through the current crisis, but I think that it become very clear having lived through it that that again, what what I hear over and over again is I never want to live through something like that again, and so that the the inbound interest that we're getting for.

Our our solution, especially from large customers is is is substantial and and and while while I think that that is a that that's worth continuing to test and continued to refine their has not it has not been a concern which has been brought up on a single call.

All that we've talked to my my Hunch is that you know in every board room, you're hearing people, who really witness the pain and the loss of productivity that relying on on premise hardware I imposed on them and they're saying, we need a different texture and.

<unk> and right now I think they're going to tolerate being able to to switch over I think we have the additional benefit that you know because we're a subscription business. It is it it doesn't have nearly the cash outlay that you have to have for for tried a double down on on hardware.

Got to cut the next loss and and and promise for you.

One of the numbers it pretty much across the board numbers came into head out the guidance and how to protest expectations. One number they came in a little bit <unk> expectations was free cash flow you talked about some accelerated hardware purchases. There's also a lot of load on the overall network any one time items or anything in particular.

<unk>, one that we should keep in mind when remodeling the rest of the year.

No I I think we are going to stay for the year with the guidance. We gave this this really trying to manage through the crisis. We we you know we also were able to save some by paying certain things earlier, so over the year. There I think the guidance, it's good to and S. message.

You said, we did the infrastructure D.M. team did an extra ordinary gorbachev, making sure that early in the year in January you're already making sure supply chain is protected and that weighed heavily on on our cats slow in the first quarter, but.

The the trip felon or for the remainder of the year we <unk>.

Hmm.

Excellent. Thank you very much.

That concludes questions and answers or turn it back to the presenters for.

Comments.

Thank you everyone for for tuning in you know, we I I I want to just to say again, how proud I am of the entire classic team. We're working under you know extraordinary conditions that I'm proud of the fact that you're all helping make the internet function. Thanks to all the.

Analysts, who who tuned in add to all of our shareholders I Hope I hope, everyone is safe and healthy and washing your hands, often and we'll talk to you again next quarter.

That concludes to the conference call you may know disconnect.

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