Q2 2020 Cloudflare Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the cloud flare Cuties Twentytwenty earnings Conference call. At this time, all participants are any listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone keypad.
If you require any further assistance. Please press Star then zero I would now like to hand to conference over to your speaker today, Jason Olin head of Investor Relations. Thank you. Please go ahead.
Hey, Brandon we start the recording please.
Randy.
Operator.
Yeah, Randy we don't.
Here anything that's it.
Any speaking.
Thank you for joining us to discuss cloud players financial results for the second quarter 2020 with me on the call we have Matthew Prince co founder.
CEO Michelle's out one co founder and CEO.
Thomas Seifert CFO by now everyone should have access to earnings announcement.
It's announcement as well as our supplemental financial information may be found in our Investor Relations website.
As a reminder, we'll be making forward looking statements during today's discussion, including but not limited to be impacted the carbon 19 pandemic on our and our customers vendors and partners operations in future financial performance anticipated product launches and the time and market potential what those launches a company.
As anticipated future revenue financial performance operating performance non-GAAP gross margin non-GAAP net loss from operations non-GAAP net loss per share shares outstanding.
Non-GAAP operating expenses free cash flow non-GAAP effective tax rate dollar not retention rate three and paying customers and large customers. These statements and other comments are not guarantees of 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 cobot 19 pandemic, an adverse conditions and the general domestic and global economic markets. Our actual results may differ significantly from those projected or suggested in any forward looking statements. These forward looking statements apply as of today and you should not rely on them as representing our views into fuel.
Sure we undertake no obligation to update these statements. After this call for a more complete discussion of the risks and uncertainties that could impact or future operating results and financial condition. Please see our filings with the Securities and Exchange Commission as well as in today's earnings press release, unless otherwise noted all numbers, we talk about today other than revenue.
We'll be on an adjusted non-GAAP basis, all current and prior appeared financials discussed are reflected under AMC success. Six you may find a reconciliation of GAAP to non-GAAP financial measures in our earnings press release on our Investor Relations website.
Sure historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago, but.
But also like to inform you that we will be virtually participating in the Oppenheimer annual technology Internet and Communications conference on August 11.
Keybanc future of technology series on August 18th.
And the Jeffery software conference on September 14th now I'd like to turn the call over to Matthew.
Thank you Jason.
We had a very strong.
Our Q2 revenue came in just shy of $100 million, a 48% year over year.
We saw strength from our customers of all sizes. We grew our large customer account those paying up more than $100000 annually by 65% year over year. We also added nearly 7000, new paying customers, bringing our total paying customer account to over 96000 at the same time, we saw strong.
Growth across our existing customer base as they adopted more features the Chrysler platform.
Well, we're very happy with our results our nature is always to be on to look out for what could go wrong.
As I talked about last quarter, we were concerned about concession and the risk of bad debt costs. As a result, the code at 19 pandemic. While we are not out I think what we see good reasons to be optimistic co bid related concession request Pete in early April and have sent tailed off.
He came in well below what we forecast for potential downside.
Today much more so than on our last earnings call. We feel we have clear visibility into the effect the pandemic on our business.
I had given us the confidence as Thomas will detail raised both our Q3 and our annual guidance.
That competent foundationally Amar very predictable and consistent business model.
That majority of our revenue more than 95% rebuilt upfront on a subscription basis.
That generally get that good visibility into our future results. Another consequent appears to have Ben we thought the peak in customer concession request earlier than other companies that bill in arrears on a more volatile usage basis.
One thing we are seeing increasingly its customers who were surprised by that large usage base build that other vendors now coming to us for predictable consistent pricing.
No one likes to be surprised bill and we believe the consistency of our staff approach it not only more predictable fraud, but also builds trust and wind loyal customers over the long term.
Well concessions ended up lower than we had forecast I'm proud of how our team work to accommodate those of our customers that were struggling due to cope with it.
These are tough times for many businesses great partnerships are often build during tough times consistency and predictability, our especially value when so much else seems uncertain.
The customers I've talked to you had been thankful that we've been there the good reliable partner with them through the challenge is a lot.
For our own business, we are relentlessly paranoid so we've been watching a handful of metrics in order to help understand the impact of these unusual times.
As I mentioned her last earnings call. Our sales cycle had kicked up by a few days in Q1 that trended back down in Q2 and remains well under at quarter end at the low end of our historic range.
Worried sales productivity may slow as our team adapted to working remotely instead sales productivity per ramped reps get a new record high.
Deeper into the we'd we watch our receivable collection period closely we speculated that business has struggled during the pandemic our collection period made like.
We were pleasantly surprised to see our collection period stayed stable over the last two quarters.
So what's going on.
We believe the pandemic sports company to support their vendors into two buckets nice to have been macaos all indications from the quantitative metrics were watching as was the qualitative conversations we're having with customers are the cloud clarity squarely in the must have bucket of course, we're part of the larger global economy had less we forget.
That we're selling them into the global pandemic lots of risk remain but we've seen no indication that we are uniquely exposed to the effects of the crisis quite the opposite.
For example from new customers segment, they have traditionally been slow to adopt the cloud are increasingly embracing their digital transformation and turning to us for help.
In Q2, we saw particular strength in Europe industrial company and small businesses. Those are not the first three segments do you think about when you think about cloud adoption and yet kobin has caused even those segments. The customers that traditionally are slow to change to adapt in order to survive.
The nimbleness of our go to market team and our short sales cycle have allowed us to adjust our playbook and be there for new customers in this segment as they unexpectedly accelerated their digital network transformation plan.
It also helps the customers need our services more than ever we talked last earnings call about the incredible increasing consumption and Internet services generally the global growth of Internet traffic largely plateaued in Q2, and we believe it will remain largely flat from Q3, what did not flat. So we're cyber it.
We block, 37% more cyber attacks per day for the same cohort of customers in Q2 than Q1, they get that metric as our cyber attack equivalent of same store sales do you include new customers to growth in mitigating that attacks with 63%.
When companies based online cyber threat, they increasingly turn immediately to cloud Claire.
May with the busiest month, the internet has ever seen for distributed denial of service attack.
Jason sawn attack against one of our customers that lasted four days and peaked at more than 750 million packet per second.
Our network didn't flinch, the targeted customers infrastructure never slowed down and they weren't even aware until our systems alerted them.
If I said the say none of its expected 2020 to work out the way it had I'm thankful for our team and our technologies flexibility I'm proud of all the customers. We've helped ensure have a fast reliable and secure internet through these challenging times I swore after last earnings call, where literally repeated the work for time I would never again call anything unprecedented.
But here we are.
Back in April I spoke to our team at our Q2 kick off I emphasized the great companies use price the to focus on what's most important but also to invest in the future while others pull back our team roasted that challenge it's been incredible to see the rate of innovation that has continued and in fact accelerated even as we've had to adapt.
Now to the new work environment.
One place you can measure that investment in hiring.
Unlike many other than the industry, we did not slowdown we hired 257 new team members in Q2, which is a record brought and ahead of our hiring plan.
But what's behind those numbers is even more impressive we had nearly 47000 applicant up 750% year over year. If you do the math that means we extended offers to less than 0.6% of applicants we had a 96% offer acceptance rate companywide and a 99% rate in our sales.
Organization.
The talent, we're seeing is incredible.
Parents and proud when I got in Dave Yeah turn cap the odds are getting a job of cloud, though these days are much harder when 18 months from now you hear about some incredible new feature or a big customer win no that the investment in the people who made that happened came during that time, when we stepped on the gap, while others were pumping to break.
Even as we made these investments you continued to make substantial progress in our path toward profitability. This quarter, we delivered nearly 2000 basis points in operating leverage year over year, and even as we saw unprecedent bike and traffic cyber attack, our gross margins remain north of 76.
<unk> percent and within our long term target model.
But of course, there's no metric more important to judging the health of any business and its ability to win the trust of new customers to that end I wanted to walk through a handful of customer stories for the quarter.
What is the largest and oldest European financial services firms Cindi three year deal were $450000 per year for cloud Flair for team are zero Trust cloud based replacing for legacy VPN firewall.
They talked to many of the major Zero Trust cloud security players and chose class plan for the capabilities of our current offering as well as what they described as our future proof roadmap.
We believe there will be an opportunity to further expand its customer as our browser isolation technology is rolled out in the second half of this year.
A large U.S. based industrial manufacturers signed a deal with $350000 per year to adopt cloud players web application firewall solution.
We're moving to the cloud as part of their digital transformation, replacing legacy on premise hardware and software cloud players the clear winner in cloud security.
Having established a trusted relationship with them last quarter. This quarter, we are talking to them about adopting our cloud flair for team solution for their 50000 employees.
A leading identity and access management provider signed a two year deal worth half a million dollars per year.
They move workloads away from Amazon Web services, due to better speed and flexibility of our platform.
They are part of a general trend, we're seeing from the most security savvy organization, who tell us They trust by blood platform respect our team, leaving our ability to continue to innovate and are betting on our technology.
Born in the cloud gaming platform signed an expansion of their existing cloud player contract for an additional $1.8 million annually. This platform, which you have kids at home, they're almost certainly you. They chose cloud player to ensure the best possible experience for all their users worldwide.
I've been excited to watch how they use cloud color workers are surplus computing platform to scale any power the explosive growth they've seen over the first half of 2020.
That's one Great example of a cloud learnt workers customer, but I wanted to finished by giving you a picture of how developers generally are adopting our certain lets computing platform clapboard workers launch nearly three years ago part of what was powerful about workers was that it was a true turning complete serverless computing platform that will.
Allow developers to build sophisticated application and run them edge to edge across our entire network.
Today, approximately 10% of traffic flowing through published network is powered by workers about 20% of new large customer deal include workers and in Q2 alone 22000, New developers wrote their first application using workers up 440% year over year, we're not.
Satisfied being just a niche edge computing platform, we want to be the go to serve lets computing platform for all developers in application.
To that end last week, we announced a number of new bottler workers features we significantly raised deep you limit, allowing customers to build even more sophisticated applications, we released pricing, but it's up to 75% less expensive when the same workloads and AAMC Lambda, while still being margin accretive for us.
We expanded our tools to support the languages developers already know in love like Javascript C C plus plus Python rot scale out and even COBOL when I'm excited to see if the developers choosing Adler workers aren't doing so just because of the basket, but also because it's the most consistent secure.
Our cost effective computing platform, it's easy for them to use and help solve the for me global compliance issues. There see audio is increasingly care about watch this space as Michelle likes to say, we're just getting started.
With that I'll turn it over to Thomas to walk through our financial results for the quarter Thomas take it away.
Thank you Matthew and thanks, again to everyone for joining us.
That's mess you mentioned, we continued the momentum from old first quarter, so less headwinds from the cobot atomic than previously anticipated and delivered another outstanding quarter with strengths in multiple areas of the business.
Total revenue for the second quarter, 248% year over year to $99.7 million.
The growth in revenue was driven by another quarter of strong customer demand both in terms of new logo acquisition as well as expansion within our existing customer base.
From a geographic perspective do you S. represented 49% of revenue increased 46% year over year.
Oh International business represented 51% of revenue increased 50% year over year.
International growth, driven primarily by EMEA, which saw record year over year growth, 62%, Oh by new product adoption from large enterprises.
Turning to our customer metrics, we exited the quarter with more than 3 million total free and paying customers, representing an increase of 40% year over year.
As a reminder, beginning last quarter, we shifted to revenue base capesize and away from billings as the basis for or keep yards.
We added a record number of large and paying customers in the second quarter on both the sequential and year over year basis.
We added roughly 7000 paying customers in the second quarter, bringing the total number of paying customers to over 96000.
We added more than 80 large customer sequentially ending the quarter was 637 paying customers was greater than $100000, an annualized revenue, which is up 65% year over year.
Roughly half the 637 large custom assessment on the platform for more than a year and the other hall for less than one year.
Well the second quarter dollar based metro attention was 115%, which decreased 2% sequentially and 7% year over year.
The decline was primarily driven by non strategic accounts in Asia Pacific the churned off or platform.
Outside of the Asia Pacific region overall expansion in the quarter from large enterprise customers was strong with nine of our top 10 deals in terms of new ACB coming from existing accounts.
A meaningful number flow arch expansion deals came from customers that hasn't yet been on the platform for a year and therefore, that's yet to contribute to dolan that retention.
View this as a healthy indication of our ability to expand our new customers quickly and expect this trend to continue into the second half was 2020.
Second quarter gross margin was 76.8% down 150 basis points sequentially, and 130 basis points year over year, which is in line with the expectations, we shared last quarter and our long term target of 75% to 77%.
We've been able to absorb internet traffic levels, 30% to 40% higher than pre cobot without a significant impact to gross margin.
Turning to operating expenses.
We remain focused on building a long term business was the Stena book growth, while improving the operating leverage in our business.
Second quarter operating expenses as a percentage of revenue decreased 8% sequentially and 20% year over year to 86%.
This mess you mentioned, we achieved record hiring in the second quarter with a focus on key geographies like Austin list them, increasing overhead Cohen by 44% year over year and bringing our total number of employees to 1500 30 fives the ending the quarter.
Sales and marketing expenses were $47.4 million for the quarter, representing an increase of 9% sequentially and 33% year over year.
Sales and marketing as a percentage of revenue remained flat at 48% sequentially and decreased 5% year over year to add to what must you mentioned, we had a record quarter in terms of sales hiring including quota bearing reps, which is important as we look out this fiscal year 21.
Research and development expenses were $21.3 million in the quarter, representing an increase of 4% sequentially and 15% year over year R&D as a percentage of revenue decreased to 21% from 22% last quarter and 27% and the same quarter last year.
We've seen excellent progress building out or less than office, which we expect to contribute to long term R&D leverage.
<unk> expenses were $17.4 million for the quarter, representing a decrease of 21% sequentially and constant year over year. The sequential decrease was primarily driven by lower than expected bad debt expense and the reduction in events and office expenses DNA as a percentage of revenue.
You were 17%, representing a decrease of 7% sequentially and 8% year over year.
We continue to see operating leverage in the business as operating margin improved by over 1800 basis points year over year, and 600 basis points sequentially.
Operating loss was $9.5 million in the second quarter compared to $18.7 billion in the same period last year, we accelerated hiring the second quarter in order to remain on track to achieve full year hiring plans and the such expect to see variations in the magnitude of operating leverage going forward.
Net loss in the quarter was $9.6 million for net loss per share of three cents, our effective tax rate for Q2 was negative 12.2%.
Strong and flexible balance sheet, ending the second quarter was $1.1 billion in cash cash equivalents and available for sale securities.
Early in the quarter, we issued a 575 million dollar convertible note offering with total net proceeds so $562 million.
In connection with the offering we bought a cup call was 100% premium in order to protect our common shareholders from dilution.
Second quarter free cash flow was negative $20.2 million, so 20% of revenue compared to negative $16.9 million or 25% of revenue in the same period last year.
Operating cash flow was positive $4 million from the second quarter.
The improvement was primarily due to greater profitability and improved working capital helped by strong collections, Oh, Dsos remain well within the historical range, which we view as encouraging against the recession or reason why aren't.
We expect to see variability in operating cash flow due to ongoing fluctuations in working capital and the growth in our enterprise business.
Before moving to guidance for the third quarter and full year I would like to provide an update on the cobot related impacts and associates Russians, we shared last quarter.
Last quarter, we disclosed the custom it's highly affected by Qubits related challenges, particularly those in Mexico sensitive industries, such as transportation hospitality and retail represented approximately 8% of our business in second quarter. This cohort grew mid single digit sequentially a decrease.
Lately as a percentage of total revenue.
So it doesn't use industries are seeing challenges, but continue to invest to both out of web presence in order to remain relevant and competitive.
We also disclosed last quarter that we saw customer concessions uptick in March and decline in April we are pleased to share the second quarter contract, but to fixations came in well below the 2 million dollar headwind, we anticipated with these customer modification requests having trended down during the quarter historical levels.
During the quarter, we were pleased to observe a slight decrease in the sales cycle and remaining within the range. We've seen historically. In addition, we also saw an uptick in our sales productivity, which improved 7% sequentially.
We continue to exceed or new HCV and customer renewal targets.
He has trended as planned from a net new ACB and renewals perspective, and despite the current environment, we observed a sequential increase in win rates, which returned to historical ranges.
Remaining performance applications or ARPU ended the quarter, two and then in $74 million up 18% quarter over quarter end up 58% year over year.
Also uncertainties remain in the current environment, we're confident in the continued growth of all business and the durability of or subscription model with the barrier paid revenue continuing to be less than 5% of total revenue. Therefore, we're pleased to raise guidance both for the third quarter as well as for the for.
Fiscal year.
For the third quarter, we expect revenue in the range of 102.5 million to $103.5 million, representing an increase of 39% to 40% year over year.
We expect operating loss in the range of 16 million to $15 million.
We expect net loss per share the range of six to five cents, assuming approximately 302 million common shares outstanding and we expect an effective tax rate was negative 6.2%.
For the full year Twentytwenty, we expect revenue in the range of $404 million to $408 million, representing an increase of 41% to 42% year over year.
We expect operating loss for the full year in the range of $55 million to $53 million, we expect net loss per share over the period in the range of 18 to 17 cents, assuming approximately 301 million common shares outstanding we expect an effective tax rate for twentytwenty, let's make it to 8.6%.
In closing we're optimistic about the continued durability of our business and the efficiency of our platform. We're thankful for the resiliency of our employees the strength of our customer relationships and overall productivity and the work from home environment as such we believe we are well positioned to execute.
Despite these challenging times with that I'd like to open it up for questions. Operator, Please poll for questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
We will pause for just a moment to compile the Q any roster.
Your first question comes from the line of it Matt Hedberg with RBC capital markets.
Hey, guys. Thanks for taking my questions and congrats on a really strong quarter and certainly it's a tough environment that does not go unnoticed.
You know what really stood out to me is growth in large customers I think it was 65% and also Matthew talked about.
Record productivity and really strong new hires and others are pulling back I guess given like these trends.
Seem to be accelerating here.
You know large enterprise expansion does typically mean, you're displacing a legacy on prem vendor or rather is greenfield wins to support new cloud workloads.
Yes, Matt. Thanks, Thanks for the question thanks for that could as.
We've been really happy with their ability to close larger and larger customers were up to now about 16% of the fortune 1000 are using our using cloud so thats up from 13% and in Q1, I think we see a number of of I have different places that people come to us.
But our belief is there are no new dollars in the world and so I, we don't think of it as a greenfield opportunity, but rather a traditionally that we are replacing what is usually a existing on premise hardware based solution that part of the digital transformation that enterprises are going through right now with it.
Whether they were planning on doing that in 2020 or not.
Got it that's helpful and then the other thing obviously, it's been in the news with a.
Work or unbound workers on bound.
Personally when we talk to partners and customers like we think workers can be one just the biggest long term opportunities you have and you did give a lot of helpful metrics to think about this opportunity could you give a little bit more details about what unbound actually means for adoption of that services. It strikes me that there's a number of positives. There you highlighted some of them, but just maybe a little bit more details on.
On on bound.
Yes, when we do so we've had a edge computing offering in the market now for nearly three years and I think over that period of time, we've learned a lot about what developers really want from a computing platform and I think that when you and I spoke three years ago I, probably have talked about you know powering ohios.
Devices, and driverless cars, and how being faster was really the killer feature for for that edge computing products I think what we've learned over the last three years is that actually when developers think about what they're doing one of the terms and computer science is that you don't want to have premature optimization that that's actually a.
On the stake and so fat is great.
But if you think of it is sort of math was hierarchy of developers need fastest like self actualization at the last thing that you get not the first and so what we're really building with unbound is something is just a an edge computing platform, which which we think are gonna be largely niche application.
But instead think of it is a true serverless application that can provide a number of different functions and the one that I think as the most interesting and encouraging Brockton and we think it's just the enormous opportunity is around something thats incredibly boring in some in some respects, which is compliance as we.
Have more and more countries around the world acquiring data localization and keeping their customers keeping their citizens data inside the borders and their countries that where you need a network like plateware and the fact that today, we're already in more than 100 countries around the world and you can at the developer right to one.
Platform and be in compliance with with those increasingly complicated requirement I think that's going to be a really very large opportunity for us and that's what we're hearing from the largest customers that are interested on back.
Thanks, a lot congrats guys.
And your next question comes from the line of James Fish with Piper Sandler.
Hey, guys congrats on the quarter and appreciate the details on on workers there this quarter Matthew and in the color on the call Thomas and our checks heading into the quarter. We were able to have a lot more conversations than normal regarding cloud player who we took we don't see as much really generalizing back.
You guys didn't disclose how much is coming from indirect sources, but can you talk about how your go to market is changing and what you're seeing from more the traditional channel and integrators out there including between landing net new customers first expansion.
Yeah.
I think that that channel is something where we see a lot of opportunity for us to continue to grow and improve we continue to move up market and we're working with partners that can help us do that and I think there to areas that I'm, particularly excited about one of the things that was difficult about the chan.
Ill from the beginning what we made clear so easy.
To sign up for there wasn't it wasn't clear what value reseller could add at the value added resellers and so I think that was that was that was that was a trickier place for us with products like workers. What we're increasingly seeing is channel partners that have real specialties.
In certain areas being able to really bring real value and developed IP on our platform that they can then sell over and over and over again. So I think it's still early days of that but we're seeing that from large partners like an IB gam and other system graders odd that are able to deliver that and.
Really seeing value across across our platform I think the second thing is that the.
Schemes suite I, if you look at other companies that have a cloud based zero trust solution a lot of them have gone to market through channel partners and so I think we are taking that and add putting that as an extra tool in the bags that those channel partners and I think that's going to be an opportune.
Unity for us to really build our relationship with those partners and then hopefully educate them overtime to sell the full suite of cloud like product.
And then math you just kind of follow up obviously, there's a lot of political news out there going on but can you can you kind of help us frame up if we should expect any impact related to any of the bands that are going onto your business more related to you guys. Do you have a larger China presence, including a couple of.
Large China relationships I guess, how are you guys thinking about that for the back half a year potentially.
So that's something that where we're following closely and and obviously, we don't have a crystal ball in terms of how those relations develop on a pure metrics space that China revenue is low single digits brought much less than 5% of total revenue and so that.
With that even in the worst case scenarios, you don't see that as they as a significant.
Change in our business, but I think it is more important is that that long term strategy of the night.
We sell more at U.S. company to the Chinese market and so we actually think that by being the infrastructure that helps us companies better sell to the Chinese market. We actually did that is aligned with the long term interest actually on both sides of the political I both tied to the.
If it goes in our and so so far we haven't seen anything that makes us.
You suspect that we will be fate.
Unusual challenges, but even if we do again at the small part of our business.
That makes sense. Thanks, Matthew Thanks, guys.
Your next question comes from the line of Sterling Auty with JP Morgan.
Hi, This is drew on for Sterling, you kind of touched on that the bad but I would just wondering if you could provide some more color on how to China opportunity is ramping, particularly with the JD Cloud data Center addition, and what kind of demand you're seeing in that region.
Yes, so we continue to see demand from Chinese company.
Let me say it differently I think there are two different directions that we're seeing demand. So one is from Chinese companies, which are trying to sell outside of China and the second is for U.S. companies that want to sell into China I think the the former of those we've seen continued strength in I think there's a little bit.
I've uncertainty around the latter, but but again, it's been a relatively small piece of our business are the JD cloud partnership.
He is going very well, we we expect that that will turn turn on in in the first half of 2021, which is what it was the on schedule for and they have so far been a terrific partner for us and the same is true of Baidu, they've now been a partner for us for over five years and again.
We think that it very much aligned and being be infrastructure that can help more companies sell into China, and we think that that's in a very unique opportunity that we can provide to the market.
Great. Thank you.
Your next question comes from the line of Phil Winslow with Wells Fargo.
Great. Thanks, guys for taking my question and congrats on another great quarter I actually just have two of them first one of things you talked about as customers benefit from the new products without changing their infrastructure just because of the way that your your network is built what are you thinking about I guess, the tipping point, especially sort of in a cobot world of having sort of multiple functions from from cloud FLIR.
Are you starting to see adoption of more functions because because the code that over the world. How are you thinking about that tipping point and then just have one follow up to that.
Yeah I think.
Our strategy from the beginning has been how can we get our customers onto our network. How can we get traffic flowing through our network learn from what that is and then how migrate customers to use more and more of our platform and so we I think we are seeing that in.
Two directions, one is oh, we are technically able to recommend other products to customers. So at a very consistent play odd that we're running right. Now is we may be helping somebody with their basic firewall application, but we see that they are experiencing a lot.
Automated bot traffic, we can do analysis on that bot traffic and then recommend that as an additional solution to them and so that that is helping us expand across those those customers. The second part is is much less technical but just simply that we've really built trial at.
As a provider that offers an enormous.
And very compelling return on the investment that they have made and so that allows that with that try to go back to them I get introduction inside of the organization led our sales team move laterally and build much more long term and dynamic relationship driven sales.
So.
Where we really think that the secret of cloud clear is that one plus one equal three and I think that what you're seeing in the market, where you've seen from our customers is that we're seeing that same pattern happened over and over again, let me. It's been really interesting has been how quickly that's happening and I think a little bit of that might be coming due to kobin.
Where we are often times now having a customer land with one product and then as Thomas said, sometimes just the very next quarter expand with an additional product and so we're seeing really strong adoption and really strong expansion that doesn't necessarily always happen over over multiple years, though and so I think.
That in some ways why what what we actually internally see a much much stronger expansion that you might see an in something like that dollar based net retention statistic.
Got a great and then just a real one follow up obviously, nobody laws workers more than us, but they want to talk about to your other new products.
Magic Transit and teams for teams Wonder if you give a sense of just how many customers are just users you're up to now with teams and then also measure transit just sort of any any update there on the on the progress.
Yes, with with teams, we haven't disclosed exactly how many how many customers we have on on the platform. That's sold on a seat basis, but we have bad as we said in the last call we've been really.
Really heart.
How many people we've been able to help gearing Kobe and we had over 2000 companies sign up for our promotion that gave that product away through September of this.
This year and so we've been now reaching out to those customers and have have been very encouraged by by those early conversations of converting what have been on that that three cobot plan into paying customers and we we think that teams is one of the products that we're most excited about and will be a meeting.
Well driver of revenue, especially in 2021 for Magic Transit.
It it really is one of those sleeper product that taken off and one of the announcement that we had our earlier. This week is that you can now directly interconnect your network directly into into ours, and so I think watch that space, we're getting larger and larger win and that is more deeply integrating up into the.
Infrastructure of our customers, which we think makes cloud flare very sticky product and allows us to provide more solutions to our customers over the longer.
Great all right. Thanks, guys keep it would go works.
Thanks.
Your next question comes from the line of Alex Henderson with Needham.
Thank you very much so I wanted to step back from the granularity of the quarter.
A little bit to what I think is probably the key longer term picture.
It seems pretty clear to me that with the billion applications are growing at a 40% plus clip and with kubernetes orchestration going from 15% of.
New applications being deployed to over 50 in the next three years you guys really are the best connective tissue between those applications to other applications domain to domain and from applications to home users so in that context.
Next.
How do you view this broader picture.
As kubernetes adoption accelerates.
So internally we're at were a big kubernetes.
Fan and end user ourselves, but I will say is that what we're hearing from developers is that even kubernetes is really a staff on on sort of the journey towards developer Nirvana, which is can you get rid of having a tech ops team entirely can you stop having to thing.
About the underlying infrastructure can you just write code and automatically will scale offer scale down to what you. What you are are are delivering and that really the magic. What we have built with workers and that's really the promise of.
Serverless platform and so I think you're exactly right that the the fact that kotler is this connective tissue as the network puts us in a very strategic relationship, but but we absolutely think that that the world beyond.
The the world beyond containers, the world beyond that kind of orchestration platform on its something were an individual developer could on their own build a billion dollar company without ever having to have a tech ops team and and I think that that's really the promise that products like Kws land.
That Google cloud function that is your function and are targeting and what we're proud of is that workers is taking those workloads and being able to deliver that to developers in a way that is faster more consistent more cost effective easier to use and overtime I think is.
Going to be a much more compliance friendly platform, especially at the Internet development ecosystem gets more and more complicated overtime.
So going to the second part of the question.
Directly heading in the nordstroms going which is.
To the extent to workers enables serverless and drives to.
Probably the most efficient.
Platform per coders to to move to can you talk a little bit about why yours is better than the competitions in terms of the way you're platforms design, particularly with the ISIL It's Andy.
Near zero Cold starts why that is so differentiated versus.
The competition because it's a critical point that you guys not only have the most open platform for.
The way you're writing it.
You're not just doing say, one language like varnish, but rather than doing.
All the programming languages the customers.
Coders want and how that same.
Time.
Platform that delivers exceptional security and I'm very test performance.
On the edge.
Yeah, when when I was when I was in network administrator Bakken in the early nineties at my College, when we wanted to turn up in new application, we had actually physically by a new server and at the time, we actually bought servers from gateway and I think how covered boxes, where.
We're fine then and at the time to turn up in New application took to took a lot of time and then along came B.M., where and virtual machine and what that allowed with multiple different applicant, Iran. On a single machine and that gave rise to the very first cloud provider.
There's a that were out there, but even virtual machines had a lot of overhead as they ran up so that's where you had companies like dark cloud, which became docker and the real revolution in containers, which were a lighter weight version of a virtual machine. The goal here is always to make sure that you can run code in a secure.
Multitenant environment and containers will be slightly lighter weight version and that's that's what most of the serverless platforms out. There today are building on top of are those containers and the downside to that is that those containers. When you have to scale up it takes a lot of time. So for example, with.
Something like AWB Lambda it will automatically spin up another machine that with another container when there is load the demands it but the problem is that it can take hundreds of millisecond stop to seconds for that application to be ready and that inconsistency is a really bad experience for users which is really the.
Not going a lot of the circles platforms that are out there today, what we realized that in order to make workers as as powerful as we wanted to be we needed to make it a platform that was even more efficient than what you could get with containers and that's why we move to a technology called Islip, and so isolates or just the next generation and it.
Gives us some real advantages. It means we can have literally we announced last week zero micro second zero nanosecond hold start times, where.
Jim is ready the minute you want to run it I mean, we can support a wide variety of different languages. We don't require developers have to learn our language. We want to go to them now have them come to us and I think one of the really important thing did that data efficiency has actually allowed us to price the product in a way which is.
Incredibly competitive again as much as 75% less expensive than ADW at Lambda offer the exact same workloads and that means that and the reason we can do that is because we just have not much less overhead. So we think that this is the next step and the next generation in the same way that the.
Yes, we're a revolution from bare metal and container to her evolution from from BMS, We think containers or the excuse me that isolates or the next step and that what powers workers and that's how we can be as efficient and flexible as we've been able to become.
So, but just follow this one last point on that so as I'm.
King micro services out consistently and constantly those cold starts are very frequent so that would mean that.
It has to happen that way in order to have the C. I see the pipeline work in that environment right. The three conclusion I.
I think thats right and I think that actually as as you distribute we think that the distribute nature of building that into the network is good because it makes it faster by reducing network latency, but if we hadn't been able to reduce cold starts down that far than we when it then you have more it spread the loaded spread across more machine, which makes that a.
Worse and worse problem. So by solving that I think we've overcome one of the biggest limitation does have an edge computing platform and again. This isn't this isn't a beta this isn't vaporware. This isn't something is it something that last quarter 22000 developers wrote their first workers application on and and it's just been really amazing.
To watch it develop in the market over over the last three years.
Thanks, Alex operator can we move onto the next analyst please.
Your next question comes from the line of Brent Hill with Jefferies.
Oh, Thanks, and just just back in the enterprise momentum that I'm just curious you could.
Give us your view in the back half of the year in how that pipeline shaping up and.
Matthew what are you hearing it's kind of the biggest constraint right now for you to open up the enterprise, even even more than you have today what.
See things you need to pass through to really make this a make this move quick thanks.
Yeah, and then let I'll I'll answer the second half of the question then I'll, let Tom it.
Talk.
A little bit of what were what we're seeing in terms of in terms of backlog. So.
I think that our strategy when we launched from the beginning was just start at the low end and and move up overtime and I think we've done that.
Incredibly well with well over 600 now customers that are that are paying us over $100000 a year, 16% of the fortune 1000, and kicking off a lot of the requirement that those larger more sophisticated customers are are requiring in terms of compliance.
And and and other features that are more sophisticated customer has and so I really think that we have proven that we can land those largest of the large customers. We're building the case studies around.
Around that and I think that you'll see more and more of the largest enterprises in the world adopting cloud Blair. They may start on just one of our products, but again I think we've demonstrated that once we have someone using any part of our platform. We can expand that over overtime. Thomas you want to talk about backlog.
Yes. So we've we've seen really strong performance from a new ACB generation perspective, there. The sales team has done an outstanding job and because of that or back. So good core RPL, what has gone up 18% quarter over quarter, 50% year over year and that means that from a guidance for spec.
This 75% of the third quarter is already rolling off the balance sheet.
We also think that the the strong momentum we've seen on large expansion Telus like I mentioned in my script, but nine out of the large 10 large deals where expansion deals with existing come with customers. If we look at our pipeline. We think that trend is also going to continue for the second half 2020.
Great. Thanks.
Your next question comes from the line of Shaul event with Oppenheimer.
Thank you good afternoon, guys. Congrats on my end as well with respect to the quarterly performance in guidance.
Question for Tom on and it might be currently bigoted building going on that prior question I'm trying to get a sense with respect to guidance just directionally.
During the last quarter it was what appears to be.
Playing more defund on all fronts that make just kicked off.
Kept your guidance intact, though but this quarter, we are getting could be in Erie.
Those of US working with you historically in prior positions we call your optimism on guidance on maybe the they conservatism level.
Just just trying to gauge and understanding and made some sort of the comparable on crop you want to guidance this quarter versus the prior and I have a follow up.
Yeah. Thanks. So the question there we wouldn't call a conservative we would call it prudent and you're right. The guidance last quarter was there was a look more uncertainty out there and.
We were very open communicating that we wanted to keep the hands on the steering wheel is most you.
Called it making sure that we show the in control of our business. We think we were and the guidance was about protecting the downside sleeping in index and the reiterating guidance for the year.
For this quarter, we look where data points. We finished the second quarter that it's very strong we have good insight into internal pipeline.
We have good visibility what is going to roll off from a balance sheet perspective. So that this is less uncertainty from what we can control we've seen significantly less headwinds from a concession than from a better perspective, and so that allowed us to maybe lean in a bit more.
Still despite all that you know, there's still a huge amount of uncertainty out there.
So we updated our models and we run our our simulations and.
I would call it.
Prudent still prudent but in light of a lot more data points, we happened to look more visibility, we have what what pipeline and customer momentum is.
Is it looks like for the second house.
That is fair enough that fair enough in an attempt to one I don't know what a Thomas you want to take it may be Matthew.
He was also I think we'll ask.
I feel that I am I want to try and then a pro could little differently.
So that he can access the team product currently given free as a public service to move new users until September 1st.
Have you run some sort of the back over the envelope analysis, what the potential revenue could have been generating doesn't have to be quantitative so any qualitative commentary maybe some color on that.
We'll be highly appreciated thank you for that.
So let me to have a run that did curse and must you're going to jump in to give up the it's not like we have no paying customers.
On the team product Matthew in his script mentioned one of the oldest financial institutions and in Europe that that signed up for cloud flare excess and of course that is a paying customer when we talk about three it's really the customers that we that we signed up wouldn't be opened it up there at the beginning of the crew.
Basis, and we look to conversion.
Scenarios, it's fair to say that.
Little if that almost none of that what is today free.
It's reflected in our guidance for the year.
Because we want to be really considerate about how we approach that the crisis is no thunder lots of customers that are still struggling a depend on us being a good business partner. So I think we will have a lot more.
To talk to you about when we when we come to our next earnings call.
So but in terms of for cost very little of this conversion this reflected in the focus today.
Al operator can.
Sorry, just quickly ahead.
We're going to optimize for doing the right by doing right by our customers and add for the and for the long term add died. So so again I think we're trying to be very prudent in terms of forecasting in any anything for that for those customers right now.
Thanks, operator can we take questions from one more analyst please.
Yes. Your next question comes from the line of James Breen with William Blair.
Great. Thanks for taking the questions.
Just a couple.
The same size you get.
Customers growing.
Yes.
Yes.
And.
Or is it.
Sure.
Okay.
Okay.
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I'm sorry.
Great.
I see.
Yeah, I think we jumped to the next Christian in line.
Operator can we take questions from one were analyst please.
And your next question comes from the line of Pat Walravens with GMP Securities.
Hi. This is Joe good went on for Pat. Thank you. So much for to your question can you give us an update on the size of the enterprise sales force I believe it was around 25 or three reps not too long ago and the image on the enterprise.
Opportunity what are some of the key changes you're seeing the conversations you're having with.
Customers and prospects. Thanks.
Let me take the first part and then Messrs during two a jump in answering the second quadrant, we're not going to love of color and specific numbers. So that is developing but you hurt in the script and do it from us in talking about it from a hiring perspective. This was a very strong quarter for us on there from the sale side.
Especially also from a quota carrying reps perspective. So we are we are really happy with the progress we're making at building out the team and letting its scale from from a headcount this woman expense, but perspective behind.
Demand curves, we see I think that was one of the unique things about our business model is that we don't have to invest ahead of demand, but our our ramp ups follow with customers.
From a size perspective, and from a geographic perspective, and we're making good progress, but we are staying true to our model keeping the you know or go to market distressed human or customer acquisition costs incurred costs in line.
And I think from a conversations with customers perspective, you know I think that the thing that has been the most.
Surprising I think to us and and is and as driven I think a little by coded has been that customers that traditionally have been slow to adopt the cloud.
From regions the World like Europe, which is which has been a little bit more conservative off from from areas like manufacturing and industrial which have been which have been a little bit slower traditionally that we are hearing more and more of them say, okay. We get it we really have to do that and we can't wait any longer and so I think that that.
And on the very positive thing that we're hearing and they really are starting to understand that cloud player is the next generation network that can solve a lot of the problem that they that they used to have to buy boxes for and that makes sense as part of a and a large part of their over.
For all digital transformation strategy.
Thank you.
And there are no further questions at this time and I'll turn it back over to the speakers for any closing remarks.
Just wanted to say thank you to our entire team at cloud Claire I spent amazing to watch every when adapt to over the last five months a remote working environment really proud of how productive everyone has or hasn't made thanks to everyone has it as a shareholder where we're going to keep going forward as Michelle.
They were just getting started thank you.
This concludes today's conference call you may now disconnect.
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