Q4 2020 Cloudflare Inc Earnings Call
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Ladies and gentlemen, thank you first stemming bar.
And walk them to be clubs, where Q4, 'twenty and 'twenty earnings call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over to your Speaker Chipping.
Jayson Noland head of Investor relations. Thank.
Thank you. Please go ahead Sir.
Thank you for joining us to discuss cloud players financial results for the fourth quarter of 2020 with me on the call. We have Matthew Prince co founder and CEO, Michelle <unk> co founder President and CFO Thomas Seifert CFO.
By now everyone should have access to our earnings announcement this announcement as well as our supplemental financial information maybe found on our Investor Relations website. As a reminder, we will be making forward looking statements during today's discussion, including but not limited to the impact of the COVID-19 pandemic on our and our customers vendors and partners operations.
And future financial performance anticipated product launches and the time and market potential of those products. The company's 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.
Low non-GAAP effective tax rate dollar net retention rate free and paying customers and large customers. These statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainties some of which are beyond our control, including but not limited to the extent and duration of the impact of the COVID-19 pandemic and the diverse.
Additionally, and the general domestic and global economic markets. Our actual results may differ significantly from those projected or suggested and any forward looking statements.
And we're looking statements acquire as of today and you should not rely on them as representing our views and 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 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 will be on an adjusted non-GAAP basis.
Current and prior period financials discussed are reflected under ASC 606, you may find a reconciliation of GAAP to non-GAAP financial measures and our earnings release on our Investor Relations website.
For historical periods, our GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago.
Before finishing up I'd like to invite you to our virtual Investor Day Tomorrow, and starting at noon Pacific time, we have and exciting agenda planned Matthew will start things off with a focus on our culture of innovation and Michelle will be hosting a customer panel, including NCR Garmin and common spirit health, Jim Taylor, our Chief product Officer will host a panel of clod flow of product.
Leaders and finally, Thomas will provide a financial update before we finish with Q&A Youll find a registration page on our IR site.
<unk> will be virtually participating and the JMP Tech conference on March 1st and the Morgan Stanley TMT Conference on March 2nd now I'd like to turn the call over to Matthew.
Thank you, Jason we had an excellent quarter that topped off a remarkable year, we achieved a $125 9 million and revenue up 50% year over year for the year, our revenue was a bit over $430 million up 50% over 2019, I wanted to pause and thank all our team at cloud.
Blair for the hard work that resulted in another year of extraordinary growth.
On revenue, our other business metrics and the quarter were very strong our paying customer count grew to over 111000, and up 10% quarter over quarter, and our strongest quarterly growth and several years large customers does that spend over $100000 per year with us continues to be our strongest growth area.
On a 92, new customers and Q4 and bringing our total large customer count to 828 revenue.
Revenue from these large customers increased sequentially to 49% up from 47% and Q3 as our sales team continues to close larger and larger enterprise accounts.
As you look across customer segments by five our large customer segment is growing the fastest.
Because of new logo wins and also because our land and expand motion is picking up steam.
And we saw initial evidence of this earlier in the year, but are now seeing it reflected and lagging indicators like dollar based net retention, which increased 300 basis points sequentially to 119% and Q4, while there may be some volatility and that number going forward I am encouraged that when you dig into what's behind that improvement is being driven per.
Primarily by customer adoption of our expanding product portfolio.
In particular, we're seeing more of our existing customers adopt cloud book or teams are zero Trust network security solution as well as magic transit customers see if they can use the full range of cloud based products to achieve the corporate network on the future. This is the vision, we articulate with class one and it's resonating with customers.
In other words, our sales team and more successful in part because our R&D teams keep delivering more products and features our customers need innovation and the energy fuels clockwork.
One thing that kept coming up over the course of the quarter with how our pace of innovation is cat net per developers. This is something I plan to talk more about tomorrow at our Investor day, but to give you a preview from our earliest day developers, where our core audience. We made it easy for them to sign up and get started using our services without having to go through a traditional sales process.
As a feature day network exactly how they want it we let them have ball control through our workers development platform.
And while we augment our developer first sign up process with a terrific sales team every product. We launch is designed to be adopted by developers first one way of measuring that is the rate at which developers are adopting our platform workers edge computing platform in Q4 more than 50000, new developers wrote and deployed their first cloud.
Flow worker that rate of new developers building on workers for the first time and a quarter is more than double since we last reported and Q2.
But it's not just workers that brings developers to cloud plus platform. That's why one of my favorite stories from the quarter was not one of our biggest wins on a dollar basis, but rather one that I think evidence is how developers see the broader cloud platform.
The engineering team and one of the leading software companies themselves building tools for developers approached us about better securing their own development environment. This project wasn't imposed by the it organization from the top down, but instead and led by developers and the company from the bottom up a new having seen increasing threats and attacks like the one that impacted.
And when they needed better access controls they led the process to find the best solution and they chose clopper asset part of our cloud book, our teams suite and our conversations with them one theme kept coming out Butler as the only company with a zero trust solution that really understands and is built for the needs of developers it's a <unk>.
NT dollar and you won't be able to start and we expect we'll be able to grow with this customer, but I think it's an indication that something more important developers of the future of IP and having won their trust and we expect will help us win retain and expand more and more customers over time to that and hear some of our more traditional big wins for the quarter.
Yeah.
A fortune 500 oil and gas conglomerate and signed a three year $1 billion deal to implement a portion of our cloud per one architecture, including Magic Transit Ddos mitigation firewall and DNS.
And your plate spend they had with legacy telecom providers that had faced serious technical challenges trying to integrate the telecom network services with third party offerings.
We also beat out a number of point cloud solutions, the customer appreciated our ease of use technical innovation and the way multiple products fit together and do a unified solution.
A fortune 500 U S financial provider signed a three year $1 $6 million deal to replace legacy telecom spend and move towards the cloud per one architecture.
And they were particularly impressed with our product roadmap and our pace of innovation.
Sticking with financial services for a second a fortune 500 Asian financial services Company signed a four year $8 $5 million deal with us they too are implementing our cloud quarter, one architecture to modernize their corporate network. While we often win deals that are driven by developer teams. This is an example of the classic it led RFP or sale.
Team engage with the customer through our relationship and won the business as part of the win our solutions engineering team was able to use our cloud flow workers' platform to seamlessly migrate the customer from their previous provider.
A fortune 500 pharmaceutical company lean into their cloud for their implementation further adopting the cloud layer one architecture. They signed a $450000 per year deal to add our Magic Transit service. The company had received a threat from a hacker targeting their network. We received a call from the customer on a Friday and have them on boarded over the.
And I think this speaks both to the nimbleness of our solution and also to the fact that when existing customers that security needs cloud players increasingly their first call.
A fortune 500 semiconductor provider signed a three year $1 $4 million deal to replace a legacy network provider.
Appreciated our technical innovation, the way our product and seamlessly work together and our performance. They said their previous vendor solution quote works, but it's clunky and slow with bolted on parts and as for cloud player. He described that that quote much more agile and quote the company of the future that really made me smile.
And.
Unfortunately, 1000 enterprise software provider signed a three year $2 $6 million deal to implement cloud layer across their organization and initially it came to us in order to improve their performance and China, something they struggled to be able to do with any other provider.
Also impressed with our workers edge computing platform. They are fast growing technically savvy organization and we look forward to growing with them on their path to joining our other fortune 500 customers.
Before I hand, it over to Tom and I wanted to take a second to reflect back on 2020. It was a remarkable year for cloud flare for the Internet and well for all of humanity. We were proud to be there when the world needed the internet more than ever before helping our customers shift to remote work, ensuring the network itself could scale to handle a massive increase in traffic.
EMEA Athenian project and cloud for campaigns to ensure cyber attack didn't disrupt the 2020 election and most recently launching project fair shot to help governments municipalities hospitals clinics and pharmacies around the world more fairly distribute the COVID-19 vaccine.
As one of the one hundreds of organizations that has reached out to implement project per shot said the other day quote cloud player has literally help save lives.
It was incredible to watch our team rapidly build the technology behind project per shot on our workers platform and deploy it at tremendous scale and a matter of weeks, we're incredibly proud of how our technology and expertise help make a challenging year a little bit better.
But it wasn't easy.
And the shift to working remotely while continuing to recruit hire innovate deliver scale and sell our services.
While there were some tailwind there were a lot of headwinds due in April for instance, traffic grew across our network more in two weeks and we had expected it to over two years that put pressure on our business.
Less than 5% of our revenue comes from new usage based products. So on traffic spikes are associated costs spike, but our revenue doesn't automatically follow.
Now customers love the predictability of this the last thing anyone wanted and 2020 was a surprise bill and our consistent pricing is one of the things that differentiate that but that means our team has to do the hard work renegotiating and bandwidth agreement inventing new technologies and continuing to ring out every penny of efficiency that is.
Why I was particularly impressed that our gross margin was 78, 1% and Q4, it's actually down 60 basis points year over year I am proud of the fact, however that we could do all the things to keep your internet working the way it needed to in 2020 and it only costs of 60 basis points, we didn't raise prices on our customers when they needed us most we didn't sacrifice.
And the quality of our service we did what we do embedded new technology and got more efficient and going into 2021 look out we're a lean mean innovation machine and we have no intention of slowing down with that I'll turn it over to Thomas.
Thank you Matthew and thank you to everyone for joining us.
Well it has been a year of challenges I am extremely proud of our team's performance and unrelenting execution and serving our customers and Cobra community with an outstanding fourth quarter, where we again exceeded the high end of our guidance wrapping up and exceptional year across the board.
Total revenue for the fourth quarter increased 50% year over year to $125 9 million.
Total revenue for fiscal 'twenty, and 'twenty also increased 50% year over year to $431 1 million.
Since 2016, we have grown at a compound annual growth rate of 50% demonstrating our continued growth at scale.
For a material profit perspective, we saw noteworthy strengths and the U S and.
In EMEA.
<unk> represented 53 percentage of revenue and increased 54% year over year EMEA represented 26 percentage of revenue and increased 60% year over year.
Asia Pacific represented 16% of revenue and increased 33% yield per year.
As Jill noted you signed a three year deal last year to book 150 points of presence in China, and we are excited to say that the relationship is off to an excellent start.
I do renewed its contract and the fourth quarter for the next six months. We're in the process of transitioning from Baidu to J D. As our primary partner in China. This transition, Microsoft and temporary short term headwinds to growth in that region.
And expanding internationally remains the priority.
And three new international offers within 2021st and Tokyo, followed by parents and to run through.
With our inverted go to market strategy, we invest behind the demand, we're seeing and the success of the customers, we acquire helping to remove risks because we continue to expand into and absolutely.
Turning to our customer metrics, we exited the quarter with more than $3 5 million total free and paying customers.
Representing an increase of 38% year over year.
And Q4, we had a record quarter obtained customer additions, adding over 10000 paying customers sequentially and over 27000 paying customers year over year. We ended the quarter with 111 sales and 183 paying customers, representing an increase of 32% year over year.
The acceleration and paying customer growth was primarily driven by increased new product adoption from free to paying customers.
We ended the quarter with 828 large customers, which we define as paying customers with greater than $100000 annualized revenue.
Representing an increase of 57% year over year.
And we add this might be too large customers sequentially and over 302020.
We saw significant expansion from our large enterprise customers, which helped to drive per dollar based net retention rate of 119% representing a three point increase sequentially.
Our enterprise go to market efforts generated significant ROI, which we look forward to providing additional insight on touring our investor Day Tomorrow.
Efficiency remains at the core <unk> business and this demonstrated and the consistently high gross margin, we generate from growing revenue and and the low capex, we need to deploy and build out the footprint and capacity and network.
Fourth quarter gross margin was 78, 1%, representing an increase of 80 basis points sequentially and that's.
Capex represented 9% of revenue and the fourth quarter and 12 per cent for the year in line with the guidance shared last quarter, we expect to see continued variability and how we deploy and network capex over the year, but we expect that we will continue to trend down as a percentage of revenue.
Turning to the operating expenses.
Fourth quarter operating expenses as a percentage of revenue increased 1% sequentially and decreased 18% year over year to 82%. We had another strong hiring quarter with an increase of 41% year over year, bringing our total number of employees to seven 788 at the end of per quarter.
Sales and marketing expenses were $58 2 million for the quarter sales and marketing as a percentage of revenue increased 1% sequentially and decreased to 46% from 52% and the same quarter last year.
We continue to invest and our go to market efforts to add sales capacity and expand our global footprint.
Research and development expenses per $25 7 million and the quarter R&D as a percentage of revenue decreased 1% sequentially and decreased 20% from 26% and the same quarter last year.
General and administrative expenses were $19 9 million for the quarter.
G&A as a percentage of revenue was flat sequentially and decreased to 16 from 22% and the same quarter last year.
Scaling our business efficiently remains a top priority and we continue to see strong operating leverage and the fourth quarter with operating margin, improving 70, and 150 basis points year over year.
Operating loss was $5 5 million compared to $18 3 million and the same period last year.
Net loss and the quarter was $7 4 million or net loss per share of <unk>.
Our effective tax rate for Q4 was negative <unk> 28 per plant.
Turning to the balance sheet.
We ended the fourth quarter with 1 billion and cash cash equivalents and available for sales securities.
Free cash flow was negative $23 5 million.
Were 19% of revenue compared to negative $23 5 million or 28% of revenue and the same period last year.
Operating cash flow was negative $8 8 million and the fourth.
Last quarter or seven percentage of revenue, which decreased $10 $8 million sequentially and a slight decrease approximately $200000 year over year.
For Q4, a decrease in operating cash flow was driven primarily by an increase in DSO was due to seasonality collections, however have come and strong and turnover.
We expect to see some level of variability and cash flow margins due to ongoing fluctuations in working capital the growth on our large enterprise business and seasonal factors.
Additionally, we expect to see cash flow impacts due to investments and leasehold improvements as we think towards the future of how we use our offices and reinvent our spaces to support a new hybrid tort environment.
Before moving to guidance for the first quarter and full year I would like to provide a brief update on COVID-19 related impacts and the associated provisions we shared last quarter.
Throughout 2020, we've disclosed the percentage of revenue represented by customers and Covid macro sensitive industries, such as transportation hospitality and retail this cohort represented 8% of revenue and the first quarter, 7% and the second and third quarter and we're pleased.
Share that this percentage remained consistent at 7% and the fourth quarter.
Concessions and bad debt also came in well below expectations again, this quarter and therefore remain consistent with historical levels.
And in Q4, we saw another strong quarter on new ACB growth, increasing average customer spend and higher sales productivity.
Remaining performance obligations, our Apio remains strong and Q4 coming in at $384 million representing.
Representing an increase of 12% sequentially and 75% year over year.
Current and <unk> or 75% of total <unk>.
Given the strong growth and momentum we are seeing we remain optimistic about the demand for our products and confident and the continued growth of our business.
Such we are pleased to again raised our outlook for both the quarter and full year.
For the first quarter, we expect revenue and the range of $130 million to $131 million.
Representing an increase of 42% to 44% year over year.
We expect operating loss and the range of mine to $8 million.
And we expect net loss per share and the range of $3 <unk>, assuming approximately $3 6 million common shares outstanding.
We expect and effective tax rate of negative 20%.
For the full year 2021, we expect revenue and the range of 580 miles per pipeline that might be $3 million.
Representing an increase of 37% to 38% year over year.
We expect operating loss for the full year and the range of $25 million to $21 million and we expect net loss per share over that period and the range of mine to <unk>.
Assuming approximately 309 million common shares outstanding and we expect and effective tax rate for 2021 of negative 60%.
And closing it was another very strong quarter closing out and extraordinary year.
And again want to thank our employees for delivering these great results and for their continued dedication.
We hope to see many of you tomorrow will be hosting our first investor day, where we will look forward to sharing a deep dive on on our products and platform as well as providing an update on our financial progress and targets and with that I'd like to open it up for questions. Operator, Please poll for questions.
Certainly at this time, if you would like to ask a question. Please press Star then one on your telephone keypad to remove your question press the pound key.
We do request that you. Please limit yourself to just one question and one follow up we will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of flow from Wells Fargo. Your line is open.
Hey, Thanks, guys for taking my questions. Congrats on a great closer and really just a great year and.
On a quarter, where a lot of numbers, obviously jumped off the page. The one that really stood out to US was the customer count those 10000, plus are added quarter to quarter and Q4, I mean, that's almost as many as you added and all of 2090 2019, I'm wondering if you Brian as you just some more color on what's driving that is that the new products like teams and assertive sort of area of your product set like secure.
And what's driving that just some more color on that.
Awesome and I just have one follow up.
Yes, Phil Thanks for question and we were we were excited to see that the paying customer count was up.
As strong as it was and that's our strongest quarter over quarter growth that we've had and some time I think there is not.
On one specific thing that that I would point to I think we've built what is a strong machine and sort of a strong horse ploughing through.
Snowfield and <unk> sale, if you will but I think that that.
We're always looking for ways that we can get either our existing customers that are on the free version of our service to pay us or to get more people to come into the funnel and so I think there are three different areas that I would point out the first is that our total customer count.
And really strong performance as we saw people just adopting cloud player as a whole a lot of those customers start out as free customers and migrate up but some percentage will start as paying customers from day, one and so as the total customer count grows and it was our strongest quarter over quarter growth, we had and and all of the all of 2020 last quarter as well and that total customer.
Now that that feed that I think the second thing was we launched a new feature which we call automatic platform optimization or a po that had real appeal for a lot of our existing free customers, where they could with one click of a button and at a payment to us get substantial.
<unk> on on especially our Wordpress driven sites and so I think that that drove some potential additional attention and additional usage and then we also saw some of the customers that were using the free version of our team's product and if you remember at the beginning of the pandemic, we made copper per teams a free product.
A lot we had very good news very strong conversion of that and that translated into paying customers some of which showed up in the quarter. So I think it was those three things plus us just continuing to execute and and and again really proud of our team.
Great and then just to follow up on that and both commented on you highlighted gross margin not just this quarter, but this year and it's really kind of a case study so to speak of converting and variable cost to fixed or no cost, but I kind of I will take the other side of that sort of using it as a competitive weapon versus.
Versus other players on this space and it might charge on a on a variable basis.
Do you think about using that in 'twenty, one and beyond sort of as a way to think about displacements and talking to folks who maybe have these variables spikes.
And then obviously variable change and their costs are there and.
Their provider how do you how do you think about using sort of your fixed or no cost model and sort of.
Weapon on in terms of competitive displacements.
Yes, we've seen for quite some time that there is a lot of kind of.
Angst over the surprise bill that variable based billing leads to and I think that especially as youre trying to sell a service like a security service.
If you get a cyber attack and all of a sudden you get a bigger bill from your provider than the provider is not that much different than the attacker themselves. Both of them are trying are are costing you and and so from the beginning we really believed that it was important to keep our core services on.
On a on a fixed predictable basis and so our theme that we're hearing already in Q4 and coming through now into Q1 is that.
Companies. After the craziness of 2020 are looking for a real level of predictability and we definitely see our ability to use our strong gross margin performance.
Two to potentially displace some of those providers that really surprised customers over over the course of 2020.
Great.
What I would add is two.
And two really good examples, but always come to my mind.
And where you can see how we can use their margin.
Jake weapon.
One was certainly when we unmet need the ddos for the very first time you saw it.
Last year when we when we gave our teams product away for free for pretty much most of the year.
And then we added other products when we supported the election platform. So we've done that and the path and that will be.
And we will stay with that strategy moving forward.
Great. Thank you for the extra color there.
Your next question comes from the line of James Fish from Piper Sandler Your line is open.
Hey, guys congrats on the quarter and thanks for the question.
Matthew you actually just mentioned the free to paid conversion of teams.
Strong can you guys provide any more color as to really how much of that free base, you've now converted versus kind of what's left to go chase and 'twenty, one and any other new kind of pipeline, you've got and Q4 for teams.
Yes, so I think that we have.
Two different ways and we look at that so they are first of all there Ben.
Companies that that started out.
And on a small small portion of their team using that team's product and so that the teams product grows naturally with the number of seats that adopt it and so our team right. Now is focused on a lot of we had we had a lot of success, which we talked about last quarter and converting those those.
Free customers to being paying customers and now I think what we're trying to do largely for those is take them from being small customers and grow them into larger and larger customers over time, and so that that's one bit of focus I think we have continued to.
Try to be really empathetic to the customers that continue to be in either industries or segments that are tough and so we have continued to extend for.
Those businesses that are still being hampered by the pandemic.
The day, the their payment terms and and continue to extend that free offer.
We want to be focused on the long term and we think we're building a relationship with those customers. The feedback is that they're they're very positive and while that's a small percentage of that overall base, that's something which we do think theres opportunity around but the bigger one is that we think that once once an organization and starts using the <unk>.
<unk> products, and and we make that super easy for them to use for a small part of their organization that gives us an opportunity to really expand that product over time, and thats really where our team is focused.
Makes sense and on the go to market side.
Awful lot of wins, especially with cloud square one this quarter, our reps, leading with this or the individual solutions that still kind of comprise it and just any sense of how much of new bookings that really drove this quarter.
Yes, I think that that is.
It depends I think that the usual motion to adopting the full cloud player. One suite remains that a customer will come to us with a very specific need they'll need to put in new access controls.
Around some of their their their applications or services they'll need to defend against a new vulnerability or cyber threat, either they become aware of but once we get into.
The selling motion, what we see is that customers really care.
How about the overall platform and how it fits together and Thats what cloud player one represents and one of the things that Thomas will be talking about tomorrow. During our Investor day is how we have continued to see real strength and getting customers not just to adopt any one solution or any one product of ours, but to adopt.
And that overall solution and as we talked about and our IPO. What we think about is that once a customer is using four or more of our products is very very difficult to compete with us because of the broad suite and so we are definitely <unk>.
Working with customers to try to get them to that for a more number and Thomas will talk about tomorrow, a little bit more on the success, we've had doing that.
That's very helpful. Thanks, guys congrats.
Your next question comes from the line of Brent Thill from Jefferies. Your line is open.
Matt You mentioned the largest customer segment segment is growing the fastest I'm curious if you did on.
Shed a little more light on that topic and in for free.
Thomas just tying into that when you look at.
And the quota carrying reps that youll add to meet the demand youre seeing and this large enterprise build out into 'twenty, one or are you accelerating your growth or are you adjusting some of the ads that you made last year to address this segment of the market. Thank.
Thank you very much.
Yeah. Thanks, Brett So I'll start and then and then Thomas can can that can add some more more color. So the first thing is and again not to keep plugging Thomas.
Segment Tomorrow, but I was just looking over the slide and we're going to provide a lot more color on exactly how.
The various customer segments or are working and how the how the growth at the strongest then.
And I and our largest customers is the fastest growing portion of.
Our business I think that's driven by two different things I think that half of that is coming from our increasing ability at landing big deals early and so we are seeing more and more that when there is that sort of traditional multimillion dollar on.
RFID or RFP, which is M.
<unk> is submitted that we have the team to be able to respond to that and win those deals and the product is in place and we're winning more of those deals.
At the very beginning and I think that's a really good sign I think the other part is really good sign is that our land and expand motion continues to pick up steam and we are seeing more customers grow into.
Those larger categories, and and again tomorrow, Thomas will provide more clarity on that but I think that what we see across our entire organization is that we're adding the support in order to really make sure that those customers have a terrific experience and that means bringing on great salespeople. We're not we're not one of the companies that.
Believe that you can get away without having salespeople and do you have customers who are spending.
$1 million to $10 million with you they want to have someone that they can really build a relationship with and so on tomorrow will outline a lot. Some of those sales leaders, who have joined our team and they're really incredible kind of enterprise DNA that they are bringing with us and and I think thats, making us better and better company.
And the price on your second question and invested heavily in sales capacity last year and.
Terms of quota carrying reps, but also leadership and beach, we've hired great talent I think there is a real positive over book yield loss.
It's been able to keep our sales productivity extremely on both in terms of how fast we onboard people and how fast they ramp but also in terms of how much Florida and retire once they are ramped on.
And we will continue to invest and sales capacity and we.
Moving into this year.
I think we've always said that our commitment to spend on sales and marketing both continue on as long as the returns those superior top line growth and.
It's worked really well and successfully.
Last year, the Cumulus on an outstanding job and we will continue to pursue this path for this year too.
Thank you.
Your next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.
Sure and very very nice quarter, and very nice year and fact.
Sure.
And I'm going to disagree with my colleague Phil Winslow I think the most impressive number I saw on and on the page was net expansion and net dollar expansion rate up to up to 119.
And I think it really highlights both on and your retention has remained rock solid and you have been expanding really well.
And particularly the large customers.
It was a little bit about maybe help us sort of understand the quantification on when our customers buying class layer, one and getting the whole platform what kind of uplift do you see on on a typical customer win there and when they're kind of going on with the platform.
Yes, Keith I really and I realize it's been on the numbers.
Following carefully and we really appreciate it.
With that.
Dollar based net return on is definitely.
Lagging indicators.
And I think that we saw real success and our ability.
To sell more products.
And customers over the course of the year and so we expected that it would pick up and it's heading in the direction and we wanted to me we're not satisfied yet we think there's a.
A lot of improvement left to go and I think we're on judge of ourselves and we use a pretty conservative.
Based on net retention and new definition.
And and I think that Thats been something which we've grown into what I think is important though is that it's a real indication of how.
Our R&D teams ability to deliver new products really supplementary ability.
And our sales team to be able to sell more to our cash.
Customers over time, and so what we are.
And with top over team and with the broader sort of definition on the spotlight won.
That we are able to go to customers and get them to oftentimes significantly increased their spend.
With cloud and then over time and specialty shop, leveraging on its products are sold based on our feet space.
We think that you'll be able to continue to expand with them over time and a way.
And many of our traditional products haven't changed.
And we're excited about this time, we do see significant uplift from <unk> and <unk> and I think that that's something that we're continuing to really track and are motivated by.
Right.
And follow up.
And that assumption and that question net.
Retention rate.
It was the remaining solid can you give us some visibility in terms of that expansion and net dollar expansion rates are you.
Is it all on the upsell portion or is there any change and the underlying kind of gross retention.
Yes, we've had very slow on various.
And that number for quite some time and I don't think that there's anything there hasn't been anything that has changed that underlying gross retention number.
And it's continued to trend there and.
At a very strong level and and so most of the improvement and dollar based net retention is actually and our ability to better up sell to customers.
And so much.
Your next question comes from the line of Matt Hedberg from RBC capital markets.
Please make sure your lines are not on speaker phone when asking questions. Mr. Hedberg. Your line is open.
Great. Thanks, so much guys and congrats on the quarter and really the year.
And I wanted to ask about the solar wind or Sun burst breach kind of curious if you saw it impact pipeline perhaps.
Would it lead to more free teams conversion just sort of curious on on that aspect I'd have to imagine you guys are on a pretty good spot to help help a lot of your customers and potential future customers with those sorts of issues.
Yes, Thanks, Matt.
We I think it's early for us to to be able to indicate clearly whether that has had a significant impact yet I think that the first thing that was the question that we got from our customers was where we impacted and the answer is no we werent at solar wind.
Customer I think the more important thing and a story that I think that the market is waking up to is how is Europe trust approach to security like the one that <unk> can help with.
Really acts almost it is almost bulkheads and a ship.
They are going to be flaws and software over time, and and and solar wind and the impact at this time, but the real challenge is that because of the attacker was able to get into solar wind and they were then able to once they were in move across the entire organization and that is a symptom of the previous sort of castle and moat.
Approach once you find one way across one moat you have access to the entire castle and.
And Thats talent, whereas I think that the real.
The real brilliance of a zero trust approach is that it puts those natural bulkheads and place. So that if there is some sort of reach and one part of an organization and the attacker then can't move laterally across the rest of that and so that's something that we have implemented as our own security system, then and it allowed us to vary.
Quickly on not only verified and we werent using solar winds anywhere and cloud player. But then also to really do an assessment that there were there was nothing else that created an issue for us and I and I think also when we sell our cloud over teams products to customers. This idea of a much more modern zero trust approach to six.
Charity is resonating and so I think solar wind.
And is one instance, where it's going to be a tailwind to sell more zero trust approaches and we think that our zero trust approach is not only the most developer friendly.
And and and and the most effective.
Out there and and I think over time that will lead to more and more customers for us.
That's great. Thank you and then and then Thomas mentioned in the script that.
It sounds like and six months, you're going to be migrating away from Baidu to J D. J D dot com and sort of curious on on the thought process. There and I think he also mentioned that there could be a slight headwind.
And just sort of wondering is there any more clarification on what that might mean and really what the rationale is ultimately at the end of the day on that decision. Thank you.
Yes.
We.
One of the things I think is unique about cloud flare that we provide a truly global network that has extend that extend around the entire world, including into China, and so for our customers that care about performance in China. This is a way for us to be able to give them a unified platform and that was a pretty.
<unk>.
It was a pretty ambitious goal for us to just add on and we set out on a journey with Baidu in 2014.
Two to build that one unified network and for them to be our partner in China. They have been a terrific partner to us over the course of.
And the last six plus years, and we and we appreciate everything that they that they have done in order to help us do that we wanted to upgrade the network and China and really make it something that was going to be even more performance and dramatically increase.
And the presence that we had and so we went out looking at and see whether it with baidu or J D or who would be our partner for what we hope will be another six plus year relationship and that team and buy at J D really impressed us.
Both in terms of their technical acumen and their ability to help us really build out what is an extensive network across what is often a very complicated region for both technical and and other other region reason and so over the course of the next three years, we're working with J D to build out over 150 points of presence and.
China alone will be able to to have our customers opt into using that if they want and we can also generate revenue as J D cells, the rest of our global network.
And two to customers elsewhere as we transition off there was a payment that was coming from from Baidu and the past.
For us that will that will diminish and we have and payment that comes from J D.
That picks and pick some of that up but in the meantime that transition there may be some headwinds, we don't think it's going to be material and it's all baked into our existing guidance.
Thanks, so much.
People are and next question comes from the line of.
From Evercore your line is open.
Hey, Thanks for taking my question guys I guess two for me as well first off I was hoping if you could maybe talk about how do you think about product to product deployment versus product development and calendar 'twenty, one because if I think about the last 12 months right.
And the velocity of new profit launching fairly impressive kind of imagine how much. The Tam has expanded since the IPO, but as you think about calendar 'twenty. One should we think about this new product innovation to sustain the same cadence or do you think we spend more time, perhaps scaling these products up to for the increasing wallet share with customers.
Yes. Thanks for thanks for the question and I think that our rate of innovation and it's something that cloud is really designed for and it's something that I may be talking a lot about.
And at the Investor Day Tomorrow about how we how we do that we have no intention of slowing down on.
And our rate of innovation and so I think that you will see a series of.
Product weeks that will be very similar to what you saw in 2020 with really great launches across that that will include both taking products that we have announced and are currently in beta and moving them into <unk> and so we're excited about some of the extensions to our workers platform being generally available things like <unk>.
And will object and making that something that people can can sink their teeth M do and really really work on and the early feedback from the beta users has been terrific, but it also mean on thinking about and dreaming up new ways to take our network and deliver more value to that and so I think that.
90% of our product and engineering organization is really focused on how do we take our existing products take feedback from our users and continuously make those better like a traditional product organization, but we have this one team, which we call epi for emerging technology and incubation and just about <unk>.
10% of our R&D efforts, who are really thinking about how do we dream up what is is over the horizon and and and they are not slowing down and I think that a lot of the things that crossover teams products and copper. One for example are graduating out of ATI and through our traditional product organization and that freed up some.
Headroom for them to start thinking about what are the next products that are there that are going to shake the industry 18 months from now.
Thanks, a lot for that and if I could just follow up.
Think about the calendar 'twenty, one revenue guide and IRA.
Really appreciate you folks have and giving us a guidance at this point.
We did 50% plus revenue growth this year and calendar 'twenty I think the midpoint of the guide implies 37% growth and 21.
What are the factors that are driving that sort of a deceleration in 'twenty one.
Yes.
Well, let me let me get started on <unk>.
Thompson.
It served us well last year.
And in times of uncertainty to be thoughtful and prudent about the guidance that we provided for the year and I think we apply the same approach.
And we lean and more.
This year, if you compare the guidance we gave at the beginning of this year and compared to last year, but we also have to recognize the numbers become bigger there's a law of large numbers and there is still uncertainty.
And out there that has diminished and making guidance and easier topic as last year. So I think it's a prudent and thoughtful approach thinking towards the opportunities, but also weighing the risks.
Undoubtedly are still out there.
And I think I would.
Echo Echo, what Thomas said and and I think that we have tried to be very thoughtful throughout this year I remember at day.
And when we were back in in April.
After our early May and after our Q and Q1 guidance.
We didn't know what the World was was it was in store and I think Theres a lot of uncertainty is still out in the world and and while we've seen an enormous amount of success.
And and we're excited we want we want to be extremely prudent about how we think about the future.
Your next question comes from the line of Jonathan <unk> from Baird. Your line is open.
Yes. Thank you.
Congrats on the performance. So I have a two part question on security first can you talk about the opportunity Youre seeing the cross sell across the more traditional WAF denial of service products and the newer offerings like access gateway and Brian browser isolation, just what kind of expenses youre seeing there that would be the follow on would be what is the impact too.
Cost of goods when you thought about that security reverse and forward proxy use case is that a point of future leverage and the model.
Yeah, Thanks, Jonathan for that.
For the two questions I can I can take a stab at both and then and then Thomas May have something to add so I think that we've been very pleasantly surprised at the way that there is a cross sell opportunity.
On from different products I think the two that seem to go together like like peanut butter jelly for.
<unk> have been our access product, which is all about how do we secure IV access to applications, which are exposed to internal internal users.
And our WAF and Ddos product.
I think other competitors and the market, often and think that sort of access and gateway fit naturally together and we see that as well, but theres really an opportunity and what we're seeing is that as people are adopting a zero trust approach that means exposing more applications to the internet and while access controls are important to that and and Internet gateway.
Days are important to that when those things get exposed to the internet. They have traditional web application firewall concerns and they especially have ddos mitigation concerns and so those different products and up fitting very nicely together and customers like that they can manage all of their security needs through one pane of glass.
And that's I think something that is very differentiated in our products versus other products that are that are in the marketplace or trying to cobble together, a number of different solutions and <unk>.
In order to in order to get get what clod flow offers out of the box.
Your second question I think is it really goes to.
What is the other side of the same advantage that we have which is that early on and collateralized history. We made the determination that every single server everywhere across our network would run every single bit of our software and so that means that we can deploy and we need more capacity for one product or another.
<unk>.
Network automatically adjust to that and allows us to be able to adapt what that also means is that.
And for products that are sort of as you as you put it forward versus reverse proxies, which is just a direction that traffic is flowing it turns out and you only pay and when you are paying for bandwidth you only pay for the larger kind of and versus out and so it can often be at least on a bandwidth basis.
It can often be that we can add new products.
Products to a customer's overall bill without significantly changing what our underlying cost infrastructure is and I think that's part of the secret sauce of how cloud flow works is our product team is always looking at what are the excess resources that we have on our network.
And how can we deploy products in order to take advantage of those of those excess resources and so and so the.
So as we add if we have a customer that's using our ddos and WAF, if we get them to adopt access and gateway it doesn't meaningfully change change or our cost basis and that also means that we can be very.
Competitive and especially on on an ROI basis versus competitors and we can bundle products together and a very effective way.
No. That's very helpful. Thank you very much Matt.
Once again and if you would like to ask a question. Please press Star then the number one on your telephone keypad and once again to the Star then the number one on your telephone keypad your new.
Next question comes from the line of James Breen from William Blair. Your line is open.
Thanks for taking the question can you just give us a little more color on <unk>.
Sort of how the revenue mix is split out and the success you had internationally.
Relative to the U S.
And I know you've talked a lot about sort of the architecture and that we're helping from a compliance standpoint is the software delivery can you just talk about that as well. Thanks.
Sure I think that we had a very strong year.
And in both the U S and Europe.
Today.
The U S represents about 50% of our revenue and the rest of the world.
<unk> is the other other 50% I think that Europe has had very strong growth.
And it has really been a stand out for some time, we had some.
We were watching carefully, especially as there were concerns around adoption.
Some U S technology companies and some of the privacy regulations, but I would I think you'd see and in Q4 was we really leaned in to the fact that copper is a privacy first organization and we saw that pay off and the results were more and more our European customers are willing to adopt us and where.
Seeing a number of European governments, turning to cloud player as part of project Fair shot.
And they as they rollout and the vaccine deployment and I think that that is a a good early indication of the trust that we've built on that market.
Throughout 2020 has been definitely and that transition year for us and we saw that and its growth has not been as strong as we've seen in Europe and the reason for that and we've talked about this on previous calls that the reason for that is that it is a complicated market in terms of how and.
And in terms of.
The multitude of various bandwidth providers and you have a bit of a chicken and egg problem, where in order to get enough bandwidth to get great pricing from providers you have to have a whole bunch of customers, but in order to get a whole bunch of customers you have to have great pricing and so we made what I think was a very smart and rational.
Decision earlier and collaborators history to take on customers that we knew we would be unlikely to have with us over the long term, but that we that would give us that initial bandwidth usage and in the region in order to get the interconnectivity of the performance and the pricing that we need it and so I'm encouraged by one of the examples.
And we gave with the $8 $5 million contract for a large Asian financial institution, which adopt that theyre going to be a real lighthouse customer for us I think theyre going to up level that they respond. There. We've also brought in and new head of our Asian sales effort, who came to us out of kind of.
And we're super excited for him to join and I think that Asia is and it's really poised.
B B.
And do kind of go from a rebuilding year in 2022, a real position of strength and 2021.
Great. Thank you.
Your next question comes from the line of Gray Powell from <unk>. Your line is open.
Okay, great. Thanks for thanks for work on me in here and congratulations on the good quarter.
So yes, maybe maybe some other follow up questions on cloud for our assets and.
And our fieldwork we've heard that a lot of customers that rushed out.
In March of last year to increase their legacy VPN capacity for work from home initiatives that they're now looking for more modern solutions and I think you've kind of hit on that earlier, but is that something you see today and do you see potential for cloud for access adoption to accelerate over the next six months.
Yes, Thanks, Gregg for the question I think that the.
I think that the story of 2020 was really everybody kind of holding on for Dear life in the it world and and hoping that they can hold things together and that meant.
And if you were relying on a bunch of legacy hardware VPN and you put in a big order early and a year just to get whatever you could in the door to make sure that your team could continue to be productive, but what I'm hearing from the CTO and CIO and he says that I saw.
<unk> is one.
One phrase over and over again, which is never a GAAP.
They having lived through that and seeing the pain that that it cause and they never want to be in a position to have to manage something like that again and I think also large enterprise organizations are waking up to the fact that the that sort of workplace and the future is going to be more flexible about where.
And when and how people work and so we're definitely hearing from people, who who are who.
And frankly for the last nine months, where like I'm too busy to even take your phone call. They are now starting to put their heads up and say I don't want to keep investing and what I know is the solution and the past and so I think that that definitely for both our access and gateway products, but really for the overall.
Caterpillar one solution is as important and so I don't think that.
And I E.
And I don't think that we are at that sort of tail end of that wave of transformation. I think we are much much much earlier and that process and the story of 2020 was not.
Cio's.
And sticking their heads up and saying gosh, we gotta go.
Sign up for cloud player on the story of 'twenty and 'twenty was people were trying to figure out how to survive.
I think the story of 2021 might be that there is a much broader move away from what had been a traditional castle and moat and had been a traditional hardware based security approach.
<unk> to a much more modern and zero Trust approach and we are optimistic that cloud book can be one of the leaders as companies do make their way through that transition.
Understood that makes perfect sense. Thank you very much.
Operator can we take one more question please.
Certainly your final question comes from the line of Alex Henderson from Needham Your line is open.
So sneaking in under the wire.
And.
Hey.
Was hoping you could talk a little bit about the.
Domain to the main traffic protection market.
And particularly as we see.
More and more adoption of kubernetes and other modern micro service based applications.
And that in turn drives.
And more domain and main application to application traffic.
What are you seeing in terms of that contributing to your protection of data and swipe.
And how do you think that that.
And that evolves.
As we go forward we have seen.
<unk> companies are trying to get into that space, but it seems like a natural for you guys.
Yes, Alex I think that that's it.
It is I think a natural extension of both our.
Access and our gateway products and one of the things that that we see a lot is that customers that have complicated.
And network architectures, where they might be running some of their own applications on.
Aye.
AWS or a Microsoft Azure they may be using the machine learning out of and IBM or a Google they may be using.
Other SaaS vendors and and really coordinating between that and what we're seeing is that we have really positioned ourselves I think well to be the network that connects those those those various pieces together so one of the initiatives that.
And that we launched.
And some time ago, we called the bandwidth alliance.
And that is a way that if you're moving data between clouds or between SaaS application and we can help you do so and both the most efficient way, but also then save you money, we connect to all the major public cloud providers over private network interface, and we don't pay and send them.
Bandwidth and they don't pay to send up bandwidth and so our argument.
And to them was and why should we be charging customers.
For exchanging that that bandwidth.
Themselves and we had we've had a lot of success and getting a number of the large cloud providers to adopt that and that then means that not only can you get the real benefit cloud.
Cloud player in terms of security access control visibility, but you can actually save money on your underlying cloud spend as well and so I think that that's definitely an area.
Net debt us being that connective tissue between clouds and between application is a very natural point for us and it's part of why you know at our core we think of cloud flares and network and we're on network that can help connect multiple applications, even if they are across different providers together.
I wanted to.
Question and go back to the staffing and commentary.
You said in the quarter, you had a 41% increase in staffing and I assume.
And that.
More than.
Disproportional piece of that went into the sales and marketing piece, particularly going after the large enterprise.
As we look at <unk> 21 can you give us any metrics around your expectations for the sales capacity growth.
Net spaces, and so does it go up and that 50% plus range.
On a full year basis.
Or any other metrics along those lines.
That would help us gauge that capacity expansion.
Yes, so I'll take a stab at the beginning of it and then and then Thomas can can weigh in if he has anything to add.
I think that 2020 was was pretty remarkable for us we had new.
Nearly 200000 people.
People apply.
And to work at cloud player and we only accepted about half a percent of the total of the total applicant of those 200000.
About half were for either were for sales and marketing roles within within the company. So we saw a very very very strong raw numbers of applicants and we're seeing those applicants coming to us from really other enterprise sales organizations that we had.
Meyer at every level both from early in their career to very seasoned leaders that can get can lead that team and so we've invested heavily and building out our sales capacity over the course of 2020, and we and we will continue to invest and that and we've got a great pipeline of candidates.
That are excited to join our team and and and I'm, just really blown away by the caliber of the.
The people who were interviewing or are on boarding.
On a weekly basis.
That's what I would add.
Alex.
We will continue to invest and ourselves capacity, but it's a more sophisticated approach than just hiring people, we have to balance more levers and we are getting better at it and and expanding DNR. As one example, a stronger focus on channel partners and from an international go to market perspective, it would be.
But but overall sales capacity will continue to increase and people invest heavily into it.
Okay, Thanks, and I guess, that's a wrap.
And I'll turn the call back to management for closing remarks.
I appreciate first of all everyone on cloud player who worked incredibly hard this year to take what was a challenging year and and be there for each other for our customers and for the Internet as a whole I am proud of the role of the cloud flow played and making sure that the internet held together.
During what was a year that was really really really extraordinary.
Looking forward to talking with many of you tomorrow on our Investor day that kicks off right at 12 P. M Pacific time.
And to anyone and you just need to register to at our Investor Relations page, which is that cloud player Dot net and so until then looking forward to giving you more of an update and hope to see money of you tomorrow. Thank you.
That concludes today's conference call. Thank you everybody for joining you may now disconnect.
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