Q1 2022 Cloudflare Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to cloud players first quarter 2022 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star one.
Jayson Noland head of Investor Relations you May begin your conference.
Thank you for joining us to discuss <unk> financial results for the first quarter 2022.
With me on the call, we have Matthew Prince co founder and CEO , Michelle that co founder President and C O L.
Thomas Seifert CFO .
Now everyone should have access to our earnings announcement this announcement as well as our supplemental financial information may be 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 our customers vendors and partners operations future financial performance anticipated product launches and the timing and market potential of those products. The company's anticipated future revenue financial performance operating performance non-GAAP gross margin.
non-GAAP net income or loss non-GAAP net income or loss per share shares outstanding.
GAAP operating expenses free cash flow non-GAAP tax expense dollar based net retention rate 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 at the impact of the Covid night.
Endemic and adverse conditions in 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 in the future. We undertake no obligation to update these statements. After this call for a more complete discussion of the risks and uncertainties that could impact our future operating results 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.
All current and prior period financials discussed are reflected under ASC 606, you may find a reconciliation of GAAP to non-GAAP financial measures in our earnings release on our Investor Relations website.
Starkel 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 join US for our Investor Day next week on Thursday May 12, it's being held in conjunction with our user conference Clubfoot connect in New York City.
This is Jack will start at nine a M. Eastern and finished around 11 45 with a live webcast accessible from our Investor Relations website <unk>.
Additionally, we will be participating in the Jefferies software conference in San Francisco on June 1st now I would like to turn the call over to Matthew.
Thank you, Jason we had a terrific quarter in Q1, we achieved revenue of $212 million up 54% year over year.
It had a quarterly record of more than 14000, new paying customers up 10% quarter over quarter, bringing our total paying customer count to over 154000.
121, new large customers those that pay us over $100000 per year up 63% year over year to a total of one five.
537 today, 58% of our revenue comes from those large customers our largest customers continue to get larger and larger those spending over $500000 a year growing 68% year over year, and those spending over $1 million a year growing 72% year over year, we now.
Have 12 customers and partners spending over $5 billion per year with us and yet we remain highly diversified with no customer representing more than 5% of revenue our land and expand motion continues to improve with dollar based net retention hitting a new record of 127% in the quarter up 400 basis points year over.
For year, new product and an increased interest in consolidating behind a single trusted vendor for network services has been the key to our continued customer expansion.
Efficiency has always been a hallmark of our business and even in these inflationary times, we achieved a gross margin in the quarter of 78, 7% up 110 basis points year over year.
That continues to be above our target gross margin range of $75 to 77% and affords us the opportunity to selectively target competitors customers offering them bundles of products that work seamlessly together, reducing the number of vendors they need and providing them with modern solutions all while saving the money at the same time.
We are finding this and especially compelling value proposition when it seems everyone else's raising prices or can't even say for certain when there'll be able to deliver their legacy hardware boxes.
We closed our largest acquisition ever in the quarter buying area, one security for $162 million.
At a very high hurdle rate for acquisitions being strongly biased towards internal development, but arity, one technology and team are special we started out as their customer I remember shortly after we implemented their solution right into our Chief Security Officer to ask if something was wrong I hadn't seen any fishing reports in a few weeks, where you usually are chemo report double digits per day.
<unk> turned out area, one and their incredible email security Tac was the answer by the way if youre still seeing phishing messages in your inbox tell your ITT, because we now have a great solution.
Over the last few years, the customer very what we got to another team at cloud player where our budget. We're good at sniffing out when Teck is real and when it would be yes. The area. One team shares the same spirit. So they were fun to work with and they are definitely in the BFS, we talk to them briefly about a partnership but it became quickly clear it made far more sense for them to join.
Blair and fully integrate with our zero Trust suite, let me give you a sense of how that's going.
Extended offers to all the <unk> team and even in this hot labor market, 98% of them chose to join cloud player and I'm not giving up hope on that last one area one team member who hasn't yet.
That's something about how good of a fit the two companies are together the technologies and the culture.
Rail is the number one source of network threats that no leading zero trust vendor has truly integrated E Mail security is a major wide spot the industry with guilt, yes, as you see others in the space now scrambled to build buy or partner to fill the hole, we pointed out in their offerings. No that is the best signal cloud players Zero Trust solution is.
Resonating in the market and taking share no matter, what they may set and good luck to them. We got the best team in the best Tech in the business.
Let's talk about some customer wins in the quarter, starting with area. One in the second half of Q1 cloud Claritin area. One sales team started working together we.
We saw a number of customer wins from existing cloud customers, adding area, one as well as from area. One pipeline deals that accelerated after news broke of our acquisition practitioners Truste cloud player and know that if we buy a company that works and we'll scale.
New customers, who onboard it to area one in the quarter included a major Asian airline U S bolt bracket investment bank and a fortune 1000 trucking company, let me dig into that trucking Company example of that.
They were an existing cloud customer they were in the midst of a pilot testing a wide range of E Mail security vendors in those test area. One cut twice as many phishing E Mail. The next best competitor that the Tech was now part of cloud player made the decision a no brainer the trucking company signed a 7500 seats $385000.
Two year deal what this space, there's going to be a lot more stories like this what we continued to see success with our other zero trust products, a Midwestern U S. State bought 75000 seats in a three year $5 $1 million deal. The state was replacing legacy hardware and had decided to move to a cloud based solution.
When they began talking to us it was a competitive deal, but they preferred cloud players tightly integrated approach that gave them a single pane of glass with integrated policies and threat intelligence.
Loved our performance and network that had presence inside their state borders. This was an example of the sale in partnership with a major systems integrator, which we expect will be part of more and more large euro truck sales. We are confident our implementation of these products has plenty of margin to support a robust partner ecosystem a large Indian.
Media platform chose class leverage these scalar and Palo Alto networks for their zero Trust network. They signed a $150000 deal for 5000 seats. They appreciate it how much more tightly integrated our solutions were than the competition.
We're going head to head with the scalar and Palo Alto networks, more and more and we like our win rates when we do.
Our European Fortune 500, automotive company adopted <unk> Zero Trust approach to help manage their global fleet of more than 10 million vehicles.
On the contract worth $320000 per year, we're seeing more and more of these Iot zero Trust use cases and believe there is significant opportunity to expand with this customer.
The expansion of Fortune 500 software company expanded their relationship with us, bringing their annual run rate to $15 million per year, the new contract expanded our relationship to another internal division.
<unk> them build their future scalable secure modern network. They repeatedly let us know we were the only vendor a trusted in that space for such a mission critical service.
On the theme of trust, a large social networks and a $3 million five year contracts. They are using our global network to authenticate the security of one of their messaging products. They built the authentication application on workers are surplus compute platform that workers can keep up with their tremendous scale and volume is a testament to <unk>.
Effortless scalability.
Sticking with workers, a large Australian software company adopted workers to help power our collaboration tool they signed $145000 contract. They are using workers durable object functionality to build real time global synchronization engine products. What we're seeing with workers is that there is a natural expansion as smart software teams.
Realized what they can do when they can write code and effectively deploy it directly into the internet fabric.
We expect this customer will continue to use workers for more of their projects now that they've proven success with this one.
A fortune 500 healthcare company signed a $1 $2 million three year deal. It is a pretty standard network security and performance used case for us, replacing legacy hardware. What I thought was interesting was that the team has moved from a large financial services customer of ours as they change jobs. They brought cloud player to their new employer.
We're going to see a lot more of this as practitioners that succeeded in their last job by leaning on us are moving on and moving up in their careers to new opportunities.
A fortune 500 financial services company went all in on class there. They said that they see as the future based on a $1 5 million three year deal. It was driven by the Chief Security officer from start to finish the sales cycle was around four months. They ripped out a number of legacy vendors and consolidated a number of network services behind us they were tough.
Higher to trying to find best of breed with every product and instead ending up with a Franklin side Matt.
Realize they could with US have the best of breed network that is tightly integrated with the features all efficiently worked together, we expect they will continue to grow their contract now that they have.
<unk> fully into cloud based architecture.
One last story, a fortune 1000 gaming company signed a $3 $3 million three year contracts I Love. This story they were using AWS, but found their security couldn't prevent the attack they were seeing after struggling to keep their application online aws's team. Eventually told them you should just use cloud and so they did.
Let them and lots of other customers know that our two is progressing to open beta next week and we expect we'll be able to save them lots of AWS egret fees as well.
I wanted to close by talking about what we're seeing in Russia, and Ukraine I mentioned the region at the end of the last earnings call. A number of you reached out to say it seemed out of place at the time Unfortunately approved pressure at.
At cloud there are global network serves as an early warning sensor for what's happening across the internet in the months, leading up to Russia's invasion, we thought characteristics cyber probing and other warning signs that were similar to what we'd seen in Georgia, and Crimea years earlier concerned with grief western governments and offered our services to critical infrastructure providers.
And government institutions in Ukraine, well before the physical invasion began.
Many organizations there took us up on our offer of protection.
One of the stories of the war has been the relative lack of cyber attacks, that's not exactly accurate there have been attacks. However, the number had that have been successful are thankfully few I'm proud of the role of the cloud players play to that end in Russia, Belarus, and the Russian occupied regions of Ukraine, we terminated all users tied to sanction parties.
And put additional checks in place for new customers signing up for our services the region, including Ukraine represents less than 1% of revenue that we do not anticipate meaningful financial impact to our business, but we are conservatively reserving for the worst case, just like we did at the beginning of Covid.
One surprising thing that happened in the quarter was that our one dot one dot one dot one app rose to number one in the Russian App stores, we build that out and give it away to consumers for free as the world's largest testbed for a key component of our zero Trust solution. It turned out in what was an increasingly hostile network environment inside.
Asia citizens, they're wanting to see what was really going on install the app in order to access Western media now we wont make any money of this so some of you may wonder why am I, telling you about it during an earnings call because it turns out doing the right thing and being there when someone on the internet needs that has always been core.
Cloud flare and as always turned out to be good business for us over the long term, it's why I love My job.
Successfully operating inside the hospital network environment that is Russia today makes our mobile app better for our enterprise Zero trust customers, ensuring Ukrainian critical infrastructure stays online means we can stand up to the biggest nation state sponsored attacks for our largest government financial services and other off targeted customers.
And briefing government on what's about to happen proves the power and unique insight we get from our global network, where in the truck business, we always have been.
Revenue guidance with strength in multiple areas of the business.
[noise] to revenue.
Total revenue for the first quarter increased 64% year over year, two $212.2 million.
The growth in revenue driven by strong adoption of our product portfolio and continue attraction with our enterprise customer base.
From a geographic perspective into your one we saw continued strength in both the U S and internationally.
The U S represented Turkey three per cent of revenue and increased 66 per cent you over a year.
EMEA represented 26% of revenue and increased 57 per cent you over here.
APAC represented 14% of revenue and increased 31% you over a year.
We are pleased to see growth continue to accelerate in APAC N C. Mia repeat is our highest growth geography this quarter.
Turning to a customer metrics.
We exited the quarter with 154001 hundred mind paying customers, representing an increase of 29% year over year.
We ended the year with 1537 large customers, representing an increase of 63% year over year or an additional 121 large customers in the quarter.
We were pleased to see large customer revenue contribution increase again sequentially.
Significant expansion from a large customers contributed to a record dollar based in that retention rate of 127%, representing an increase of 200 basis points sequentially.
We continue to see broad base springs across our enterprise go to market efforts, which we look forward to providing additional insight during our Investor day next week.
Moving to cross margin first quarter gross margin, but 78.7% consistent with last quarter network Capex represented at 9% of revenue in the first quarter.
What we expect to see some level of quarter to quarter variability given strategic purchase decisions and continue to expect network topics to be 12% to 14% of revenue for critical 2022.
Trying to operating expenses first quarter operating expenses as a percentage of revenue decreased 2% sequentially and decreased 7% year over year to 76%.
We had another strong hiring quarter, where we saw a total number of employees increased 42 per cent to you over a year, bringing our total number of employees to approximately 2750 at the end of the quarter.
Sales and marketing expenses were $89.7 million for the quarter sales.
Sales and marketing as a percentage of revenue decreased 2% sequentially and decrease the 42, so I'm 46 per cent in the same quarter last year.
Research and development expenses $40.3 million in the quarter.
R and D. As a percentage of revenue state flat sequentially and decreased from 19% from 21% in the second quarter last year.
G&A expenses for $32 million for the quarter.
C N a as a percentage of revenue increased 1% sequentially and decreased 215 from 17% in the same quarter last year.
We saw continued operating leverage strengths in the first quarter with operating margin improving 770 basis points here over a year.
Operating income was $4.9 million compared to an operating loss of $7.5 million in the same period last year.
Q1, so a third consecutive quarter of achieving operating profit.
As a reminder, we intend to grow all operating expenses in line with the revenue staying here or at breakeven and reading the excess profitability back into the business to address the enormous opportunity in front of us.
Turning to net income in the balance sheet.
Oh and net income in the quarter was $3.5 million or a net income per share of one cent.
Tex expense for the first quarter was $1.7 million.
We ended the first quarter with $1.7 billion in cash cash equivalents and available for sale securities.
Free cash flow with negative $64.4 million or 30% of revenue compared to negative 2.2 million or 2% of revenue in the same period last year.
Operating cash flow was negative $35.5 million in the first quarter or 70 per cent of revenue compared to $23.5 million or 17% of revenue in the same period last year.
The decreasing cash Flo was primarily related to a unique was holding tax payment of approximately $30 million.
As mentioned last quarter, we expected to see some cash flow variability in the first half of 2022, but we continue to expect to return to positive free cash flow from the second half of this year.
Remaining performance applications are P O came in at $688 million.
Representing an increase of 10% sequentially and 57% year over year.
<unk> was 76% of total or appeal.
Turning took items.
It's Matthew mentioned, we close the area one acquisition on April 1st which is expected to contribute less than 1% of revenue in the dilute it impact unprofitability just reflected in guidance in both the second quarter and full year.
Additionally, in the first quarter. We also ended all relationships, where they use those kinds of things from parties in Russia, which represented less than 1% Empire to revenue.
For the second quarter, we expect revenue in the range of $226.5 million to $227.5 million, representing an increase of 49% a year.
We expect an operating loss, including area one in the range of $2 million to $1 million.
Expect a net loss per share one cents to breakeven.
Modeling purposes. Please note that if we report positive net income in the second quarter, we expect <unk> to be 344 million poorly diluted chair.
The 325 million basic shares should we report the net loss, we expect a text expense of $1.8 million.
For the full year 2022, we expect revenue in the range of $965 million to $969 million, representing an increase of 45 per cent to 46 per cent you over here.
You expect operating income for the full year in the range of 10 million to $14 million and we expect net income test share over that period and the range of three to.
Assuming approximately 345 million common shares outstanding.
We expect the techs expense of $7.7 million.
In closing it was another very strong quarter I again want to thank our employees for delivering these great with sauce and for their continued dedication will.
We look forward to hosting our second Investor Day next Thursday, we're both do a deeper to ice on our product portfolio and recent acquisitions as well as updates on our financial progress and market opportunity and with that I'd like to open it up for questions. Operator, please pull for questions.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
First question comes from the line of Matt Headbirths with our B C capital markets. Your line is open.
Okay get Stamberg strip format hedberg, thanks for taking our questions. So a dollar based on that retention continues to track well the 127% was really nice to see obviously, having success with large customer expansion, maybe a little more if you could and what what is it that gets customers to buy into the broader set of the platform and what <unk>.
Really gets nose enterprise customers to the next level of usage.
Sure. Thanks. Thanks for thanks for the question I I think that what we've seen is that once the customer is on our network. We can see traffic to cross their systems, typically and make intelligent recommendations over what additional products. So I'll I'll give you a specific example, where.
We have an incredible bought management product that is is good at stopping malicious automated traffic on our customers site one of the things we do it even before someone is using the bot management product. We can look at their traffic patterns see how many bought they have and then.
Generate a report for them that says you know you have a bot problem here's what we see would you like us to help US help you with it and so I think that that was sort of intelligent recommendations have been very good at getting customers to adopt additional products on on our platform I think going forward as we've talked about in pre.
Diaz earnings calls, but you'll see us do more and more is bundled together our services into much broader licenses and so you can see that with even some of the examples that that I brought up on on on the on the prepared remarks earlier, where companies that buy into our total infrastructure.
Commit to a certain spend with us and then they are able to just continuously add additional products and we true that up on it on an annual basis. I think we are really unique in that we have that broad set of of different products, where once you're using our service we can start making intelligent recommendation.
And we can solve so many problems for our customers that does sort of Sitewide license. It makes sense and I think that that that will continue to be a big piece of our our growth going forward.
I think I need your help.
I wanted to add to the tie it back to the incredibly and <unk>, but you should keep in mind to not only see expansion working but they're more products and features available. So every cooperative that plays into into our DNR strategy moving forward.
Very helpful from both of you and then new customer generation really robust in the quarter record as you mentioned anything worth pointing out there as a driver or counting for that strong new customer numbers.
Yeah, I don't I don't mean that I don't need a critique your work, but you're you're early note that went out suggested that we now have 14000 customers and in fact, we actually added 14000, new customers and the court paying customers in the quarter and are now in over 150000 paying customers across the platform I think that that that again is is.
Is just showing that across regardless of the size of customer we've been able to very effectively get them onto our platform nurture them over time get them to use additional products and services and grow them into larger and larger customers and so I I didn't get it it's at some level when you when you look at.
Growth like that there's never one particular thing that you can point to and say that was what was going on because again. It. It. We serve is such a broad set of customers from very small to very very large, but but I'm really proud of the team and the hard work that they've done in order to deliver in in continuing to grow.
So our our entire customer base, and and and that's and it's great to see us have a record at 14000, new customers in the corner.
That's great. Thanks man.
Your next question comes from the line of Chill Fishbein twist. Your line is open.
Good evening and fantastic execution again, alright, Matthew a couple of other companies that are cloud central <unk> reported that internet traffic has been trending.
Down over the past several months I love to just get your take on what's happening and how cloud transposition and how there how your internet traffic it's been swelling.
Yeah, we we haven't seen that I think it has been Ah continued growth <unk> to to first of all answer. Your question just straight up you know we saw your over your traffic growth across our network, 75.8% a quarter of a quarter growth of $15.
9% and that's in line with sorted the quarter over quarter growth that we've seen for the for the last period, it's worth remembering that that we don't we don't Bill primarily based on usage, we we bill and I'm much more predictable way and so I I think that that is it.
Good indication that we are taking sure from from the rest of the industry, but but even in these post COVID-19 times that the traffic across our network continues to to grow and we do that while still maintaining you know about what our target gross margins are <unk>.
The other thing, which you didn't ask about but but I think it's interesting to compare is how much C. P. U usage has grown across our network and where bandwidth is grown 75.8% year over year C. P. U usage has actually grown 89.1% an over the quarter. It's it's.
15.9 for bandwidth and and 21.8 per cent growth for C. P. U usage, what I, what I think is why that's interesting and that's important because I think that that's actually showing where people are not just using cloudflare for moving bits around but they're using cloudflare into order to do intelligent processing of those beds and that.
Intelligence, which is really driven by our like our workers edge computing product as well as some of our security products, that's actually growing faster than bandwidth and I and I think that that Delta shows why we're able to continue to grow revenue at that that that 54% that we did in the corner does that does that answer your question.
More than I want it but thank you that was great I appreciate it.
Your next question comes from the line of <unk> with Jeffrey New line is open.
Matthew I the area one acquisition I think is a unique one for you and kind of maybe outside your your your core lane that you've gone can can you just talk to that and then I'll also and when you think about to go to market and the synergies among the other sweet can you just talk through.
How do you think that unveils you know over the next overnight Silva quarters. Thank you.
Yeah, I think so first of all any acquisition is a bit unusual for us because we have such a strong bias towards internal development.
And and building products ourselves Uhm, I think though area one an email security in particular make just a ton of sense for us to do something around Uhm. If you look across every other protocol that is sent across the internet, we we <unk>.
Texts, whether it's you know H D b traffic or at your <unk> traffic to you or to your phone system or you know, it's it's S. S. A traffic anything that's out there any protocol, we protect uhm and and we had just not dived into protecting S. M. T P and the email protocols and I think a little.
That is you know honestly my fault M and and our C. T O Jon's fault because both of US had worked in email security prior to coming to Cloudflare and and and I think we have the scar tissue to prove from it. So all the time, our sales team would come to us and say hey, customers really would love us to have an email so.
<unk> product or engineering team would say, we have a ton of data that could help inform an email security product, we should build it and I think John I would would often veto that I think that frankly with a blind spot on both of our side because if you look at the data E Mail security is by far.
The number one source of threats that come into an organization almost every headline hacking incident that you've read about in the last two years email was the initial way that that that vulnerability was was take into account. So I think it makes a ton of sense for.
US to have a solution. It's also incredibly powerful because with a D. N S provider that we can make it one click deployment where it's.
<unk> a customer of ours click the single button and instantly they get the benefits of the area one solution and they can continue to use whoever their existing email provider is whether that's outlook and and and and Microsoft office or or if it's G sweet or if it's something that they're hosting on premise much like cloud.
Blair area, one as a proxy, but it's just a proxy for E mail traffic. So I think it's a very natural point for us to integrate I think it's a very easy sales motion for our customers to go through and to the second part of your question I think it integrates with the rest of our zero Trust sweet extremely well so for.
Instant when you get an email from an unknown sender, we can automatically isolate that email using our browser isolation product. So that any links that you click on in that link don't actually render on your on your laptop, but they're actually rendered at the edge of our network. So any malicious content. That's in those lengths we can stop.
And so I think that this is gonna be a very effective way to introduce our zero trust sweet to the market. It gets people to start to adopt a seats based approach to our products very easy for our existing customers to deploy with one click and I think it's gonna.
B, a gateway to the rest of hours zero trust products selling more of our gateway and access and browser isolation products as well does that answer your question.
And that was very comprehensive thank you.
Your next question comes from the line at the James Fish with Piper Sandler Your line is open.
Hi, guys Court.
<unk> I wanted to hear a little bit more about the wave to products like teams and Magic Transit match plan are doing especially it seems like these are driving the largest dollar gross spill. Additionally, how has caused far for offices progressed. This quarter and is there any way to think of how many customers are a penetration rate of using so.
<unk> waves through solutions, but I'm talking about here.
Yeah, So I think that that the wave to solutions and and and I I I would I would characterize it a little bit differently I would say that you know we have.
Like Magic Transit Magic firewall that that really do compliment some of our more traditional products. They are all about protecting content protecting your infrastructure and then we have products like gateway and access and browser isolation, which are all about protecting users and so I think you've caught those sort of.
Into into wave to uhm and that that's true from a timing perspective, but they actually are are slightly different and they and and and I think that they.
Are both growing very well, but there <unk>. They they are somewhat different in terms of the the way that we go to market with those products and in some cases the exact buyer is within an organization for those products and so I think we've seen really strong adoption for the magic transit product.
Uhm that is replacing a lot of the traditional network Ddos protection services, any particular strengths and carriers that are starting to use the product as well, which I think of that which is a really exciting opportunity and it's we're getting that because of the fact that we can just.
Stand in front of a much more traffic impossible and then there's possible through any sort of box based solution I think on the use or based products. We're seeing really good adoption of those both for customers who are coming first for those products. But then also for us to be able to sell those products to our existing customers and there's a really natural extern.
<unk> between our traditional firewall products and the access product and that those those dovetail very well together I think kotler for offices continues to progressed really well, although it's very early in terms of what that would that will look like you know we have in the quarter, we announced some of the hardware.
That we are deploying and we are starting to build that out within networks I would say that rather than that us measuring the success of that product today based on the revenue that it generates I think we are much more measuring the success of that product based on the willingness of landlords and in network providers to invite us into.
Their facilities and allow us to directly interconnect and I think that that is in in in every region, where we have deployed that club for opposites that is trending app or ahead of what our expectations are.
Thanks for the details Matthew.
Your next question comes from the line of <unk> Winslow with credit. Please your line is open.
Okay. Thanks for answering my question in grass on another another great quarter want to focus on on on workers in in our two you're talking about some pretty significant wins there Matthew one of the things you've also talk about yours, how sort of it takes a long time to sort of escape velocity and a and a platform in terms of developer adoption et cetera, how are you talking about sort.
Where do we stand right now and is there anything sort of surprising you in sort of the rate and pace.
Workers are destroyed all the broader platform are you talking about about our too.
Sure. So so first of all as as I mentioned are too is gonna progressed from a closed beta to an open beta next week and and next week, we have platform week, which is really very much focused on all of the different ways of cloudflare can be a platform for developers to develop on.
But really a focus around that the various workers products and I think we'll have some very exciting surprises as part of as part of what we're what we're rolling out over the course of the week as well I think that.
If you study developer platforms for them to really reach escape velocity takes between eight and 12 years and so workers what was launched in late 2017. So.
So we're we're we're we're continuing to develop it we're on that curve I think the thing that has surprised me is that we're seeing very big companies with very sophisticated development teams getting excited about and realizing that workers as a solution for a lot of the problems.
<unk> two examples that I mentioned in the prepared remarks, you know one.
Major social network is that that's a very sophisticated developer team that chose to build using workers and I think what we found is that once it seemed like that see the power of what they can do with workers.
That really excites them, both within the organization, they're at and also as they change jobs and go to other places where they take the technology with them same thing is true with the Australia and software company, we're doing something like real time collaboration across multiple continents, if you're trying to do that with a traditional public cloud.
It's it's a ton of work with durable objects and workers. It's almost just works out of the box and in fact, we have examples of how that done and I think that that was something that was again incredibly well received by that very sophisticated software engineering team and we expect that they will continue to do more with the product. So.
I think again, it's going to be some time before you know before it before it's something that we would I.
That is is dramatically contributing to revenue, but I am very pleasantly surprised.
<unk>. How many developers are are are are flocking to the the workers ecosystem and we'll be talking a lot more about it next week.
Oh, so I'm looking forward to it thanks a lot.
Your next question comes from the line of Keith Slice with Morgan Stanley . Your line is open.
Hi, It's me I'm also known for Keith Wise. Thank you for taking our questions May I again mentioned the opportunity to use gross margins as a weapon against customers who are are against <unk> competitors are more vulnerable to pricing and cost pressures can.
Can you detail what has allowed cloudflare to resist these pressures both on the pricing and costs front.
You know I think efficiency is just that our core and so our network has always been designed in such a way to be able to get just to be as efficient as as possible and so that has allowed us to deliver the services that that we do I.
I think we you know <unk>, we we sometimes get compared with some of the more traditional C. D N type vendors and that's just never how we have seen ourselves and it's not business that we have that we have chased and so I think that where if you're selling.
<unk> you know just bit delivery it turns out that being you know a little bit faster or really the <unk>. The returns are incredibly diminishing uhm, whereas if you're selling security if you're selling you know intelligence, which is built into the network, if you're selling the ability to drive that.
That that that has that has a very compelling use case I think from the beginning we also always said that you know Cloudflare you know one of the first sentence of cloud play. It was you know never lose on price and I think that forced us to be efficient from the beginning and so customers.
I think in this time, where everyone is looking for ways to figure out how they can save money on there I T budget and where many other vendors are trying to figure out how they can eat hold a raise prices I think we can continue to be pushing forward and take.
King chair, and especially taking that high margin chair from both existing hardware vendors, who are having a hard time, even delivering their products as well as you know other cloud vendors that that that I again, I think our are are not as efficient as as we've been so I think that's been key too.
To our our stories since the earliest days it will continue to be key to our story and I I think it's that that efficiency is is a hallmark of who we are a cloud sorry.
Awesome. Thank you for the details and maybe on this from one for Thomas when when can we kind of expect this gross margin strategy to show up in the numbers.
I'm not sure what you mean by showing up in the numbers. So I think that we have <unk>.
Just the significant revenue growth that we've been able to digest the significance traffic.
Gross that that Matthew a chair for elude to do and it's been able to scale at a at a flat.
Margin I I I think there's already a testament.
So the ellipticity off off the network and I just want to reiterate that because I think that is wonderful.
Wonderful a competitive promotes the ability that all products are running on every surface in every city.
Because of the the complete network surface.
Your degrees of freedom to manage costs and demand and supply and every server that we every city that we regardless of where in the world.
The freedom to manage the the flexibility to set you up this network. So I think you'll see that already today, we've seen tremendous growth product wise revenue wise traffic wise effort metrics that you're looking at that would measure Beth and have been able to digest, the afternoon and and stable too.
To a slightly gross margins I think it's already a testament to that.
[noise] understood. Thank you.
Your next question comes from the line of James Breen with William Blair. Your line is open.
Thanks for taking the questions just sort of on that point a little bit. So are you are you basically you sort of managing to kind of a breakeven non-GAAP operating income line, you know plus or minus a couple of million here just to maximize the revenue and then you know just from an expansion standpoint, you know as you filled out more.
Network more points presence does enable you to go deeper into some of the multinationals that right now maybe you don't have access to because of that thanks.
Sure Jim Uhm, So I, you know I I think that we've been very consistent.
Saying that we're going to hold as close to break even on our operating margin as as we can I I I sat on a previous call that you know if we if we showed you know massively.
Positive earnings per share that would mean something that we did something wrong because if we can continue to grow at at the rate that were that were that were guiding toward you know, there's there's nowhere else, we should be putting that money other than back into the business to grow the business as quickly.
As possible and so I think that you know where where we are doing that we have been very consistent in delivering that message I don't think there's anything that has changed about that strategy and and again I think we're managing towards a a breakeven on an operating margin.
In terms of in terms of the Pops, you know I think that.
<unk> we're already in.
<unk> well over 100 countries around the world I think that when multinationals look to us it's not our it's not our our pop presidents that that that has ever been you know it certainly does we went public standing in the way of them adopting us and and I think that if you look at the the <unk>.
Companies that you know if <unk> that we're highlighting and some of the examples these are almost all massive multinational companies.
Companies that that rely on our network and think that it's the case I think the thing which is powerful about as we build out more pops is that counter intuitively because of the design of our network and because of the efficiency of our network to Paul Thomas and I, just alluded to uhm. It actually drives are caught <unk>.
Down over time, rather than driving it up it takes it takes a certain amount of servers in order to process a certain number of requests. So you're capex is actually driven by the amount of usage of your service more than anything else. What is powerful is because we have done the hard work on the networking and software side to make.
It so that any server anywhere can handle any request that means that as we continue to expand our network out that we're able to directly interconnect with the various I S. P is an eyeball networks around the world and drive our costs down or things like bandwidth co location.
In other variable costs that are part of our business and so I I I think that that's decomposing a little bit what the reason for our our ability to to continue to expand it and if in the future you know we needed John Snorkels and dived to the bottom of the ocean.
And an order because we can get more efficiency and in in in our in our network by putting out a pop you know somewhere there we're going to continue to do whatever is necessary to be able to deliver our services as efficiently and cost effectively as possible.
Great. Thanks.
Your next question comes from the line of Adam Bork with Stifel. Your line is open.
Hey, guys. Thanks, so much for taking the question Uhm, maybe just for Matthew on the federal vertical. We're just hoping you could provide an update if a federal and the opportunity that you see obviously, you've seen subtraction, there with the <unk> with the joint when with Accenture, just curious how you're thinking about the federal opportunity in 2022, I will gladly take so much.
Yeah <unk> you know federal is is a big opportunity for us Fedramp. We think will continue unlock that we got word actually today that we have have a thumbs up from our our sponsoring agency and are just waiting kind of in line with the with the overall federal agency to get that approve.
So we think that's all going well we've done everything that we can do and you know, it's it's a little bit like being at the D. M V. You've gotta Kinda just wait for your number to get called but we're we're confident that it will it'll get called hopefully sooner than later and and if if anyone if anyone at the federal D. M V as listening and we there's there's a lot there's a lot of agencies that want to use.
So hopefully we can meet that meet that requirement that is not holding us back from working with Accenture as well as other partners and we've continued to see significant interest and I think the thing that I would come back to is the amount of trust that we have built and the sort of sea level equivalent of the federal government.
You know the the the number of calls that that our team that and including myself have received from the people who are really trusted with securing the U S infrastructure to understand what's going on in Ukraine to ask us for.
Help protecting that the infrastructure in the United States I think that that that speaks incredibly well of US. We we actually launched in partnership with Crowdstrike as well as Ping identity in the quarter that critical infrastructure Protection Act and I was really honored by the White House, you know stepping up and saying that.
That was something that they recommended any hospitals utilities or energy companies adopt as as quickly as possible. So I think that we have an enormous amount of goodwill within within the government I think where we are moving forward and think that there is an enormous opportunity to <unk> to add.
Deliver on that goodwill and and and any day now hopefully the that that the fed ramped D. M V will call our number and we'll be able to announce that that that that process is formally behind us.
Great. Thanks, so much.
Next question comes from the line of Alex Henderson with Needham Your line is open.
Great. Thanks first off I wanted to just to to really complement you guys and what a great job you've done protect.
Protecting broke the Ukrainian infrastructure as well as the reporters that.
Needed there and continue to deliver access to western news flow into Russia, it's really important stuff.
Uhm.
I wanted to ask was really around the.
Internet traffic to question asked earlier and maybe you can give us a couple of data points on the change in your coding total, but uhm. The traffic obviously up 75 per cent is well ahead of the growth in the marketplace, which I think is around 30 per cent.
So can you.
Davis on where you are in terms of what percentage of internet traffic you're carrying.
<unk> along the same lines, it's my understanding that API traffic has more than doubled over the last 18 months in terms of its rate of growth come over 150 per cent to something in excess of 300 per cent, which ultimately suggest that there's very irate some close to the main the main.
To me to use your crowd to purchase.
Basically a key part of what you guys do protecting.
And optimizing and accelerating that traffic. So can you can you talk to us a little bit about where you are those statistics in terms of sure and what the implication of that a P. I growth rate is I realize you're not.
Being paid her a bit but rather that would imply very rapid acceleration and the number of domains that are being.
Traffic too thanks.
Yeah first of all.
Thank you for for the for the Kudos at the beginning and you know it's it's been it's been you know, it's it's been a a quarter aware of a lot of our team has been working.
Tireless nights to make sure that as much of the Ukrainian infrastructure stays on line and and that you know services like one O. One O. One O. One continue to allow people in in in parts of the world, where they may not have free access to the internet for them to be able to see what's what's happening.
And I think that that's that's that that's something that I'm really proud of our team for I've done and I. Appreciate you, calling it out in terms of cloud says percentage of Internet traffic you know I think it's <unk>. We don't really we know what are we know what our numerator is but we don't know what the denominator is and I don't think there's a good source of that I think that we look at some proxies for that.
In other in other places one is what percentage of that the top million websites are behind us and that number is around 20% today I think with that under represents is a lot of our other products. It doesn't take into account products like ours their address products that doesn't take into account.
Things like Magic transit and other products, but from it just pure what percentage of the of the web uses cloudflare on if you measure that using third party sources. It's around tried around 20 per cent for a P. I uhm I I think that that has been a trend that we've seen for quite some time more and more of the traffic that passes through clouds. There is a.
P I traffic in the quarter, we announced our updated API protection Sweet we've seen really great adoption for that again I I think it's one of those things where it's it's it's all it's all sort of the same protocols, but being able to understand that this is an API validate that IP I help developers.
You know really make sure that the schema that is being sent to and from that API. Uhm is correct. Those are all things that our our network is is very good at delivering and we're seeing strong customer interest and strong customer growth from that and the last thing I'd say is that workers as a big you know there is no easier way to build.
An API today than on workers and I think that next week during platform week, we're gonna have a bunch of examples of customers and companies and developers that are doing exactly that and I think that that's going to be a bigger and bigger piece of the worker story going forward.
If I could just throw one additional question.
China.
Could you give us an update on one or the traffic isn't reaccelerating at a faster rate when it will start to eclipse.
The company averages thanks.
So so I don't think the broken out the traffic from from India, and China, and and I don't and I don't know precisely what the growth rates are that was a revenue question Oh I don't know I'm not.
From a revenue a revenue perspective, so so again I think that those are both you know regions that are interesting to us. They are very different from one another I think that we have seen a lot of success selling into the Indian market and and been able to been able to continue to expand.
<unk>, our services, there and and and and and and we've done a great job at both selling to customers as well as finding ways to interconnect with what is a very complicated you know I S. P model in in in India, and China, We've always worked with partners and so.
We have been a longtime partner with Baidu. We are more recent partner with J D cloud and and I think that in both in in that case that partnership is going extremely well and and again it. It's it. It. It is it is complicated for any western company to be operating in China and so.
The fact that we have now been doing so sense 2015, I I think shows that that <unk> shows the the power of what we've been able to deliver it also it's not always that the purpose that where they were trying to generate revenue from inside of China the value of us.
Having a network that extends into China is is at least an equal part if not if not greater that we can form multinational companies that you can with one single network deliver services to every country on earth, including inside of China, and I think that that is unique for us to be able to do that and have.
The same features and functionality largely there that we have around around the <unk> rest of the world. So I think both of those are market pets have their own complications, but we continue to operate in and and and see success.
Thanks.
Operator can we take one more question place.
Certainly your last question comes from the line of <unk> with Evercore. Your line is open.
Perfect. Thank you for squeeze me and.
I have two is one of the last time at the same time first off I was hoping you could just talk about you know there's growing concern of a recession in Europe and America. So in that context are you seeing any shift in your customers buying patterns or data closing right. So anything ups any impact from risk of recession do how you'll feel she was operating.
And then if you don't just clarify it from a perspective, how does it embedded into your revenue in operating profit guide for June quarter, what is the impact from from the deals are to me. Thank you.
Sure I'll take the first question then Thomas Kim close close out with the the second Uhm.
As I said I think that this will when the history books are written turn out to be the most complicated quarter that tech companies have have lived through certainly sense Q1 of 2020, and I think that there is real risk of of a recession.
<unk> going forward and and and even even aside from that I think that there is definitely we're all seeing you know the inflationary environment and the concerns around that what I'm, what I like though is I can't imagine a company that is better positioned for a situation like that then we are we're offering a service which is not.
A nice to have but a must have we're offering a service in a way, which saves customers money over what their existing solutions are we have deployed the network in such a way that we can make sure that we service customers as we need them and so what we saw in the quarter was was definitely buyers can see.
<unk> over what was going on in the world, but in many cases that was actually having them come to us and so I think that as as as there are challenging economic times, we are extremely well positioned to provide what are critical services to make sure.
The Internet continues to work in it and to me it it feels a lot like the beginning of Covid, where you know I think there's a lot of concern that's out there but over time, what we find is time and time and time again customers are turning to us, saying, we want to consolidate our spend from instead of spending a cost 10 different vendors, we want to put it all behind you.
<unk>. They liked the fact that we have that bundled integrated approach and they liked the fact that we're able to save the money over what their legacy solutions are that are in place. So I think that that physicians, that's very well for what may be what was what I think with all ready challenging quarter for many companies and I think it might be a challenging.
<unk> four four companies over the over the next period to come.
And the trusting your garden scripts, followed or or a standard approach was trying to be thoughtful imprudent. When it came to the exposure to Russia, Ukraine, Belarus. So we already mentioned that we we the <unk> less than 1% Edwin.
The total revenue in the first quarter and reflected this also in there the guidance for your short for the current quarter and for the rest of the year and as I said in the prepared remarks.
<unk> Uhm area. One is also reflected in guidance circles for the second quarter as well as for the four year and that is true both for revenue, but less than than one person contribution for the year, but it's also true for the diluted impact off on <unk>.
<unk> ability.
Ah reflected in the garden this week.
That is all the time, we have for questions I'd like to turn the call back to C. E O Matthew prints for closing remarks.
This has been a challenging quarter as we've watched what world events have taken place I'm incredibly proud of our team for having made sure that Ukrainian infrastructure stayed online that people the world could see what was really happening and providing a network with clubs there that I really can stand up.
To any challenge that's ahead I really appreciate all the work of all of the Cloudflare employees I appreciate all of our customers I'm looking forward to seeing many of you at our Investor day, and our customer day, which is next next week in New York and stay tuned for a lot of announcements, it's gonna be a busy week for us because it's also part.
Form week, which is one of our innovation weeks and we're expecting it announced a number of really great features. Thank you so much.
It's concludes today's conference call. Thank you for joining you may now disconnect.
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