Q4 2023 Cloudflare Inc Earnings Call
Yeah.
Speaker Change: Good afternoon, and welcome to the cloud for Q4 2023 earnings Conference call.
Speaker Change: But all in English.
Speaker Change: All right and then on mute to prevent background noise after.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star one again.
After the Speakers' remarks, there will be a question and answer session.
Speaker Change: If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Speaker Change: To withdraw your question Press Star one again.
Operator: I will now turn the call over to Mr. Phil Winslow, Vice President of Strategic Finance, Treasury, and Investor Relations, so you may begin your conference. Thank you for joining us today to discuss Cloudflare's financial results for the fourth quarter of 2023. With me on the call, we have Matthew Prince, co-founder and CEO, Michelle Zatlin, co-founder, president, and COO, and Thomas Seifert, CFO. By now, everyone should have access to our earnings announcement.
Speaker Change: Now I'll turn the call over to Mr. Phil Winslow, Vice President of strategic Finance Treasury and Investor Relations May begin your conference.
Thank you for joining us today to discuss <unk> financial results for the fourth quarter of 2023 with me on the call. We have Matthew Prince co founder and CEO, Michelle is that one co founder President and CLO and Thomas Seifert CFO.
Phil Winslow: 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.
Phil Winslow: This announcement, as well as supplemental financial information, can be found on our investor relations website. As a reminder, we'll be making forward-looking statements during today's discussion, including, but not limited to, our customers, vendors, and partners' operations and future financial performance, our anticipated product launches, and the timing and market potential of those products, our anticipated future financial and operating performance, and our expectations regarding future macroeconomic conditions. These statements and other comments are not guarantees of future performance and are subject to risks and uncertainty, much of which is beyond our control. Our actual results may differ significantly from those projected or suggested in any of our 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.
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 and future financial performance, our anticipated product launches and the timing and market potential of those products, our anticipated future financial and operating performance and our expectations regarding.
Phil Winslow: Future macroeconomic conditions. These statements and other comments are not guarantees of future performance and are subject to risks and uncertainties.
Phil Winslow: <unk> is beyond our control our actual results may differ significantly from those projected or suggested in any.
Phil Winslow: Any of our forward looking statements.
Phil Winslow: These forward looking statements apply as of today and you should not rely on them as representing our views in the future.
Phil Winslow: We undertake no obligation to update these statements after this call.
Phil Winslow: 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 SEC 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. You may find a reconciliation of GAAP to non-GAAP financial measures that are included in our earnings release on our investor relations website.
Phil Winslow: 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 SEC as well as in today's earnings press release.
Phil Winslow: Unless otherwise noted all numbers, we talked about today other than revenue will be on an adjusted non-GAAP basis.
Phil Winslow: You can find a reconciliation of GAAP to non-GAAP financial measures that are included in our earnings release on our Investor Relations website for historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago.
Phil Winslow: For historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago. We would also like to inform you that we will be participating in VARID's Software Silicon Slopes event on February 28th and the Morgan Stanley Technology, Media, and Telecom Conference on March 6th. Before closing, please save the date for our Investor Day on Thursday, May 30th, which is being held in conjunction with our user conference, Cloudflare Connect, in New York City. A live webcast will also be accessible from our investor relations website. Now, I'd like to turn the call over to Matt.
Phil Winslow: We'd also like to inform you that we will be participating in baird's software silicon slopes event on February 28, and the Morgan Stanley Technology Media and Telecom conference on March 6th.
Phil Winslow: We're wrapping up please save the date for our Investor Day on Thursday May 30, which is being held in conjunction with our user conference cloud connect in New York City.
Phil Winslow: A live webcast will also be accessible from our Investor Relations Web site.
Phil Winslow: Now I'd like to turn the call over to Matthew.
Matthew Prince: Thank you, Phil. We had an exceptionally strong quarter. We achieved revenue of $362.5 million, up 32% year-over-year. We added 198 new large customers, those that pay us more than $100,000 per year, and now we have 2,756 large customers, up 35% year-over-year. We saw particular strength in our largest customers, with a record number of net new customers spending more than both half a million dollars a year and one million dollars a year on an annualized basis. We signed our largest new logo with an expected total contract value of over $30 million and our largest customer renewal with a total contract value of $60 million. We blew away our previous record for new ACV bookings in a quarter.
Matthew: Thank you Phil we had an exceptionally strong quarter, we achieved revenue of $362 5 million up 32% year over year. We added 198, new large customers does the past more than $100000 per year and now have 2756 large customers up.
Matthew: 35% year over year.
Matthew: We saw particular strength in our largest customers with a record number of net new customers spending more than bulk half a million dollars a year and $1 million a year on an annualized basis, we signed our largest new logo with an expected total contract value over $30 million and our largest customer renewal.
Matthew: With a total contract value of $60 million, we blew away our previous record for new ACB booked in a quarter in Q4, new ACD booked grew nearly 40% year over year, making it not only our record in absolute ACB, but also the fastest percentage growth we've seen since 2012.
Matthew Prince: In Q4, new ACV booked grew nearly 40 percent year over year, making it not only our record for absolute ACV but also the fastest percentage growth we've seen since 2021. Our pipeline close rates, salesforce productivity, average deal size, and linearity all improved markedly quarter over quarter. I continue to be encouraged by the early results we're seeing from our new sales recruiting and training program. During the fourth quarter, the pipeline generated by the cohort under the new program was 2.1 times higher than the year-ago cohort, and account engagement increased by 3.5 times compared with a year ago. I'm excited by our maturing sales execution and believe it will pay dividends in 2024 as these sales professionals fully rank. Our dollar-based net retention kicked down 1 percent quarter-over-quarter to 115 percent.
Matthew: One.
Our pipeline close rates Salesforce productivity average deal size and linearity all improved markedly quarter over quarter I continue to be encouraged by the early results, we're seeing from our new sales recruiting and training programs during the fourth quarter the pipeline generated by the cohort under the new program.
Matthew: Was two one times higher than the year ago cohort.
Matthew: And account engagement increased by three five times compared with a year ago.
Matthew: Excited by our maturing sales execution and believe it will pay dividends in 2024 as these sales professionals fully ramped.
Our dollar based net retention ticked down 1% quarter over quarter to 115%. Our gross margin was 78, 9% again above our long term target of $75 to 77% and up from 78, 7% last quarter, we delivered an operating profit of $39 eight.
Matthew Prince: Our gross margin was 78.9 percent, again, above our long-term target of 75 to 77 percent and up from 78.7 percent last week. We delivered an operating profit of $39.8 million, representing an operating margin of 11%. We also meaningfully outperformed on free cash flow, generating $50.7 million during the quarter and approximately $120 million in free cash flow for the year. I'm proud of our team for their continued excellence.
Matthew: Representing an operating margin of 11%, we also meaningfully outperformed on free cash flow generating $57 million during the quarter and approximately $120 million in free cash flow for the year I am proud of our team for their continued execution the machine that unrealized cloud flare is fine.
Matthew Prince: The machine that underlies Cloudflare is firing efficiently on all cylinders, and we've been able to execute even as the macro environment remains choppy. The key to that execution has been improvement in our go-to-market efforts. Fifteen months ago, we brought on Mark Boroditsky to effectively execute a turnaround for Cloudflare's go-to-market. At the time, we had enterprise customers, but we hadn't operationalized repeatedly and consistently landing. We were also suffering from a COVID hangover and, like much of the industry, were slack on performance management. Mark changed all that.
Matthew: During efficiently on all cylinders, and we've been able to execute even as the macro environment remains choppy.
Matthew: Key to that execution has been improvement in our go to market efforts 15 months ago, we brought on Mark <unk> to execute effectively a turnaround of <unk> go to market team.
Matthew: At the time, we had enterprise customers, but we hadn't operationalized repeatedly and consistently landing them we will.
Matthew: We're also suffering from a COVID-19 hangover and like much of the industry had been flat on performance management.
Matthew: <unk> changed all that he has brought in the process and discipline, we needed to be world class in sale. The same way, we already were in product and engineering it's.
Matthew Prince: He's brought in the process and discipline we needed to be world-class in sales, the same way we already were in product and engineering. It's hard to be the turnaround guy, and we owe Mark a huge debt of gratitude for playing that role. But there's someone we always whispered about as our ideal go-to-market leader, if we could ever have him as a full-time member of our team. Mark Anderson.
Matthew: It's hard to beat the turnaround Guy and we own Mark a huge debt of gratitude for playing that role.
Matthew: But there is someone we always whispered about as our ideal go to market leader, if we could ever have him as a full time member of our team Mark Anderson. He built Palo Alto networks World class sales organization into the machine. It is today, yes, it's an incredible domain expertise and contacts in our industry. He is one of the great.
Matthew Prince: He built Palo Alto Network's world-class sales organization into the machine it is today. He has incredible domain expertise and contacts in our industry. He's one of the great B2B sales software leaders. And as we were getting ready to go public, we couldn't quite convince him to run our go-to-market organization. But we did the next best thing, inviting him to join our board.
Matthew: <unk> sales software leaders and as we were getting ready to go public we couldnt quite convinced them to run our go to market Org, but we did the next best thing inviting him to join our board.
Matthew Prince: Over the last four years, we've gotten to know each other on Cloudflare. From there, he's provided invaluable counsel to me, Michelle, and our go-to-market leaders. And so, after Alterix, the company he'd been running as CEO, agreed to go private, he reached out and asked whether we'd be interested in not just having him as a coach but also as a player on the field, rolling up his sleeves and getting back to what he's best at, running a world-class go-to-market organization, selling great products, and delivering incredible value and support to customers. Given the deep I wanted to invite Mark Anderson to the call to say a few words. Mark?
Matthew: Over the last four years, we've gotten to know each other on cloud Flex board from there. She has provided invaluable counsel to me Michele and our go to market leaders and so after Alterra. The company had been running at CEO agreed to go private.
Matthew: First out and asked whether we'd be interested in not just having him as a coach but also a player on the field rolling up his sleeves and getting back to what he's got that running a world class go to market organization, selling great products and delivering incredible value and support to customers given the deep relationship and trust, we developed and is.
Matthew: <unk> expertise and leadership in our field. It was as close to a no brainer as I can remember in a long time I wanted to invite Mark Anderson to the call to say a few words Marc thank.
Mark Anderson: Thank you, Matthew. I've had the privilege of working closely with the great leadership team here at Cloudflare in my role as a member of the Board of Directors for the last four and a half years, and I've been amazed, not just at what Cloudflare has accomplished to date, but more importantly, how the market is increasingly moving to where Cloudflare is already uniquely positioned. The time to capitalize on these major technological shifts is now. When I start to think about where I could make the most impact during the next stage of my career,
Mark Anderson: Thank you Matthew.
Mark Anderson: The privilege to work closely with the great leadership team here at clubs layer in my role as a member of the board of directors for the last four and a half years and I've been amazed well, let's just what cloud flair has accomplished to date, but more importantly, how the market is increasingly moving towards cloud player is already uniquely positioned.
Mark Anderson: Time to capitalize on these major technology shifts is now.
Mark Anderson: When I start to think about where I could make the most impact during the next stage of my career.
Matthew Prince: I reached out to Matthew and Michelle to see if I could help elevate Cloudflare's go-to-market organization to the next level. Operationalizing productivity at scale at Cloudflare will involve, one, augmenting foundational systems and tools that are already in place with a framework of execution that applies discipline and rigor to all that we do for customers. And two, bringing on more stage-appropriate talent to blend with our amazing sales team to best capture the massive market opportunity ahead of us. We all agree that my skill set and experience building and enabling world-class go-to-market organizations matched perfectly with Cloudflare to further accelerate its next stage of growth at scale. And I'm extremely excited to work together with Matthew, Michelle, and all of my fellow Cloudflarens to make Cloudflare one of the most iconic technology companies in the history of the industry. Thanks, Mark. I want to again thank Mark Boroditsky for getting us to this place. We couldn't have done it without him.
Mark Anderson: I reached out to Matthew Michelle to see if I can help elevate cloud players go to market organization to the next level.
Mark Anderson: Operationalize and productivity at scale in cloud player will involve one augmenting foundational systems and tools that are already in place with our framework of execution that apply discipline and rigor to all that we do for customers and to bringing on more stage appropriate talent to blend.
Mark Anderson: Our amazing sales team the best capture the massive market opportunity ahead of us.
Mark Anderson: We all agreed that my skill set and experience building and enable world class go to market organization.
Mark Anderson: <unk> perfectly with cloud flair to further accelerate its next stage of growth at scale.
Mark Anderson: And I'm extremely excited to work together with Matthew Michele and all of my fellow cloud Clariant to make cloud for one of the most iconic technology companies in the history of the industry.
Thanks Bart.
Speaker Change: I wanted to again, thank mark <unk> for getting us to this place we couldnt have done it without again he will continue to be an adviser to cloud player for the next several months to make sure. Our Mark Anderson is set up for success. He will always be part of the cloud team and I'm excited to hear what challenges. He takes on next I also wanted to take this time to reaffirm that.
Matthew Prince: He will continue to be an advisor to Cloudflare for the next several months to make sure Mark Anderson is set up for success. He will always be part of the Cloudflare team, and I'm excited to hear what challenges he takes on. I also wanted to take this time to reaffirm that Michelle and I aren't going anywhere or changing our roles in any way.
Speaker Change: Michel and I arent going anywhere or changing our roles in any way I wake up every morning more excited about the opportunities we have to fulfill our mission of helping build a better internet.
Matthew Prince: I wake up every morning more excited about the opportunities we have to fulfill our mission of helping build a better Internet. If you study iconic technology companies, they are often mission-driven, founder-led, but include a dynamic and evolving leadership team surrounding the founders who bring a wealth of experience to each stage of the company's journey. That a leader like Mark Anderson can get to know us over the last four years from his seat on our board and then choose to join our team, standing side by side with the other senior team we have assembled, gives me confidence that we're on a path to being one of the iconic technology companies ourselves. We're not there yet, so I'm not satisfied, and I remain fully committed to that journey.
Speaker Change: <unk> studied the iconic technology companies Theyre, often mission driven founder led but include a dynamic and evolving leadership team surrounding the founders who bring a wealth of experience for each stage of the company's journey.
Speaker Change: That a leader like Mark Anderson can get to know us over the last four years from his seat on our board and then choose to join our team standing side to side with the other senior team. We have assembled give me confidence that we're on a path to being one of the iconic technology companies ourselves, we're not there yet so I'm not satisfied and I.
Speaker Change: Remain fully committed to that journey with.
Matthew Prince: With that, let me walk you through some of the customer wins we had in the quarter. We were awarded a three-year contract with a ceiling value of $33 million for the U.S. Department of Commerce, which will be deploying services across our SASE application performance and security solutions. We believe deals like this validate the criticality of converging application performance, security, network, and zero-trust services on a unified platform and how Cloudflare can deliver a comprehensive, commercially off-the-shelf platform from a single vendor as compared with numerous point product competitors. A leading technology company expanded its relationship with Cloudflare, signing a three-year, $6.6 million contract for Cloudflare's Zero Trust Given the company's highly complex and secure environment, implementing a first-generation zero-trust vendor proved to be a challenge.
Speaker Change: With that let me walk through some of the customer wins, we had in the quarter. We were awarded a three year contract with a ceiling value of $33 million for the U S Department of Commerce, which will be deploying services across our SaaS application performance and security solutions. We believe deals like this validate the criticality of converging apt.
Speaker Change: Location performance Security network, and Zero Trust services on a unified platform and how cloud flare can deliver a comprehensive commercially off the shelf platform from a single vendor as compared with numerous point product competitors, a leading technology company expanded their relationship with the cloud players signing a three year.
Speaker Change: $6 $6 million contract for cloud players Zero Trust suite to protect access for 10000 employees and contractors given the company is highly complex and secure environment implementing a first generation zero trust vendor proved to be a challenge. This company had done a zero Trust RF.
Matthew Prince: This company had done a Zero Trust RFP a year prior, but when they reviewed Cloudflare's Zero Trust solution again, they were impressed by our significant progress and innovation. Not only was our rate of innovation a key differentiator, but with Cloudflare, they're able to simplify and consolidate zero trust, application performance, and security, all on a single platform. A Fortune 500 hospitality company expanded their relationship with Cloudflare, signing a five-year, $4.3 million contract for 20,000 zero-trust sites. This company approached us 15 months ago with a basic zero-trust use.
Speaker Change: A year prior but when they reviewed cloud players zero Trust solution again, they were impressed by our significant progress in innovation.
Speaker Change: Not only was our rate of innovation, a key differentiator, but with cloud flare, they're able to simplify and consolidate zero Trust application performance and security all on a single platform.
Speaker Change: A fortune 500 hospitality company expanded their relationship with cloud player signing a five year $4 $3 million contract for 2000 Zero Trust seats.
Speaker Change: This company approach at 15 months ago with a basic zero Trust use case, the scope quickly expanded from one to several as this company start to re architect their entire zero Trust approach the lack of platform integration in the absence of strategic vision from their incumbent vendors, including our first generation Zero Trust.
Matthew Prince: The scope quickly expanded from one to several as this company sought to re-architect their entire zero-trust approach. The lack of platform integration and the absence of strategic vision from their incumbent vendors, including a first-generation zero-trust competitor, led them to Cloudflare for our easy-to-use, comprehensive platform with a cloud-first architecture. Although performance improvement was not an important consideration early on, after a six-month paid pilot, the team was blown away by how much improvement they saw with Cloudflare, stating, "holy bleep, I've never seen JIRA go this fast." A sophisticated tech company with one of the most technical and daring engineering teams signed a two-year, $646,000 contract.
<unk> led them to cloud flair for our easy to use comprehensive platform with a cloud first architecture.
Speaker Change: Although performance improvement with not an important consideration early on after a six month paid pilot the team was blown away by how much improvement they thought with clouds are steadying, Holy Bleep I've never seen <unk> ago. This fast.
Speaker Change: Our sophisticated tech company with one of the most technical and daring engineering team signed a two year $646000 contract. The company had recently experienced a breach driving them to increase their security posture and adopt a zero trust approach. This company considered nearly every relevant vendor in.
Speaker Change: A market over 13 in total and cloud player in one other competitor was selected for a proof of concept and 30 day pilot. After just 14 days cloud flow was fully configured and completed all success criteria, whereas our competitor was unable to get off the ground the ease of deployment with key for this <unk>.
Matthew Prince: The company had recently experienced a breach, driving them to increase their security posture and adopt a zero-trust approach. This company considered nearly every relevant vendor in the market, over 13 in total, and Cloudflare and one other competitor were selected for a proof of concept and 30-day pilot. After just 14 days, Cloudflare was fully configured and met all success criteria, whereas our competitor was unable to get off the ground. Ease of deployment was key for this company, which needed to design a solution in a very complex environment. With Cloudflare, everything worked out of the box.
Speaker Change: Company, who needed to design a solution and a very complex environment with cloud flare everything worked out of the box or.
Speaker Change: A fortune 500 technology company signed a two year $6 million contract for advanced application security. The company was experiencing an increased ddos attacks.
Speaker Change: Large hyperscale public cloud was unable to mitigate these unmedicated attacks created significant latency, resulting in a loss of traffic and potential revenue debut cloud <unk> is the leading expert in Ddos mitigation based on our HCV to rapid reset publication and the compatibility of our layer seven security bundle.
Matthew Prince: A Fortune 500 technology company signed a two-year, $6 million contract for advanced application security. The company was experiencing increased DDoS attacks that a large, hyperscale public cloud was unable to mitigate. These unmitigated attacks created significant latency, resulting in a loss of traffic and potential revenue.
Speaker Change: With their self hosted technology and public cloud vendors may cloud learn easy choice. It's just the beginning with this customer.
Speaker Change: A large U S commercial airline expanded their relationship with cloud player signing a two year $857000 contract to procure zero trust seats, a great land and expand example, this is the third deal we've done with this customer in 2023 as they undergo a digital transformation project. They are using our full zero trust.
Matthew Prince: They view Cloudflare as the leading expert in DDoS mitigation based on our HTTP2 rapid reset publication, and the compatibility of our Layer 7 security bundle with their self-hosted technology and public cloud vendors made Cloudflare an easy choice. But it's just the beginning with this customer. A large U.S. commercial airline expanded their relationship with Cloudflare, signing a two-year, $857,000 contract to procure zero-trust seats. A great land and expand example, this is the third deal we've done with this customer in 2023 as they undergo a digital transformation project. They're using our full zero-trust suite along with application services. They love our unified network, single pane of glass, and speed of implementation. A fourth deal with them is already on the horizon. A local government authority in the U.K. signed a 5-year, $2.1 million contract for 4,700 zero-trust devices. The government authority was pursuing a very large digital transformation project to modernize and improve its security posture with a complete network refresh and the adoption of zero trust. Following a three-year engagement process, the authority was evaluating two competing zero-trust vendors.
Speaker Change: We along with application services, they love our unified network single pane of glass and speed of implementation a fourth deal with them is already on the horizon.
Speaker Change: Our local government authority and the U K signed a five year $2 1 million contract for 4700 Zero Trust seats. The government authority was pursuing a very large digital transformation project to modernize and improve security posture with a complete network refresh and the adoption of zero Trust.
Speaker Change: Following a three year engagement process authority with evaluating to competing <unk> vendors cloud flecked entered the process in the late stages closer one was selected as the core component of their modernization program due to our ease of use seamless integrations and expansive platform with a single control plane and their words quote.
Speaker Change: Collateralized EV it just works.
Speaker Change: These days no earnings conference would be complete without an update on AI as of the end of 2023, we deployed Gpus and 120 cities globally meaningfully ahead of our target of 100 cities by the end of 2024, we plan to have influence tuned Gpus deployed in nearly every city that makes up cloud for its global network.
Matthew Prince: Cloudflare entered the process in the late stages, and Cloudflare 1 was selected as the core component of their modernization program due to our ease of use, seamless integrations, and expansive platform with a single control plane. In their words, quote: "Cloudflare is easy; it just works."
Speaker Change: And within milliseconds of nearly every device connected to the internet worldwide.
Speaker Change: Brett and potential impact of the use cases, we are seeing with workers AI are extraordinary and we're super excited about the opportunity to establish workers AI surplus model built on cloud those trusted global network as the best infrastructure for running AI inference tasks.
Matthew Prince: These days, no earnings conference would be complete without an update on AI. As of the end of 2023, we have deployed GPUs in 120 cities globally, meaningfully ahead of our target of 100. By the end of 2024, we plan to have inference-tuned GPUs deployed in nearly every city that makes up Cloudflare's global network and within milliseconds of nearly every device connected to the internet worldwide. The breadth and potential impact of the use cases we are seeing with workers AI are extraordinary.
Speaker Change: From our launch in September to the month of December the average number of daily workers AI request increased nine acts. Furthermore, one third of the thousands of workers AI accounts are new to the workers' platform, suggesting that workers AI is not just significant opportunity in and of itself, but also a potential accelerant to.
Adoption of the Workers' overall platform.
Speaker Change: <unk>, However is only part of the AI equation.
Speaker Change: We're also extremely encouraged by interest in vector is our vector database, which makes it easy fast and affordable to index and store vectors to support use cases that require asset not just the running model, but customized data too as well as AI gateway, which gives organizations the tools the cash rate limit.
Matthew Prince: And we're super excited about the opportunity to establish workers' AI serverless model built on Cloudflare's trusted global network as the best infrastructure for running AI inference tasks. From our launch in September to the month of December, the average number of daily workers' AI requests increased 9x. Furthermore, one-third of the thousands of workers' AI accounts are new to the platform, suggesting that workers' AI is not just a significant opportunity in and of itself but also a potential accelerant to adoption of the platform overall. Inference, however, is only part of the AI equation.
Speaker Change: And observe their AI deployments, regardless of where they are running.
Speaker Change: AI on Workers' platform is just getting started and there are exciting things on the roadmap that we look forward to sharing with you in the not so distant future.
Speaker Change: As I reflect back on the last quarter I'm proud of our team. It feels like we're once again firing on all cylinders, but a quarter is only one data point as we talked about throughout the last year. The macro environment remains challenging it buyers are still skittish. The world is not getting any less complicated and as a company we still.
Matthew Prince: We are also extremely encouraged by the interest in Vectorize, our vector database, which makes it easy, fast, and affordable to index and store vectors to support use cases that require access not just to running models but customized data too, as well as AI Gateway, which gives organizations the tools to cache, rate limit, and observe their AI deployments regardless of where they're running. AI on workers is just getting started, and there are exciting things on the roadmap that we look forward to sharing with you in the not-so-distant future. As I reflect back on the last quarter, I'm proud of our team. It feels like we're once again firing on all cylinders. But a quarter is only one day to.
Speaker Change: I have a ton to prove those were the dominant themes of 2023 and I think it's likely they will remain the themes of 2024, so while I am encouraged by our results. We continue to remain prudent and focused on disciplined execution building and improving our team delivering exceptional value to our customers and solving some of the half.
Speaker Change: Artist engineering challenges, the internet phases with that I'll hand, it over to Thomas to walk through our financials Thomas take it away.
Thomas: Thank you Matthew and thank you to everyone for joining us I want to take a moment to welcome Eric and listen to their clients their team to Mark.
Matthew Prince: As we talked about throughout the last year, the macro environment remains challenging, and IT buyers are still skittish. The world is not getting any less complicated, and as a company, we still have a ton to prove. Those were the dominant themes of 2023, and I think it's likely they'll remain the themes of 2024. So, while I'm encouraged by our results, we continue to remain prudent and focused on disciplined execution. Building and improving our team, delivering exceptional value to our customers, and solving some of the hardest engineering challenges the Internet has ever seen. With that, I'll hand it over to Thomas to walk through our financials. Thomas, take it away.
Thomas: Credibly excited to have you on board to further accelerate our next phase of growth at cloud Flair.
Turning to our financial results.
Thomas: I am pleased to share that the positive momentum from our focus on refining our go to market strategies and operations continue during the fourth quarter.
Thomas: As Matthew mentioned earlier pipeline growth rates sales productivity average deal size and linearity all improved compared with last quarter.
Thomas: Strength in our business this quarter was driven by robust momentum with large customers significant progress in the public sector and growth in <unk>, including the largest new customer win in the company's history with a contract ceiling value of $33 million.
Thomas J. Seifert: Thank you, Matthew, and thank you to everyone for joining us. I want to take a moment to welcome Mark Anderson to the Cloudflare team, too. Mark, we're incredibly excited to have you on board to further accelerate our next phase of growth at Cloudflare. Now, turning to our financial results. I'm pleased to share that the positive momentum from our focus on refining our go-to-market strategies and operations continued during the fourth quarter. As Matthew mentioned earlier, pipeline close rates, sales productivity, average deal size, and linearity all improved compared with last quarter. Strengths in our business this quarter were driven by robust momentum with large customers, significant progress in the public sector, and growth in Cloudflare 1, including the largest new customer win in the company's history with a contract ceiling value of $33 million. Importantly, we also continue to maintain our strong commitment to being fiscally responsible and act as good stewards of investors' capital.
Thomas: Importantly, we also continue to maintain our strong commitment to being fiscally responsible and act as good stewards of investors capital.
Thomas: Operating profit increased nearly two and half times year over year and be significantly outperformed on free cash flow generating a record $57 million during the fourth quarter.
Thomas: Turning to revenue.
Thomas: Total revenue for the fourth quarter increased 32% year over year to $362 5 million.
Thomas: From a geographic perspective, the U S represented 52% of revenue and increased 30% year over year.
Thomas: EMEA represented 28% of revenue and increased 38% year over year.
Thomas: APAC represented 13% of revenue and increased 25% year over year.
Thomas: Turning to our customer metrics in the fourth quarter, we had 189791 paying customers.
Thomas: Sending an additional roughly 27700 paying customers in 2023, and an increase of 17% year over year.
Thomas J. Seifert: Operating profit increased nearly two and a half times year over year and was significantly outperformed on free cash flow, generating a record $50.7 million during the fourth quarter. Turning to revenue, total revenue for the fourth quarter increased 32% year over year to $362.5 million. From a geographic perspective, the U.S. represented 52% of revenue and increased 30% year over year. EMEA represented 28% of revenue and increased 38% year over year.
Thomas: We were pleased to see revenue contribution from large customers during the quarter increased again to 66% of revenue up from 63% in the fourth quarter last year.
Thomas: For fiscal 2023 revenue from large customers represented 64% of total revenue compared to 61% in 2022% and 54% in 2021.
Thomas: As Matthew referenced earlier, we added a record number of net new customers spending more than $500000 and $1 million on an.
Thomas J. Seifert: APAC represented 13% of revenue and increased 25% year-over-year. Turning to our customer metrics, in the fourth quarter, we had 189,791 paying customers.
Thomas: Your life basis with cloud player.
Thomas: For the full year, we ended the year with 346 customers that spent over $500000 with us.
Thomas: Two 6% increase year over year, and we ended the year with 118 customers that spend over $1 million with us for 39% increase year over year.
Thomas J. Seifert: Representing an addition of roughly 27,700 paying customers in 2023 and an increase of 17% year over year. We were pleased to see revenue contribution from large customers during the quarter increase again to 66% of revenue, up from 63% in the fourth quarter last year. For fiscal 2023, revenue from large customers represented 64% of total revenue compared to 61% in 2022 and 54% in 2021. As Matthew referenced earlier, we added a record number of net new customers spending more than $500,000 and $1 million on an annualized basis with Cloudflare. For the full year, we ended the year with 346 customers that spent over $500,000 with us, a 56% increase year-over-year, and we ended the year with 118 customers that spent over a million dollars with us, a 39% increase year-over-year. We also exited 2023 with three customers spending at least $20 million on an annualized basis with Cloudflare, one of which signed the largest total contract value renewal agreement in Our dollar-based net retention rate was 115% during the fourth quarter, representing a decrease of 1 percentage point sequentially.
Thomas: We also exited 2023 with three customer spending at least $20 million.
Thomas: On annualized basis with cloud flare, one of which signed the largest total contract value renewal agreement in our company's history of $60 million in the fourth quarter.
Thomas: Our dollar based net retention rate was 115% during the fourth quarter, representing a decrease of one percentage point sequentially.
Thomas: As we mentioned last quarter, there can be some variability in this metric quarter to quarter, but we continue to believe the prior decelerating trend and DNR is stabilizing near these levels.
Thomas: Moving to gross margin.
Thomas: Fourth quarter gross margin was 78, 9%, representing an increase of 20 basis points sequentially and an increase of 150 basis points year over year.
Thomas: Gross margin was 78, 3% for fiscal 2023 remaining above our long term target range of 75% to 77%.
Thomas: Network Capex represented 8% of revenue in the fourth quarter as we continue to benefit from our focus on driving greater efficiency from our infrastructure and the uniqueness of our platform to onboard new workloads.
Thomas: We expect network capex to be 10% to 12% of revenue in fiscal 2024.
Thomas: With the evolution of the composition of our infrastructure, we undertook an assessment of the useful life of our servers and network equipment.
Thomas: <unk> 2024, we determined that continuous advancements in hardware technology and improvements in our data center designs have increase the efficiency in how we operate our equipment.
Thomas: Resulting in the estimated useful life of these assets extending from four to five years starting in fiscal 2024.
Thomas J. Seifert: As we mentioned last quarter, there can be some variability in this metric quarter to quarter, but we continue to believe the prior decelerating trend in DNR is stabilizing near these levels. Moving to cross-margin. Fourth quarter cross-margin was 78.9%, representing an increase of 20 basis points sequentially and an increase of 150 basis points year-over-year. Growth margin was 78.3% for fiscal 2023, remaining above our long-term target range of 75 to 77%. Network CapEx represented 8% of revenue in the fourth quarter, as we continue to benefit from our focus on driving greater efficiency from our infrastructure and the uniqueness of our platform to onboard new workloads. We expect network capex to be 10% to 12% of revenue in fiscal 2024. With the evolution of the composition of our infrastructure, we undertook an assessment of the useful lives of our servers and network equipment. In January 2024, we determined that continuous advancements in hardware technology and improvements in our data center designs have increased the efficiency of how we operate our equipment. Resulting in the estimated useful life of these assets extending from four to five years, starting in fiscal 2024.
Thomas: We estimate this change will reduce depreciation by approximately $20 million for fiscal 'twenty 'twenty four for assets in service.
Thomas: <unk> 31 of 2023.
Courted primarily in the cost of revenue.
Thomas: As we discussed previously we view our margin efficiency as one of <unk> key competitive advantages and we intend to leverage this opportunity as a strategic weapon to increasingly disrupt markets through continued innovation on our platform and differentiated product packaging.
Thomas: Turning to operating expenses fourth quarter operating expenses as a percentage of revenue decreased by 3% year over year to 68%.
Thomas: Our total number of employees increased 14% year over year, bringing our total headcount was 3682 at the end of the quarter.
Thomas: We will continue to pace hiring based on market conditions over the course of fiscal 2024 and remain committed to driving higher productivity and greater efficiency across our operations.
Thomas: Sales and marketing expenses were $145 2 million for the quarter.
Thomas: Sales and marketing as a percentage of revenue decreased to 40% from 41% in the same quarter last year.
Thomas: Research and development expenses were $59 5 million in the quarter R&D as a percentage of revenue decreased to 16 from 18% in the same quarter last year.
Thomas: General and administrative expenses were $41 5 million for the quarter.
Thomas: G&A as a percentage of revenue decreased to 11% from 12% in the same quarter last year.
Thomas: Operating income was $39 8 million compared to $16 8 million in the same period last year fourth quarter operating margin was 11% an increase of 490 basis points year over year.
Thomas: These results highlight our continued focus on becoming more efficient more productive given that operational excellence is the long term competitive advantage.
Thomas J. Seifert: We estimate this change will reduce depreciation by approximately $20 million for fiscal 2024 for assets in service as of December 31st, 2023, recorded primarily in the cost of revenue. As we discussed previously, we view our margin efficiency as one of Cloudflare's key competitive advantages. And we intend to leverage this opportunity as a strategic weapon to increasingly disrupt markets through continued innovation on our platform and differentiated product packages. Turning to operating expenses, Fourth quarter operating expenses as a percentage of revenue decreased by 3% year over year to 68%.
Thomas: Turning to net income in the balance sheet.
Thomas: It would come in the quarter were $53 5 million.
Thomas: Diluted net income per share of 15%.
Thomas: We ended the fourth quarter was $1 $7 billion in cash cash equivalents and available for sale securities.
Thomas: Free cash flow was $50 7 million in the fourth quarter or 14% of revenue compared to $33 7 million or 12% of revenue in the same period last year.
Thomas: Remaining performance obligations or IPO came in at $1 $245 million, representing an increase of 15% sequentially, a 37% year over year current <unk> was 7% to 3% of total our appeal moving.
Thomas J. Seifert: Our total number of employees increased 14% over a year, bringing our total headcount to 3,682 at the end of the quarter. We'll continue to pace hiring based on market conditions over the course of fiscal 2024 and remain committed to driving higher productivity and greater efficiency across all operations. Sales and marketing expenses were $145.2 million for the quarter.
Speaker Change: Moving to guidance for the first quarter and full year 2024.
Speaker Change: We are encouraged by the progress we delivered during the fourth quarter in terms of improving close rates and productivity metrics. However, mixed macroeconomic data points surface. A reminder, that we are operating in a business environment that also showing signs of improving exiting 2023 continues to be challenging to predict.
Speaker Change: <unk>.
Speaker Change: As a result, we remain prudent in our outlook for 2024, and we are fully committed to continuing to adapt our tactics and strategies in response to any positive or negative external variables just as we did in 2023.
Thomas J. Seifert: Sales and marketing as a percentage of revenue decreased to 40% from 41% in the same quarter last year. Research and development expenses were $59.5 million in the quarter. R&D as a percentage of revenue decreased to 16 from 18% in the same quarter last year. General and administrative expenses were $41.5 million for the quarter. GNA as a percentage of revenue decreased to 11 from 12% in the same quarter last year.
Speaker Change: Now turning to guidance.
Speaker Change: For the first quarter, we expect revenue in the range of $372 five.
Speaker Change: $373 5 million, representing an increase of 28% to 29% year over year.
Speaker Change: We expect operating income in the range of $34 million to $35 million.
Speaker Change: And we expect an effective tax rate of 11%.
Speaker Change: We expect diluted net income per share of 13, assuming approximately 356 million shares outstanding.
Thomas J. Seifert: Operating income was $39.8 million compared to $16.8 million in the same period last year. Fourth quarter operating margin was 11%, an increase of 490 basis points year over year. These results highlight our continued focus on becoming more efficient and more productive, given that operational excellence is a long-term competitive advantage. Turning to net income on the balance sheet, our income in the quarter was $53.5 million, or a dilutive net income per share of 15 cents.
Speaker Change: For the full year 2024, we expect revenue in the range of $1 48 billion to $1 65, 2 billion, representing an increase of 27% year over year.
Speaker Change: We anticipate the weighting of revenue in the first half versus second half of 2024 to be similar to 2023.
Speaker Change: We expect operating income for the full year in the range of $154 million to $158 million.
Speaker Change: We expect an effective tax rate of 11% for 2024, and we expect diluted net income per share over that period to be $58 million to $50 million.
Thomas J. Seifert: We ended the fourth quarter with $1.7 billion in cash, cash equivalents, and available for sale security, free cash flow, or $50.7 million in the fourth quarter, or 14% of revenue compared to $33.7 million or 12% of revenue in the same period last year. Remaining performance obligations, or RPO, came in at $1,245,000,000, representing an increase of 15% sequentially or 37% year-over-year. Current RPO was 73% of total RPO.
Speaker Change: Assuming approximately 358 million shares outstanding.
Speaker Change: After having achieved significant free cash flow of approximately $120 million in 2023.
Speaker Change: Free cash flow to be relatively consistent with operating profit for the full year 2024, with the first half lower in the second half higher compared with operating profit.
Speaker Change: In closing our team remains committed to driving operational excellence, ensuring long term growth and delivering significant shareholder value.
Speaker Change: Like to thank our employees for their dedication to our mission as well as our customers for trusting us to help them solve some of the hardest problems that they face when modernizing transforming and securing their businesses and with that I'd like to open it up for questions. Operator, Please poll for questions.
Thomas J. Seifert: Moving to guidance for the first quarter and full year 2024, we're encouraged by the progress we delivered during the fourth quarter in terms of improving close rates and productivity metrics. However, mixed macroeconomic data points serve as a reminder that we are operating in a business environment that, while showing signs of improving, exiting 2023 continues to be challenging to predict. As a result, we remain prudent in our outlook for 2024, and we are fully committed to continuing to adapt our tactics and strategies in response to any positive or negative external variables, just as we did in 2023. Now turning to guidance. For the first quarter, we expect revenue in the range of $372.5 to $373.5 million, representing an increase of 28% to 29% year-over-year. We expect operating income in the range of $34 to $35 million, and we expect an effective tax rate of 11%. We expect a diluted net income per share of $0.13, assuming approximately 356 million shares outstanding.
Operator: Thank you.
Operator: This time I would like to remind everyone in order to ask a question. Please press star one.
Speaker Change: These limit yourself to one question and one follow up.
Speaker Change: Your first question comes from Brent Thill with Jefferies. Please go ahead.
Brent Thill: Matthew It seems like there is a confluence of factors that led to your outperformance.
Brent Thill: I'm wondering if you could just.
Speaker Change: On pack.
A little bit deeper in terms of some of the common themes I know you mentioned enterprise strength.
Brent Thill: What else are you seeing that's leading to this magnitude of outperformance.
Matthew: Yes, Thanks Brent.
Matthew: The first thing really is what we talked a lot about on the call which is.
Matthew: Real focus.
Matthew: Align go to market excellence and.
Matthew: I think Mark Board did ski who really worked hand in hand with Mark Anderson on our board.
Matthew: Has done a great job over the last 15 months.
Matthew: Really focusing on how we make sure that we're as great in go to market as we have been in product and engineering and I think that's the biggest thing to point out I think the second thing is that we've really seen strength in our zero trust in SaaS fee products. Some of the biggest wins that we saw in the.
Thomas J. Seifert: For the full year 2024, we expect revenue in the range of $1.48 billion to $1.652 billion, representing an increase of 27% year over year. We anticipate the weighting of revenue in the first half versus the second half of 2024 to be similar to 2023. We expect operating income for the full year in the range of $154 to $158 million. We expect an effective tax rate of 11 percent for 2024, and we expect diluted net income per share over that period to be 58 to 59 cents, assuming approximately 358 million shares outstanding.
Matthew: Quarter, where big Zero Trust deals and I think that those products have caught up significantly and youll see.
Matthew: In the analyst day industry analyst reports and others that were very quickly becoming one of the real leaders in that space and I think over time, we will surpass many of the first generation zero trust vendors and that really opens up another leg on the stool and then and then lastly.
Matthew: I just continue to be really.
Matthew: Astonished by the rate at which our developer platform is growing AI is not yet contributing materially to revenue, but it has contributed materially to developer excitement over the platform and we're seeing more and more large deals more and more interesting applications coming in.
Operator: After having achieved significant free cash flow of approximately $120 million in 2023, we expect free cash flow to be relatively consistent with operating profit for the full year 2024, with the first half lower and the second half higher compared with operating profit. In closing, our team remains committed to driving operational excellence, ensuring long-term growth, and delivering significant shareholder value. I'd like to thank our employees for their dedication to our mission, as well as our customers for trusting us to help them solve some of the hardest problems that they face when modernizing, transforming, and securing their business. And with that, I'd like to open it up to questions. Operator, please pull for questions. Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star 1.
Matthew: Using the workers' platform and and that that is as gone gone well as well so I think operational excellence and go to market.
Matthew: Think that really strength around our zero Trust products and then just continued outperformance on our developer platform and those things all came together in Q4 of 2023.
Speaker Change: Thanks Nancy.
Speaker Change: Your next question comes from Matt Hedberg with RBC capital markets. Please.
Matthew George Hedberg: Please go ahead.
Matthew George Hedberg: Great. Thanks for taking my question team.
Matthew George Hedberg: Great hire and Mark Anderson I realize it's fresh still fresh in Matthew you talked a little bit on the call about what he's going to be focused on but I guess, maybe just I wanted to double click on that.
Operator: Please limit yourself to one question and one follow-up. Your first question comes from Brent Thill with Jeffries. Please go ahead.
Speaker Change: Or are there some specific sales processes or partner motion that you think mark's going to be focused on to really drive that next level of enterprise growth and maybe could you talk about overall rep productivity, which I know has been a big focus for you all over the last year.
Matthew Prince: Matthew, it seems like there's a confluence of factors that led to your outperformance. I was wondering if you could just... Unpack a little bit deeper in terms of some of the common themes. I know you mentioned enterprise strength, but what else are you seeing that's leading to this magnitude of outperformance? Yeah, thanks, Brent. You know, I think the first thing really is what we talked a lot about on the call, which is just real focus on go-to-market excellence. And I think Mark Boroditsky, who really worked hand-in-hand with Mark Anderson, you know, on our board, has done a great job over the last 15 months of really focusing on how we make sure that we're as great in go-to-market as we have been in product And I think that's the biggest thing to point out.
Speaker Change: Sure Matt I appreciate it so first of all.
Speaker Change: I think working with Mark Anderson.
Speaker Change: <unk> has been a big piece behind the scenes of the improvements that we've seen in the go to market.
Speaker Change: Performance that we've had had so far and so it is as a board member his hands have been.
Speaker Change: Involved in a lot of the strategic decisions. We've made a lot of the focus that we've made and so I think this is less of a radical change in terms of the strategy and it's more of a continuation of what we have done that said I think that the thing, which mark brings which is unique.
Matthew Prince: I think the second thing is that we've really seen strength in our zero-trust and SASE products. Some of the biggest wins that we saw in the quarter were big zero-trust deals, and I think that those products have caught up significantly. And you'll see in, you know, industry analyst reports and others that we're very quickly becoming one of the real leaders in that space. And I think over time, we will surpass many of the first-generation zero-trust vendors, and that really opens up another leg on the stool. And then lastly, I just continue to be really astonished by the rate at which our developer platform is growing. AI is not yet contributing materially to revenue, but it has contributed materially to developer excitement over the platform.
Speaker Change: And as we thought of who would be our ideal sales leader.
Speaker Change: We really started thinking about that before we went public.
Speaker Change: Mark was top of the list because of the domain expertise because of the relationships that he has because of the trust that he has built in the industry and because of the the other sales professionals.
Speaker Change: That really have worked with him and want to follow him and have their own again expertise and and.
Speaker Change: And relationships in the industry as well and so I think that Mark Anderson will continue a lot of what <unk> has done continue to professionalize. Our organization continue to move up market continue to really focus on rep productivity focus on making sure that we have all of the right training.
Matthew Prince: And we're seeing more and more large deals, more and more interesting applications coming in using the workers platform, and that has gone well as well. So I think operational excellence and go-to-market, I think that really strength around our zero-trust products, and then just continued outperformance on our developer platform, and those things all came together in Q4 of 2023. Thanks, Matthew. Your next question comes from Matt Hedberg with RBC Capital Markets. Please go ahead.
Speaker Change: All of the right ramping resources that reps need focus on making sure that our sales processes are as efficient as possible and I think that will be a big piece of what he is delivering I think zoom out from that the other thing which is a big initiative for US is just looking at our overall platform.
Operator: Gray, thanks for taking my question, team. You know, great hiring Mark Anderson. I realize it's fresh, still fresh. And Matthew talked a little bit on the call about what he's going to be focused on. But I guess maybe just, I wanted to double-click on that.
Speaker Change: Saying, how can we make it actually much easier not only for our internally team to sell but also for partners to sell as well right. Now we have a ton of different products and I think bringing that together and finding ways to make that those products.
Matthew Prince: You know, are there some specific sales processes or partner motions that you think Mark's going to be focused on to really drive that next level of enterprise growth? And maybe could you talk about overall rep productivity, which I know has been a big focus for you all over the last year? Sure, Matt, I appreciate it.
Speaker Change: Just individual products, but as a platform and an overall platform, that's where we tend to win is when people buy that overall platform and Thats, where there really isn't a ton of competition when when people are comparing the total platform the clouds our offers.
Speaker Change: Does anyone else in our space, we are able to deliver a much more robust network security performance reliability package than any other vendor.
Matthew Prince: So, first of all, I think working with Mark Anderson has been a big piece behind the scenes of the improvements that we've seen in the go-to-market performance that we've had so far. And so his, as a board member, his hands have been involved in a lot of the strategic decisions we've made, a lot of the focus that we've made. And so I think this is less of a radical change in terms of the strategy, and it's more of a continuation of what we have done. That said, I think that the thing which Mark brings, which is unique, and as we thought of, you know, who would be our ideal sales leader, and we really started thinking about that before we went public, you know, Mark was top of the list because of the domain expertise, because of the relationships that he has, because of the trust that he's built in the industry, and because of the other sales professionals that really have worked with him and want to follow him and have their own, again, expertise and relationships in the industry as well.
Speaker Change: In that space and I think March helps us deliver that and continue again on some of the great work that <unk> had started and really set them up for success.
Speaker Change: Alright, great color, if I could ask one follow up to Thomas.
Your guide for 'twenty for revenue I think it calls for about 600 basis points of deceleration. Obviously, you talked about a lot of positive sequentially, but also some of the caution that you still have about the macro I was just wondering if you could unpack a little bit more some of the assumptions. There I think you'd noted maybe NR might be nearing a bottom, but just whats built into that in terms of like logo adds maybe an improvement in our or.
Speaker Change: But just sort of unpack that a little bit more thank you.
Speaker Change: Yes.
Speaker Change: Obviously, we entered we had are very good.
Speaker Change: Quarter with a lot of good data points pointing in the right direction. The improvement that Matthew was talking about on the go to market side not only in terms of productivity, but pipeline improve their devices improved linearity went better. We also saw their best quarter over quarter improvement from in <unk>.
Matthew Prince: And so I think that Mark Anderson will continue a lot of what Mark Boroditsky has done, continue to professionalize our organization, continue to move up market, continue to really focus on rep productivity, focus on making sure that we have all of the right training, all of the right ramping resources that reps need, and focus on making sure that our sales process is as efficient as possible. And I think that will be a big piece of what he is delivering.
Speaker Change: This.
Speaker Change: This is all pointing in the right direction, but we still have to cope with the fact that one data point alone is hard to change your prediction and career trajectory. So we are still cautious about everything else that is going on.
Speaker Change: You mentioned in his part the big themes that we saw last year from a macro economic perspective skittishness of buyers and budget releases is still continuing and I think this informed our view for for the for the year and obviously, we'll adjust our strategy and our approach to the year as we are.
Matthew Prince: I think if you zoom out from that, the other thing which is a big initiative for us is just looking at our overall platform and saying, how can we make it much easier not only for our internal team to sell but also for partners to sell as well? Right now, we have a ton of different products, and I think bringing that together and finding ways to really make those products, not just individual products, but as a platform and an overall platform. That's where we tend to win is when people buy that overall platform. And that's where there really isn't a ton of competition.
Speaker Change: And as we collect more data points.
But it served us well over the last four years as a public company.
Speaker Change: To look really hard at the data, we have and draw the right from solutions from it.
Speaker Change: That 24 won't get us to the same outcome.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Andrew Nowinski with Wells Fargo. Your line is open.
Andrew James Nowinski: Thank you so much for taking the question and congrats on a great quarter.
Andrew James Nowinski: I wanted to start with a question on <unk>.
SaaS. So you rattled off of about a dozen large zero trust deals in your prepared remarks, Youre clearly seeing some very strong demand from large customers, which I think coincides with a lot of the feedback we've been hearing about how cloud players having more success penetrating that mid and large enterprise space with with your Zero Trust solutions. So maybe if you could comment on your sort of secret to success.
Matthew Prince: When people are comparing the total platform that CloudFlare offers versus anyone else in the space, we are able to deliver a much more robust network security performance reliability package than any other vendor that's in that space. And I think Mark helps us deliver that and continue again on some of the great work that Mark Boroditsky had started and really sets him up for success. Great, great caller.
Andrew James Nowinski: And getting these large deals closed because it seems like it's there's more to it than just the maturation of your platform.
Speaker Change: Yes, Andy.
Thomas J. Seifert: If I could ask one follow-up question to Thomas, your guide for 24 revenue, I think it calls for about 600 basis points of deceleration. Obviously, you talked about a lot of positives sequentially, but also some of the caution that you still have about the macro. Just wondering if you could unpack a little bit more some of the assumptions there. I think you noted maybe NRR might be nearing a bottom, but just, you know, what's built into that in terms of like logo ads, maybe an improvement in NRR, but just sort of unpack that a little bit more. Thanks.
Andy: I think.
Andy: I think that first of all the.
Andy: We didn't start out as a company that had a zero trust platform and so.
Andy: Thats something that was very natural add on to our network. We think its very complimentary with the other other services that we offer and and I think that as we studied the industry and studied the space was clear that this set of solutions ended up squarely in our Bailey.
Andy: <unk> of what it was that we were that we were delivering and.
Andy: And so that.
Andy: I think that that that.
Andy: Within a very natural place, but but we are new to this space.
Thomas J. Seifert: Yeah, you know, obviously, we had a very good fourth quarter with a lot of good data points pointing in the right direction. The improvement that Matthew was talking about on the go-to-market side, not only in terms of productivity, but pipeline improved, their deal sizes improved, and linearity went better. We also saw their best quarter-over-quarter improvement from an RPO perspective.
Andy: And things take time, and especially in the larger buyers.
Andy: They want validation like Gartner and Forrester and other industry analysts, saying that you should be in the consideration set and so theres a bit of a chicken and egg issue, where you'd have to sort of start to get your first large customers and your early adopters in order for the gardeners and foresters too.
Thomas J. Seifert: This is all pointing in the right direction, but we still have to cope with the fact that one data point alone is hard to change your prediction and your trajectory, so we are still cautious about everything else that is going on. Matthew mentioned in his part that the big scenes that we saw last year from a macroeconomic perspective, the skittishness of buyers, and budget releases are still continuing, and I think this informed our view for the year. Obviously, we'll adjust our strategy and our approach to the year as we collect more data points, but it served us well over the last four years as a public company to look really hard at the data we have and draw the right conclusions from Thank you. Your next question comes from the line of Andrew Nowinski with Wells Fargo. Your line is open.
Andy: To put you in consideration and then.
Andy: From that.
Andy: You start to build that reputation with the industry analysts and that gets you in more deals and what we find is when we're in the consideration set.
Andy: Or just a next generation platform and we're faster we're more secure more reliable and we're a better solution for a lot of vendors and so not only are we winning the greenfield opportunities, but we are increasingly winning opportunities are from first generation zero trust vendors, where.
Andy: There are customers arent satisfied with the solutions, they have and Theyre moving fully to us. So I think that a lot of it has been just the maturing of our platform, but not just from a technology perspective.
Andy: We're pretty good at that and we have a lot of control that but also just from a.
Operator: Thank you so much for taking the question. I think we're in for a great quarter. I wanted to start with a question on sex. Sassy.
Andy: I'm not understanding in the industry that this is something that we offer and understanding of how the various components of cloud flare fit well together and I think that that's something that becomes itself a flywheel.
Matthew Prince: So you rattled off about a dozen large zero-trust deals in your prepared remarks, and you're clearly seeing some very strong demand from large customers, which I think coincides with a lot of the feedback we've been hearing about how Cloudflare is having more success penetrating that mid and large enterprise space with your zero-trust solution. So maybe you could comment on your sort of secret to success and getting these large deals closed, because it seems like there's more to it than just the maturation of your platform. Yeah, Andy, I think that, first of all, we didn't start out as a company that had a zero-trust platform. And so that's something that was a very natural add-on to our network.
Andy: Which we which we expect will continue to.
Andy: Deliver success for us in this space over time.
Andy: It sounds like especially with Mark Anderson, joining now as well too.
Speaker Change: I wanted to ask a quick follow up on vector is because I think it's really interesting and how it may potentially be driving growth of <unk> as well know from talking to some industry folks. It sounds like customers are starting to recognize how important vector databases as it relates to inference and fine tuning models, but I'm curious.
Speaker Change: I know, it's still early days, but what is the feedback on vector is and are you actually seeing a pull through or a sort of a push to revenue onto <unk> as well from that.
Speaker Change: Yes, the way that we see.
Matthew Prince: We think that it's very complementary with the other services that we offer. And I think that as we studied the industry and studied the space, it was clear that this set of solutions ended up, you know, squarely in our bailiwick of what it was that we were delivering. And so that, I think that that was a very natural place, but we are new to this space.
Speaker Change: The space in general as we want to have all of the different components that you need in order to build.
Speaker Change: Just a full featured.
AI application and and there.
Speaker Change: And that means supporting as many models as possible and some of the work that we're doing.
Matthew Prince: And things take time, and especially for larger buyers, they want validation like, you know, Gartner and Forrester and other industry analysts saying that you should be in the consideration set. And so there's a bit of a chicken-and-egg issue where you have to sort of start to get your first large customers and your early adopters in order for the Gartners and Forresters to put you in consideration. And then from that, you start to build that reputation with industry analysts, and that gets you in more deals. And what we find is that when we're in the consideration set, we're just a next-generation platform. And we're faster, we're more secure, we're more reliable, and we're a better solution for a lot of vendors.
Speaker Change: With the major model.
Speaker Change: Vendors like like the meadows the world.
Speaker Change: The marketplaces like hugging base gives us that.
Speaker Change: We want to have the best place.
Speaker Change: <unk> inference.
Speaker Change: And we think that yet where we are.
Speaker Change: Goldilocks in that space, where the centralized public clouds are too far away and your your device that youre holding in your hand are wearing on your rest is often doesn't have enough power, but where we are sitting in between gives that really incredible place for in France.
Matthew Prince: And so not only are we winning the green field opportunities, but we're increasingly winning opportunities from first-generation zero-trust vendors where their customers aren't satisfied with the solutions they have, and they're moving fully to us. So I think that a lot of it has been just the maturing of our platform, but not just from a technological perspective. We're pretty good at that, and we have a lot of control of that.
Speaker Change: But then the next step of that is you have to be able to take those models and make them your own and thats exactly what <unk> does it allows you to it.
Speaker Change: Customize those models and tune them due to fine tuning around making them your own and so what's been interesting about that is that <unk>.
Speaker Change: Being local and having presence all around the world ends up mattering in various places in the example that a customer gave us. The other day was that if you have a model and it responds in the United States and it's spelled color.
Matthew Prince: But also just from an understanding in the industry that this is something that we offer, and an understanding of how the various components of CloudFlare fit well together. And I think that that's something that has become a flywheel, which we expect will continue to deliver success for us in this space over time. It sounds like, especially with Mark Anderson joining now as well, too. I want to ask a quick follow-up on Vectorize, because I think it's really interesting in how it may potentially be driving growth of R2 as well.
Speaker Change: L O U R. It feels very for it whereas if it is in the U K and installed that are it also feels very foreign and so the ability to not just tuned models, but tune them locally while still having the power of BCE Gpus. They can then run the inference tasks, that's a really killer combination.
Matthew Prince: From talking to some industry folks, it sounds like customers are starting to recognize how important a vector database is as it relates to inference and fine-tuning models. But I'm curious, I know it's still early days, but what is the feedback on Vectorize, and are you actually seeing a pull-through or a push to revenue on R2 as well from that? Thanks.
Speaker Change: And as you said, it's built on top of the existing primitives that we have including our two which is our object storage.
Speaker Change: Space and so while it's early in the entire AI space I think we are very well positioned and very strategic and if you look at things like.
Speaker Change: Various downloads of our libraries on public so open source repos.
Matthew Prince: Yeah, the way that we're we see. The space in general is we want to have all of the different components that you need in order to build, just a full-featured AI application, and that means supporting as many models as possible, and some of the work that we're doing with the major model vendors like the Metas of the World, the marketplaces like Hugging Face gives us that. We want to have the best place for inference, and we think that we're Goldilocks in that space where the centralized public clouds are too far away, and your device that you're holding in your hand or wearing on your wrist doesn't have enough power, but where we are sitting in between gives that really incredible place for inference, but then the next step of that is you have to be able to take those models and make them your own, and that's exactly what Vectorize does.
Speaker Change: Taking off like Crazy and I said it is incredibly encouraging and I think we will become a larger and larger part of our business going forward.
Speaker Change: Thank you.
Hamzah Fotowalla: Your next question comes from the line of Hamzah photo Waller with Morgan Stanley. Your line is open.
Hamzah Waller: Hey, good evening. Thank you for taking my question.
Hamzah Waller: Maybe just stick on the hey.
Hamzah Waller: Hey, Jay I theme.
Matthew I'm, just curious I know, it's very early days, but.
Hamzah Waller: As you deploy these gpus at all your locations worldwide. How are you feeling from a capacity standpoint from a capex perspective.
Hamzah Waller: Your ability to meet the demand as some of the sort of inference starts to ramp and then maybe a follow up for Thomas.
Speaker Change: I think variable revenue has a very low percentage of your overall sales.
Matthew Prince: It allows you to customize those models and tune them, do the fine-tuning around making them your own, and so what's been interesting about that is that being local and having presence all around the world ends up mattering in various places, and the example that a customer gave us the other day was that if you have a model and it responds in the United States and it spells color C-O-L-O-U-R, it feels very foreign, whereas if it's in the UK and it spells it C-O-L-O-R, it also feels very foreign, and so the ability to not just tune models but tune them locally while still having the power of beefy GPUs that can then run the inference tasks, that's a really killer combination, and as you said, it's built on top of the existing primitives that we have, including R2, which is our object storage space, and so while it's early in the entire AI space, I think we are very well positioned and very strategic, and if you look at things like the various downloads of our libraries on public open source repos, they are taking off like crazy, and it is incredibly encouraging, and I think will become a larger and larger part of our business going forward. Thank you. Your next question comes from the line of Hamza Fadawalla with Morgan Stanley. Your line is open.
Thomas: Can you give us any context of how that looks for Q4 relative to Q3. Thank you.
Speaker Change: Yes, I'll take the first question Thomas Thomas can take the second.
Thomas: I'll start with a in a place that you might not expect.
Thomas: Is that.
Speaker Change: Our success in the Zero Trust market.
Thomas: It's actually helps empower our ability to invest.
Thomas: In the developer platform and especially the AI market.
Thomas: To understand that the nature of how our business works is that every single service that we run is capable of running on every single piece of equipment. That's out there. So we don't run a different network for our security products than we do for our performance products, we don't run a different network.
Thomas: For that <unk> service that we have versus our access versus our Ddos mitigation. It's all the same machines that are running across that and so one of the secrets to cloud for our success has been that we've been able to always look for places where there is more sort of unused capacity and then.
Operator: Thank you for taking my question. Maybe to stick on the Edge AI theme, Matthew, I'm just curious, I know it's very early days, but as you deploy these GPUs at all your locations worldwide, how are you feeling from a capacity standpoint, from a CapEx perspective, in your ability to meet the demand as some of the inference starts to ramp? And then maybe a follow-up for Thomas.
Thomas: Secondly act as a giant scheduler in order to make that capacity more productive and what's been interesting about the zero trust basis that the very nature of how that traffic works where.
Thomas: Our first generation services were all reverse proxy services. The traffic was flowing kind of in one direction, whereas our zero Trust services are always called forward proxy services. The traffic is flowing in the other but it turns out that you can you can actually have traffic flow both directions without having additional capex cost and so as a bigger and bigger.
Matthew Prince: I think variable revenue is a very low percentage of your overall sales. Can you give us any context of how that looked for Q4 relative to Q3? Yeah, so I'll take the first question and Thomas can take the second.
Matthew Prince: You know, I'll start in a place that you might not expect, which is that our success in the zero trust market has actually helped empower our ability to invest in the developer platform and, especially, the AI market. To understand that, the nature of how our business works is that every single service that we run is capable of running on every single piece of equipment that's out there. So we don't run a different network for our security products than we do for our performance products. We don't run a different network for the CASB service that we have versus our access versus our DDoS mitigation.
Thomas: Part of our revenue is these zero trust products. It means that it actually frees up capex as a percentage of revenue for us to go after other opportunities and so that's what has freed up our us to go after a lot of the AI opportunities that we've had as was freed up our ability to acquire.
Thomas: Higher the Gpus and invest.
Thomas: Behind the demand that we're seeing and I feel really good because at core what we're really good at is running a giant network as a giant scheduler and then ringing as much efficiency and utilization out of that is as possible and so we have been able to stay ahead.
Matthew Prince: It's all the same machines that are running across that. And so one of the secrets to Cloudflare's success has been that we've been able to always look for places where there is more sort of unused capacity and then effectively act as a giant scheduler in order to make that capacity more productive. And what's been interesting about the Zero Trust space is that the very nature of how that traffic works, where, you know, our first generation services were all reverse proxy services, and the traffic was flowing kind of in one direction, whereas our Zero Trust services are all what's called forward proxy services. The traffic is flowing in one direction.
Thomas: Of the demand that we've seen.
Thomas: For the Gpus and other other resources that we need for some of these newer products and and we're complementing that by also adding revenue, which is just much less capex efficient because it's much less capex intensive.
Matthew Prince: But it turns out that you can actually have traffic flow in both directions without having additional CapEx costs. And so, as a bigger and bigger part of our revenue is these Zero Trust products, it means that it actually frees up CapEx as a percentage of revenue for us to go after other opportunities. And so that's what has freed up us to go after a lot of the AI opportunities that we've had. It's what has freed up our ability to acquire the GPUs and invest in behind the demand that we're seeing. And I feel really good because, at core, what we are really good at is running a giant network as a giant scheduler and then wringing as much efficiency and utilization out of that as possible.
Thomas: And much more capex efficient because it's running on top of the same platform.
Thomas: Hopefully that makes sense, but it really is part of the key to our business and it's part of why we have the gross margins that we do where some of the other companies that are point solutions only doing one one of these things have much worse.
Thomas: Margin profile.
Matthew Prince: And so we have been able to stay ahead of the demand that we've seen for the GPUs and other resources that we need for some of these newer products. And we're complementing that by also adding revenue, which is just much less capital efficient because it's much less capital intensive and much more capital efficient because it's running on top of the same platform. Hopefully, that makes sense, but it really is part of the key to our business. And it's part of why we have the gross margins that we do, where some of the other companies that are point solutions only doing one of these things have much worse margin profiles. Before I answer your second question, maybe it's a bit more color on what Matthew just said.
Speaker Change: And before I answer your second question, maybe a bit more color to what Matt just said.
You really could see the inherently efficient architecture of the network in the fourth quarter. Our network Capex was 8% of revenue in the fourth quarter.
Speaker Change: And we were ahead of delivering <unk> capacity, we were at the 120 cities ahead of our plan of 100 and the guidance of 10% to 12% of revenue for this year includes a full buildout and bringing GPU capacity.
Speaker Change: Into pretty much every location we have.
Speaker Change: And on top of that and making sure that the network grows with the traffic that we booked.
Speaker Change: On our network.
Speaker Change: That is I think one of the key competitive advantages we have in the FERC architecture and that's just another proof point in the fourth quarter and regarding your question on <unk>.
Thomas J. Seifert: I mean, you really could see the inherently efficient architecture of the network in the fourth quarter. Our network cap was 8% of revenue in the fourth quarter, and we were ahead of delivering GPU capacity. We were at 120 cities out of our plan of 100.
Speaker Change: <unk> revenue.
Speaker Change: Variable revenue in the fourth quarter was a bit higher than it was in the third quarter, but it's still a small percentage of our overall revenue this will change over time.
Thomas J. Seifert: And the guidance of 10% to 12% of revenue for this year includes a full buildout and bringing GPU capacity into pretty much every location we have. And on top of that, you know, making sure that the network grows with the traffic on our network. So, you know, that is, I think, one of the key competitive advantages we have is the network architecture, and that's just another proof point in the fourth quarter. Regarding your question on variable revenue, variable revenue in the fourth quarter was a bit higher than it was in the third quarter, but it's still a small percentage of our overall revenue. This will change over time as our packaging and the offerings we bring to the market will have higher variable components, but for the fourth quarter, it was still a small part of our overall revenue. Our revenue mix. Your next question comes from the line of Jonathan Ho with William Blair. Your line is open. Hi, good afternoon.
Speaker Change: Our packaging and the offerings, we bring to the market, we'll have higher variable components, but for the fourth quarter. It was still a small part of overall revenue.
Speaker Change: Our revenue mix.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Jonathan Ho with William Blair. Your line is open.
Jonathan Ho: Hi, Good afternoon, Matthew you mentioned that a third of workers AI accounts are new to workers.
Jonathan Ho: Could this be potentially an accelerant to your developer platform overall and could you maybe give us some color on the adoption of workers in terms of the service model by developers relative to competitors.
Matthew: Yeah. It is.
<unk>.
Matthew: I think that if you study developer platforms.
Operator: Matthew, you mentioned that a third of workers' AI accounts are new to workers. You know, how could this potentially be an accelerant to your developer platform overall? And could you maybe give us some color on the adoption of workers in terms of the serverless model by developers relative to competitors? Yeah, it's, um, you know, I think that if you study developer platforms, they inherently take some time to really take off and take hold, and it averages about ten years from when they launch before they seem like they're getting there. And the reason for that is because of the fact that you need early adopters; those early adopters need to build something which is a killer app, and people say, wow, I couldn't have built that in any other way.
Matthew: They inherently take.
Speaker Change: Some time.
To really take off and take hold and and and averages.
Speaker Change: About about 10 years from when they launch.
Speaker Change: Before they seem like they're getting to that and the reason for that is.
Speaker Change: Is because of the fact that you need early adopters.
Speaker Change: Early adopters need to build something which is a killer app, which people say wow I couldn't have built that in any other than any other way.
Speaker Change: Some of the people who are behind that first killer App need to then go on and start other.
Speaker Change: <unk> services other other company is build other other things there is an ecosystem that has to develop around all of that and that that that inherently take some time to take off on developer platforms are adopted theyre not sold.
Matthew Prince: Some of the people who are behind that first killer app need to then go on and start other services, other companies, and build other things. There's an ecosystem that has to develop around all of that, and that inherently takes some time to take off. When developer platforms are adopted, they're not sold. And so, you know, again, I think that we've been very excited about the rate at which things have been adopted at Cloudflare for our developer platform, but we've also been realistic that for that developer platform to take off, inherent in how these develop, there is some time. There are a handful of ways that you can have shortcuts.
Speaker Change: And so and so so again I think that we have been very excited about the rate at which things had been adopted cloud flair for our developer platform, but we've also been realistic that for that developer platform to take off inherent in how these develop.
Speaker Change: There is some time there are a handful of ways that you can have shortcuts.
Speaker Change: One of those is to attach yourself to other developer ecosystems, which are which are really robust and so some of the ways that we are effectively.
Matthew Prince: One of those is to attach yourself to other developer ecosystems, which are really robust. And so, some of the ways that we are effectively providing the underlying infrastructure for some major other platforms that are out there, a number of the big e-commerce platforms and other things, that helps train developers early on on how to build with us, and again, is one of the shortcuts to get there. The other one is attaching yourself to wherever there is a lot of interest in the developer ecosystem. And so, I think that as you look out at the AI space, and we try to survey what are the most common cloud platforms that are being used across the hottest AI startups and companies that are out there, Cloudflare is the most common answer to that.
Providing the underlying infrastructure for some major other platforms that are out there in a number of the big E Commerce platforms and other things that helps train developers early on on how to build with us and again as one of the short cuts to get there. Another one is attaching yourself to wherever there is a lot of.
Interest in the developer ecosystem and so I think that as you look out at the AI space.
Speaker Change: And we try to survey what are the most common.
Speaker Change: <unk> platforms that are being used across the hottest AI startups in and companies that are out there <unk> is the most common to them and I think that that.
Matthew Prince: And I think that that, again, accelerates the rate at which you're able to get that adoption. And so, if you look at things like NPM downloads of packages, and you compare sort of the things that you would download to run on Cloudflare workers versus, you know, competitors like AWS's serverless offering, it's been pretty amazing that we've actually caught up with, and now passed AWS by some measures in terms of the packages which are being downloaded that are out there. And again, we're a much newer platform.
Speaker Change: Again accelerates the rate at which youre able to get that adoption and so if you look at things like NPM.
Speaker Change: Downloads of packages and you compare that.
Speaker Change: Things that you would download to run on.
Speaker Change: Unclassified workers versus competitors like AWS is server less offering it's been pretty amazing, but we've actually caught and now past AWS by some measures in terms of the packages, which are being downloaded.
Speaker Change: That are out there and again, we're a much newer platform and so.
Matthew Prince: And so, I'm encouraged that we'll hopefully be taking that average time for new developer platforms to reach scale down because of some of the success we've seen. And again, I'm really proud of our team and how they've executed in delivering that. Excellent. Thank you. Your next question comes from the line of Tim Horan with Oppenheimer.
Speaker Change: I'm encouraged that we'll be hoping hopefully taking that average time for new developer platforms to reach scale.
Speaker Change: Down.
Speaker Change: Because of some of the success, we've seen and again I'm really proud of our team and how they've executed in delivering this.
Speaker Change: Excellent. Thank you.
Speaker Change: Your next question comes from the line of Tim Horan with Oppenheimer. Your line is open.
Operator: Related to the previous question, can you maybe update us on your best guess on timing when the workers' platform starts to drive some material revenue, when it starts to move the needle, and maybe the same thing for AI? I know you said kind of not this year.
Tim Horan: Thank you related to the previous question can you maybe update us on your best guess on timing when the workers platform starts to drive some material revenue when it starts to move the needle and maybe the same thing for AI. I know you said kind of not this year and what do you think for both of these platforms. What does this mean for overall growth rates for the company. Thank you.
Matthew Prince: And what do you think for both these platforms? What does this mean for overall growth rates for the company? Yeah, I think. What has been interesting has been that workers are a big piece of a lot of the deals that we see. So, it's still somewhere around 20 percent of the large deals that we close have some workers component to them. And that's held actually fairly steady, but those deals have continued to go up and up. So, it depends on how – we don't break out the various pieces of Cloudflare because we think that the platform functions very well as one unified platform.
Speaker Change: Yes, I think.
Speaker Change: What what has been interesting has been that workers is a big piece of a lot of the deals that we see so it's still in somewhere around 20% of the large deals that we closed have some workers component.
Speaker Change: And Thats held actually fairly steady, but those deals have continued to go up and up so it depends on how we don't break out the various pieces of cloud center, because we think that the platform.
Speaker Change: Functions very well as one unified platform and we closed more deals because we have workers involved but a lot of times.
Matthew Prince: And we close more deals because we have workers involved, but a lot of times, that includes our reverse proxy security services. It oftentimes includes our zero trust security services. And what we really want to be is not a one-trick pony for any one of our customers. We want to actually have multiple different things that they rely on and be that strategic vendor that provides a broad set of solutions to them. So, I think it's already materially driving new business and large deals. But as a worker platform, I think the AI space, I think a lot of the money which is being spent on AI right now, especially with some of the hyperscale public clouds, a lot of that is for the training of models that is not – we are not the right place to actually do model training.
That includes our.
Speaker Change: Reverse proxy security services Oftentimes includes our zero Trust security services, and what we really want to be is not a one trick pony for any one of our customers. We want to actually have multiple different things that they rely on and be that strategic vendor that provides a broad set of solutions to them.
Speaker Change: So I think it's already.
Speaker Change: Materially driving new business and large deals.
Speaker Change: But but.
It is the workers' platform I think the AI space I think a lot of the money, which is being spent.
Speaker Change: On AI right now, especially with some of the Hyperscale public clouds, a lot of that is for training of models that that is not we are not the right place to actually do model training, but as that transitions over time and people start to figure out how can you take.
Matthew Prince: But as that transitions over time and people start to figure out how you can take the models that you've built and turn them into real products, I think that's where you'll start to see a much more significant share of – you'll start to see revenue that is showing up that is meaningful to us in terms of delivering value in the AI space. But I think it's – we're still so early.
Those are models that you've built and turn them into real products.
Speaker Change: Thats, where youll start to see a much more significant share of of.
Speaker Change: Youll start to see.
Speaker Change: Revenue that is showing up as meaningful to us in terms of delivering.
Speaker Change: The value in the AI space.
Speaker Change: I think it's the we're still so early.
Matthew Prince: And I think that the thing to track is less about us. It's more about how long it takes product managers and engineers to really figure out how to harness these new tools to provide customer value. I think we've seen a ton of – I mean, the challenging thing with AI is that it is really easy to make a demo, but it's very hard to make a product.
Speaker Change: And I think that the.
Speaker Change: The thing to track is less about about us it's more about how long does it take product managers and engineers to really figure out how to harness these new tools in the interim.
Speaker Change: Providing customer value I think we've seen a ton of.
Speaker Change: Challenging thing with AI is.
Speaker Change: It is really easy to make a demo, but it's very hard to make a product.
Matthew Prince: There's a ton of value that will be created here, but I think it's still – it's going to still take some time. And I think it's going to be up to some things that are somewhat out of our control. But I can't imagine being better positioned than we are.
Speaker Change: There is a ton of value that will be will be created here.
Speaker Change: But.
Speaker Change: But I think it's it's still it's going to still take some time and I think it's going to be up to some things that are somewhat out of our control, but I can't imagine being better position than we are.
Operator: Thank you. Your next question comes from the line of Trevor Walsh with Citizens JMP Securities. Your line is open.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Trevor Walsh with citizens JMP Securities. Your line is open.
Matthew Prince: Great, hi team! Thanks for taking my question. Matthew, maybe for you, one of the just sort of round up all the different kinds of themes and things that you've been talking about throughout, you've got a platform of platforms where you're playing in AI, you're playing with, you know, developers and workers and zero trust, etc. It creates a big TAM, but then at the same time, from a go-to-market perspective, you have a lot of different stakeholders and buyers within an organization that you have to try to round up and sell that vision.
Trevor Walsh: Great Hi team. Thanks for taking my question.
Trevor Walsh: Matthew maybe for you wanted to just sort of round up all the different kind of themes and things that you've been talking about throughout <unk>.
Speaker Change: <unk> got a platform a platform where youre planning an.
Trevor Walsh: You're playing with developers and workers in the zero Trust et cetera creates a big Tam, but then at the same time from a go to market perspective, do you have a lot of different.
Trevor Walsh: Stakeholders and buyers within an organization do you have to try new roundup and sell that vision, So where where do you think you need to go from a go to market perspective, especially with Mark coming on board now in terms of whether it's internal enablement.
Matthew Prince: So, where do you think you need to go from just a go-to-market perspective, especially with Mark's coming on board now, in terms of whether it's internal enablement, simplifying pricing and packaging, like you talked about, kind of how do you thread that needle, I guess, of all those different kinds of people, and how do you see that kind of playing out kind of this coming year and beyond? Thanks. Yeah, so I think our strategy remains our strategy, which is, you know, land with one product and then demonstrate, build trust, demonstrate value, and then expand to help customers both create more value and save money across their overall platform. And what we see over and over again is that the customer that just, you know, this last quarter signed a, you know, $60 million total contract value renewal, they started with one product and were a $60,000 customer a year when So that should work.
Trevor Walsh: Simple simplifying packaging pricing and packaging like you've talked about kind of how do you. How do you thread that needle I guess of all those different kind of people and how do you see that kind of playing out kind of desk coming this coming year and beyond thanks.
Trevor Walsh: Yes, So I think our strategy remains our strategy, which is land with one product and then demonstrate build trust to demonstrate value and then expand to help customers both create more value and save money across across their their overall all platform and what we see over and over again.
Trevor Walsh: <unk> is a customer that just this last quarter signed a $60 million total contract value renewal, they started with one product and whereas $60000 customer a year when they when they first started so that works I think operationalized that now is the thing, which we've made huge strides.
Matthew Prince: I think operationalizing that now is the thing we've made huge strides on over the last 15 months, and I think Mark Anderson will continue to help with that. What I think is, you know, really attractive about Mark Anderson is, yes, he knows the security space and the network security space from his time at Palo Alto Networks, but also, from his time at Palo Alto Networks, they went from really a one-product company to a platform company. And that's something which, you know, we really admire and think is rare when companies figure out that play. We've got that set of products.
Trevor Walsh: On over the last 15 months and are adding Mark Anderson will continue to help with that.
Trevor Walsh: What I think is.
Trevor Walsh: Really attractive about Mark Anderson.
Trevor Walsh: Is it yes, he knows the security space and the network security space from his time at Palo Alto networks, but also from the time of Palo Alto networks. They went from really a one product company to a platform company and Thats, something which we really admire and in think is is.
Trevor Walsh: It is rare when companies figure out that play we've got that set of products we've got.
Matthew Prince: We've got, you know, a lot of customers, and now it's how do we, again, continue to demonstrate value, and I think bringing on incredibly talented leaders like Mark Anderson who are trusted and respected in the space, who have run this play before and been successful with it, and can now take the breadth of products that we have and the opportunity we have and build an iconic company and an iconic go-to-market organization. Again, I'm incredibly honored to have him on board, and, you know, his first day was today, and he's already rolling up his sleeves and getting to work. Great I appreciate it. Your next question comes from the line of Joel Fishbein with Truist Securities. Your line is open. Thanks for taking the time to answer the question. Matthew, just two quick ones. You mentioned in the prepared remarks about public business just getting, you know, being fairly strong, and you mentioned the U.S. Department of Commerce. Can you give us any color on adoption, you know, in the public sector?
Trevor Walsh: A lot a lot of customers and now it's how do we again continue to demonstrate value, adding bringing an incredibly talented leaders like Mark Anderson, who are who are trusted and respected in the space who have run this play before <unk> been successful with it and we can now take the breadth of products that we have and the.
Trevor Walsh: <unk>, we have and build an iconic company in an iconic go to market organization again.
Trevor Walsh: Incredibly honored to have him onboard and and and his first day with today and he is already rolling up his sleeves and and getting to work.
Speaker Change: Great I appreciate it.
Speaker Change: Your next question comes from the line of Joel Fishbein with <unk> Securities. Your line is open.
Joel P. Fishbein: Thanks for taking the question Matthew just two quick ones.
Joel P. Fishbein: You mentioned in the prepared remarks about.
Joel P. Fishbein: <unk>.
Joel P. Fishbein: Business just being.
Joel P. Fishbein: Being fairly strong and you mentioned the.
Joel P. Fishbein: U S Department of Commerce can you give us any color about on adoption and the public sector and then just tied to that you are very early.
Matthew Prince: And then, just tied to that, you were very early and very right in talking about the macro becoming weak several years ago. And I'm just curious, I know I listened to your prepared remarks and just, you know, wanted to take your temperature about how you're just feeling in general about the way that the demand environment is currently. Thanks. Yeah, so, um... Related questions, actually.
Joel P. Fishbein: And very right in talking about the macro becoming weak several years ago and I'm, just curious I know I listen to your prepared remarks, and just wanted to take your temperature about how youre just feeling in general about the way that the.
Joel P. Fishbein: Demand environment is currently thanks.
Speaker Change: Yes so.
Speaker Change: Sort of related questions actually.
Matthew Prince: You know, I think that our federal business, as well as our SLED business, state, local, education, and our global government business, have all been real signs of strength. And I think that that, in part, is because of the fact that the world's getting scarier, and we're seeing more attacks. 2022 was actually very quiet on the cyber front, whereas the back half of 2023, and especially after the Hamas invasion and kidnappings in Israel, really took off in terms of cyber attacks that were going on around the world. And I think governments recognize the importance of staying safe and secure. More than half of the world's population will vote in 2023 in elections.
Speaker Change: I think that.
Speaker Change: Our our federal business as.
Speaker Change: As well as our sled business state local education.
Speaker Change: And our our global government business has all been real signs of strength and I think that that that in part is because of the fact that the <unk>.
Speaker Change: World's getting scarier, and we're seeing more attacks.
Speaker Change: 'twenty two is actually very quiet on the cyber front, whereas the back half of 2023 and especially after.
Speaker Change: The the Hamas invasion and kidnappings in and Israel really took off in terms of in terms of cyber attacks.
Speaker Change: That were going on around the world and I think governments.
Speaker Change: Recognize.
Speaker Change: The importance of staying safe and secure more than half of the world's population will vote in 2023 elections, and so I think the fact that we've been leaders in protecting elections.
Matthew Prince: And so I think the fact that we've been leaders in protecting elections and making sure that elections are run without cybersecurity being part of the story. It has got us in the conversation in a lot of places around the world, and I think that we have a maturing set of go-to-market motions and a really great leadership team around our state and local business, or, excuse me, our federal and state business, which is showing real signs of promise. So I would expect that business will continue to be strong throughout 2024. Your second question is kind of the flip side of that, which is, you know, I think that macro continues to be challenging. There are two hot wars going on right now. I think we are not out of the woods economically in terms of, you know, getting totally ahead of inflation. Again, I think in the U.S. that it looks better than some other places in the world.
Speaker Change: Making sure that elections are run without cyber security being part of the story.
Speaker Change: It has gotten us in the conversation and a lot of places around the world and.
Speaker Change: I think that where we have a maturing.
Speaker Change: Set of of of just go to market motions and a really great leadership team around our state and local business or excuse me, our federal and state business.
Speaker Change: Which which is showing real signs of promise. So I would expect that that business continues to be strong.
Speaker Change: Throughout 2024.
Speaker Change: The second question is is kind of the flip side of that which is.
Speaker Change: I think that that the macro continues to be challenging.
Speaker Change: They're they're too Hot wars going on.
Speaker Change: Right now.
Speaker Change: I think we are not out of the woods.
Speaker Change: Economically.
Speaker Change: In terms of.
Speaker Change: Getting totally ahead of inflation again, I think in the U S.
Speaker Change: It looks that looks better than some of the other places in the world. There's a lot of ways that you can imagine the world continues to get more complicated and I think buyers continue to be get ish.
Matthew Prince: There are a lot of ways that you can imagine the world continues to get more complicated, and I think IT buyers continue to be skittish. Q4 definitely felt like people were starting to make decisions, and they were starting to say that there are certain things that are must-haves versus nice-to-haves, and I think we continue to be sorted into the must-have bucket. But we continue to be very prudent and very thoughtful as we think about our business. We're trying to scale behind the demand that we see and not get cocky about ramping anything too fast.
Speaker Change: Q4 definitely felt like people were starting to make decisions and they were starting to say that there are certain things that are must haves versus nice to haves and I think we continue to be sorted into the must have bucket.
Speaker Change: But we continue to be very prudent.
Speaker Change: Very thoughtful as we think about our business, we're trying to scale behind the demand that we see not get cocky about.
Speaker Change: About about ramping anything too fast, but I E. In a world that is increasingly difficult and increasingly complicated.
Matthew Prince: But in a world that is increasingly difficult and increasingly complicated, you know, I'm glad that we're in the business of helping provide cybersecurity. And I'm incredibly proud of our team for living up to our mission of helping make sure the Internet stays safe, secure, and reliable. That is all the time we have for questions today.
Speaker Change: I'm glad that where we are in the business of helping provide cyber security and I'm and I'm incredibly proud of our team for living up to our mission of helping make sure of the internet stays safe secure and reliable.
Speaker Change: That is all the time, we have for questions today, I will turn the call back to Matthew Prince for closing remarks.
Matthew Prince: I will turn the call back to Matthew Prince for closing remarks. I just wanted to thank the entire Cloudflare team for, you know, just all the incredibly hard work over Q4 and into the beginning of 2024, and we're just so incredibly proud of the work that everyone is doing. I'm excited to add Mark Anderson to our team full-time. He started today, as I said, and is already rolling up his sleeves.
Matthew Prince: I just wanted to thank the entire <unk> team for all.
Matthew Prince: All the incredibly hard work over Q4 and into the beginning of 2024 and <unk> and we are just so incredibly proud of the work that everyone is doing I'm excited to add Mark Anderson to our team full time.
Matthew Prince: He started actually today as I said and is already rolling up his sleeves I want to thank Mark <unk>, who will continue to act as an adviser to cloud flare and help with the transition. He has been nothing but a class act throughout this and we couldn't have gotten here. Thanks to all of our customers investors and we'll see you back here in about three months. Thank you.
Matthew Prince: I want to thank Mark Boroditsky, who will continue to act as an advisor to Cloudflare and help with the transition. He's been nothing but a class act throughout this, and we couldn't have gotten here without him. Thanks to all of our customers, investors, and we'll see you back here in about three months. This concludes today's conference call. We thank you for joining us. You may now disconnect your line.
Speaker Change: This concludes today's conference call. We thank you for joining you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Amy.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: Alright.
Unnamed Speaker: I don't blame you if you need to take a break, and I don't blame you that you didn't call me yesterday. And I should take the blame for not letting you go, and I should take the blame for not taking it slow. So I say that it's nobody's fault, that it wasn't what I thought it'd be, and it's okay cause, honestly, I don't blame you for your honesty. And, oh, it's such a shame that I didn't take the blame for things. I don't have much to lose, it's all good when I'm with you, but loving someone takes more than just responsibility. Things I wanna say to you should be a crime to just hate you.
Speaker Change: Yes.
Speaker Change: So Alaska.
Speaker Change: Matt.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].