Q1 2024 Cloudflare Inc Earnings Call

Operator: Thank you for standing by, and welcome to the Cloudflare first quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.

Thank you for standing by and welcome to the club for first quarter 2024 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star for the number one on your telephone.

Operator: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the star by the number one on your telephone keypad. If you would like to withdraw your question again, press star number one. Thank you. Now I'd like to turn the call over to your host, Phil Winslow, Vice President of Strategic Finance, Treasury, and Investor Relations. You may begin.

Phil Winslow: Keypad, if you would like to withdraw your question again prestige star one.

Operator: Now I'll turn the call over to your host Phil Winslow, Vice President of strategic Finance Treasury and Investor Relations you may begin.

Phil Winslow: Thank you for joining us today to discuss Cloudflare's financial results for the first quarter of 2024. With me on the call, we have Matthew Prince, co-founder and CEO, Michelle Zatlin, co-founder and president, NCOO, Thomas Seifert, CFO, and Mark Anderson, President of Revenue.

Phil Winslow: Thank you for joining us today to discuss <unk> financial results for the first quarter of 2024 with me on the call. We have Matthew Prince co founder and CEO, Michelle <unk> co founder President and CEO, Thomas Seifert, CFO, and Mark Anderson, President and revenue.

Phil Winslow: By now, everyone should have access to our earnings announcement. This announcement, as well as supplemental financial information, may be found on our investor relations website. As a reminder, we will be making forward-looking statements during today's discussion, including, but not limited to, our customers, vendors, and partners' operations and future financial performance, our anticipated product launches, and the timing and market potential of those products, as well as our anticipated future financial and operating performance and our expectations regarding future macroeconomic conditions.

Phil Winslow: I know everyone should have access to our earnings announcement this announcement as well as our supplemental financial information may be found on our Investor Relations website.

Phil Winslow: 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.

Phil Winslow: Our anticipated future financial and operating performance and our expectations regarding future macroeconomic conditions.

Phil Winslow: These results and other comments are not guarantees of future performance and are subject to risks and uncertainties, 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.

Phil Winslow: These results and other comments are not guarantees of future performance.

Phil Winslow: Subject to risks and uncertainties much of which is beyond our control.

Phil Winslow: 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. 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 will 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: Otherwise noted all numbers, we talk about today other than revenue will be on an adjusted non-GAAP basis.

Phil Winslow: You'll 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 historical periods, a gap to non-gap reconciliation can be found in the supplemental financial information referenced a few months ago. Before wrapping up, 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 Matthew.

Phil Winslow: For historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few months ago.

Matthew: Before wrapping up please save the date for our Investor Day on Thursday May 30, which is being held in conjunction with our user conference collaborator connect in New York City.

Matthew: A live webcast will also be accessible from our Investor Relations website.

Phil Winslow: Now I'd like to turn the call over to Matthew.

Matthew Prince: Thank you, Phil. We had a very strong quarter. We achieved revenue of $378.6 million, up 30% year-over-year. We added 122 new large customers, those that pay us more than $100,000 per year, and now we have 2,878 large customers, up 33% year-over-year. Revenue contribution from our large customers during the quarter increased to 67%, up from 62% in the first quarter last year. Digging into our largest customers, we added a record number of net new customers year over year spending more than $100,000, $500,000, and $1 million on an annualized basis.

Matthew: Thank you Phil we had a very strong quarter, we achieved revenue of $378 6 million up 30% year over year.

Matthew Prince: <unk> added 122, new large customers those that pay us more than $100000 per year, and now have 2878 large customers up 33% year over year revenue contribution from our large customers during the quarter increased to 67% up from 62% in the first quarter of last year.

Matthew Prince: Digging into our largest customers we added a record number of net new customers year over year spending more than $100000 $500000 and $1 million on an annualized basis.

Matthew Prince: We are successfully moving up market and becoming a larger and more strategic vendor to more and more of our customers. Our dollar-based net retention held steady quarter over quarter at 115 percent. Our gross margin was 79.5 percent, again, above our long-term target range of 75 to 77 percent and up from 78.9 percent last quarter. We delivered operating profit of $42.4 million, representing an operating margin of 11.2%.

Matthew Prince: We're successfully moving upmarket and becoming a larger and more strategic vendor to more and more of our customers are.

Matthew Prince: Our dollar based net retention held steady quarter over quarter at 115%.

Matthew Prince: Our gross margin was 79, 5% again above our long term target range of 75% to 77% and up from 78, 9% last quarter.

Matthew Prince: We delivered operating profit of $42 4 million, representing an operating margin of 11, 2%.

Matthew Prince: Our gross margin and operating margin performance underscore Cloudflare's efficiency and increasing operational excellence. We again meaningfully outperformed on free cash flow, generating $35.6 million during the quarter. We have our hands firmly on the levers of our business. I'm proud of the fact that our team has been able to continue to build our network, service larger and larger customers, and launch entirely new categories of products, including in the AI space, while remaining disciplined with our CapEx, gross margin, operating margin, and cash flow.

Matthew Prince: Our gross margin and operating margin performance underscore cloud plus efficiency and increasing operational excellence.

Matthew Prince: Again meaningfully outperformed on free cash flow generating $35 6 million during the quarter.

Matthew Prince: We have our hands firmly on the levers of our business I am proud of the fact that our team has been able to continue to build our network service larger and larger customers and launch entirely new categories of products, including in the AI space, while remaining disciplined with our Capex gross margin operating margin and cash flow.

Matthew Prince: We have an elegant business that works because all the pieces fit together and leverage our hyper-efficient network infrastructure in a way that we believe no competitor can match. If I reflect back on the history of Cloudflare, it divides fairly neatly into seven-year eras. The first seven years, 2010 through 2017, were all about engineering and little else, figuring out if it was even possible to build the revolutionary network we have today.

Matthew Prince: We have an elegant business that works because how all the pieces fit together and leverage our hyper efficient network infrastructure in a way that we believe no competitors can match.

Matthew Prince: If I reflect back on the history of cloud player. It divides fairly neatly into seven year eras. The first seven years, 2010% through 2017, we're all about engineering and little out figuring out if it was even possible to build the revolutionary network we have today.

Matthew Prince: The next seven were all about product, taking that incredible engineering and packaging it up. As we got bigger and better, we didn't stop being incredible at engineering. We continue to build on and improve that foundation. Looking forward to the next seven years, we will continue to be the best in the world in engineering and products, but we'll add to that world-class sales and marketing. To that end, just 90 days ago, we announced that Mark Anderson would be joining Cloudflare as our new President of Revenue to accelerate our next phase of growth at scale. He hit the ground running and has been enthusiastically embraced by our team. I thought it made sense for Mark to say a few words on what he's seen in his first 90 days.

Matthew Prince: The next seven we're all about product, taking that incredible engineering and packaging it up.

Matthew Prince: As we got greater product, we didn't stop being incredible with engineering, we continue to build on and improve that foundation.

Mark F. Anderson: Looking forward to the next seven years, we will continue to be the best in the world in engineering and product, but will add to that world class sales and marketing.

Matthew Prince: To that end, just 90 days ago, we announced that Mark Anderson will be joining <unk> as our new president of revenue to accelerate our next phase of growth and scale. He hit the ground running and has been enthusiastically embraced by our team.

Mark F. Anderson: Got it made sense for Mark to say a few words on what he's seen in its first 90 days Mark.

Mark F. Anderson: Thanks, Matthew. I have known Cloudflare and the team as a board member for the last four and a half years. But the thing that surprised me the most, getting in the trenches, is just how incredible the product is. I know this space, and we are leaps and bounds better than any of our competitors. What also surprised me is how much room for improvement there is for Cloudflare's go-to-market organization. The last year has been about clearing the way for a world-class enterprise sales organization to emerge.

Mark F. Anderson: Thanks, Matthew I think closer to the team as a board member for the last four and a half years.

Mark F. Anderson: The thing that surprised me the most getting in the trenches just how incredible the product is.

Mark F. Anderson: This space and we are leaps and bounds better than any of our competitors.

Mark F. Anderson: What also surprised me is how much room for improvement there is for cloud players go to market organization.

Mark F. Anderson: The last year has been about clearing away for a world class enterprise sales organization to emerge we've got some great people great experiences.

Mark F. Anderson: We've got some great people, great experiences, and gosh, I can see the early results. I'm now planning to step on the gas, building and enabling this team that can take CloudFlare's best-of-breed products to every single enterprise everywhere in the world. I don't see anything stopping us from becoming one of the most strategic key vendors to every Fortune 500 company out there. I couldn't be more excited.

Mark F. Anderson: Gosh I can see the early results.

Mark F. Anderson: Planning to step on the gas building and enabling this team that can take cloud players best of breed products every single enterprise everywhere in the world I don't see anything stopping us from becoming one of the most strategic key vendors to every fortune 500 company out there I couldnt be more excited.

Speaker Change: Thanks Mark.

Mark F. Anderson: Some of the benefits of a world-class leader are hard to measure in the short term, but I'll give you one that can be clearly measured, and it stood out to me. The number of applicants for strategic account and enterprise sales positions increased 56% in March versus February following Mark Anderson's appointment. We're definitely hiring. Across all positions, we had over 350,000 applicants in Q1, up 47% over the same quarter last year.

Mark F. Anderson: Some of the benefits of a world class leader are hard to measure in the short term, but I'll give you one that can be clearly measured and that stood out to me. The number of applicants for strategic account and enterprise sales positions increased 56% in March versus February following Mark Anderson's appointment.

Mark F. Anderson: We're definitely hiring across all positions, we had over 350000 applicants in Q1 up 47% over the same quarter last year. We added several senior go to market leaders with proven track records in their areas of expertise, including a new chief partner Officer a new.

Mark F. Anderson: We added several senior go-to-market leaders with proven track records in their areas of expertise, including a new chief partner officer, a new head of global sales and renewals, and multiple regional strategic account sales leaders. If you're a sales professional who wants to win with great products and world-class leadership, the word is out. Cloudflare is the place to bet on the next stage of your career. Beyond incredible hiring, our sales productivity from existing team members improved year over year, sales cycles were similar to last quarter, and new pipeline attainment exceeded our expectations. I don't think Marc can take credit for any of that yet, which is actually very encouraging.

Mark F. Anderson: Head of global sales and renewals and multiple regional strategic account sales leaders, if youre a sales professional who wants to win with great products and World Class leadership. The word is out cloud players as the place to bet. The next stage of your career.

Mark F. Anderson: Beyond incredible hiring our sales productivity from existing team members improved year over year sales cycles were similar to last quarter and new pipeline attainment exceeded our expectations I don't think mark can take credit for any of that yet which is actually very encouraging we have room for improvement as he said, but now we have the right.

Matthew Prince: We have room for improvement, as he said, but now we have the right leadership and foundation to take our go-to-market efforts to the next level. I feel extremely confident and clear about the long-term opportunity that Cloudflare has in front of us. In the short term, however, my crystal ball is less clear. We see a lot of signals based on our privileged position running a good chunk of the Internet. Even without that visibility, if you've been watching the news at all, it's clear that the near-term outlook for the world is uncertain, with increasing tensions in the Middle East, no end in sight to the Russia-Ukraine war, and potential signs of instability in Asia. It's not at all certain on anything we see that things will get worse.

Matthew Prince: Leadership and foundation to take our go to market efforts to the next level.

Matthew Prince: I feel extremely confident and clear in the long term opportunity that cloud flair has in front of us in the short term. However, my Crystal ball is less clear, we see a lot of signals based on a privilege position running a good chunk of the internet even without that visibility if you've been watching the news at all it's clear that the near term outlook for the world is uncertain.

Matthew Prince: Increasing tensions in the middle East no insight from the Russia, Ukraine War and potential signs of instability in Asia if not.

Matthew Prince: Not at all certain on anything we see that things will get worse, but we do know from even recent history that macro factors can impact short term sales trends.

Matthew Prince: But we do know from even recent history that macro factors can impact short-term sales trends. We're fortunate that we're in the cybersecurity space, perhaps one of the few sectors that can actually benefit from increased global tensions. We're already seeing that, especially in our government.

Matthew Prince: We're fortunate that we're in the cyber security space, perhaps one of the few sectors that can actually benefit from an increased global tensions we're already seeing that especially in our government business.

Matthew Prince: But we also want to acknowledge the risky world we live in and be, as we always have been, prudent and careful with our investments and our forecasts as we look into what is a short-term cloudy crystal ball. That served us well in the past and I think it will prove to be a disciplined approach once again going forward. The short term is uncertain, but the long term is bright. And so, in the medium term, we're going to keep our hands firmly on the levers of our business and thoughtfully invest in our go-to-market efforts, in great engineering, and in disruptive new products that deliver incredible value to our customers.

Matthew Prince: We also want to acknowledge the risky world, we live in and be as we always have been prudent and careful with our investment in our forecast as we look into what is a short term cloudy crystal ball.

Matthew Prince: It's served us well in the past and I think will prove to be the disciplined approach once again going forward the <unk>.

Matthew Prince: Short term is uncertain the long term, it's bright and so in the medium term, we're going to keep our hands firmly on the levers of our business and thoughtfully invest in our go to market efforts and great engineering at in disruptive new products that deliver incredible value to our customers. That's the winning strategy, especially in uncertain times speaking of customers, Let me share.

Matthew Prince: That's the winning strategy, especially in uncertain times. Speaking of customers, let me share some great wins for the quarter. The National Cyber Security Center, the UK's Technical Authority for Cyber Thrive, won a three-year contract with CloudSler to deliver its protective domain name service. PB&S protects over 1,400 U.K. organizations in central government, local government, health care, and emergency services from malware and cyber threats. This was a very competitive process with several vendors and a rigorous technical evaluation.

Matthew Prince: Some great wins for the quarter.

Matthew Prince: The National Cyber Security Center, the UK technical authority for cyber threats.

Matthew Prince: Three year contract with classified to deliberate protective domain name service P. DNS protects over 1400 U K organization and Central government local government health care and emergency services from malware and cyber threats.

Matthew Prince: It was a very competitive process with several vendors and a rigorous technical evaluation, we tightly collaborated with Accenture a partner, we're looking forward to working with even more closely on this landmark UK public sector with.

Matthew Prince: We tightly collaborated with Accenture, a partner we're looking forward to working with even more closely on this landmark U.K. public sector WIP. A leading technology company expanded its relationship with Cloudflare, signing a three-year, $40 million pool-of-funds contract, $8.5 million of which are expansions. This deal is an example of a strategic platform deal that we're increasingly seeing customers opt for with a rate card for more than 40 Cloudflare products and services. These include Cloudflare 1, Magic Transit, R2, as well as Workers AI, which the customer was quick to dive into and start trialing.

Matthew Prince: A leading technology company expanded their relationship with the cloud players signing a three year $40 million pool of funds contract $8 5 million of which our expansion. This deal is an example of a strategic platform deal that we're increasingly seeing customers opt for with a rate card for more than 40 classified products in <unk>.

Matthew Prince: Services. These include classified one magic transit are too as well as workers AI, which the customer was quick to dive in and start trialing as a textbook land and expand story is customer first came to us in 2017 for our application security services and has continued to expand over the years with <unk>.

Matthew Prince: As a textbook land and expand story, this customer first came to us in 2017 for our application security services and has continued to expand over the years, with this deal encompassing the vast majority of Cloudflare's platforms. A Fortune 100 financial services company signed a similar four-year, $10 million pool of funds. This customer represents our largest new logo win with a major financial institution. We successfully completed six different proofs of concepts, and the main business drivers for going with Cloudflare were resilience, operational efficiency from a single unified platform, and our ability to meet data sovereignty requirements with complete flexibility at the country level, a requirement that no other vendor was able to accommodate. We anticipate this deal will serve as a beachhead for us to win more financial service customers looking for the same benefits. A large international energy company signed a five-year, $4.5 million contract.

Matthew Prince: Deal encompassing the vast majority of cloud platform.

Matthew Prince: A fortune 100 financial services company signed a similar four year $10 million pool of funds deal. This customer represents our largest new logo win with a major financial institution. We successfully completed six different proof of concepts and the main business drivers for us going with cloud cyber resilience the operational.

Matthew Prince: <unk> from a single unified platform and our ability to meet data sovereignty requirements with complete flexibility at the country level a requirement that no. Other vendor was able to accommodate we anticipate this deal will serve as a beachhead for us to win more financial service customers looking for the same benefits.

Matthew Prince: A large international energy company signed a five year $4 $5 million contract. This new customer is going all in with cloud SaaS platform with 6000 Zero Trust fees, along with Casspi DLP browser isolation Magic Wan Magic firewall.

Matthew Prince: This new customer is going all in with Cloudflare's SaaSy platform with 6,000 Zero Trust seats, along with CASB, DLP, Browser Isolation, Magic WAN, and Magic Firewall. Competing against a first-generation Zero Trust vendor, our focus on scalability and efficiency, as well as the ability to consolidate several vendors due to the significant value in our portfolio, were key factors delivering this win. A large financial institution in Latin America signed a two-year, $1.3 million contract for zero-trust fees for their employees and contractors, along with our application security services. This was a very competitive process with 11 participants.

Matthew Prince: Heating against the first generation zero trust vendor or focus on scalability and efficiency as well as the ability to consolidate several vendors due to the significant value in our overall portfolio were key factors delivering this win.

Matthew Prince: A large financial institution in Latin America signed a two year $1 $3 million contract for zero Trust seats for their employees and contractors along with our application security services. This is a very competitive process with 11 participants kotlarz pace of innovation speed of deployment superior performance and integrated platform with Didi.

Matthew Prince: Cloudflare's pace of innovation, speed of deployment, superior performance, and integrated platform with DDoS and WAF for agentless access set us apart from the rest. A leading digital marketplace signed a three-year, $880,000 contract for Zero Trust, Magic WAN, and application security. The company was looking to simplify, optimize, and reduce latency in their security architecture and WAN platform. With their incumbent solution, this company found it difficult to roll out a consistent security posture where they could manage security and the network together.

Matthew Prince: <unk> and <unk> for agent list access set us apart from the rest.

Matthew Prince: A leading digital marketplace signed a three year $880000 contract for Zero Trust Magic Wan and application security. The company was looking to simplify optimize and reduce latency and their security architecture and Wan platform.

Matthew Prince: With their incumbent solution. This company founded difficult to rollout consistent security posture, where they can manage security and network together with cloud flare. This customer is able to consolidate seven incumbent products on a cloud first modernized network emerging network and security solutions on our unified platform with a single control plane.

Matthew Prince: With Cloudflare, this customer is able to consolidate seven incumbent products on Cloudflare's modernized network, merging network and security solutions on our unified platform with a single control plane. A Fortune 100 government-sponsored financial services company signed a three-year, $3 million contract for DDoS protection with our Magic Transit, Magic Firewall, and DNS Firewall products. This customer was looking for a solution that was more resilient, performant, and better architected than their incumbents. With Cloudflare's unified platform, this customer is able to improve attack mitigation outcomes on a single pane of glass and eliminate the need for dedicated teams to run and manage multiple products. Another deal with this customer is already underway.

Matthew Prince: A leading construction company signed a three-year, $720,000 contract for Zero Trust, Magic WAN, and Magic Firewall. This customer is looking to shift from a legacy hub-and-spoke architecture, eliminating costly hardware appliances at job sites, to a modern, cloud-native, sassy model. Cloudflare won against a first-generation zero-trust vendor due to our superior network, pace of innovation, ease of use, and speed of deployment. A U.S. government agency signed a one-year, $800,000 contract for Zero Trust, Magic WAN, and R2 object storage.

Matthew Prince: The agency was looking to modernize infrastructure and eliminate a complex network of multiple legacy point solution vendors. Cloudflare displaced a first-generation, zero-trust provider due to its ease of use, speed of deployment, and integrated platform with a single control platform. These are all great wins.

Matthew Prince: And again, I think what we're seeing is more and more customers are turning to the complete Cloudflare platform. Before I hand it over to Thomas, I wanted to spend a couple of minutes talking about Cloudflare Workers, our developer platform. The last few months have been incredible for the entire worker ecosystem.

Matthew Prince: First, we crossed over 2 million active developers building applications on Cloudflow workers. Second, in April, we GA'd a number of key products like D1, our serverless SQL database, HyperDrive, which makes any traditional database perform like it's globally distributed, and Workers AI, which allows developers to run and tune AI models across our global network. We're ahead of schedule rolling out GPUs across our network and now have them running in more than 150 cities globally, making us what we believe is the most widely distributed AI cloud by a huge margin.

Matthew Prince: Our next generation of servers that begin to roll out in Q2 have GPUs built in by default and will support faster inference and even larger, more complicated models. Developers are building incredible new applications using our AI, and we're making it increasingly easy for them. We added support for Python, the second most popular programming language generally and the most common language for AI applications. We rolled out our partnership with HuggingFace, making it one click simple to deploy most of their catalog of models to Cloudflare's network. And we added other bleeding-edge models, including releasing META's LLAMA3 to production simultaneously the day it was announced.

Matthew Prince: One of my favorite aspects of my job is that I feel like I get to see into the future when I talk to developers who are building on Cloudflare Workers. I'm proud that we're delivering the tools they need to build applications that are intelligent, scalable, and lightning fast around the world. Internally and externally, our innovation engine continues to fire on all cylinders. And, as I said, I've never been more excited about the future for Cloudflare, the Internet, and us users who will get to enjoy the benefits of all of this innovation in so many aspects of our lives. With that, I'll turn it over to Thomas. Thomas, please take it away. Thanks.

Thomas Seifert: Thank you, Matthew, and thank you to everyone for joining us. We're pleased with our execution during the first quarter. Sales productivity improved year over year again this quarter. Sales cycles were similar to last quarter, and our new pipeline attainment exceeded our expectations. The quarter was highlighted by sustained momentum with large customers, including our largest new logo win with a major financial institution, and continued progress in the public sector, including our largest contract with new foreign government customers. We're also seeing security remain a high priority for our customers, given continued geopolitical uncertainty and high-profile cyber attacks.

Thomas Seifert: Driving demand for our application and network security businesses, as well as Cloudflare 1. We also maintained our strong commitment to being fiscally responsible and acting as good stewards of investors' capital. During the first quarter.

Thomas Seifert: Operating profit more than doubled year over year, and we generated strong free cash flow of $35.6 million, driven by a notable uptick in collections on our accounts receivable. Turning to revenue, total revenue for the first quarter increased 30% over a year to $378.6 million. From a geographic perspective, the US represented 52% of revenue and increased 28% year over year. EMEA represented 28% of revenue and increased to 35% year over year. APAC represented 12% of revenue and increased 22% year over year.

Thomas Seifert: Turning to our customer metrics, in the first quarter, we had about 197,000 paying customers, representing an increase of 17% year-over-year. We ended the quarter with about 2,900 large customers, representing an increase of 33% year over year and an addition of 122 large customers in the quarter. As Matthew mentioned, we were pleased to see revenue contribution from large customers during the quarter increase again to 67% of revenue, up from 62% in the first quarter last year.

Thomas Seifert: We also added a record number of net new customers year over year across all three large customer cohorts, that is, those spending more than $100,000, $500,000, and $1 million on an annualized basis with Cloudflare. Our dollar-based net retention rate was 115% during the first quarter in consistent sequential. 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 the margin.

Thomas Seifert: First quarter cross margin was 79.5%, representing an increase of 60 basis points sequentially and an increase of 170 basis points year over year. Network CapEx represented 8% of revenue in the first 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 workflows. We expect Network CapEx to be 10 to 12% of revenue in Cisco 2024. Turning to operating expenses,

Thomas Seifert: First quarter operating expenses as a percentage of revenue decreased by 3% year over year to 68%. As we remain committed to driving higher productivity and greater efficiency across our operations. Our total number of employees increased 9% over a year, bringing our total headcount to 3,704 at the end of the quarter.

Thomas Seifert: Sales and marketing expenses were $156.8 million for the quarter. Sales and marketing as a percentage of revenue decreased to 41% from 42% in the same quarter last year. Over the last five quarters, we focused on refining our go-to-market strategies and operations. We are encouraged by the double-digit year-over-year improvement in sales productivity that we again delivered during the first quarter, which continues the upward trend from the trough of early last year toward the productivity levels we consistently achieved in 2021 and early 2022.

Thomas Seifert: We expect this positive trajectory to continue based on the analysis of our pipeline and with the onboarding of Mark Anderson and the other senior go-to-market leaders Matthew referenced earlier. As you've heard us say many times, we are committed to the underlying unit economics of our business and make data-driven decisions to pace hiring. The improvements in sales productivity and other leading indicators of our business give us confidence to invest in additional go-to-market improvements and further expand sales capacity.

Thomas Seifert: As a result, we intend to accelerate headcount additions in the coming quarters as compared to the first quarter. Research and development expenses were $58.7 million in the quarter. R&D as a percentage of revenue decreased to 16 from 18% in the same quarter last year.

Thomas Seifert: General and administrative expenses were $43.2 million for the quarter. G&A as a percentage of revenue decreased to 11 from 12% in the same quarter last year. Operating income was $42.4 million, compared to $19.4 million in the same period last year. First quarter operating margin was 11.2%, an increase of 450 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.

Thomas Seifert: Turning to net income and the balance. Our net income in the quarter was $58.2 million, or a dilutive net income of $0.16 per share. We ended the first quarter with $1.7 billion in cash, cash equivalents, and available for sale security. Free cap flow was $35.6 million in the first quarter on 9% of revenue compared to $13.9 million of 5% of revenue in the same period last year. Remaining performance obligations, or RPO, came in at $1.343 billion, representing an increase of 8% sequentially and 40% year-over-year.

Thomas Seifert: Current RPO was 70% of total RPO. Moving to guidance for the second quarter and full year 2024, we are pleased with our execution during the first quarter. However, ongoing mixed macroeconomic data points and heightened geopolitical uncertainty serve as reminders that we continue to operate in a business environment that remains challenging to predict.

Operator: As a result, we remain prudent in our outlook for 2024. For the second quarter, we expect revenue in the range of $393.5 to $394.5 million, representing an increase of 28% year over year. We expect operating income in the range of $35 to $36 million, and we expect an effective tax rate of 10%. We expect diluted net income per share of $0.14, assuming approximately 360 million shares outside. For the full year 2024, we expect revenue in the range of $1.648 billion to $1.652 billion, representing an increase of 27% year over year.

Operator: We expect operating income for the full year in the range of $160 to $164 million. We expect an effective tax rate of 10% in 2024. We expect our diluted net income per share over that period to be 60 to 61 cents, assuming approximately 361 million shares outstanding. 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.

Operator: 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 for questions. Operator, please pull for questions.

Operator: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. We ask that you please limit yourself to one question and one follow-up. Your first question comes from a line called Matt Hedberg from RC Capital Markets.

Matthew George Hedberg: Your line is open. Great. Thanks, guys. Congratulations on the quarter. Maybe one for Matthew first and then one for Thomas. Matthew, our checks

Matthew Prince: The checks continue to show you're becoming more relevant and sassy. Can you talk a bit more about the progress in that market and why you appear to be taking share in what feels like a more competitive market today? Yeah, you know, I think we're really proud of our team for our ability to execute there.

Matthew Prince: SASE, for those people who aren't as familiar with it, is the forward proxy products that we sell. It helps make sure that employees who are using the Internet are protected from malware, protected from malicious sites, and that the networks that you use as part of your business are as secure as possible. We were able to build our SASE platform on top of Cloudflare's existing network, and the advantage of that is that it means that you get a true platform. Not only do you get those forward proxy products, but a lot of times, we're bundling in our reverse proxy products.

Matthew Prince: And that total solution is extremely compelling in the marketplace, and it's something that no other SASE vendor can match. And so I think we are a newer entrant into this space, but we've caught up very quickly. You can see we have improved more in the Gartner rankings and the Forrester rankings than any other vendor in this space, and companies are taking notice. The other thing that I think everybody really loves is that most security companies think that performance is sort of a nice-to-have, not a must-have.

Matthew Prince: We never accepted that, and so our SASE platform is significantly better and faster than anyone else. And so anyone who's listening to this, if you're frustrated with the VPN that you have to log into, if you're frustrated with whatever service that's providing that, even if it's a new cloud service, if it's slowing you down and making it harder for you to do work, give us a call at Cloudflare, because we can actually improve that and make it significantly better. And that's what Excellent. And maybe just a quick one for Thomas.

Thomas Seifert: I know calculated billings isn't a great metric for you guys based on your model, but I'm wondering how we should think about billings in the context of your expanded usage-based pricing.

Matthew Prince: SaaS platform is significantly better and faster than anyone else and so anyone who is listening to that if you are frustrated with the VPN that you have to log into if you're frustrated with whatever service, that's providing that even if it's a new cloud service. If it's slowing you down and making it harder for you to do work I guess give us a call at <unk> because we can.

Thomas Seifert: Improve that and make it significantly better and that's what we're seeing from customer after customer after customer is that our next generation SaaS platform is winning in this space.

Thomas Seifert: Excellent and then maybe just a quick one for Thomas.

Thomas Seifert: I know calculated billings isn't a great metric for you guys based on your model, but I'm wondering how we should think about billings.

Thomas Seifert: In the context of your expanded usage based pricing model.

Thomas Seifert: usage-based pricing model

Thomas Seifert: Yeah, especially if we compare the fourth quarter to this quarter, the fourth quarter was a very strong quarter both in terms of new business as well as in terms of renewal. But what made this quarter even more special from a comparability perspective is that you had Matthew talk about some very large, significant deals, both in the federal as well as in the commercial space. Some of these very large deals, a pool of fund deals, have a very different shape to them from a current RPO and buildings perspective.

Thomas Seifert: Yes.

Thomas Seifert: Especially if we compare fourth quarter. This quarter fourth quarter was there was a very strong quarter at both in terms of new.

Thomas Seifert: New business as well as in terms of renewal what made this quarter even more special.

Thomas Seifert: From a comparability perspective as you heard from as we talked about some very large significant deals.

Thomas Seifert: Both in the in the center row as well as in the commercial space. Some of these very large deals a pool of funding deals and they are a very different shape to them from our from current <unk> in billings perspective.

Thomas Seifert: One indication.

Thomas Seifert: And one indication, you know, is RPO, it's up 40% year over year where you see this momentum more neutralized and some of the noise taken away. But without any doubt, this business is becoming more complex, and this is then also reflected in some more noise from a quarter to quarter perspective. But overall, we are really happy with the performance in the quarter.

Thomas Seifert: <unk>, it's up about 40% year over year, where you'll see this momentum more neutralized in some of the noise taken away, but oh.

Thomas Seifert: Without any doubt or businesses.

Thomas Seifert: Business is becoming more complex and.

Thomas Seifert: And then also reflected in some more noise from quarter to quarter perspective, but overall, we are really happy with the performance in the quarter.

Speaker Change: Got it thanks, a lot guys.

Andrew James Nowinski: Your next question comes from the line of Andrew Nguinsky from Wells Fargo. Your line is open.

Thomas Seifert: Your next question comes from the line of Andrew Nowinski from Wells Fargo. Your line is open.

Andrew James Nowinski: Great. Thank you very much for taking the question and congratulations on a nice quarter. I wanted to start with a question on workers AI, because I think it's one of the most exciting products you have in your portfolio. You mentioned workers AI, and developers are using your platform to build some new AI applications. Can you just give us some examples of maybe what those apps are and, you know, why they chose workers AI to build on among the many other, you know, alternatives out there?

Andrew James Nowinski: Great.

Unknown Attendee: Thank you very much for taking the question and congrats on a nice quarter.

Andrew James Nowinski: Want to start with a question on Workers' AI, because I think it's one of the most exciting products that you have in your portfolio.

Andrew James Nowinski: Mentioned workers' AI and developers are using your platform to build some new AI applications can you just give us some examples of maybe what those apps are in.

Andrew James Nowinski: Why they chose workers AI to build build out among the many other.

Speaker Change: Alternatives out there.

Matthew Prince: Yeah, Andrew, as I said, one of the most fun parts of my job is getting to see what developers are building. So, let me give you, I don't know, a handful of examples off the top of my head and see if any of these are interesting. You can stop me if they get boring.

Speaker Change: Yes, Andrew.

Matthew Prince: As I said one of the most fun part of my job is getting to see.

Matthew Prince: See what developers are building so let me give you.

Matthew Prince: Hello, I have a handful of examples off the top of my head and see if any of any of these are interesting and stop me if they get boring I think one of the largest E. Commerce platforms out there is starting to use brokers AI to do image classification and generate keywords for their shops, a startup in the drone space is taking imagery.

Matthew Prince: You know, I think one of the largest e-commerce platforms out there is starting to use workers' AI to do image classification and generate keywords for their shops. A startup in the drone space is taking imagery and turning it into 3D models and using workers' AI to do that, and they serve customers around the globe. And so that's interesting.

Matthew Prince: And turning it into three D models.

Matthew Prince: And using workers AI to do that and they service around the globe and so that's interesting.

Matthew Prince: A handful of public platform companies are using workers' AI for video transcription, transcribing, translation, all those things. A multinational online food ordering company, every once in a while, a restaurant doesn't submit a picture for one of the dishes, and so they're actually experimenting with workers' AI to generate pictures of the food that you're serving. Hopefully, they disclose that it's not an actual picture.

Matthew Prince: A handful of.

Matthew Prince: Of the public platform companies are using workers AI for video subscription transcribing translation, although thing is AI.

Matthew Prince: Multinational online soon.

Matthew Prince: Food ordering company.

Matthew Prince: Every once a while restaurant doesn't submit a picture for one of the dishes and so theyre actually experimenting with workers AI to generate.

Matthew Prince: <unk> of the food that you're that you are serving hopefully they disclosed that it's not an actual actual picture.

Matthew Prince: A handful of photo and video editing platforms are using workers' AI or evaluating it in order to do image enhancement and make that better. There's a startup that's generating songs in whatever language you speak and local languages, and they're using workers' AI in order to power their song generation platform. We're seeing a bunch of large consulting companies, public companies, the big gaming companies, all of which are actually worried about shadow AI.

Matthew Prince: Full of Soto and video, adding platforms or are using workers AI are evaluating it in order to do image enhancement and make make that better.

Matthew Prince: There is a startup that's generating.

Matthew Prince: Songs in whatever language you speak in local languages and they are using workers AI in order to.

Matthew Prince: Are there some generation platform, we're thinking about a large consulting companies public companies. The big gaming company, all of which are actually worried about shadow AI and so they are actually using <unk>.

Matthew Prince: And so they're actually using workers' AI gateway in order to understand how their own teams are using workers. Startup is using it as a series of... Enterprise summarization tools, where they can look at a bunch of emails and very quickly summarize them into executive reports. There's another startup that's creating an AI search engine. And there's a public company in the financial services space that's doing real-time fraud detection. There are people who are finding ways to, in the renovation space. How can you imagine, before you hire a contractor, what the space is going to look like in another sense?

Matthew Prince: AI gateway in order to understand how their own teams are using our workers.

Matthew Prince: Startup is using.

Matthew Prince: It is a series of.

Matthew Prince: Enterprise, some summarization tools, where they can look at a bunch of emails and very quickly summarize them into executive reports theirs.

Matthew Prince: Another startup is creating an AI search engine.

Matthew Prince: A public company in the in the financial services space is doing real time fraud detection. There are people, who are who are finding ways to.

Matthew Prince: In our renovation space, how can you imagine.

Matthew Prince: For you hire a contractor what the space is going to look like.

Matthew Prince: I mean, I can just go on and on and on with example after example after example, and our team just hands these to us every day, and it's so exciting to see what people are doing in this space and the different ways that they're using it. In terms of why, what is it about Cloudflare that's unique? I think there are sort of three things that stand out to me about it.

Matthew Prince: In another sense I mean, I can just go on and on and on with example. After example, after example, and our team just hands. These to US every day and it's so exciting to see what people are doing in this space and the different ways that they are using it in terms of why what what is it about south Florida. That's unique I think there are sort of three things that stand out.

Matthew Prince: To me about it. The first is just the performance of class our workers AI, because we are distributed around the world and today over 150 locations globally as we serve customers that serve a global audience. We can just give them a much better experience than having to ship all of your code back to some central location.

Matthew Prince: The first is just the performance of Cloudflare Workers AI. Because we are distributed around the world, and today there are over 150 locations globally, as we serve customers that serve a global audience, we can just give them a much better experience than having to ship all of your code back to some central location. The second is that we can actually be significantly more cost-effective. If you're using one of the big hyperscale clouds in order to do any sort of AI task, it's up to you to manage efficiency.

Matthew Prince: Is that we can actually be significantly more cost effective if you're using one of the big Hyperscale cloud in order to do in order to do any sort of AI task. It's up to you to manage efficiency you have to make sure that you're getting the most out of the GPU that you are renting, whereas what we do is much more of a surplus AI model, where you are.

Matthew Prince: You have to make sure that you're getting the most out of the GPU that you're renting, whereas what we do is much more of a serverless AI model where you only pay for the tasks that you actually run.

Matthew Prince: Only pay for the task that you actually run so, especially in a lot of the startups. They are finding that they can just get significant better efficiencies significant better.

Matthew Prince: So especially in a lot of startups, they're finding that they can just get significantly better efficiency, significantly better costs if they use our platform in order to deliver that AI experience. And then the third thing is that because we are distributed globally and because of the fact that we have such a rich ecosystem that we've built where you can get a soup-to-nuts AI experience, that's allowing people to actually fine-tune their models.

Matthew Prince: Cost if they use our platform in order to deliver.

Matthew Prince: That that AI experience and then the third thing is that because we have distributed globally and because of the fact that we have such a rich ecosystem that we've built where you can get a soup to nuts AI experience, that's allowing people to actually fine tune their models. So my Silly example of this is that if you have an AI.

Matthew Prince: So my silly example of this is that if you have an AI that's responding back to a British user and describing what something looks like versus a U.S. user, in the U.K., you want color to be spelled C-O-L-O-U-R. In the U.S., you want it to be spelled C-O-L-O-R. Because we can regionally tune that, we can actually correspond with all of the local and regional differences all around the world.

Matthew Prince: That's responding back to British user and describing what something looks like versus a U S user in the U K you want color to be spelled C. O. L. O. You are in the U S. You wanted to be spelled C. O L. O R. Because we can regionally tune that we can actually correspond with all of the local and regional differences.

Matthew Prince: That's something that you don't get anywhere else, and that, I think, is going to be really important for these inference tasks. They're going to want to be run locally for both normative and experience reasons, but also for the regulatory reasons that are out there. So I'm super excited about what we're seeing in the AI space. I'm really proud of our team for being ahead of our rollout. We've had to actually physically get geared up to over 150 cities worldwide, and we're still on track to, by the end of this year, we think be able to do AI inference from nearly every location that make up Cloudflare. So, thank you so much for your time.

Matthew Prince: All around the world, that's something that you don't get anywhere else and that I think it's going to be really important for these inference tasks are going to want to be run locally for both the.

Matthew Prince: The normative in and experienced reasons, but also for the regulatory reasons that are out there. So I think I made super excited about what we're seeing in the <unk>.

Matthew Prince: I space I'm really proud of our team for being ahead of our rollout we'd had to actually physically get geared up over 150 cities worldwide and we're still on track to by the end of this year, we think be able to do AI inference from nearly every location that makes up the southwest network.

Thomas Seifert: Well, that was an incredibly comprehensive answer. Thank you so much, Matthew. Maybe just a quick one for Thomas. You know, you guys have made some great new hires, beefing up your go-to-market on the channel side with Tom Evans and, of course, Mark Anderson. I know you talked about the uncertain macro in the short term, but I was wondering if you're factoring in any sort of conservatism into your annual outlook for the go-to-market changes that, you know, you guys might make as a reason for perhaps not raising your guidance despite the strong Q1. Thank you.

Speaker Change: Well that was an incredibly comprehensive answer thank you so much Matthew.

Thomas Seifert: Maybe just a quick one for Thomas you know you guys have made some great new hires beefing up your go to market on the channel side with time Evans and of course, Mark Anderson.

Speaker Change: I know you've talked about the uncertain macro.

Thomas Seifert: In the short term, but I was wondering if you're factoring in any sort of conservatism into your annual outlook for the go to market changes that.

Thomas Seifert: You know you guys are it might make as a reason for perhaps not raising your guidance.

Thomas Seifert: Despite the strong Q1, thank you.

Thomas Seifert: As you know, conservative is not a word that we use when we talk about giving guidance. We tend to be thoughtful and prudent about it. And, of course, it's a balance of the tailwinds that we see, but also the uncertainty that is out there. And, you know, every major go-to-market transformation, or, in our case, it's actually more of an evolution, and that's reflected in our guidance, too.

Thomas Seifert: As you know conservative this is not a word that we use when you talk about giving guidance.

Thomas Seifert: We tend to be thoughtful.

Thomas Seifert: Every mayor.

Thomas Seifert: A major go to market transformation or in our case, it's actually more of an evolution service risks.

Speaker Change: Got it thank you.

Brent John Thill: Your next question comes from the line of Brent Thill from Jeffreys. Your line is open.

Matthew Prince: Thanks. Matthew, on federal, the last couple quarters you've had a theme of some pretty big wins, and I'm just curious if you could give us a sense of where you think penetration is, and is it fair to say the flywheel is spinning faster here, at least from what you guys are giving us in terms of the breadcrumbs around the federal business?

Brent John Thill: Thanks Matthew.

Brent John Thill: On central the last couple of quarters, you've had a theme of some pretty big wins and I'm. Just curious if you could give us a sense of where you think penetration is and is it fair to say the flywheel spinning faster here at least from what you guys are giving us in terms of the bread crumbs around the federal business.

Matthew Prince: Yeah, I think federal is exciting for us. You know, last year we achieved FedRAMP certification. That's opened a lot of FedRAMP, or excuse me, federal deals to us. I think we've always had a great relationship with a lot of the members of the federal government. I think that the thing that is hard to appreciate as I talk to, you know, our federal customers is how much they appreciate that when they ask us to help with something, we step up and help.

Matthew Prince: I think federals is is exciting for us.

Matthew Prince: Last year, we achieved a fed ramp certification that's opened a lot of fed ramp or excuse me a federal deals to us I think we'd always had a great relationship with a lot of the member.

Matthew Prince: Members of the federal government I think that the thing which is hard to appreciate that.

Matthew Prince: As I talked to.

Matthew Prince: Our federal customers is how much they appreciate that when they ask us.

Matthew Prince: To help with something we step up and help. So this is this year in the United States, obviously election year, we've been running the Athenian project since 2016, which provides our services at no cost to anyone who is helping administer an election anywhere in the United States.

Matthew Prince: So, you know, this year in the United States, obviously an election year, we've been running the Athenian Project since 2016, which provides our services at no cost to anyone who is helping administer an election anywhere in the United States. We do similar things around the rest of the world.

Matthew Prince: We've done similar things around the rest of the world. We've looked at the White house on a number of initiatives, including project safe schools in order to protect the most vulnerable schools and communities across across the country.

Matthew Prince: We've worked with the White House on a number of initiatives, including Project Safe Schools, in order to protect the most vulnerable schools and communities across the country. And, you know, that is the foundation which I think has built an incredible amount of trust and an incredible amount of goodwill in the federal space. And so today, as the world is getting scarier and scarier, and we're seeing more and more cyber attacks, our federal business, I think, is being driven by the fact that we have great products, the fact that we have the certifications that are required to serve the federal government, and the fact that we've built an incredible relationship as being not just a trusted vendor but a true partner where we have helped make sure that when there's any public institution And I think that's now turning into more and more business that is also generating significant revenue for us.

Matthew Prince: And that is all the foundation, which I think has built an incredible amount of trust and an incredible amount of goodwill in the federal space and so today as the world is is getting scarier and scarier and we're seeing more and more cyber attacks.

Matthew Prince: The federal our federal business I think is being driven by the fact that we have great products. The fact that we are have the certifications that are required to serve the federal government and the fact that we built an incredible relationship as being a trusted vendor, but a true partner.

Thomas Seifert: And then just quickly, for you, Ann Thomas, this AI CapEx war debate, you saw all the big hyperscalers take CapEx way up. How do you do this efficiently? You mentioned bringing gear to 150 cities, you're ahead in GPO rollout. Explain how you're, is this, is there only one way, only one way to go with costs? Or is there a way you can do this in a more efficient way than maybe

Speaker Change: And then just quickly.

Matthew Prince: For you and Thomas This AI Capex War debate you saw all the big Hyperscale or take Capex way up.

Thomas Seifert: How do you do this efficiently you mentioned, bringing year to 150 cities or HUD in G. P. A rollout.

Thomas Seifert: Explain how your.

Thomas Seifert: This is the only which way only one way to go with costs are.

Thomas Seifert: Is there a way you can do this in a more efficient way than maybe others.

Matthew Prince: I'll start and then Thomas may have more to add. No, I think the thing which is really magical about Cloudflare's business, which is really elegant, is that it all fits together so well. So, for instance, as we sell more of our Zero Trust and SASE products. Those are extremely high-margin products, and they don't require a significant additional amount of CapEx. That then frees up our ability to invest that CapEx in other areas, including in the AI space.

Unknown Attendee: I'll start and then and then tell US may have have more to add I think the thing which is really magical about cloud search business, which is really elegant.

Matthew Prince: Is that it all fits together so well.

Matthew Prince: So for instance, as we sell more of our zero Trust in SaaS products.

Matthew Prince: And those are extremely high margin products and they don't require a significant additional amount of capex that then frees up our ability to invest back capex in other areas, including in the AI space I think we made some very smart decisions.

Matthew Prince: I think we made some very smart decisions, specifically reserving space on the equipment that we deployed, knowing that AI would be part of our story at some point in the future. We really wanted to make sure that was the case. That means that as we deploy CapEx, it's literally not shipping an entire server to support AI but shipping just the GPU cards that go into existing servers that are in the field. That reduces the amount of CapEx that has to be deployed. Again, it works because it is all running on one unified network.

Matthew Prince: Specifically reserving space and the equipment that we that we deployed knowing that AI would be part of our story at some point in the in the future and so we really wanted to make sure. That's the case that means that as we deploy capex, it's literally not shipping an entire server to support AI, but shipping just the GPU cards that go.

Matthew Prince: Into existing servers that are in the field that reduces the amount of capex that has to be deployed and again. It works because it is all what running on one unified network. The fact that every server across <unk> entire platform is capable of performing any function that we need that has allowed us an enormous amount of <unk>.

Thomas Seifert: The fact that every server across Cloudflare's entire platform is capable of performing any function that we need has allowed us an enormous amount of flexibility in how we can deploy things. The other part is that a lot of the hyperscale players are really doing is they're renting out a full GPU or a full machine, whereas our business is a little bit different. We're selling the actual work that those machines do.

Thomas Seifert: The the Hyperscale players what they are really doing is theyre renting out.

Thomas Seifert: Our full GPU or a full.

Thomas Seifert: A full machine, whereas our business of all the different we're selling the actual work that those machines do what that means is that we can then be much more efficient at figuring out how to allow multi tenant use of the equipment that we have provided and we can make sure that the utilization is extremely high so.

Thomas Seifert: What that means is that we can then be much more efficient at figuring out how to allow the multi-tenant use of the equipment that we have provided, and we can make sure that the utilization is extremely high. Again, I don't know the exact numbers for each of the hyperscalers, and they all have slightly different characteristics, but in the average hyperscaler, if they're getting maybe 20% utilization out of a CPU or GPU resource that they've deployed, we can often be many times that in terms of utilization, where on CPUs, we're seeing almost 80% utilization.

Thomas Seifert: And again these are I don't know the exact numbers for each of the Hyperscale orders and they all have different slightly different characteristics, but in the average hyperscale or if theyre getting maybe 20% utilization out of our CPU or GPU resources. They've deployed we can often be many times that in terms of the utilization, we're aware and Cpus we're seeing.

Thomas Seifert: That efficiency allows us to get more out of every CapEx dollar. Finally, I would say that inference is different than training, and so you need different resources for that. You don't necessarily need the most cutting-edge GPUs in order to do inference tasks, and so that has meant that we haven't had to chase down GPUs that are in limited supply. It's also meant that we can be much smarter about picking and choosing between different GPU vendors and matching workloads to whoever it is that can provide the best service, and I think over time, that gives us a significant advantage over people who are just trying to Thanks.

Thomas Seifert: Almost 80% utilization so that efficiency allows us to get more out of every capex dollar finally, I would say that inference is different in training and and so you need different resources for that you don't need necessarily the most cutting edge.

Thomas Seifert: <unk> in order to do inference tasks and and so that has that has meant that we haven't had to chase down what is that GPS that have limited quantity. It's also meant that we can be much smarter about.

Thomas Seifert: Picking and choosing between different GPU vendors and matching workloads to whoever it is that that can provide the best service and I think over time that gives us a significant advantage over people who are just trying to rent one particular type of GPU or or a rent that and let the customers figure out.

Thomas Seifert: How to be as efficient as possible.

Thomas Seifert: Thanks. There's not much to add to this.

Thomas Seifert: Not much to add to this we were at 8% to 9% of <unk>.

Joel P. Fishbein: We were at eight to 9% of revenue with network CapEx in the first quarter. We said the year would be close to the range of 10 to 12, and this includes the rollout of GPU capacity pretty much to every server and every location we have. I think just to underline what Matthew just said, the huge variety of use cases we see and that Matthew talked about when he talked about worker AI deployment with developers gives us huge insight into how we optimize this capacity.

Joel P. Fishbein: Revenue for.

Joel P. Fishbein: The master talked about when he talked about working with AI deployment, what's developers because of huge inside and how we optimize this capacity in the smart one card that is good for them and if wherever your inference task and disability to optimize our investment mix and <unk>.

Joel P. Fishbein: And there's not one card that is good for every inference task. And this ability to optimize our investment mix in GPU capacity to that need based on the huge variety of use cases we see is, I think, an additional big factor that allows us to be so efficient with our CapEx.

Joel P. Fishbein: Paucity toured that need based on the huge variety of use cases, we see it.

Joel P. Fishbein: I think an additional big factor that allows us to be so efficient with our capex spend.

Matthew Prince: Your next question comes from the line of Joel Fishbein from Truist Securities. Your line is open.

Joel P. Fishbein: Your next question comes from the line of Joel Fishbein from Truest Securities. Your line is open.

Thomas Seifert: Thank you. Thanks for taking the question and for great execution in the quarter, 30% top-line growth. Matthew, one for you and a follow-up for Thomas.

Joel P. Fishbein: Thank you. Thanks for taking my question and great execution in the quarter, 30% topline growth.

Joel P. Fishbein: Matthew one for you and a follow up for Thomas Matthew.

Jonathan Frank Ho: Matthew, you talked a lot about the hiring of go-to-market talent and just infusing on that. How is it – you know, there seems to be a war on talent for AI engineers. You've seen a few companies do accu-hires where they're just, you know, draining talent. Curious where Cloudflare is with hiring and retaining talent and if it's fitting into your normal, you know, compensation things, you know, capacity.

Joel P. Fishbein: You talked a lot about the <unk>.

Jonathan Frank Ho: Irene.

Jonathan Frank Ho: Go to market talent.

Jonathan Frank Ho:

Jonathan Frank Ho: Compensation things.

Jonathan Frank Ho: Capacity.

Matthew Prince: Yeah, I think we are very fortunate that across the board, we are seen as a place where if you want to be innovative, if you want to invent the future, or if you want to sell really, really incredible products, or help market them, or frankly, work on some of the hardest public policy issues, or get to work with Thomas on the world's coolest finance team, Cloudflare is a place where you can go. And so when you see someone like Mark Anderson, when you see someone like Stephanie Cohen, and you see the engineers who are coming to Cloudflare every day, you know, we had 350,000 people apply to work at Cloudflare in Q1 for, I don't know, 250 jobs, roughly. That's extraordinary.

Matthew Prince: Yes, I mean I think.

Matthew Prince: We are seeing is a place where if you want to be innovative.

Matthew Prince: If you want to to invent.

Matthew Prince: And then the future.

Matthew Prince: Or if you want to sell really really incredible products or help market them or frankly work on some of the hardest public policy issues or are you know get to work with Thomas.

Matthew Prince: On the world's coolest finance team.

Matthew Prince: That you that cloud player is a place where you can go and so when you see someone like Mark Anderson only see someone like Stephanie Cohen and AUC. The engineers, who are coming to cloud for every day, we had three.

Matthew Prince: 350000 people apply to work at <unk> in Q1.

Matthew Prince: Sure.

Matthew Prince: 250 jobs roughly.

Matthew Prince: That's extraordinary.

Matthew Prince: And that's up over what was an extraordinary Q1 of last year, up almost 50% year over year. So I think that the talent war is real, but we are in a fortunate position where we are winning that war. We have not seen an uptick in any regrettable attrition.

Matthew Prince: And that is that and that's up over what was an extraordinary Q1 of last year up almost almost 50% year over year. So I am.

Matthew Prince: I think that the talent or is real but we're in a fortunate position, where we are we're winning that war, we have not seen an uptick in our regret any regrettable attrition.

Matthew Prince: It's been it's I think we're very fortunate to be working on some of the world's hardest problems in some of the smartest people in the world want to come and help us on this.

Thomas Seifert: That's great. And Thomas, for you, just in terms of sales productivity, really strong improvement again. Do you expect that to change with the acceleration of new hires, sales hires, or are you hiring more experienced people so their time to productivity is shorter?

Speaker Change: That's great and Thomas for you just in terms of sales productivity really strong improvement again do.

Thomas Seifert: Do you expect that to change.

Thomas Seifert: With the acceleration of new hires sales hires are you hiring more experienced people. So their time to productivity is shorter.

Thomas Seifert: This is, of course, what the goal is. But, you know, even if you hire experienced people, there's a ramp-up curve that comes along with it. We are moving upmarket. We are getting to larger and larger customers, more strategic accounts. They're more complex. There's more layers.

Thomas Seifert: This is of course what.

Thomas Seifert: The goal is but you know even if you hire them.

Thomas Seifert: <unk> people, there's a ramp up.

Thomas Seifert: Okay.

Thomas Seifert: Along with it we are moving upmarket, we are getting to larger and larger customers are more strategic accounts, they're more complex, they're some overly.

Thomas Seifert: So John this balances itself out.

Thomas Seifert: So, you know, this balances itself out. We hire great talent. We see great productivity improvements. But, as I said earlier, every transformation or evolution in the go-to-market side comes with potential risk. And we try to be thoughtful when we give guidance that there might be downside risks.

Thomas Seifert: Higher create talent, we see great productivity improvement, but as I said earlier.

Thomas Seifert: Every transformation or evolution of the go to market side comes with potential risks.

Thomas Seifert: We tried to be thoughtful when we when we give guidance.

Thomas Seifert: There might be downside implied.

Jonathan Frank Ho: That's great. Thank you so much. Your next question comes from the line of Jonathan Ho from William Blair.

Speaker Change: That's great. Thank you so much.

Jonathan Frank Ho: Your next question comes from the line of Jonathan Ho from William Blair. Your line is open. Hi, I just wanted to follow up on that last question and just try to better understand from a sales productivity perspective.

Jonathan Frank Ho: Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.

Jonathan Frank Ho: Hi, I just wanted to follow up on that last question and just try to better understand from a sales productivity standpoint, what inning are we in and where do you think mark can add the most value.

Matthew Prince: I'll start and then Thomas Thomas can maybe add some more if he has it. You know, I think that we are still early in the journey of being really great at enterprise. I think Mark's comments said that our product is great, but our ability to really sell to large enterprises, to understand their needs and drive more of a strategic relationship is something that we are continuing to work on.

Thomas Seifert: I'll start and then Thomas Thomas and maybe add some more if he has it I think that.

Matthew Prince: I think we are still early in the journey of being really great at enterprise.

Matthew Prince: In Mark's comments he has.

Matthew Prince: Said that our product is great.

Matthew Prince: But our ability to really sell.

Matthew Prince: Two large enterprises to understand their needs and and you know drive more of a strategic relationship is something that we are continuing to work on that that is.

Matthew Prince: That is, I think the last 18 months were all about us sort of cleaning up the sales organization, and now, with Mark on board, it's all about now how do we get the real professionals on board where we can become that strategic vendor for literally every large company in the world. There is no large company that doesn't have a need for what it is that we sell. What I think is really encouraging is that where we have done that, where we have really nailed it, we are becoming one of the largest IT vendors for those companies, and some of those are very large companies.

Matthew Prince: I think the.

Matthew Prince: The last 18 months were all about us sort of cleaning up the sales organization and.

Matthew Prince: And now with Mark on Board, it's all about now how do we get the real professionals on board, where we can become that strategic vendor for literally every large company in the world. There is there is no large company that doesn't have a need for what it is that we sell but I think it is really encouraging is where we have done that we're.

Matthew Prince: Are we where we have where we have really nailed that.

Matthew Prince: We are becoming one of the largest it vendors for those for those companies and some of those are very large companies and the fact that we won a very large financial services organization and became a strategic vendor for them.

Matthew Prince: I think the fact that we won a very large financial services organization and became a strategic vendor for them, as I said, is a beachhead for us to go in and take much more share. I think all the major financial services institutions in the United States use us for something, but I wouldn't say that we are a strategic vendor for many of them yet. We are going to be, and we can do so many things in the networking and security space that they absolutely need, and as we, I think, mature that process, it's great.

Matthew Prince: And that as I said as a beachhead for us to go in and take much more share almost all of the financial major financial service institutions in United States use us for something but I wouldn't say that we are a strategic vendor for for many of them yet we're going to be and we can do so many things in the networking and security space.

Matthew Prince: Absolutely need and as we I think mature that process, it's great I can't imagine someone who is better for this role then Mark Anderson and and again it was not the plan when we added <unk> to our board four years ago, but he's gotten to know us over that period of time and it's just incredible to see.

Matthew Prince: I can't imagine someone who is better for this role than Mark Anderson, and again, it was not the plan when we added him to our board four years ago, but he has gotten to know us over that period of time, and it's just incredible to see the high caliber of talent who is excited to lean forward and work with him going forward. Is there something specific in the macro that's maybe causing you a little bit of pause?

Matthew Prince: The high caliber of talent, who is excited to lean forward and work with them going forward.

Matthew Prince: Anything that you can sort of point to in terms of that additional concern on the outlook? Thank you. You know, I think that we get a lot of signals based on where we sit on the internet. And, and what I would say right now is that there's not any, one thing pointing in any one clear direction. But there's a lot of noise pointing in a number of different directions that give us, I think, reason to be cautious.

Matthew Prince: Excellent and just a quick follow up is there something specific in the macro that's maybe causing you a little bit of a pause on anything that you can sort of point to in terms of that additional concerned on the outlook. Thank you.

Matthew Prince: I think that we.

Matthew Prince: We get a lot of signal based on where we sit on the on the Internet and and what I would say right now is that it's not any any one thing pointing in any one clear direction, but there is a lot of noise.

Matthew Prince: Noise pointing in a number of different directions that give us.

Matthew Prince: The reason to be cautious.

Matthew Prince: And and I think that that is.

Matthew Prince: That is that as our in our very nature is always taking as much signal being data driven.

Matthew Prince: And making sure that we're making investments in a responsible way and so.

Matthew Prince: And, and, and I think that that is, that is, our very nature is always taking as much of a signal, being data driven, and making sure that we're making investments in a responsible way. And so, you know, I think the obvious thing is the geopolitical uncertainty around the world. That absolutely causes changes in buying behavior. On the other hand, some of that change, those changes in buying behavior, have been positive for us, as we're seeing, especially in our government business, pick up because of that uncertainty.

Matthew Prince: I think the obvious thing is the geopolitical uncertainty around the world.

Matthew Prince: That that absolutely causes changes in buying behavior.

Matthew Prince: On the other hand, some of that change those changes in buying behavior have been positive for us as we're seeing especially in our government business pick up because of that that uncertainty. So there are puts and takes that are out there.

Matthew Prince: So there are puts and takes that are out there. What we want to do is just make sure that we are being prudent and responsible and thoughtful as we make investments. And as we think through how to handle the responsibility that we have with investors' capital and that they've trusted us with.

Matthew Prince: What we want to do is just make sure that we are being prudent and responsible and thoughtful as we make investments and as we think through how to handle the responsibility that we have with with investors capital and that they've trusted us with.

Speaker Change: Thank you.

Thomas Blakey: Your next question is from the line of Tom Blakey from KeyBank Capital Markets. Your line is open.

Matthew Prince: Sure.

Matthew Prince: James from the line of Tom Blakey from Keybanc capital markets. Your line is open.

Matthew Prince: Hey guys, great. Thanks for taking my question. Now, I was wondering about the recent Nafeli acquisition around multi cloud networking and a possible acceleration to, you know, act two. There's probably a question about zero trust SASE services, I guess, specifically, um, you know, maybe because the impetus of the deal, maybe there was some pent up demand that maybe this, you know, addition of multi cloud networking technology could maybe expand Cloudflare's reach from a zero trust perspective And I have a follow-up question.

Thomas Blakey: Hey, guys great. Thanks for taking my question.

Matthew Prince: I was wondering about the recent Maselli acquisition.

Matthew Prince: Around multi cloud networking and possible acceleration to act to that as part of your question on zero trial SaaS services I guess specifically.

Matthew Prince: Maybe because the impetus of the deal maybe there was some pent up demand that maybe this.

Matthew Prince: Addition of multi cloud networking technology could may be expand.

Matthew Prince: Theres reach from a zero Trust perspective, I'd love to hear your comments, there and I have a follow up.

Matthew Prince: Yeah, we're incredibly excited to have the Nafeli team on board. We want to make it – we think the space that Cloudflare competes in is in the networking and in the security space, and so making it very easy to get traffic onto our network, to connect to any other cloud, is just a critical aspect. And it seemed like something that we were either going to have to, you know, build or buy.

Speaker Change: Yes, we're incredibly excited to have the nacelle a team onboard we want to make it.

Matthew Prince: We think the space that clients are competes in is in the in the networking and in the security space and so making it very easy.

Matthew Prince: To get traffic onto our network to connect to any other cloud is a critical aspect and it seemed like something that we were either going to have to build or buy and we came across in the Sally.

Matthew Prince: And we came across the Nafeli team in part because they came in through our own LaunchPad program, which is a program for customers and startups that use Cloudflare's resources, and especially our workers' platform, in order to build. What is powerful about that is we use that same platform to build ourselves. And so when we find great teams working in a space that we think is exciting, building on the same platform that is the same platform that our own team uses, that just decreases the risk of any kind of technical integration, you know, any kind of sort of Frankensteining of your platform that's out there. And so the Nafeli team, you know, was really great, and we were excited to announce it. We think that, again, our hurdle rate for acquisitions and M&A remains very, very high.

Matthew Prince: Team in part because they came in through our own.

Matthew Prince: One.

Matthew Prince: <unk> customers that and startups that use cloud players resources.

Matthew Prince: And especially our workers platform in order to build what's powerful about that is we use that same platform to build ourselves and so when we find great teams working in a space that we think is exciting building on the same platform that is the same platform that our own team uses that that just.

Matthew Prince: Decreases the risk.

Matthew Prince: Our hurdle rate for acquisitions, and M&A remains very very high.

Matthew Prince: But some of these small acquisitions where we found great teams working in interesting spaces have worked incredibly well for us. You know, a couple other examples that are very similar to the baseline that we acquired are, again, giving serverless observability to our platform. That's one of the top things that developers on our platform are looking for. And, again, another time where we found someone who's using our own platform in order to build out a great observability platform there.

Matthew Prince: But this was some of that some of these small acquisitions, where we found great teams working on interesting spaces as works incredibly well for US a couple of other examples that are that are very similar.

Matthew Prince: Baseline that we acquired is again.

Matthew Prince: Giving surveillance.

Matthew Prince: Observe ability to our platform. That's one of the number one things that developers on our platform. We're looking for and again another time, where we found some of it is using our own platform in order to in order to build out a great observe ability platform. There a party kit, which is a real time integration service again.

Matthew Prince: PartyKit, which is a real-time integration service, is just a natural extension of what it is that we're doing. So, again, none of these are very large acquisitions, but I think they're extremely strategic. I think they accelerate our ability to get into more markets. And what I love is that they often use our own existing developer platform, which means that they are just incredibly easy for us to integrate with the rest of CloudFlare and decrease the technical risk as we go with M&A.

Matthew Prince: It's just a natural extension of what what it is that we're doing so.

Matthew Prince: Again, none of these are very large acquisitions, but I think theyre extremely strategic I think they accelerate our ability to get into more markets.

Matthew Prince: And what I love is that they often times are using our own existing developer platform, which means that they are just incredibly easy for us to integrate with the rest of the class there and decrease the technical risk as we are as we go.

Matthew Prince: In all three of those cases, also, the founders and the team, they're just sort of CloudFlare-like people, and they're people that we're so excited and proud to have on the team, and I think you'll hear more about the wins that we have from all those areas over the quarter.

Thomas Blakey: Well, that'd be great to get more, you know, high-margin SASE revenue here. I'd like to go, as a segue there, back to Brent's question on GPU, and I think you gave a great question about the unique architecture of the platform and this kind of multi-tenancy, but is it, just seeing the explosive growth of other CSPs and the approaches that folks are taking there, is it fair to characterize this way that CapEx would have to go up relatively significantly if, say... You know, a handful of these applications being built on your platform, you know, explode to the like of something like a copilot.

Matthew Prince: Well that'd be that'd be great to get more high margin SaaS revenue here I'd like to go as a segue there back to Brian's question on.

Thomas Blakey: GPU and I think you gave a great question about the unique architecture of the platform and this kind of multi tenancy.

Thomas Blakey: Folks are taking there is it fair to characterize.

Thomas Blakey: This way that that Capex would have to go up relatively significantly.

Thomas Blakey: <unk>.

Thomas Blakey: A handful of these.

Thomas Blakey: Applications being both on your platform.

Thomas Blakey: Blow to the lack of something like a copilot.

Matthew Prince: Well, I think that what I would look at is CapEx as a percentage of revenue, and I think one of the things that's always been magical about Cloudflare has been that we've been able to invest behind the demand, not ahead of the demand, and so we're really good at rolling out more capacity wherever we need it, and so that would be an amazing problem to have if we have to – so it may be that we, on a just pure dollars basis, end up spending more on GPUs, but as a percentage of revenue, we feel very comfortable that we can service these applications very well at the percentage of revenues that is in our forecast.

Thomas Blakey: Well I think that what I would look at as Capex as a percentage of revenue and I think one of the things that's always been magical about cloud flair has been that we've been able to invest behind the demand not ahead of the demand and so we are really good at rolling out more.

Matthew Prince: Capacity wherever wherever we need it and so that'll be an amazing problem to have if we have to we thought it may be that we on a on a just pure dollars basis end up spending more on gpus, but as a percentage of revenue we feel very comfortable that we can service. These applications are very well.

Matthew Prince: At the percentage of revenues that it is in our in our forecast going forward.

Thomas Seifert: What I would want to add here is the efficiency of the architecture is really driving this. We talked about the revenue mix that allows us to invest in GPUs with more and more revenue driven by Zero Trust products. The efficiency that is driven by the hardware architecture is an additional factor that goes into this. We are in the rollout of what we call Generation 12 now of our service architecture. It's a little bit more than a 25% total cost of ownership reduction in this new generation, so that is 25% more CapEx we can deploy towards GPUs. So the levers are just not in one place; they're in many places. And the combination of this is really driving this incredible efficiency.

Matthew Prince: Thank you, Matt what I would regard.

Thomas Seifert: The revenue mix that allows us to invest into gpus by more and more revenue driven by fewer trust products.

Thomas Seifert: The rollout of what we call generation 12 now of our service.

Thomas Seifert: Tom.

Thomas Seifert: Cost of ownership reduction.

Thomas Seifert: That's great. Well, maybe we'll look for you breaking out AI or Gen-AI revenue one of these days, Thomas.

Speaker Change: Really driving this incredible efficiency.

Thomas: Well, that's great well, maybe we will look for you breaking out AI or Gen. AI revenue one of these days notice.

Alexander Henderson: As soon as it is the right thing to do, at the moment, I think, you know, we shouldn't get tired of saying that the benefit of driving adoption is significantly more important than driving more revenue in the short term. This is why the efficiency is so high. We see so many use cases from 2 million developers being on the platform. This far-sighted approach has served us well, and we'll continue with it.

Speaker Change: As soon as it is.

Alexander Henderson: The right thing to do.

Alexander Henderson: At the moment, I think we shouldn't get tired, but the benefit and driving adoption.

Alexander Henderson: Can they frequently more important than driving more revenue in the short term. This is why the efficiencies are highest.

Alexander Henderson: So we see so many use cases from 2 million developers being on the platform.

Alexander Henderson: Thus far sighted approach has served us well.

Alexander Henderson: Continue with it.

Speaker Change: Okay. Thank you.

Matthew Prince: Our next question comes from the line of Alex Henderson from Needham. The line is open. OK.

Alexander Henderson: Your next question comes from the line of Alex Henderson from Needham.

Alexander Henderson: Great. Thank you so much.

Alexander Henderson: Great. Thank you so much.

Matthew Prince: I wanted to ask you a question about your comments about macro conditions. About two years ago, I think it was, you guys gave an early warning that the economy had some risks attached to it and that you were seeing signs of a slowdown. And that actually occurred, you know, six, nine, 12 months later. So with this commentary on this call, are you suggesting that you're seeing similar kinds of characteristics in the conditions, or is this just, a little bit more noise about it, and therefore, you're being prudent, but you just don't have any visibility to whether that's going to happen yet? Can you contrast this event to several years ago when you gave that that caution?

Alexander Henderson: I wanted to ask a question about your comments about the macro conditions.

Matthew Prince: Two years ago I think.

Matthew Prince: It was you guys.

Matthew Prince: Had some risks to it that you were seeing signs of slowdown and that actually occurred.

Matthew Prince: Six 912 months later and.

Matthew Prince: So with this commentary.

Matthew Prince: On this call are you suggesting.

Matthew Prince: Youre seeing similar kind of characteristics to the conditions or is this just.

Matthew Prince: Can you contrast, this event to several years ago, when you gave that that caution.

Matthew Prince: Yeah.

Matthew Prince: Yeah, Alex, um, you know, I so two years ago, I felt like we had a pretty clear signal that the economy was slowing down. I would say that we don't have as clear a signal today that that's the case.

Speaker Change: Yeah Alex.

Matthew Prince: Yeah.

Matthew Prince: I would say that we don't have as clear a signal today that that's the case.

Matthew Prince: It's that we see things that worry us, but we also see things that give us some level of optimism. And so I think describing the crystal ball as cloudy is the right thing to do. What I like, though, is that we have a crystal ball. We can make investments, and we can think through what that future looks like, in part because we just get much more signals than I think the average enterprise SaaS company gets.

Matthew Prince: It's we see things that worry us.

Matthew Prince: But we also see things that that they give us some level of optimism and so I think describing the crystal ball is cloudy.

Matthew Prince: Is the right is the right thing what I like those that we have a crystal ball.

Matthew Prince: And I think that that has served us well, and I think we try not to be surprising in any way. And so as we see a – I would say that there is certainly an uptick in uncertainty and sort of potential downsides this quarter over last quarter, but I would not characterize it as the same concerns that I had in Q1 of last year, when we saw what we thought was much, much clearer.

Matthew Prince: Uncertainty and sort of potential downside this quarter over last quarter.

Matthew Prince: But I would not characterize it as the same concerns that I had in Q1 of 'twenty what was at 22.

Matthew Prince: Where where we where we saw what we thought was much much clear. So we continue to watch this.

Matthew Prince: So we continue to watch this. Again, I feel like I am proud of how well Thomas and the rest of the team have the ability to take that and keep their hands on the levers of our business and continue to execute. But I'm not – I think my level of concern is not at the same level that it was in Q1 of 2022, but it is definitely heightened over a lot of what we've seen in more recent years.

Matthew Prince: Again, I feel like I am proud of how well our.

Matthew Prince: Thomas and the rest of the team have the.

Matthew Prince: The ability to take that and keep their hands on the levers of our business.

Alexander Henderson: Well, if nothing's really spooking you here, I'm still struggling with the guidance and the outlook for the back half of the year. You've given guidance or commentary that you're seeing significant strengthening of your pipeline. You're saying your duration's stable.

Matthew Prince: So nothing's really spooking you here.

Alexander Henderson: Our commentary that Youre seeing.

Alexander Henderson: Significant strengthening of your pipeline Youre seeing your durations stable years.

Matthew Prince: You're seeing solid closure rates. You're adding more sales capacity. You're winning large customer deals at an accelerating rate. With the first quarter beating and the second quarter above the street, the back half is much more conservative. So I guess the question is, is that a function of a specific weakness in a particular geography or, you know, due to political issues, or is it just trying to feather in more opportunity for the sales organization to be realigned as Mark comes on and drives things? Because ultimately, it sounds like the mechanics imply an acceleration, not a deceleration.

Matthew Prince: With the first quarter beat in the second quarter above the street to the back half is much more conservative. So I guess the question is is that a function of spin.

Matthew Prince: <unk> imply an acceleration not a deceleration.

Matthew Prince: Yeah, Alex, I'll start, and then Thomas can give a little bit more color. But I would push back on your initial statement, which was that nothing spooks me. A lot spooks me right now. So just because, and I want to make it clear, we are in a much more uncertain environment, and the signal that we're seeing is that uncertainty is up. In addition to that, I think you're correct that whenever you have a sales leadership change, there is risk that comes with it.

Speaker Change: Yeah, Allison So I'll start and then in and then Thomas can give a little bit more color I would push back on your initial statement, which which was that nothing Spooks me a lot Spooks me right now so just because just and I want to make it clear that we are in a much more uncertain environment and the signal that we're seeing is that in.

Matthew Prince: Certainty is up.

Matthew Prince: In addition to that I think you are correct that whenever you have a sales leadership change there is there is risk there.

Matthew Prince: That comes with it and so there is a bit of that but the primary factor here is that as we look at the signals in the overall macro economy. It is it feels like a much more Ah Ah it feels like theres much more reason to worry.

Matthew Prince: And so there's a bit of that. But the primary factor here is that as we look at the signals in the overall macro economy, it feels like there's much more reason to worry in Q1 than there was in Q4. But that doesn't mean that it was the same, just sound the alarm bells that we were seeing back in Q1 of 2020.

Matthew Prince: In Q1 than there was in Q4, but that doesn't mean that it was the same just sound the alarm bells are.

Timothy Kelly Horan: Great. So you just essentially de-risked it. I appreciate it. Thanks.

Matthew Prince: Your last question comes from a line of Tim Horan from Oppenheimer. Your line is open.

Timothy Kelly Horan: Comes from the line of Tim Horan from Oppenheimer. Your line is open.

Timothy Kelly Horan: Thanks guys. We saw the hyperscale cloud revenues really accelerate this quarter. They accelerated guidance. And they're actually talking about being kind of capacity constrained, and you're kind of the on-ramp to those cloud guys. I guess, you know, why the disconnect between, you know, what they're seeing in Guidant, you know, versus what you're seeing out there right now? And, you know, particularly, you're also in, like, their fastest-growing segments of serverless and low latency. But I guess, what's changed, other than, you know, your concerns about the macro, or is there anything about the on-ramp pieces?

Timothy Kelly Horan: Well. Thanks, guys. We saw the Hyperscale cloud revenues really accelerate this quarter they accelerated guidance.

Timothy Kelly Horan: And they're actually talking about being kind of capacity constrained and you are kind of the on ramp onto those cloud guys. I guess you don't know.

Timothy Kelly Horan: Why the disconnect between what they're seeing a guidance.

Timothy Kelly Horan: Versus what Youre seeing out there right now and particularly Youre also unlike their fastest growing segments of surplus and low latency, but I guess, what's changed other than your concerns on the macro or is anything on the on ramp pieces.

Matthew Prince: Yeah, you know, I think that the big thing, Tim, that I point to is that they tend to be purely usage-based models. And the advantage of usage-based models is that they react very quickly, both up and down. And so I think that we tend to be much more of a subscription-based model, and the good thing about that is that it has a lot more stability. And that stability helps you when things are slowing down.

Timothy Kelly Horan: Yeah, you know I think that the.

Matthew Prince: The Big thing Tim that point too is is that they tend to be purely usage based models.

Matthew Prince: And the good of usage based models is that they they react very quickly.

Matthew Prince: Both up and down and so I think at whereas we tend to be much more of a subscription based model.

Matthew Prince: And the good of that is that it has a lot more stability.

Matthew Prince: But and that stability helps you win when things are slowing down so we had significantly faster growth than the hyperscale or in the last in the last few quarters and <unk> and we're now around where they are this quarter.

Matthew Prince: So we had, you know, significantly faster growth than the hyperscalers in the last few quarters, and we're now around where they are this quarter. And so I think, you know, we are a little bit more moderated than some of the more usage-based models, and I think that explains some of it. I think the second thing that I'd add is that for some of the products, especially around the AI products, as Thomas said, we're really optimizing around adoption.

Matthew Prince: And so I think.

Matthew Prince: We are we are a little bit more moderated than some of the more usage based models and I think that that that explains.

Matthew Prince: I explained some of it I think the second thing that I'd add is that for some of the parts, especially in there around the AI products as Thomas said, we're really optimizing around adoption.

Matthew Prince: And while we published pricing, and that pricing was extremely well-received, in addition to being, you know, very attractive for us from a margin perspective in the last month, that's something that is still not a place where we are heavily monetizing yet. But, again, as I listed some of the examples, we see plenty of opportunity there, and we think that when we decide the time is right to turn on some of these monetization opportunities, it will help contribute to our top-line growth.

Matthew Prince: And while we published our pricing and that pricing was extremely.

Matthew Prince: Well received in addition to being very very attractive for us from a margin perspective.

Matthew Prince: In the last in the last months.

Matthew Prince: That's something that is it.

Matthew Prince: But again I think as I listed some of the examples we see plenty of opportunity there and we think that when we when we decide the time is right to turn on some of those monetization it'll it'll.

Timothy Kelly Horan: And just two quick follow-ups. Are you seeing any real other competitors coming into what you offer on a global serverless, low-latency basis? I guess you're implying that at some point revenue growth should really accelerate here. I mean, in a more stable macro environment or with more visibility, everything we've been talking about on this call seems, like my predecessor said, incredibly positive. And your guide for the second half down to 26% just seems very, very low versus what it potentially could be. Do you think these steps will enable you to accelerate in the next couple of years?

Timothy Kelly Horan: I guess, you're implying at some point revenue growth should really accelerate here.

Timothy Kelly Horan: And your guide for the second half down to 26% just seems like very very low versus what potentially could be I guess do you think these steps will enable you to accelerate in the next couple of years.

Matthew Prince: So on the competition front, we really don't. We think that we are in a very unique position. We don't see anybody else that is yet rolling out the type of connectivity cloud with true serverless architecture. But there are people who are buying some legacy businesses. There are people who sort of talk a good game, but it turns out when you pull the covers back, I don't have very much business in this space at all.

Matthew Prince: This is a there are people who have sort of talked a good game, but it turns out when you pull the covers back I don't have very much business in this space at all and so we are I think unique in the in the position that we're offering I don't think that'll stay true forever. Other people will will provide services here, but we have a clear lead we have the richest eat.

Matthew Prince: So we're, I think, unique in the position that we're offering. But I don't think that'll stay true forever. Other people will provide services here, but we have a clear lead. We have the richest ecosystem. And I think that what's great about Cloudflare's business is that we have existing, very stable businesses that continue to perform. We have newer businesses for us, like our Zero Trust and SASE businesses, which are just accelerating up the S-curve.

Matthew Prince: This then and I think that what's great about classifieds business is that we have existing very stable businesses that continue to perform we have newer businesses for us like our zero Trust and SaaS businesses, which are which are just you know.

Matthew Prince: The S curve and then we have a lot of bleeding edge opportunity with things like our workers platform and so copper is all about stacking S curves one behind another behind another and so we're I think a lot of companies run out of a Tam run out of market.

Matthew Prince: And then we have a lot of bleeding-edge opportunities with things like our workers platform. And so Cloudflare is all about stacking S-curves, one behind another, behind another. And so, where I think a lot of companies run out of TAM, run out of market, we are able to continue to add and innovate into new areas in a way that I think will achieve what we want, which is we think we're gonna be one of the truly iconic technology companies, and we're investing for that long-term, including, at times, making the choice of optimizing for adoption rather than trying to figure out how we make money And we think that that's the right formula for building what will be an iconic technology company over the long term.

Matthew Prince: AD and innovate into new areas.

Matthew Prince: Way that I think we will achieve what we want which is we think we're going to be one of the truly iconic technology companies and we're investing for that long term, including at times, making the choice of optimizing for adoption rather than trying to figure out how we make money from from every every single customer.

Matthew Prince: That concludes our question and answer session. I will now turn the call back over to Matthew Prince for some closing remarks.

Matthew Prince: That concludes our question and answer session I will now turn the call back over to Matthew print some final remarks.

Matthew Prince: I just want to thank our entire team for executing. I know that in the world right now, there's a lot of scary things going on. There's a lot of tension. And what we do every day, making sure that the Internet continues to function, that it continues to be a force that drives the economy around the world going forward, I can't imagine anything more important to be working on. So thank you to the entire team for delivering yet another terrific quarter. We're getting back to work now, and we'll see you all again next quarter. Thank you.

Matthew Prince: I just wanted to thank our entire team for executing I know that in the world right now there's a lot of a lot of scary things going on there's a lot of.

Matthew Prince: Tension.

Matthew Prince: And what we do every day, making sure that the Internet continues to function that it continues to be a force that drives the economy around the world is going forward I can't imagine anything more important to be working on so thank you for the entire team for delivering yet another terrific quarter, we're getting back to work now and we'll see you all.

Matthew Prince: Again next quarter. Thank you.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.

Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.

Operator: [music].

Operator: Okay.

Operator: [noise] so Alaska.

Speaker Change: Thank you.

Operator: Okay.

Operator: Steve.

Operator: Hi.

Operator: He cannot and me.

Operator: Honestly.

Operator: Yes.

Operator: Thank.