Q2 2024 Cloudflare Inc Earnings Call

Unknown Executive: representing our views in the future. We undertake no obligation to update these statements after this call.

Undertakes no obligation to update these statements after this call.

Unknown Executive: 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-gap-based basis. You may find a reconciliation of GAAP to non-GAAP financial measures that are included in our earnings release on our investor relations website.

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.

Otherwise noted all numbers, we were talking about today other than revenue will be on an adjusted non-GAAP basis.

A reconciliation of GAAP to non-GAAP financial measures that are included in our earnings release on our Investor Relations website.

Unknown Executive: For historical periods, a gap to non-gap reconciliation can be found in the supplemental financial information referenced a few moments ago. We would also like to inform you that we will be participating in the Steeple Tech Executive Summit on August 26th and the Goldman Sachs Communicopia and Technology Conference on September 10th. Now, I'd like to turn the call over to Matt. Thank you, Phil.

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

We'd also like to inform you that we will be participating in the Stifel Executive Summit on August 26, and the Goldman Sachs Committee, Copia and Technology Conference on September 10.

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

Matt: We had a terrific quarter, even with the continued macroeconomic uncertainty. We crossed $1.6 billion in annualized revenue, achieving $401 million in the second quarter, up 30% year over year. During the quarter, we added 168 new large customers, those that pay us more than $100,000 per year, and now we have 3,046 large customers, also up 30% year over year. Revenue contribution from these large customers during the quarter remained consistent at 67%, up from 64% in the second quarter last year. Our dollar-based net retention was 112%, down 3 percentage points quarter over quarter.

Matthew: Thank you, Phil we had a terrific quarter, even with the continued macroeconomic uncertainty we crossed $1 6 billion in annualized revenue achieving $401 million in the second quarter up 30% year over year.

Matthew: During the quarter, we added 168, new large customers those that pay us more than $100000 per year and now have 3046 large customers also up 30% year over year.

Matthew: Revenue contribution from these large customers during the quarter remained consistent at 67% up from 64% in the second quarter last year. Our dollar based net retention was 112% down three percentage points quarter over quarter. Our gross margin was 79% again above our long term target.

Matt: Our gross margin was 79%, again, above our long-term target range of 75% to 77%. We delivered an operating profit of $57 million, representing an operating margin of 14.2%, underscoring our commitment to operational efficiency and productivity. We generated strong free cash flow of $38.3 million during the quarter, ahead of our expectations.

Matthew: That range of $75 to 77%, we delivered an operating profit of $57 million, representing an operating margin of 14, 2% underscoring our commitment to operational efficiency and productivity, we generated strong free cash flow of $38 3 million.

Matt: This wasn't an easy quarter, but we continued to execute and deliver strong results. While I think we benefit from being a must-have, not a nice-to-have, we still had to fight for every deal as the IT buying environment continues to be challenging. But our investment in go-to-market improvements is showing dividends. It turns out that when you have the right players on the field, you can still play and win even in the rain.

Matthew: During the quarter ahead of our expectations. This wasn't an easy quarter, but we continue to execute and deliver strong results while I.

Matthew: We benefit from being a must have not a nice to have we still have to fight for every deal as the buying environment continues to be challenging, but our investments in go to market improvements are showing dividends turns out when you have the right players on the field you can still play and win even in the rate.

Matt: In the second quarter, we again delivered another double-digit year-over-year improvement in sales productivity. In addition, close rates, and sales cycles both also improved quarter-to-quarter and year-over-year. I'm proud of our team's execution.

Matthew: In the second quarter, we again delivered another double digit year over year improvement in sales productivity. In addition closed rates and sales cycles also improved quarter to quarter and year over year I'm proud of our team's execution.

Matt: I also couldn't be more pleased about the early returns from Mark Anderson and the other go-to-market leaders with proven track records who have joined the team. In Q2, Mark hired a new VP of Sales in the Americas, a new VP of Revenue Operations, and a global head of customer success. These are world-class go-to-market executives who recognize that we have the product, engineering, and go-to-market leadership for them to make a bet on their career. As Mark continues to focus on operationalizing productivity at scale and building a world-class go-to-market engine, a key focus in the second quarter involved making changes to the composition of our organization and bringing on more stage-appropriate talent.

Mark Anderson: I also could not be more pleased about the early returns from Mark Anderson and the other go to market leaders with proven track Records, who have joined the team.

Speaker Change: In Q2, Mark hired a new VP of sales in the Americas, a new VP of revenue operations and our global head of customer success. These are world class go to market executives, who recognize that we have the product engineering and go to market leadership for them to bet their careers.

Matt: This really shows in the numbers. Sales manager and AE hiring in Q2 was up 150% quarter over quarter and 163% year over year. Again, the key to the quarter was excellent execution. We expect these additions to our go-to-market team to further add to our already building momentum with large enterprise customers, partners, and the public sector, which we again delivered during the second quarter. That's a great segue to discuss some of our wins in the quarter.

Speaker Change: As Mark continues to focus on operationalized productivity at scale and building a world class go to market engine, a key focus in the second quarter involve making changes to the composition of our organization and bringing on more stage appropriate talent.

Speaker Change: It really shows in the numbers.

Speaker Change: Sales manager in AE hiring in Q2 was up 150% quarter over quarter and 163% year over year again, the key to the quarter was excellent execution.

Speaker Change: We expect these additions to our go to market team to further add to our already building momentum with large enterprise customers partners and the public sector that we again delivered during the second quarter, that's a great segue to discuss some of our wins in the quarter.

Matt: A leading Australian technology company expanded their relationship with Cloudflare, signing a two-year $17.5 million contract, $7.2 million of which is for expansion. They started with Cloudflare back in 2016 as a free customer and today use nearly all our products, spanning use cases as diverse as remote application access, worker serverless development, and bot management. Over the next two years, this customer expects to transmit over 180 petabytes and 3.9 trillion requests per month, and they see Cloudflare as essential to handling that level of connectivity while maintaining security.

Speaker Change: Leading Australian technology company expanded their relationship with cloud flare signing a two year $17 $5 million contract $7 2 million of which is expansion.

Speaker Change: They started with cloud for back in 2016, as a free customer and today used nearly all our products spanning use cases as diverse as remote application access Walker, so less development and Bot management.

Speaker Change: Over the next two years this customer expects to transmit over 180, Petabytes and three nine trillion requests per month.

Speaker Change: The cloud player as a central to handling that level of connectivity, while maintaining security. This is a great example of our land and expand customer who's starting with our free tier sees the value and expands over time sticking down under another leading Australia and technology company expanded their relationship with cloud player.

Matt: This is a great example of a land and expand customer who started with our free tier, sees the value, and expands over time. Sticking down under, another leading Australian technology company expanded their relationship with Cloudflare, signing a three-year, $2.6 million contract for 18,000 seats of gateway access, browser isolation, CASB, DLP, and also our worker development platform. This customer evaluated Cloudflare against three leading vendors in the market and selected us due to our superior technical solution, network performance, and future roadmap.

Speaker Change: Signing a three year $2 $6 million contract for 18000 seats of Gateway access browser isolation Casspi DLP and also our workers development platform. This customer evaluated cloud player against three leading vendors in the market and selected us due to our superior technical.

Speaker Change: <unk> network performance and future roadmap the customer called US after the deal closed and said quote you were the best solution today, but also for the future and the most strategic we're very excited for this one.

Matt: The customer called us after the deal closed and said, quote, you were the best solution today, but also for the future and the most strategic. We're very excited about this. One of the largest universities in the United States signed a five-year, $5.7 million contract.

Speaker Change: One of the largest universities.

Speaker Change: <unk> signed a five year of $5 $7 million contract. This customers going all in on cloud based SaaS platform with 20000 seats of Zero Trust has bee DLP email security Magic and Magic firewall.

Matt: This customer is going all in on Cloudflare's SaaSy platform with 20,000 seats of Zero Trust, Hasbi, DLP, email security, Magic WAN, and Magic Firewall. This university approached us looking to modernize and scale their global network as their incumbent on-premise solutions created bandwidth challenges and poor performance. With Cloudflare, they're able to replace multiple legacy vendors with a unified platform and cloud-first architecture. A large global research and development organization expanded their relationship with Cloudflare, signing a two-year $846,000 contract for Cloudflare's SASE portfolio with 3,500 seats of Access, Gateway, CASB, DLP, Browser Isolation, and Magic WAN, along with our advanced application security bundle. This was a very competitive process to displace legacy VPN providers, and Cloudflare was selected over three SASE competitors due to our superior network performance, ease of use, and configuration, as well as our unified platform.

Speaker Change: This university approached us looking to modernize and scale their global network as their incumbent on premise solutions create bandwidth challenges and core performance with cloud player. They are able to replace multiple legacy vendors with a unified platform and cloud first architecture.

Speaker Change: A large global research and development organization expanded their relationship with cloud player signing a two year $846000 contract for cloud SaaS fee portfolio with 3500 seats of access Gateway Cadby, DLP browser isolation and magic Wan along with our advanced application.

Speaker Change: Security bundle. This was a very competitive process to displace legacy VPN providers and cloud player was selected over three SaaS competitors due to our superior network performance ease of use and configuration as well as our unified platform.

Matt: A Fortune 500 financial services company expanded their relationship with Cloudflare, signing a one-year, $895,000 contract for Magic Transit and Magic Firewall. Gaps in their incumbent products with two on-premise vendors left this customer vulnerable to attacks, creating significant urgency for our placement solution. A number of channel partners mentioned Cloudflare as a leader in DDoS to this customer, and we were quick to come in and get this customer fully deployed, operational, and protected in just 10 days. A Fortune 500 gaming company signed a two-year, $3 million contract for advanced application security and performance, along with R2 storage.

Speaker Change: A fortune 500 financial services company expanded their relationship with cloud, they're sending a one year $895000 contract for Magic Transit and Magic firewall.

Speaker Change: That's been their incumbent products with two on premise vendors, but this customer vulnerable to attacks, creating significant competency for our placement solution.

Speaker Change: Number of channel partners mentioned cloud players a leader in Ddos to this customer and we were quick to come in and get the customer fully deployed operational and protected in just 10 days.

Speaker Change: A fortune 500 gaming company signed a two year $3 million contract for advanced application security and performance along with our two storage. This customer was looking to improve availability risks technical infrastructure to support its large global distribution of games. They are migrating all services from two incumbent vendors.

Matt: This customer was looking to improve availability for its technical infrastructure to support its large, global distribution of games. They're migrating all services from two incumbent vendors to Cloudflare due to the completeness of our solution, our superior network performance and scale, and unified platform, giving them a single control. A leading AI company signed a one-year $500,000 contract with Cloudflare to be their platform for AI, for inference, storage, image optimization, and application security. This company was an existing R2 customer, allowing them to unlock the best prices and performance across multiple cloud providers. However, doing both training and inference with a centralized hyperscale cloud created poor performance for their end users.

Speaker Change: To cloud player to the completeness of our solution, our superior network performance and scale and unified platform, giving them a single control plane.

Speaker Change: Our leading AI company signed a one year $500000 contract with cloud player to be their platform for AI for inference storage image optimization and application security. This company with an existing <unk> customer, allowing them to unlock the best prices and performance across multiple cloud providers. However.

Speaker Change: Doing both training and inference with a centralized hyperscale cloud created poor performance for their end users with cloud player. This customer now has assets of Gpus deployed across our network close to their end users not only will interest has to be more performance, but this customer is also realizing a 40% cost.

Matt: With Cloudflare, this customer now has access to GPUs deployed across our network, close to their end users. Not only will inference tasks be more performant, but this customer is also realizing a 40% cost improvement with workers AI. A leading technology company expanded their relationship with Cloudflare, signing a two-year $4.8 million contract. This customer is focused on growing their enterprise and FedRAMP product lines and uses Cloudflare for government along with Cloudflare workers to dynamically route traffic in order to optimize reliability.

Speaker Change: With workers AI.

Speaker Change: A leading technology company expanded their relationship with cloud flare signing a two year $4 $8 million contract. This customer is focused on growing their enterprise and fed ramp product lines and use this cloud Clifford government, along with class of our workers to dynamically route traffic in order to optimize reliability.

Matt: This customer has significantly increased their usage as they unlock new use cases and lean further into standardizing on Cloudflare wherever possible across all their business. After signing this deal, their team reached out to express interest in our AI products, so there should be more to come from this customer.

Speaker Change: This customer has significantly increased their usage as they unlock new use cases and lean further into standardizing on cloud flare wherever possible across all of their business units.

Speaker Change: After signing this deal their team reached out to express interest in our AI products. So there should be more to come from this customer.

Matt: I think there are two trends that stand out across all those customer stories. First, customers are adopting Cloudflare's broader platform and signing pool of funds deals. That can have some revenue recognition and DNR impacts.

Speaker Change: There are two trends stand out across all of those customer stories first customers are adopting cloud plus broader platform and signing pool of fund deals that can have some revenue recognition and DNR impacts, but we believe it is actually an extremely healthy sign as when customers buy into our broad platform that we know of.

Matt: But we believe it is actually an extremely healthy sign that when customers buy into our broad platform, we know of no competitors that can match our features. Second, you'll notice that more and more of these large deals include Cloudflare Workers, our developer platform. Last quarter, I announced that we had crossed 2 million active developers on the platform. I checked in just the other day, and we're already up to more than 2.4 million active developers and a 20% increase in just the last four months.

Speaker Change: No competitor that can match our feature set.

Speaker Change: Second you'll notice that more and more of these large deals include class of our workers our developer platform.

Speaker Change: Last quarter, I announced that we crossed 2 million active developers on the platform I check in just the other day and we're already up to more than $2 4 million active developers and over 20% increase in just the last four months.

Matt: This accelerated adoption following the announcements during our Developer Week in early April reinforces how developers are increasingly seeing Cloudflare as offering a complete solution for them to build and ship full-stack applications. Workers' AI is growing even faster, with developer accounts taking advantage of our AI functions increasing 67% quarter over quarter. Today, we have inference-tuned GPUs live in 167 cities worldwide, making us, we believe, the most global cloud inference

Speaker Change: Accelerated adoption following the announcements during our developer week in early April reinforces how developers are increasingly seeing cloud player as offering a complete solution for them to build and ship full stack application.

Fred: Working with AI is growing even faster with developer accounts, taking advantage of our AI functions, increasing 67% quarter over quarter. Today, we have influenced tune Gpus live in 167 cities worldwide, making us we believe the most global cloud inference solution and in Fred's request powered by cloud for AI.

Matt: And inference requests powered by Cloudflare AI increased more than 700% quarter over quarter. Developers are turning to Cloudflare for their AI tasks that need to be fast, global, and compliant with an increasing patchwork of AI regulations. There's external validation as well.

Speaker Change: More than 700% quarter over quarter developers are turning to <unk> for their AI tasks that need to be fast global and compliant with an increasing patchwork of AI regulations, there's external validation as well stack overflow recently surveyed a broad base of developers on what platform.

Matt: Stack Overflow recently surveyed a broad base of developers on what platforms they're using today. Cloudflare came in fourth, just off the podium, ahead of 22 other developer platforms and behind only the three traditional hyperscale public clouds. What's even more exciting, however, is what the survey tells us about the future. When developers were asked what platform they were most excited to work on in the coming year, Cloudflare came in second, ahead of AWS, Google, and Microsoft Azure.

Speaker Change: They are using today cloud came in fourth just off the podium ahead of 'twenty two other developer platforms and behind only the three traditional hyperscale public clouds.

Speaker Change: Even more exciting however is what the survey tells us about the future when developers were asked what platform. They we're the most excited to work on in the coming year cloud Claire Kane in seconds ahead of AWS, Google and Microsoft Azure cloud didn't even make the survey in 2022, so we're coming up fast if we.

Matt: Cloudflare didn't even make the survey in 2022, so we're coming up fast. If we continue to increase developer interest at the same rate, it won't be long before we meddle. And rest assured, our team won't be satisfied with anything short of gold. With that, I'll hand it off to Thomas, who looks after our gold, to walk through our financial results. Thomas, take it away.

Thomas: Continue to increase developer interest at the same rate it won't be long before we metal and rest assured our team won't be satisfied with anything short of gold with that I'll hand, it off to Thomas who looks after our gold to walk through our financial results Thomas take it away.

Thomas: Thank you, Matthew, and thank you to everyone for joining us. We are pleased with our execution during the second quarter as we make continuous progress on our go-to-market transformation. We again delivered another double-digit year-over-year increase in sales productivity during the second quarter, and we also saw an uptick in close rates and an improvement in the sales cycle. The quarter was highlighted by sustained momentum with large new customers. Ongoing significant progress in the public sector and continued high prioritization of security by our customers.

Thomas: Thank you Matthew and thanks to everyone for joining US we are pleased with our execution during the second quarter as we made continuous progress on our go to market transformation. We again delivered another double digit year over year increase in sales productivity during the second quarter and we also saw an uptick in close rates.

Thomas: And an improvement in sales cycles.

Thomas: The quarter was highlighted by sustained momentum with large new customers.

Speaker Change: Ongoing significant progress in the public sector and continued high prioritization of security by our customers.

Thomas: Continuing our strong commitment to being fiscally responsible and acting as good stewards of investors' capital, operating profit again more than doubled year over year, and we generated free cash flow of $38.3 million during the second quarter. Turning to revenue, total revenue for the second quarter increased 30% year-over-year to $401 million.

Speaker Change: Continuing our strong commitment to being fiscally responsible and acting as good stewards of investors capital operating profit again more than doubled year over year, and we generated free cash flow of $38 3 million during the second quarter.

Speaker Change: Turning to revenue total revenue for the second quarter increased 30% year over year to $401 million.

Thomas: From a geographic perspective, the U.S. represented 51% of revenue and increased 28% year over year. EMEA represented 28% of revenue and increased 32% year over year. APAC represented 13% of revenue and increased 29% year over year. We were pleased to see a notable uptick in both sequential and year-over-year growth in APAC as a number of go-to-market initiatives in the region began to deliver early returns. Turning to our customer metrics, in the second quarter, we had about 210,200 paying customers, an increase of 21% year-over-year.

Speaker Change: For a material profit perspective, the U S represented 51% of revenue and increased 28% year over year.

Speaker Change: EMEA represented 28% of revenue and increased 32% year over year.

Speaker Change: APAC represented 13% of revenue and increased 29% year over year.

Speaker Change: We're pleased to see a notable uptick in both sequential and year over year growth in APAC as a number of go to market initiatives in the region begin to deliver early returns.

Speaker Change: Turning to our customer metrics in the second quarter.

Speaker Change: About 210200 paying customers, an increase of 21% year over year.

Thomas: We ended the quarter with about 3,050 large customers, representing an increase of 30% year-over-year and an addition of 168 large customers in the quarter. Our dollar-based net retention rate was 112% during the second quarter, representing a decrease of three percentage points sequentially.

Speaker Change: We ended the quarter with about 3050 large customers, representing an increase of 30% year over year and then the addition of 168 large customers in the quarter.

Speaker Change: Our dollar based net retention rate was 112% during the second quarter, representing a decrease of three percentage points sequentially.

Thomas: The decline in DNR was driven by slower net expansion in our larger customer cohorts, increased platform deals in the form of pool of funds contracts, which reduce friction to adoption across our product portfolio but can impact the shape of revenue recognition, as well as deferred revenue and current RTO, especially for existing customers that transition into this structure. And anniversary, the price increase to our pro and business payable plans last year. For the next several quarters, we expect new customers to contribute a higher percentage of our overall year-over-year revenue growth, similar to the second quarter. Moving to cross-margin.

Speaker Change: The decline in DNR was driven by slower net expansion in our larger customer cohorts.

Speaker Change: Increased platform deals in the form of a pool of funds contracts, which reduce friction to adoption across our product portfolio that can impact the shape of revenue recognition as well as deferred revenue and current <unk>.

Speaker Change: Especially for existing customers the transition into this structure.

Speaker Change: And anniversarying, the price increase or a pro and business payroll plans last year.

Speaker Change: For the next several quarters, we expect new customers to contribute a higher percentage of our overall year over year revenue growth similar to the second quarter.

Speaker Change: Moving to gross margin.

Thomas: Second quarter cost margin was 79%, representing a decrease of 50 basis points sequentially and an increase of 130 basis points year over year. Network CapEx represented 6% of revenue in the second quarter. Based on the timing of certain investments, we expect network capex to increase in the second half to reach 10 to 12 percent of revenue for full year 2024. Now, turning to operating expenses. Second quarter operating expenses as a percentage of revenue decreased by 6% year over year to 65% as we remain committed to driving higher productivity and greater efficiency across all operations.

Speaker Change: Second quarter gross margin was 79% representing a decrease of 50 basis points sequentially and an increase of 130 basis points year over year.

Speaker Change: Network Capex represented 6% of revenue in the second quarter base.

Speaker Change: Based on the timing of certain investments, we expect network capex to increase in the second half to reach 10% to 12% of revenue for full year 2024.

Speaker Change: Turning to operating expenses.

Speaker Change: Second quarter operating expenses as a percentage of revenue decreased by 6% year over year to 65% as we remain committed to driving higher productivity and greater efficiency across our operations.

Thomas: Our total number of employees increased 15% year over year, bringing our total headcount to 3,902 at the end of the quarter. Sales and marketing expenses were $149.5 million for the quarter. However, sales and marketing as a percentage of revenue decreased by 37 to 41% in the same quarter last year.

Speaker Change: Our total number of employees increased 15% year over year, bringing our total head count to 3900 into at the end of the quarter.

Speaker Change: Sales and marketing expenses were $149 5 million for the quarter sales and marketing as a percentage of revenue decreased 37 from 41% in the same quarter last year.

Thomas: This decline was primarily due to the transition in our go-to-market organization to focus on more stage-appropriate talent. We are encouraged by the acceleration in account executive hiring exiting the second quarter, which Matthew mentioned earlier, and we expect this trend to continue in the second half of 2024. Research and development expenses were $65.4 million in the quarter. R&D as a percentage of revenue decreased to 16 from 17% in the same quarter last year. General and administrative expenses were $44.7 million for the quarter. G&A as a percentage of revenue decreased to 11 from 13% in the same quarter last year.

Speaker Change: This decline was primarily due to the transition in our go to market organization to focus on more stage appropriate talent.

Speaker Change: <unk> by the acceleration in the account executive hiring exiting the second quarter, which Matthew mentioned earlier and we expect this trend to continue into the second half of 2024.

Speaker Change: Research and development expenses were $65 4 million.

Speaker Change: Water.

Speaker Change: R&D as a percentage of revenue decreased to 16 from 17% in the same quarter last year.

Speaker Change: General and administrative expenses were $44 7 million for the quarter.

Speaker Change: G&A as a percentage of revenue decreased to 11% from 13% in the same quarter last year.

Thomas: Operating income was $57 million, compared to $20.3 million in the same period last year. Second quarter operating margin was 14.2%, an increase of 760 basis points year-over-year. These results highlight our continued focus on becoming more efficient and more productive, given that operational excellence is a long-term competitive advantage. Turning to net income and the balance, our net income in the quarter was $69.5 million, or a dilutive net income per share of $0.

Speaker Change: Operating income was $57 million compared.

Speaker Change: Compared to $20 3 million in the same period last year.

Speaker Change: Second quarter operating margin was 14, 2% an increase of 760 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.

Speaker Change: Turning to net income in the balance sheet our net.

Speaker Change: Income in the quarter was $69 5 million.

Speaker Change: Or a diluted net income per share of <unk> 20.

Thomas: We ended the second quarter with $1.8 billion in cash, cash equivalents, and available for sale security. Free cash flow was $38.3 million in the second quarter, or 10% of revenue compared to $20 million or 6% of revenue in the same period last year. Remaining performance obligations, or RPO, came in at $1,421,000,000, representing an increase of 6% sequentially but 37% year over year. Current RPO was 69% of total RPO. Moving on, to guidance for the third quarter and full year 2024.

Speaker Change: We ended the second quarter with $1 $8 billion in cash cash equivalents and available for sales securities free.

Speaker Change: Free cash flow was $38 3 million in the second quarter or 10% of revenue compared to $20 million or 6% of revenue in the same period last year.

Speaker Change: Remaining performance obligations or <unk> came in at $1.421 billion.

Speaker Change: Sending an increase of 6% sequentially or 37% year over year current <unk> was 69% of total <unk>.

Speaker Change: Moving to guidance for the third quarter and full year 2024, we.

Thomas: We are pleased with our execution during the second quarter, and we remain prudent in our outlook for 2024. For the third quarter, we expect revenue in the range of $423-$424 million, representing an increase of 26% year-over-year. We expect operating income in the range of $50 to $51 million, and we expect an effective tax rate of 11 percent. We expect a diluted net income per share of $0.18, assuming approximately 359 million shares outstanding.

Speaker Change: We are pleased with our execution during the second quarter and we remain prudent in our outlook for 2024.

Speaker Change: For the third quarter, we expect revenue in the range of $423 million to $424 million.

Speaker Change: Representing an increase of 26% year over year.

Speaker Change: We expect operating income in the range of $50 million to $51 million and we.

Speaker Change: And the effective tax rate of 11%.

Speaker Change: We expect diluted net income per share of <unk> 18.

Speaker Change: Assuming approximately 359 million shares outstanding.

Thomas: For the full year 2024, we expect revenue in the range of $1,657,000,000 to $1,659,000,000, representing an increase of 28% year over year. We expect operating income for the full year in the range of $196,000,000 to $198,000,000. We expect an effective tax rate of 11% for 2024. We expect diluted net income per share over that period to be $0.70 to $0.71, assuming approximately 358 million shares outstanding.

Speaker Change: For the full year 2024, we expect revenue in the range of $1 billion $657 million to $1.659 billion representing.

Speaker Change: Representing an increase of 28% year over year.

Speaker Change: Operating income for the full year in the range of 196 million to $198 million.

Speaker Change: We expect an effective tax rate of 11% for 2024.

Speaker Change: We expect diluted net income per share over that period to be 70% to 71.

Speaker Change: Assuming approximately 358 million shares outstanding.

Thomas: We're currently analyzing our ability to implement certain tax planning strategies in order to manage current and future cash tax liabilities. We will provide an update once this tax planning review is completed, if the outcome were to impact our expectations for Cloudflare's non-GAAP effective tax rate in the second half of 2024. We expect free cash flow to be consistent with our implied prior guidance of approximately $160 to $164 million for the full year 2024.

Speaker Change: We are currently analyzing our ability to implement certain tax planning strategies in order to manage current and future cash tax liabilities.

Speaker Change: We'll provide an update once this tax planning review is complete it is the <unk>.

Speaker Change: <unk> to impact our expectations for cloud for their non-GAAP effective tax rate in the second half of 2024.

Speaker Change: We expect free cash flow to be consistent with our implied guidance of approximately $160 million to $164 million for the full year 2024.

Thomas: 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 modernize, transform, and secure their business. And with that, I'd like to open it up for questions. Operator, please pull for questions. Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.

Speaker Change: In closing our team remains committed to driving operational excellence, ensuring long term growth and delivering significant shareholder value.

Speaker Change: Like to thank our employees for their dedication to our mission as well as our customers for trusting us to help them modernize transform and secure their businesses and with that I'd like to open it up for questions. Operator, Please poll for questions.

Speaker Change: Okay.

Thomas: If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via the loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.

Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue.

Speaker Change: If you would like to withdraw your question simply press Star. One again, if you are called upon to ask your question and they're listening via loud speaker on your device. Please speak up your handset and ensure that your phone is not on mute when asking your question.

Matt Hedberg: Again, please press star 1 to join. Your first question comes from the line of Matt Hedberg of RBC Capital Markets. Your line is now open. Great, thank you very much. Guys, congrats on the quarter. Obviously, this is a challenging environment, and to see the consistency is really, really great. Matthew, maybe to start with you, you know, it's great to see another quarter of double-digit sales productivity improvements. I guess, you know, what are some of the most important changes Mark Anderson and, I assume, the broader team are implementing to drive that result? And, given that you said macros remain challenging, does increased productivity also help, you know, the cause of really accelerated sales cycles and improved close rates? Yeah, thanks, Matt.

Speaker Change: Again, Please press star one to join the queue.

Speaker Change: Your first question comes from the line of Matt Hedberg of RBC capital markets. Your line is now open.

Matt Hedberg: Great. Thank you very much guys. Congrats on the quarter, obviously is a challenging environment and to see the consistency is really really great.

Speaker Change: Maybe to start with you.

Matt Hedberg: It was great to see another quarter of double digit sales productivity improvements I guess what are some of the most important changes Mark Anderson and I guess the broader team is implementing to drive that result in and given that you said macros remain challenging is increased productivity also helped.

Mark Anderson: 'cause it really accelerated sales cycles and improved close rates.

Matt: You know, I think we've tried to be very transparent about what we were seeing. I think the real nadir for us in sales productivity was in Q3 of 2023. And then this quarter, we're back to the same sales productivity that we saw back in mid-2022. So it is rebounding well. I think Mark Anderson gets a lot of credit for that over the last bit, but the real changes started even before Mark joined us.

Matt Hedberg: Yes, Thanks, Matt.

Mark Anderson: I think we.

Speaker Change: <unk> tried to be very transparent about what we're seeing I think the real nadir for us in sales productivity within Q3 of 2023 and then this quarter. We're back to the same sales productivity that we saw.

Speaker Change: Back in in the.

Speaker Change: In mid 2022, so we're.

Mark Anderson: It is it is rebounding well I think Mark Anderson gets a lot of credit for that over over the last bit but the real changes started even before mark joined us and I think we're starting to we're already seeing the benefits of the changes of just really putting in place much better.

Matt: And I think we're already seeing the benefits of the changes of just really putting in place much better operational metrics, putting in place much better training, really up-scaling our team, having the discipline to do performance management, and then have that flow through. And I think that's a lot of what you're seeing today. What Mark is doing is accelerating that even more, and that starts with hiring really excellent lieutenants and really excellent leaders.

Speaker Change: Operational metrics, putting in play it's much better training.

Speaker Change: Up leveling our team.

Speaker Change: Having the discipline to do performance management.

Mark Anderson: And then and then have that flow through and I think that's a lot of what youre seeing today. What Mark has is doing is accelerating at an even more and that starts with hiring really excellent lieutenants and really excellent leaders. It's a dramatic upgrade across our entire sales organization and then what's been just amazing to watch.

Matt: It's a dramatic upgrade across our entire sales organization. And then what's been just amazing to watch is, you know, great people want to follow great people. And so Mark has a huge number of amazing people who want to follow him.

Mark Anderson: Is great people want to follow great people and so Mark has a huge number of amazing people, who want to follow him. Those people who've followed him now are bringing in an up leveling our team and what we're seeing is not only are they more productive, but then theyre, helping our existing team who are really.

Matt: Those people who follow him now are bringing in and up-leveling our team. And what we're seeing is not only are they more productive, but they're helping our existing team, who are really, you know, amazing people, get more productive as well. So I think discipline and execution started before Mark Anderson.

Speaker Change: Amazing depot get more productive as well so I think disciplined execution that started before Mark Anderson I think it is accelerating with Mark Anderson and we have never had a product problem. We've never had a demand problem.

Matt: I think it's accelerating with Mark Anderson. And, you know, we have never had a product problem. We've never had a demand problem that's here.

Thomas: And what every sales leader who comes in says is, I just can't wait to roll up my sleeves, put in place the real discipline, and get out to selling what is an incredible product. That's great. Sounds like a real flywheel effect.

Speaker Change: That's here and what every sales leader who comes in said it I just can't wait to roll up my sleeves are put in place the real discipline and get out of selling what is an incredible product.

Speaker Change: That's great sounds like a real flywheel effect and maybe just a quick one for Thomas.

Thomas: And maybe just a quick one for Thomas, you know, in your prepared remarks, you noted that DNR ticked down three points sequentially, and obviously, this is a trailing 12-month metric, and you called out a number of factors that negatively impacted that metric. I guess the fact that you raised your four-year revenue guidance more than Q2B, does that imply DNR has bottomed, or could it see some further pressure, given that you noted a larger percentage of revenue growth will come from new customers in the future? Yeah,

Speaker Change: In your prepared remarks, you noted that DNR ticked down three points sequentially and obviously this is a trailing 12 month metric and you called out a number of factors that.

Speaker Change: That negatively impacted that metric I guess, the fact that you raised full year revenue guidance more than the Q2 beat does that imply DNR as has bottomed or could it see some further pressure given that you've noted a larger percentage of revenue growth will come from new customers in the future.

Mark Anderson: Yes.

Mark Anderson: <unk>.

Thomas: So, as we said in my previous remarks, the decrease was driven by SOA net expansion, but it was also impacted by what Matthew described, large pool of funds deals. So, as we entered the fiscal year, we've entered into several of these pool of fund deals. They're all very large in nature.

Mark Anderson: So.

Speaker Change: As we said on the in my prepared remarks.

Mark Anderson: The decrease was driven by lower net expansion, but it was also impacted by what Matthew described.

Mark Anderson: Large pool of funds deals so.

Thomas: The biggest ones, anywhere between $40 to $60 million in total contract value. As a matter of fact, four of our top ten customers are now pool of funds customers. And these pool of funds deals are generally built monthly as compared to upfront annual billings, and they tend to have longer durations.

Matthew: Entered this fiscal year, we've entered into several of these pool of fund deals. They are all very large in nature of the biggest ones anywhere between $40 million to $60 million.

Matthew: Total contract value as a matter of fact four of our top 10 customers are now <unk> customers and these will find deals that generally monthly as compared to a very good upfront annual billings and data center.

Thomas: So, most of these contracts are north of three years. And as a result, the financial impact of these pools of funds deals is very different. So, as it relates to revenue, revenue is now recognized as the customer consumes the service. And as a result, revenue recognition might be nonlinear and might ramp over time with respect to deferred revenue because those deals have monthly billing terms. We do not report upfront deferred revenue, and this can result, then, in lower deferred revenue growth.

Speaker Change: Longer durations. So most of these contracts are north of three years and as a result, the financial impact of these deals is very different it's very different on revenue and different on the <unk>.

Mark Anderson: Current <unk> and it's very different on deferred revenue and if it's an existing customer transitions that also impacts PNR.

Mark Anderson: So as it relates to revenue the revenue is now recognized as the customer consumes the service.

Mark Anderson: The result of the record revenue recognition might be non linear and my drempt overtime.

Mark Anderson: With respect to deferred revenue because those deals have monthly billing terms, we do not report upfront deferred revenue and this can result in lower deferred revenue growth and then current RVO is also impacted because the contract duration is longer. So you you will recognize upfront less.

Thomas: And then current RPO is also impacted because the contract duration is longer. So, you recognize less upfront in current RPO. So, very healthy trends will make the business a little bit more lumpy as compared to last year. I still think those KPIs are the right ones, but I think you have to look at them more from a rolling average perspective. But a very healthy development, very large deals, but with some noise and lumpiness in the transition. Super helpful, thank you.

Speaker Change: And current IPO so while.

Mark Anderson: The deals are very beneficial and helps you to the business.

Mark Anderson: It generates some noise in this transition in our DNR and the other metrics.

Mark Anderson: Very healthy trends and will make the business a little bit more lumpy.

Mark Anderson: Last year I still think those kpis that are the right kpis, but.

Mark Anderson: So you have to look at them more from a rolling.

Mark Anderson: Average perspective.

Mark Anderson: But very healthy development very large deals.

Mark Anderson: But there was some noise and lumpiness in the transition.

Speaker Change: Super helpful. Thank you.

Mark Anderson: Okay.

Shaul Eyal: Your next question comes from the line of Shaul Eyal from TD Cowen. Please go. Thank you, good afternoon, and congratulations on the results and what appears to have been a swift action by Mark and the entire team. Matthew, given the recent CrowdStrike ID outage, which was predominantly on-premise, my question is whether Cloudflare was called by some customers to assist, given your cloud connectivity capabilities and focus, and whether you could be seeing some longer-term benefit given this focus. And I have a follow-up.

Speaker Change: Your next question comes from the line of Shaul Eyal from DB Colin. Please go ahead.

Shaul Eyal: Thank you good afternoon, and congrats through results in what appears to be a swift action.

Speaker Change: And the entire team.

Matt: Yeah, Shaul, you know, I think we get called to help customers all the time, but we don't have a product that directly competes with or replaces CrowdStrike. I think the first thing I'd say is that, you know, our whole team, you know, we offered to help CrowdStrike directly in any way that we could, helping them get patches out or releases out, helping review, you know, any communications that they had And, you know, they have been a great partner.

Matthew: Matthew given the recent crowd strike IV outage, which was on premise predominantly my question is whether cloud was caused by some customers to assess given the cloud connectivity capabilities and focus and whether you could be seeing some longer term benefit given this focus.

Speaker Change: And I have a follow up.

Matthew: Yes.

Speaker Change: I think we get called to help customers all the time, but we don't have a product that directly competes.

Speaker Change: Or replaces crowd strike I think the first thing I'd say is that our whole team.

Speaker Change: We we offered to help crowd strike directly in any way that we could helping them get patches out or have leases out.

Mark Anderson: <unk> review.

Mark Anderson: Any any communications that they had and they have been a great partner, we are a customer of theirs and we continue to have faith in their product and and George and the rest of his leadership team I think more generally though.

Matt: We are a customer of theirs, and we continue to have faith in their product and in George and the rest of his leadership team. I think more generally, though, the word of the day is going to be resilience, which is that customers are going to want to make sure that they are not solely reliant on any one vendor. And that includes vendors like the ones that are providing network security, like we do at Cloudflare. And so when we're talking to large financial institutions, what they're saying to us is, "We want to use you and someone else."

Speaker Change: The word of the day is going to be resilient, which is that customers are going to want to make sure that they are not sole source on any one vendor and that includes with vendors like like the ones that are providing network security like we do at cloud flare and so when we're talking to large financial institutions.

Mark Anderson: They are saying to US is we want to use you and someone else that that I think is going to put pressure on some of the older more legacy providers I think for us it actually is potentially tailwind for us because in places where before we.

Matt: That I think is going to put pressure on some of the older, more legacy providers. But I think for us, it actually is potentially a tailwind for us, because in places where before we had to convince someone to rip and replace, now, instead, we just have to say, you need to have a second provider in place. And since we have been a disruptor in the market, moving from the low end up and increasingly going into larger enterprises, I think it actually opens up more and more opportunities for us over time.

Mark Anderson: We had to convince someone to rip and replace now instead, we just have to say you need to have a second provider in place and we have been.

Mark Anderson: The disruptor in the market moving from the low end up in increasingly going into larger enterprises, I think it actually opens up more and more opportunity for us over over time, so what I'm hearing from customers is that resilience is key that people are increasingly not wanting to be.

Matt: So what I'm hearing from customers is that resilience is key, that people are increasingly not wanting to be entirely reliant on any one vendor. And I think that, especially in the larger accounts that we're going after, that is actually going to open up an opportunity for us to get in, because it means we can sit side-by-side with someone else. What's great, though, is our performance is better, our security is better, and we know time and time and time again that if you put us next to anyone else in the CASB space, anybody else in the SASE space, anyone else that these vendors are looking at, we may start out as a number two vendor, but very quickly, they realize that we should be number one.

Mark Anderson: Entirely reliant on any one vendor and I think that especially in our larger in the larger accounts that we're going after that is actually going to open up an opportunity for us to get in because it means we can we can that sit side by side with someone else. What's great. Though is our performance is better our security is better and we.

Mark Anderson: No time and time and time again, if you put us next to anyone else in the casualty space anybody else in the SaaS space anyone else that these that these vendors are looking at.

Mark Anderson: We may start out as the number two vendor, but very quickly they realize that we should be number one.

Mark Anderson: Understood.

Matt: I was listening carefully to your prepared remarks as it relates to the product. It seems as if you're hitting on all cylinders, Magic Translate, Vertical Firewall, SASE, WorkersArt, you name it, but the question is whether there were any specific one or two products or services that stood out specifically this quarter. I think the first thing I'd say is that, and this really echoes what Thomas was just talking about, when we say that people are signing up for pooled funds deals, what they are really signing up for is to use the entire Cloudflare platform.

Speaker Change: I was listening carefully to your prepared remarks as it relates to the product things that you are hitting on all cylinders.

Speaker Change: Magic translate to virtual firewalls SaaS you work with are to you name it.

Speaker Change: Western is whether there was any specific one or two products services that stood out specifically this quarter.

Speaker Change: Yes, I think just first thing I'd say is that.

Thomas: And this just really echoes what what what what Thomas was talking about when we say that people are signing up for pool of funds deals. What they are really signing up for is to use the entire cloud flare platform and so more and more we're seeing that people are saying I'm not picking you for one feature or another I'm thinking because the entire platform.

Matt: And so more and more, we're seeing that people are saying, I'm not picking you for one feature or another; I'm picking you because the entire platform gives me a solution to all my network performance, security, and reliability needs. And so I think that's what's driving a lot of our larger deals with our larger customers. And I think that's an incredibly encouraging result.

Speaker Change: <unk> gives me a solution to all of my network performance security and reliability needs and so I think that.

Mark Anderson: That's what.

Mark Anderson: That's what's driving a lot of our larger deals with our larger customers and I think thats an incredibly encouraging.

Matt: If you force me to pick one area that's really standing out, it's got to be the developer platform. I was blown away that, just quarter over quarter, we had seen a 20% increase in active developer accounts. That is especially showing up in the worker AI platform. We've been able to partner with folks like Meta to be able to get the latest versions of Llama out on our platform, and developers are just flocking to it.

Ralph: Ralph if you forced me to pick one area, that's really standing out it's got to be the developer platform I was blown away, they're just quarter over quarter, we'd seen a 20% increase in active developer accounts that is especially showing up in the workers' AI platform, we've been able to partner with folks like meta to.

Ralph: Be able to get the latest versions of Lama out on our platform and developers are just flocking to it and so I think that if you look around in our developer channels. Our discord channel. If you look around on Twitter youll see that more and more developers are betting the future of whatever their application is on the workers' platform and they found that they can.

Matt: And so I think that if you look around in our developer channels, our Discord channel, if you look around on Twitter, you'll see that more and more developers are betting the future of whatever their application is on the workers platform, and they've found that they can use us and us alone to build future applications. And again, every day I get a new report from our team just saying, "You won't believe what somebody built on CloudFlare So if you force me to pick one thing, I'm going to say workers were the real standout of the quarter, but generally, it's been the platform. Thank you. Well done! Your next question comes from the line of James Fish from Piper Sandler. Please go ahead.

Mark Anderson: Use us and off alone to build future applications, which again every day I get I get.

Mark Anderson: Our new new.

Speaker Change: <unk> from our from our team just saying you won't believe with somebody built on cloud for our workers. So if you forced me to pick one thing I'm going to say workers was the real standout in the quarter, but generally it's been the platform.

Speaker Change: Thank you well done.

Mark Anderson: Your next question comes from the line of James Fish of Piper Sandler. Please go ahead.

James Fish: Hey guys, thanks for the questions here. Look, I know it's not a metric you guys completely focus on, but it was the largest net customer additions you guys have had as a public company in aggregate. And so, Matthew, you know, you've had a phenomenal track record of really calling out IT spending trends, and you did say there was some tightness still. And so my question really is, how are customers balancing this tightness with sort of that potential total cost of ownership savings by moving on to Cloudflare versus kind of new projects?

James Fish: Hey, guys. Thanks for the questions here.

James Fish: No. It's not a metric you guys completely focused in on but it was the largest net customer additions I think you guys have had as a public company in aggregate and so Matthew you've had a phenomenal track record of really calling out it spending trends and you did say some tightness still and so my question really is how our customers balancing the tightness with.

Speaker Change: That potential total cost of ownership savings by moving onto a cloud player versus kind of new projects and how are you kind of thinking that could change in terms of it spending if at all in the second half as budgets begin to be set later this year for next year actually.

James Fish: And how are you kind of thinking this could change in terms of IT spending, if at all, in the second half as budgets begin to be set later this year for next year? Yeah, maybe I'll start, and then Thomas might have something else to add.

James Fish: Yes, maybe I'll start and then Thomas might have.

Thomas: Something else to add so so I do think that it continues to be a challenging.

Matt: So I do think that it continues to be a challenging IT buying environment, and this was by no means an easy quarter. I'm proud of our team, and execution was really, really the name of the game here. And I think that increased execution will pay dividends, even as the IT environment inevitably does rebound over time. But our crystal ball still shows that it's challenging sledding for the overall IT environment in the quarters ahead.

Speaker Change: Buying environment and this was by no means an easy quarter I'm proud of our team and execution was really really the name of the game here and I think that that increased execution will pay dividends, even as the environment inevitably does rebound over time, but that our crystal ball.

Speaker Change: <unk> still shows that it's challenging flooding.

Speaker Change: For the overall it environment over over the quarters ahead, I do think that we benefit by being something that companies must have while it budgets might be getting caught in marketing tack in and productivity Tac and in other other spaces. I think security is one of the areas and we've had so many high profile.

Matt: I do think that we benefit by being something that companies must have. While IT budgets might be getting cut in marketing tech, productivity tech, and in other areas, I think security is one of the areas, and we've had so many high-profile security incidents over the first half of this year. Security is an area where people are continuing to invest.

Speaker Change: Security incidents over the first half of this year. The security is an area where people are continuing to invest but what I think is really powerful about cloud flare is we don't just solve one security need we solve the totality of our customer security needs and so often times when a customer is signing one of these pool of funds deals.

Matt: But what I think is really powerful about Cloudflare is that we don't just solve one security need. We solve the entirety of a customer's security needs. And so often, when a customer is signing one of these pool of funds deals, they're replacing two, three, four different vendors and consolidating behind Cloudflare. And so I think that what we'll see over time is that the network security space is the area that we want to own soup to nuts, and that we can completely have that as a solution for customers. And in times when IT budgets are tight, that is a place where people want to consolidate.

Speaker Change: They are replacing 234 <unk>.

Speaker Change: Different vendors and consolidating behind cloud player and so I think that what we see over time is that the network security space is the area that we want to own soup to nuts and that we can completely have that as a solution for <unk> customers and in times, where it budgets are tough.

Speaker Change: That is a place where people want to consolidate they want to consolidate on a single vendor and we are a beneficiary of that.

Thomas: They want to consolidate on a single vendor, and we are a beneficiary. I just wanted to add to your introduction, so it was a very strong net customer headquarters, mainly driven by three effects. So we had a one-time benefit because we migrated billing platforms and there was a catch-up, but beyond that one-time benefit, it was a very strong customer quarter driven by our two-customer increase, up 32% quarter over quarter in the second quarter, as well as the increase in developers on their workers' platform that Matthew talked about. So those three factors were driving the count, so a very strong quarter. It makes sense.

Speaker Change: And you guys are keeping that in a quick.

Thomas: Go ahead Thomas.

Thomas: Just wanted to add to your introduction so it wasn't very strong net customer add quarter.

Thomas: Mainly driven by three effects. So we had a onetime benefit because we migrate that billing platforms.

Thomas: But beyond that the one time benefit to what it was a very strong the customized quarter driven by our two customer increase up 32%.

Speaker Change: At quarter over quarter in the second quarter as well.

Thomas: The increase in developers under Workers' platform that Matthew talked about so those three.

Speaker Change: Factors that are driving the column, so very strong quarter.

Thomas: And you guys, obviously, you know, the pool of funds is another theme of this quarter. And Thomas, you had just said a few moments ago, I believe, that four of the top 10 customers are now on this type of contract. So is there a way to understand how much of RPO is now on this sort of pool of funds path, as even just those four at that kind of 50-ish million average rate would imply about 15% of RPO today? And additionally, what could that look like a few years down the road? Well, I will not give you that kind of information, but what you just said is a good indication.

Speaker Change: Makes sense and you guys. Obviously a pool of funds is another theme this quarter and Thomas you had just said a few moments ago I believe that it was four of the top 10 customers are now on this type of contracts.

Speaker Change: Is there a way to understand how much of <unk> is now on the sort of pool of funds path.

Speaker Change: You mean, just those four at that kind of $50 million average rate would imply about 15% of RPI today.

Speaker Change: And Additionally, what could that look like kind of a few years down the road.

Speaker Change: Right.

Speaker Change: I will not give you that that kind of information, but what you just said.

Speaker Change: I think it's a very good indication, we've always been the OE drive cut.

Thomas: We've always been asked how we drive customer revenue up and how you can get to three-digit million-dollar ACVs and TCVs. Pool of funds will be that path, and Matthew outlined the reasons for that. In addition to the pool of fund deals, in the second quarter, we also entered into a handful of very large subscription arrangements, all well north of $5 million. Those are more predictable from a revenue recognition and forecasting perspective, but they have very similar impacts on RTO and deferred revenue.

Speaker Change: Customer revenue up and how you can get to a three digit million dollar.

Speaker Change: An ACB since Ecb's cooler filings.

Speaker Change: It will be that path and Matthew.

Speaker Change: <unk>.

Speaker Change: The reasons for that in addition to the pillar funded deals.

Speaker Change: In the second quarter, we also entered into a handful of very large subscription arrangements, all well north of $5 million.

Speaker Change: And those are more predictable from a revenue recognition and forecasting perspective, but they are very similar impacts on <unk> and deferred revenue. So.

Thomas: So, in addition to the pool of fund structure impacting us, generating this lumpiness in the quarter, we were also successful in signing very large subscription arrangements in the second quarter. Great, thanks. Your next question comes from the line of Andrew Nowinski of Wells Fargo. Please go ahead. Okay, good afternoon.

Speaker Change: Addition to the pool of funds structure impacting us generating this lumpiness in the quarter.

Speaker Change: We're also successful signing.

Speaker Change: Logistics subscription arrangements in the second quarter tubes.

Speaker Change: Great. Thanks, guys.

Speaker Change: Your next question comes from the line of Andrew Nowinski of Wells Fargo. Please go ahead.

Andrew Nowinski: Congratulations on another amazing quarter! So I wanted to ask a bit of a techie question to start here as it relates to your Edge AI and your OHTTP offering. Now, I know you're one of the co-founders of OHTTP, but I was wondering if you could comment on how your customers might be using it as a way to preserve data privacy and maybe give us an idea of the revenue opportunity there. Sure, and this, I'm not sure how to do this and not make it a little bit geeky, but OHTDP, the original sin of Cloudflare, the original sin of the Internet is that your IP address, forget cookies, forget anything else, your IP address alone reveals a ton about who you are, where you are, and a bunch of other things.

Andrew Nowinski: Okay. Good afternoon, congrats on another amazing quarter.

Andrew Nowinski: So I wanted to ask a bit of a techie question to start here as it relates to your edge AI and your OE http offering.

Speaker Change: I know you're one of the co founders of <unk> TB, but I was wondering if you could comment on how your customers might be using that as a way to preserve data privacy and maybe give us an idea on the revenue opportunity there.

Speaker Change: Sure and this is bill.

Speaker Change: I'm not sure how to do this and not make it a little bit geeky.

Speaker Change: But OLED GDP the original spin of the cloud.

Speaker Change: Clarify the original 10 of the Internet is that your IP forget cookies forget anything else. Your IP address alone reveals a ton about who you are where you are.

Speaker Change: And a bunch in a bunch of other things your IP address in your home for instance doesn't change all that often and so even without cookies, even without anything else.

Speaker Change: People can build profiles, our view as privacy has become more and more important as we and then recognize as being more and more important online I think one of the things that our team with a number of other industry partners and leaders has really focused on.

Andrew Nowinski: As privacy has become more and more important and recognized as being more and more important online, I think one of the things that our team, with a number of other industry partners and leaders, has really focused on is how can we eliminate that original sin, how can we disassociate your IP address from your identity? OHTDP is a technology that does it. The best way to think about it is that it's essentially two hops in the system, so if your device connects to the first proxy that is out there, that proxy knows what device is connected to it, but then it can use encryption to wrap that identity piece up.

Speaker Change: It's how can we eliminate that original 10, how can we disassociate your IP address from your identity and so Oh HCP is a technology.

Speaker Change: That does it the best way to think about it is it is essentially two hops in the system. So if your device.

Speaker Change: And next to the first proxy that is out there that proxy knows what device connected to it but then it can use encryption to wrap that that identity piece up looks like putting it in an envelope and handing it off to a second proxy and that second property is the only thing that knows where.

Matt: It's like putting it in an envelope and handing it off to a second proxy, and that second proxy is the only thing that knows where that traffic is going. So one party can know who is behind something, and the other party can know where they're going, but neither party knows where any one individual is going. You can imagine, in the case of a handset manufacturer, they may operate that first proxy because they operate the handsets themselves, but then hand that off to a third party like CloudFlare in order to never have any information about where their customers go online.

Speaker Change: That traffic is going so one party can know.

Speaker Change: Who is behind something and the other party can know where theyre going but neither party knows both.

Speaker Change: <unk> any one individual is going so you can imagine.

Speaker Change: The case of like a handset manufacturer.

Speaker Change: They may operate that first proxy to the operate the handsets themselves, but then hand that off to a third party like cloud flare.

Speaker Change: In order to never have the information about where their customers go online.

Matt: I think that what's interesting about this is that the very nature of the protocol requires an independent third party. At no point can the handset manufacturer say, we're going to complete this soup to nuts. They have to have an independent third party, and the third party of choice in this, I think in large part because privacy has been so core to who CloudFlare is and what we do, it's one of our five core values in terms of when we think about products, and because of just our breadth and technical expertise, as more and more companies are thinking about this and recognizing that both for philosophical reasons but then also for regulatory reasons that they need to be as private as possible, CloudFlare is that preferred place to be that second hop in an OHTDP solution.

Speaker Change: What's interesting about this is that the very nature of the protocol requires an independent third party. So at no point.

<unk>: Can the handset manufacturers say, we're going to complete the soup to nuts. They have to have an independent third party and the third party of choice and that's I think a large part because privacy has been so core to who <unk> is and what we do with one of our five core values.

Speaker Change: In terms of when we think about products.

Speaker Change: And.

Speaker Change: Because it just our breadth and technical expertise.

Speaker Change: As more and more companies are thinking about this and recognizing that both for philosophical reasons, but then also for regulatory reasons that they need to be as private as possible cloud player is that preferred place to be that second second hop in and O H GDP solution. So I have been.

Matt: I think we built this for some very specific and, I would have thought, relatively limited use cases. I'm surprised how many different use cases this is now getting introduced to. I think that as AI continues to develop, it's an area where a lot of people are rethinking the privacy of the Internet and thinking about how they can incorporate more modern standards. To that extent, I think you will see that if there is continued growth in this space, it actually may be a lot of the AI companies that are leading in that direction. Great. Thank you. That was really helpful. Maybe a question for Thomas as well?

Speaker Change: <unk>.

Speaker Change: I think we built this for some very specific.

Speaker Change: I would've thought relatively limited use cases, I am surprised how many different use cases. This is now getting introduced into and I think that as AI continues to develop.

Speaker Change: As an area, where a lot of people are rethinking the privacy of the internet and thinking about how can we incorporate more modern.

Speaker Change: Standards and to that extent I think you will see that.

Speaker Change: If there is continued growth in this space it actually may be a lot of the AI companies that are leading leading in that direction.

Speaker Change: Great. Thank you that was really helpful.

Speaker Change: Maybe a question for Thomas as well just really impressive operating leverage in the model and a strong guide for the year and I know, you're not giving fiscal 'twenty five guidance, yet, but given the substantial raised your operating margin for this year I was wondering if you could at least tell us how youre thinking about operating leverage next year and whether you would expect operating margin expansion above the new guidance you gave for.

Thomas: Just really impressive operating leverage in the model and a strong guide for the year. I know you're not giving fiscal 25 guidance yet, but given the substantial raise to your operating margin for this year, I was wondering if you could at least tell us how you're thinking about operating leverage next year and whether you'd expect operating margin expansion above the new guidance you gave for this year. Yeah, nice try, but I'm not going to give you any guidance for next year.

Speaker Change: This year thanks.

Speaker Change: Yes.

Thomas: Dry, but im not going to give guidance for next year.

Thomas: But you know, I think over the years we have been good stewards of investors' capital, and this will continue. We – Matthew and Michelle described how we – the philosophy, how we run the business really well, and as long as we see, you know, a market that is this large in terms of time that we can disrupt and deliver strong growth rates, investment in Cloudflare is the best return for the money that we earn.

Speaker Change: But I think over the years, we have been good stewards of Investor capital and this will continue.

Speaker Change: Matthew and Michelle described how we the philosophy of how we run.

Matthew: The business really well and as long as we see a market that is this large in terms of Tam that we can disrupt.

Speaker Change: And deliver strong growth rates investment into into cloud today is the best return for the money that we earn and keeping this balance in terms of how we think about the business of growth rate and operating leverage I think serves us well in the real can continue will not.

Thomas: And keeping this balance in terms of how we think about the business of growth rate and operating leverage, I think, serves us well, and we'll continue. We'll not deviate from this philosophy next year, but I will shy away from giving you guidance.

Speaker Change: Deviate from this philosophy in next year, but I will shy away from giving you guidance.

Thomas: Okay, thanks. Keep up the good work, guys. Your next question comes from the line of Adam Borg of Stifel. Please. And thanks for taking the question. Maybe just building off the last question a little bit and even tying it back to some of the wins you talked about earlier on AI. How do you think about the inference opportunity overall? When you think about hyperscale clouds, obviously, the edge networks that you've built, as well as the edge devices themselves, what do you think about how that relationship looks like today and how that evolves?

Speaker Change: Okay. Thanks keep up the good work guys.

Speaker Change: Your next question comes from the line of Adam Borg of Stifel. Please go ahead.

Adam Borg: Awesome and thanks for taking the question, maybe just building off the last question, a little bit and even tying it back to some of the wins you talk earlier on AI.

Adam Borg: I, just think about the insurance opportunity overall.

Speaker Change: When you think about Hyperscale clouds, obviously, the edge network that you fill as well as your edge device themselves. How do you think about how that relationship looks like today and how that evolves over time.

Thomas: Yeah, Adam, I, you know, my take is that inference is primarily going to happen in two places. The first is on devices themselves, and you can already see what a number of handset manufacturers and others are doing to bring more powerful GPUs and TPUs directly to devices. And my rough, hand-wavy – I have no idea if it will be right, but just as a mental model – is that maybe 50 percent of inference tasks get handled on your device.

Adam Borg: Yes, Adam.

Adam: My my take is that inference is primarily going to happen in two places.

Speaker Change: The first is on devices themselves.

Speaker Change: And that.

Speaker Change: You can already see.

Speaker Change: Handset manufacturers and others are doing to bring more powerful gpus and Cpus directly.

Speaker Change: Two devices in my rough hand, wavy I have no idea if it'll be right, but just just as a mental model is that maybe 50% of interim inference task get handled on on your device, but there will always be either devices, which are older and maybe you don't have the latest chips.

Thomas: But there will always be devices that are older and maybe don't have the latest chips on them, or models that are bigger and require more compute power than your handheld or device is able to deliver.

Speaker Change: On them or models that are bigger and require.

Speaker Change: More.

Speaker Change: Compute power, then youre handheld or device is able to deliver and in those cases, you're going to have that that that that influence task off to something else. One not all of that is to send that back to ashburn, Virginia, or some centralized sort of traditional public cloud I think that.

Adam Borg: And in those cases, you're going to hand that inference task off to something else. One model of that is to send that back to Ashburn, Virginia, or some centralized sort of traditional public cloud. I think that, especially because of the concerns around privacy, because of the regulatory concerns where AI is getting just rapidly regulated, you're going to want to keep that as close as possible. That also has the benefit of making it as performant as possible.

Speaker Change: That especially because of the concerns around.

Speaker Change: Privacy because of the concerns of the regulatory concerns where AI is.

Speaker Change: Is getting just rapidly regulated debt youre going to want to keep that as close as possible and that also has the benefit of making it as as performance as possible and it.

Matt: And it also means that you can have the AI that's responding have regional differences more easily, so that if you're responding in the UK, the AI can spell color with a U, whereas if it's in the U.S., it can spell it with no U. I think all of those things then drive a lot of the other 50 percent of inference tasks to be running on a network like CloudFlare. We are trying to build that network out ahead, make sure that we can answer any inference tasks that can't get determined on your own device as close as possible to that device, and then make it very easy to get that inference task from us or from the device to us in a standards-based, API-driven way, so that it's seamless for that end user.

Speaker Change: It also means that you can have the AI, that's responding have regional differences more easily so that if you are responding in the UK our.

Speaker Change: The NII can spell color with a you, whereas if it's in the U S. I can spell it with no U.

Speaker Change: I think all of those things then drive a lot of the other 50% of inference tasks to be running at a network like cloud flare and so we are trying to build that network out ahead make sure that we can answer any inference tasks that that can't get determined on your own device as close as possible.

Speaker Change: <unk> to that device and then and then make it very easy to get that in front of tasks from us or from the device to us in a standards based.

Speaker Change: Hi.

Speaker Change: <unk> driven way so that it is seamless to that to that end user.

Speaker Change: There'll be some task that maybe it will be even too big to run it off although that is becoming a smaller and smaller list of tasks and maybe theres. Some small percent that makes its way back to a traditional hyperscale.

Speaker Change: Public cloud, but I really think that inference is going to be between the end devices themselves and.

Speaker Change: <unk>.

Speaker Change: On a network that is like cloud side that spans the globe and is incredibly close in in every jurisdiction where end users might be.

Matt: There will still be some tasks that maybe will be even too big to run on us, although that is becoming a smaller and smaller list of tasks, and maybe there's some small percent that makes its way back to a traditional hyperscale public cloud. But I really think that the inference is going to be between the end devices themselves and a network that is like CloudFlare that spans the globe and is incredibly fast and in every jurisdiction where end users meet. It was awesome. Thanks so much. Your next question comes from the line of Fatima Boolani of Citi. Please go ahead.

Speaker Change: Awesome. Thanks, so much.

Speaker Change: Your next question comes from the line of Fatima <unk> of Citi. Please go ahead.

Fatima Boolani: Good afternoon. Thank you for taking the time to answer my questions. Matthew and Thomas, this is for you both. I had a bigger picture question around the pricing strategy across the portfolio. So at a tactical level, you had some meaningful price increases that, you know, your first ones ever. Thomas, I was wondering if you could just comment on how far deep those have pervaded the installed base, and if you could kind of talk about where we are in terms of the innings, in terms of how that's unfurled in the base.

Fatima: Good afternoon, and thank you for taking my questions now.

Speaker Change: Matthew and Thomas this is sort of your balance sheet.

Speaker Change: I have a.

Fatima: Bigger picture question around the <unk>.

Speaker Change: Pricing strategy across the portfolio at a tactical level you had some meaningful price increases that you know your first one ever Tom.

Speaker Change: I was wondering if you could just opine on how far deep.

Speaker Change: This is pervaded the installed base and if you can kind of talk to where we are in terms of the innings in terms of how that.

Fatima: Unfurled in the base and then Matthew the bigger picture question for you is sections together.

Thomas: And then, Matthew, the bigger picture question for you is, if I piece together a lot of what you shared in the prepared remarks as it relates to pooled fund deals, more pay as you go, more consumption, payment modalities, especially as the workers' portfolio scales, how should we generally think about the business impacts and sort of revenue elasticity, if you will? Thank you. I'll start, and then Thomas can add, and I think we might both have something to say on both pieces.

Matthew: Shared in the prepared remarks as it relates to pool of finding deals more pay as you go more consumption payment modality, especially as the workers portfolio scales. How should we generally think about the business intact.

Speaker Change: Revenue elasticity, if you will.

Speaker Change: Thank you.

Speaker Change: I'll start and then Thomas can Ken can add and I think we might both have something to say on on both of both pieces. So we're about a year after.

Matt: So we're about a year after a price increase across our pay-as-you-go business. That is a It's an important part of our business, but it is a relatively small part of our business. I think we, for a long time, were very reluctant to raise prices on that part of the business, but we had added so much value that we just thought that it was the right thing to do, and we were really incredibly pleasantly surprised how many of the customers, the pay-as-you-go customers, not only did our return rates drop due to that price increase, but really actually wrote to us and said, you know, about time, because there' Price increases didn't apply across the rest of the platform, so enterprise customers, all the customers we talk about on these calls, there wasn't any dramatic price increase there.

Speaker Change: Price increase across our pay as you go business that is a.

Speaker Change: It's an important part of our business, but it is a relatively small part of our business I think we.

Speaker Change: For a long time, we're very reluctant to raise prices on that part of the business, but we had added so much value.

Matthew: We just thought that it was the right right thing to do and we were we were really incredibly pleasantly surprised how many of the customers to pay as you go customers not only.

Speaker Change: I didn't hear I return rates, we're tiny.

Speaker Change: Due to that price increase, but but really actually wrote to us and said at that time, because because theres. So much more value that you've added and that was as good price increases didn't apply across the rest of the platform. So enterprise customers all of the customers. We talked about on on these calls there wasn't any any dramatic price increase there I think.

Matt: I think we are always trying to find ways to have the highest ROI for our large customers, and typically, we can be a substantial savings over whatever the existing vendors are in the market, and because we have the efficiency in our business, we can do that while still maintaining 70%, 78%, and 79% gross margins. Our long-term target gross margins are 75% to 77%, and we've been coming in ahead of that and getting very healthy software-like gross margins, even for a business with the operational complexity and intensity that we have. And I think that that's what allows us to deliver the returns that we can.

Speaker Change: We are always trying to find ways to have the highest ROI for our large customers and typically we can be a substantial savings over whatever the existing vendors are in the market and because we have into the efficiency.

Speaker Change: In our business, we can do that while still maintaining.

Matthew: 70, 70, 879% gross margins, our long term target gross margins of $75 to 77% and we've been coming in ahead of that and can very healthy software like gross margins even for a business with the with the the operational complexity and intensity that we have and I think that that's.

Matthew: That's what allows us to be to deliver the returns that we can.

Speaker Change: Generally I think philosophically, what we want to do is be the network for all of our customers and we want to solve all of the problems that our customer has around their network and so we think of it as as being their connectivity cloud and that connectivity cloud works, great with whatever devices.

Matt: Generally, I think, philosophically, what we want to do is be the network for all of our customers, and we want to solve all of the problems that a customer has around their network, and so we think of it as being their connectivity cloud, and that connectivity cloud works great with whatever devices and things they have on-premise. It works great with whatever they're running in a traditional hyperscale public cloud, but we're that connectivity layer that sits between those things, and that's a very, very, very substantial opportunity, and one that I think we have only just started to penetrate. I appreciate it. There's not much to add to what Matthew just said.

Matthew: Things they have on premise it works, great with whatever theyre running in a traditional hyperscale public cloud, but where that connectivity layer that sits between those things and thats, a very very very substantial opportunity and one that I think we have.

Matthew: Only just started to really really penetrate.

Speaker Change: I appreciate that.

Thomas: Some of the impacts of this transition you have seen. We talked about how the pool of funds deal impacts the lumpiness or makes our numbers a little bit more lumpy. We will also have an increasingly higher share of variable revenue in our numbers. While this number is still small today, it will grow meaningful over time. This is less driven by price increases, as Matthew said, but it's more driven by the structural changes that this transition implies and with all the overall benefits of more stickiness, longer-term deals, platform deals with better expansion capability, and significantly higher total contract values. Thank you for the call. Your next question comes from the line of Hamza Fodderwala of Morgan Family. Please go ahead.

Speaker Change: There is not much to add to augment future set some of the impacts of this transition you've seen we've talked about a whole pool of funds the yield impact.

Matthew: The lumpiness or make our our numbers a little bit more lumpy.

Matthew: We will also have an increasingly higher share of variable revenue in our numbers. While this number is.

Matthew: Small today.

Matthew: So meaningful over over time this is less driven by price increases as Matthew said.

Matthew: More driven by the structural changes.

Speaker Change: And that this trend shows transocean implies and.

Matthew: With all the overall benefits of more stickiness longer duration deals platform kiosks.

Matthew: With this with Fedex expansion capability.

Speaker Change: Inefficiently higher total contract values.

Speaker Change: Thank you for the color.

Speaker Change: Your next question comes from the line of Hamzah firewall of Morgan Stanley. Please go ahead.

Hamzah Firewall: Alright. Good evening. Thank you for taking my question Matthew I just had one question on public sector.

Hamza Fodderwala: Matthew, I just had one question on the public sector for you. We saw a lot of strong growth over the last year, and I'm curious as we headed for the Federal Fiscal Year Close. Timber, what that momentum has been like, especially ahead of, you know, for What Are You Hearing?

Speaker Change: For you we saw a lot of strong momentum in the public sector space in the federal space.

Speaker Change: Over the last year I am curious as we head into the federal fiscal year close.

Speaker Change: In September.

Speaker Change: That momentum has been like especially ahead of what's going to be.

Speaker Change: An election.

Speaker Change: In November what are you hearing from from from the agency customers that you work with thank you.

Speaker Change: Yes, so federal has been a real.

Matt: Yeah, so Federal has been a real point of strength for us ever since we started investing in it, and ever since, you know, we achieved FedRAMP certification, which really unlocked a lot of U.S. government business. But we've also seen strong government business around the world. I would say, first of all, that the election is incredibly important. We couldn't have built Cloudflare without a stable functioning democracy, and you can't have stable functioning democracies unless you have elections that people can trust.

Speaker Change: Point of strength for us ever since we started investing in it.

Speaker Change: And ever since.

Matthew: We achieved fed ramp certification, which which really unlocked a lot of of U S. Federal business, but we've seen also strong government business.

Speaker Change: Around the world.

Matthew: Yes.

Speaker Change: I would say first of all.

Speaker Change: The election is incredibly important we couldn't have built cloud flare without a stable functioning democracy and you can't have stable functioning democracies unless you have elections that people can trust and so since 2016.

Matt: And so, in 2016, actually directly in response to a lot of mistrust and tampering in the 2016 election, we launched what we call the Athenian Project, where we provide our services at no cost to anyone who is helping administer an election around the world. And I'm incredibly proud of the work that we do to help support what are largely, you know, unsung heroes. And I don't care if it's a red state or a blue state or a purple state.

Speaker Change: Actually directly in response to the <unk>.

Speaker Change: A lot of mistrust and and.

Matthew: And tampering.

Matthew: In the 2016 election.

Matthew: We launched what we call the Athenian project, where we provide our services at no cost to anyone who is helping administer an election.

Matthew: Around <unk> around the world.

Matthew: Excuse me I'd, rather around the United States, Although we've increasingly started doing it in select countries around the world as well.

Speaker Change: And.

Speaker Change: I'm incredibly proud of the work that we do on this to help support what are largely unsung heroes and I don't care, if it's a red state blue state or a purple state like if you're helping administer an election in some county around the United States. You are your real Patriot and a real hero and you need all the help and protection that.

Matt: Like, if you're helping administer an election in some county around the United States, you're a real patriot and a real hero, and you need all the help and protection that we can give. And I'm proud of the fact that our team, on a pro bono basis, provides the full suite of our services to the people who are administering elections because I think it's fundamental to the success of our country, and our country is fundamental to the success of the company.

Speaker Change: We can we can give and I'm proud of the fact that our team.

Matthew: On a pro Bono basis provides the full suite of our services to the people who are administering elections, because I think it's fundamental offer the success of our country and our country is fundamental to the success of the company. So im not sure that the election itself drives significant upticks in spending and I feel kind of.

Matt: So I'm not sure that the election itself drives significant upticks in spending, and I'd feel kind of a little gross if it did, because I think it's our duty to provide our services in these cases. What I will say is that... You know, I think most of the people who are listening in on this call would say that it's not always the most rational thing to go work for the government. It certainly doesn't pay the best that's out there.

Speaker Change: Although gross if it if it did.

Matthew: Because I think it's our duty to provide our services in these cases, what I will say is that.

Speaker Change: I think most of the people who are listening in on this call would pay that debt.

Speaker Change: That it's not always the most rational thing to go work for government certainly doesn't pay the best.

Matthew: Thats out there, but but I think what government.

Matt: But I think the government officials that I've talked to, the public servants that I've talked to, again, across the political spectrum, what they all are is very mission-driven. And they believe in the mission of, you know, the United States, of this country and the importance of that. And I think that they respect it very much when companies like Cloudflare step up and say, you know, it's not just all about how we collect the most revenue, but it's how we do the right thing to protect, you know, the underlying function of democracy.

Matthew: With government officials that I've talked to the public service that I've talked to again across the political spectrum. What they all are very mission driven and they believe in the mission of the United States of this country and the importance of that in.

Matthew: I think that they very much respect when they see companies like cloud flare step up and say, it's not just all about how we collect the most revenue, but it's how we do the right thing to protect the underlying functions of democracy and so when you hear about us winning big.

Matt: And so when you hear about us winning big deals that are big numbers and large revenue-producing deals, I think a lot of that comes from the fact that we are thought of extremely well by those incredibly patriotic, very mission-driven people who are public servants. And when they're thinking about when they have a hard problem that they are going to pick a vendor for who they turn to, the work that we do on things like the Athenian Project and protecting elections is part of why we've had the momentum and the success that we've had with the federal business.

Matthew: Big deals.

Matthew: That are big.

Matthew: Numbers and large revenue producing deals I think a lot of that comes from the fact that we are thought of extremely well by those incredibly patriotic.

Matthew: Very mission, driven people, who are public servants, and when theyre thinking about when they have a hard problem that they are going to pick a vendor for who they turned to the work that we do on things like the Athenian project and protecting elections.

Matthew: It's part of why we've had the momentum and the success that we've had with our federal business and I think that that will continue.

Matthew: And only accelerate over over the over the quarters and years to come.

Matthew: Thank you.

Matt: Your next question comes from the line of Trevor Walsh of JMP. Please go ahead. Great. Hi, team. Thanks for taking my question. Maybe just one question from you and then maybe a couple parts. Matthew, you had a good win story that you had in your prepared remarks. I think it was with the Australian tech company, Sassy Deal, where they had also purchased workers.

Chairman Awash: Your next question comes from the line of Chairman Awash.

Chairman Awash: Please go ahead.

Chairman Awash: Great Hi team. Thanks for taking my question maybe.

Chairman Awash: Maybe just one question for me and maybe a couple parts. Matthew you had a good win story that you had in your prepared remarks, I think it was with the Australian Tech Company SaaS deal, where they had also purchased workers curious how how much youre leaning into those SaaS deals, where an act III product such as workers.

Trevor Walsh: I'm curious how much you're leaning into those Sassy Deals where an Act III product such as workers is kind of coming into the fold and how kind of important of a differentiator you see that within that particular market. And then, as a follow-up, you had your descaler campaign last year to kind of handle or campaign against one particular competitor in that space. Just curious if you're seeing the overall competitive landscape shift at all in the last 12 months and if we might see a similar campaign against another competitor there.

Speaker Change: Coming into the fold and how important of a differentiator you see that within that particular market and then as a follow up.

Speaker Change: You had your distiller campaign last year to kind of handle our campaign against one particular competitor in that space. Just curious if youre seeing that overall competitive landscape shifts at all kind of in the last 12 months and if we might see a similar campaign against another competitor. There just maybe just get your overall thoughts about who youre seeing in the deals if theres other players can.

Trevor Walsh: Maybe just get your overall thoughts about who you're seeing in the deals and if there are other players kind of coming up from different parts of the market that are not the standard ones that you've come across in the past.

Chairman Awash: Coming up from different parts of the market that are not not the standard ones that you've commented in the past.

Matt: Yeah, I think that the thing that we can do that's very difficult for any point solution vendor to compete with is provide a comprehensive solution. And so, again, if the theme is pool of funds, platform deals, broad deals, workers are a part of that, but it is not as big of a part as our traditional application security.

Speaker Change: Yes, I think that the.

Speaker Change: The thing that we can do that is very difficult.

Chairman Awash: For any any point solution.

Speaker Change: Vendor to compete with is <unk>.

Matthew: Provide a comprehensive.

Matthew: Solution and so.

Matthew: Again, if the theme its pool of funds platform deals broad deals.

Speaker Change: Workers is a part of that it is not as big of a part as our traditional application security if you.

Matt: It doesn't make any sense if you're going to do a SASE deal to not have the same vendor also providing your DDoS mitigation. And we're really the only vendor in the space that can do both the traffic coming into your network and the traffic going out from your network. But it's just a network. The network should be smart, and it should be – that you should provide one kind of holistic solution.

Speaker Change: It doesn't make any sense, if youre going to do a SaaS deal to not have the same vendor also providing your ddos mitigation and we're really the only vendor in the space that can that can do both the traffic coming into your network and the traffic going out from your network, but it's just the network like the network should be smart and it should be.

Matthew: You should provide one one kind of a holistic solution.

Matt: I don't know yet of any real vendors where people have said – or any real customers where people have said, I'm going to choose your SASE solution because of workers. There are places where people are using workers, and then they use our SASE solution, and those things go together. But I think you'll start to see more of that going forward. The really powerful thing comes back to sort of the origin story of workers itself.

Speaker Change: I don't know yet of any real vendors, where people have said Oh I'm.

Speaker Change: Any real customers, where people have said I'm going to choose your SaaS solution because of workers. There are places where people are using workers and then they either use a SaaS solution and those things go together, but I think youll start to see more of that going forward the really powerful thing.

Speaker Change: It comes back to sort of the origin story of workers itself, we didn't build workers to sell it as a developer platform. We built it because we saw all of these opportunities and we needed to develop a platform for our internal team customer zero to be able to build <unk>.

Matt: We didn't build Workers to sell it as a developer platform. We built it because we saw all of these opportunities, and we needed a developer platform for our internal team, customer zero, to be able to build different solutions. What's powerful about that is that it then means that that same platform can be used to adapt, configure, or customize any of the solutions that are built on workers more so than you can with any other vendor that's out there because you're using that same developer platform.

Speaker Change: Different solutions.

Matthew: Our full about that is that that then means that that same platform can be used to.

Matthew: Adapt configure.

Matthew: Our.

Matthew: Customize any of the solutions that are built on workers.

Speaker Change: More so than you can with any any other vendor that's out there because you are using that same developer platform I don't think that Thats, where I don't think we're there yet in terms of in terms of customers I think we're still in the kind of just get it up and running.

Matt: I don't think that that's – I don't think we're there yet in terms of customers. I think we're still in the kind of just get it up and running stage, and not just us. I think across the entire space, SASE is a new enough category. Secondly, I want to make sure that it's reliable. Third, I want to make sure that it is fast, and it's performant.

Speaker Change: Page not just us I think across the entire space <unk> is a new enough category, but over time I think when people will go from saying first of all I want to secure network.

Speaker Change: Secondly, I want to make sure it's reliable.

Matthew: Third I want to make sure that it is it is fast it's performance I think the next thing that people come to us I want to make sure. It's programmable I think we are still kind of in the.

Matt: I think the next thing that people will come to is, "I want to make sure it's programmable." I think we are still kind of in the secure and reliable stage. I think customers are coming to us from some of the first-generation zero-trust and sassy vendors because we are secure, reliable, and fast. But over time, secure, reliable, fast, and programmable is a pretty killer combination that I don't think there's any other vendor out there that's going to be able to match.

Matthew: In the secure and reliable stage I think customers are coming to us away from some of the first generation.

Matthew: Zero Trust and Safi vendors.

Matthew: We are.

Matthew: We are secure reliable and fast but over time secure reliable fast and programmable is a pretty killer combination that I don't think theres any other vendor out there that's going to be able to match.

Trevor Walsh: Great. I appreciate the perspective. Thanks. That concludes our Q&A session. I will now turn the conference back over to Mr. Matthew Prince for closing remarks. I just wanted to say thank you to the entire Cloudflare team. This quarter, really, the theme was execution, and you guys executed incredibly well.

Speaker Change: Great I appreciate the perspective thanks.

Matthew <unk>: That concludes our Q&A session I will now turn the conference back over to Mr. Matthew <unk> for closing remarks.

Speaker Change: Just wanted to say thank you to the entire cloud player team this quarter really the theme.

Speaker Change: It was execution.

Matthew <unk>: And you guys executed incredibly well. Thank you to the team. Thank you to all of our customers and continues to be a complicated world out there. The classifier is helping better secured networks everywhere around the world. Thank you I'll see back here next quarter.

Matt: Thank you to the team. Thank you to all of our customers. It continues to be a complicated world out there, but Cloudflare is helping better secure networks everywhere around the world.

Unknown Executive: Thank you all. See you back here next week. Ladies and gentlemen, that concludes today's call. Thank you all for joining us. You may now disconnect. I don't blame you if you need to take a break, and I don't blame you that you didn't call me yesterday, and I should take the blame for not letting you go, and I should take the blame for not taking it slow. So I say that it's nobody's fault, that it wasn't what I thought it'd be, and it's okay cause, honestly, I don't blame you for your honesty, and oh, it's such a shame that I didn't take the blame for things. I don't have much to lose, it's

Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.

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