Q4 2024 Cloudflare Inc Earnings Call
Well good day, everyone and welcome to the cloud player Q4, 'twenty 'twenty four earnings call. This conference is being recorded at this time I would like to hand, the call over to Mr. Phil Winslow. Please go ahead Sir.
Speaker Change: Thank you for joining us today to discuss <unk> financial.
Financial results for the fourth quarter of 2024 with me on the call we have Matthew Prince co founder and CEO Michel <unk> co founder President and Thomas Seifert CFO.
Speaker Change: Now everyone should have access to our earnings.
Speaker Change: This announcement as well as our supplemental financial information may be found on our Investor Relations website.
Speaker Change: As a reminder, we were making forward looking statements during today's discussion, including but not limited to our customers vendors and partners operations and future financial performance, our anticipated product launches and the timing and market potential of those products, our anticipated future financial and operating performance and our expectations regarding future macroeconomic.
Speaker Change: Conditions.
Speaker Change: These statements and other comments are not guarantees of future performance and are subject to risks and uncertainty.
Speaker Change: It's beyond our control.
Speaker Change: Our actual results may differ significantly from those projected or suggested.
Speaker Change: Any of our forward looking statements.
Speaker Change: These forward looking statements apply as of today and you should not rely on them as representing our views in the future.
Speaker Change: We undertake no obligation to update these statements after this call.
For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition. Please see our filings with the SEC as long as in today's earnings press release, unless otherwise noted all numbers, we talked about today other than revenue will be on an adjusted non-GAAP basis.
Speaker Change: You may find a reconciliation of GAAP to non-GAAP financial measures that are included in our earnings release on our Investor Relations website.
Speaker Change: For historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few months ago.
Speaker Change: We would also like to inform you that we will be participating in the Morgan Stanley Technology Media and Telecom conference on Monday March 3rd and we are hosting our annual Investor day on Wednesday March 12.
Matthew: Now with that said I'd like to turn the call over to Matthew.
Matthew: Thank you Phil we had a very strong end of 2024, we achieved revenue of $459 9 million up 27% year over year during the quarter. We added a record number of new large customers those that pay us more than $100000 per year and now have 3497 large cup.
Matthew: <unk> also up 27% year over year.
Matthew: Revenue contribution from large customers grew to 69% of revenue up from 66% in the fourth quarter last year.
Matthew: Our dollar based net retention picked up one percentage point quarter over quarter to 111%. Our gross margin was 77, 6% remaining above our long term target range of 75% to 77%.
Matthew: Delivered an operating profit of $67 2 million, representing an operating margin of 14, 6%. We continued to generate strong free cash flow, achieving $47 $8 million during the quarter and $166 $9 million for the full year.
Matthew: As we've talked about multiple times since the beginning of 2024 customers have been disappointing.
Matthew: And I think deals carefully and ensuring every dollar spend delivered clear and immediate value.
Matthew: That trend continued through Q4, however, as the quarter progressed, we saw encouraging signs of confidence is beginning to return, particularly in the U S security AI modernization and efficiency form the word cloud we hear most often in these conversations these themes play directly to cloud strength beyond the quality.
Matthew: They've got measurable improvements in Q4, we saw a notable uptick in close rates, we saw improvement in sales cycle. The majority of large customers I mentioned last quarter deals had slipped from Q3, Reengage and signed significant contracts in Q4, we crossed 3 million active developers on our platform, including <unk>.
Matthew: For workers and workers AI, and we saw record growth in our largest customers those who spend over $1 million with cloud for per year. We ended the year with 173, such customers 55 of which we added in 2024 and more than half of the new AD where in the fourth quarter alone.
Matthew: I'm proud of how our team remained disciplined and focused on delivering real ROI for customers, which drove these record results in the fourth quarter. While also ensuring we are well positioned to capture the demand we see lined up in 2025.
Matthew: More than anything behind this success is our improved go to market execution I wanted to give you an update on our progress on that front Mark Anderson continues to prove he is one of the best go to market leaders in the industry in the fourth quarter. He led the team to a fifth consecutive quarter of double digit year over year increases in sales productivity.
Matthew: For the full year, not only with the average productivity higher each quarter compared with 2023, but we also achieved meaningful improvements in shifting account executives to the right of their attainment graph. We delivered a 10 percentage point increase in ramped aes, achieving over 80% of quota compared with 2023.
With most gains coming in the 125% or higher attainment cohorts.
Matthew: We continue to aggressively hire in our sales organization with a focus on more stage appropriate talent and Onboarding enterprise account executives with proven track records in Q4, nearly 80% of our new sales hires were in the enterprise segment and the absolute number of new enterprise Aes hired increased 84% year.
Matthew: Every year.
Matthew: You've heard me say in the past, we're not limited by our total addressable market by our competitors or by our pipeline. Each day I see evidence. This is truer than ever before our constraint has been at least for another quarter. We'll continue to be the capacity of our sales force now we've seen the increase in our sales force is performance under Mark's leadership net sales capacity.
Matthew: <unk> turned the corner exiting 2024 in Q2 of 2025, we'll start to see capacity and ramp reps begin to meaningfully accelerate to give you a sense, 80% of our full year plan for 2025 is assigned to account execs, who are already in their seats a cloud player at the start of the year and now that we've got the former.
Matthew: Dialed in we're keeping our foot on the gas.
Matthew: This is what gives me confidence in our ability to reaccelerate throughout this year, we are world class and product innovation, we are world class and network stability and reliability and 2025 is the year. We will prove we can be world class in go to market as well.
Matthew: That seems like a great segue to discuss some of our customer wins in the quarter, a fortune 100 technology company signed a five year $20 million pool of funds contract, which includes all plasma products for frictionless adoption across our entire platform marketing the largest new customer win in <unk> history expected initial use.
Matthew: This include application security and performance as well as our workers developer platform. They view <unk> as a strategic partner with a shared vision for multi cloud security AI and data sovereignty is it just the beginning with this customer.
Our leading AI company expanded their relationship with clouds, they're signing a one year $13 $5 million pool of funds contract deploying this strategic pool of fund structure will provide seamless access to the entire class of our platform maximizing scale and enabling accelerated innovation with transparent pricing and a streamlined partnership.
Matthew: In the words of the customer quote cloud <unk> as a model partner, we wish to emulate this relationship with all our vendors.
Matthew: A leading global retailer signed a three year $10 $8 million contract for application services workers are two magic firewall Magic transit.
Matthew: This customer was looking for a strategic partner, who could help further develop and scale its online experience, which has been experiencing significant growth.
Matthew: Placing a 20 year incumbent classifieds unified offering and vast global presence combined with our innovative developer platform, including Workers' AI proved to be key differentiators from the incumbent and other competitors.
A major U S investment firm expanded their relationship with the cloud players signing a three year $4 million SaaS contract for Zero Trust and data loss prevention, along with Magic and Magic firewall. This customer approach cloud player unhappy with their incumbent solution from a first generation zero trust provider clouds Blair one against multiple competitors.
Matthew: Due to our superior network performance and ability to deliver a transformational single vendor SaaS solution, an easy to use unified platform.
Matthew: Our global 2000 Aviation group signed a five year $9 $4 million contract for our full suite of application security and performance products. This customer is focused on adopting a cloud first operating model to increase agility, while also improving cost efficiency. The company conducted a robust RFID against more than a dozen vendors in.
Matthew: Consideration and quantify with selected to displace a longtime incumbent due to our ability to drive greater modernization, the ease of use and flexibility of our product and our ability to deliver meaningful ROI.
Matthew: Our global 2000 financial institutions signed a four year $13 $6 million contract for application services, along with Magic Transit and threat intelligence. This customer is looking to accelerate digital transformation as well as gain more control and transparency over its security posture with their nine year incumbent provider it would take 14.
Matthew: Weeks to provision a new website with cloud flare new website can be provision in just 10 minutes in the work that this customer quote cloud stand out in this space offering a robust scalable and developer friendly edge security platform that not just offers best in class security for our digital channels, but also helped us.
Matthew: The velocity of digital changes to speed up the bank.
Matthew: A rapidly growing technology company expanded their relationship with cloud players signing a two year $1 million contract for cloud block calls cloud phone calls is a newer product in our developer platform, allowing developers to build real time audio and video applications on cloud surplus edge. This customer was looking for a more cost effective and performance.
Matthew: <unk> with cloud player. This customer was able to build new customer use cases that can scale significantly while also achieving better performance at a lower price point.
Matthew: Finally, our major international financial institution expanded their relationship with the cloud player signing a three year $6 1 million contract for application services.
Matthew: This customer is migrating from a hyperscale cloud player in order to enable our multi cloud architecture as they scale their growth in a regulated industry around the world.
It's best of breed security products higher uptime, and ease of use to scale and automate operation made us the clear winner.
Matthew: I wanted to end by talking a little bit about what we're seeing in AI. We believe <unk> has four distinct opportunities in AI. The first is the same as every other company, we're getting more efficient in our business processes using AI systems, that's not particularly interesting. These days, though I'm proud more often than not we're finding we can build these functions on our own infrastructure.
Matthew: Rather than contracting with others.
Matthew: Second is AI it makes our performance and security products smarter for customers at some level, although we never really had the hubris to describe it this way, but it's always been an AI company. The thesis was that if we can get enough internet traffic flowing through us we get spot security threat that no one else could see and today our machine learning based securities.
Matthew: <unk> regularly discovered new security threats that no human had identified before that again it feels like table Stakes for us now.
Matthew: Third opportunity is where I think things start to get interesting the killer application for class a workers, it's turning out to the AI. The model of programming is uniquely suited for building tools like AI agents and our <unk> architecture, which allows you to pay only for what you use based on CPU or GPU type positions workers to become the go.
Matthew: Two platform for developers, who want the best price performance for AI inference <unk> workflows.
Matthew: Talk last quarter about a large AI customer that was building their interface on top of our inference platform from their perspective, the partnership has gone extremely well, but behind the scenes. Our team has been able to do the hard engineering work to drive up the efficient use of our GPU infrastructure in.
Matthew: Forest paths are generally highly variable and there is a two time difference between this customer's peaks and valleys, which means they would have to pay approximately 250% more to stay provision on a hyper scaler to run the same number of inference task compared with workers AI efficient paper inference surplus.
Matthew: Model. Additionally.
Matthew: Additionally, more and more developers are discovering AI gateway with some realizing more than 10 X price performance improvement for their AI agent by serving requests directly from class less cash instead of the original model provider.
Matthew: And just last month the world was amazed that the efficiencies the team of clever engineers in China were able to deliver in the field of AI training with the deep seek model. We are seeing that there are equivalent optimizations that can be made with AI inference on cloud flex platform, resulting in faster performance and lower prices for customers and higher margin and less.
Matthew: Capex for US we believe influence is a bigger opportunity than training and our team continues to find step function breakthroughs that put us well ahead of any alternative but all of that made pale in comparison to the fourth opportunity cloud third count many of the most important AI companies as customers. We also kind of huge porch.
Matthew: The world's content creators as our users.
Matthew: Being between those two puts us in an important role to help figure out the business model of the post search web cloud.
Matthew: <unk> sits in a unique position to help figure out how content creators are compensated what agents are allowed where and on what terms and how the AI driven web of the future will fit together, it's early days, but the conversations we're having with all the relevant parties feel foundational for the future watch this space definitely exciting.
Matthew: But before I get too far ahead of myself to bring it back to the present, let me hand, it off to Thomas to talk through the fourth quarter's financials and our outlook for 2025 Thomas take it away.
Thomas: Thank you Matthew and thank you to everyone for joining us.
Thomas: We are pleased with our strong operational and financial performance for the fourth quarter building further momentum from our go to market transformation efforts that masks you discussed.
Thomas: Strength in our business this quarter was driven by significant growth with large $1 million customers.
Thomas: Ongoing traction with pool of funds contracts.
Thomas: Sustained momentum with our workers developer platform and high prioritization of security by our customers.
Thomas: We saw a notable uptick in close rates and an improvement in sales cycles.
Thomas: We also delivered another double digit year over year improvement in sales productivity with record productivity in both EMEA and APAC.
Thomas: As discussed last quarter, we were encouraged to see the number of fremd account executives increase exiting the fourth quarter, and we expect year over year growth and ramped aes to continue to accelerate each quarter throughout 2025.
Thomas: Further laying the foundation for cloud for this next phase of growth at scale.
Thomas: Turning to revenue.
Thomas: Total revenue for the fourth quarter increased 27% year over year to $459 9 million.
Thomas: From a geographic perspective, the U S represented 50% of revenue and increased 23% year over year.
Thomas: EMEA represented 28% of revenue and increased 27% year over year.
Thomas: APAC represented 14% of revenue and increased 39% year over year.
Thomas: Turning to our customer metrics.
Thomas: In the fourth quarter with approximately 237700 paying customers representing a record addition of nearly 48000 paying customers in 2024, and an increase of 25% year over year.
Thomas: We ended the quarter with about 3500 large customers representing a record addition of more than 740 large customers in 2024, an increase of 27% year over year as well as a record addition of 232 large customers in the fourth quarter alone.
Thomas: We were pleased to see revenue contribution from large customers during the quarter increased again to 69% of revenue up from 66% in the fourth quarter last year.
Thomas: For full year 2020 for revenue from large customers represented 67% of total revenue compared to 64 in 2023 and 61% in 2022.
Thomas: And we ended the year with 173 customers that spend over $1 million.
Thomas: Adding a record 55 1 million customers in 2024, and representing a 47% increase year over year.
Thomas: Our dollar based metric tension was 111% during the fourth quarter, representing an increase of one percentage point sequentially.
Thomas: As a reminder, there can be some variability in this metric quarter to quarter, but we believe the recent decelerating trend and DNR stabilizing. Despite continued near term headwinds from increased traction with telephone contracts, which can impact the shape of revenue recognition.
Ashley: Ashley for existing customers transitioning to these platform deals.
Ashley: Moving to gross margin fourth quarter gross margin was 77, 6% representing a decrease of 120 basis points sequentially and a decrease of 130 basis points year over year.
Ashley: During the fourth quarter, the percentage paid versus free customer traffic increased as compared with prior quarters, resulting in a higher allocation of expenses to cost of goods sold from sales and marketing.
Ashley: Lying economics of our network driven by its inherent scalability and efficiency remained unchanged.
Ashley: And that's where our capex represented 15% of revenue in the fourth quarter and 10% of revenue for the full year.
Ashley: As we mentioned last quarter, the accelerating shift from AI training to AI inference, that's given us confidence to continue to increase our investment in our <unk> rollout as we provision greater capacity to support demand in 2025.
Ashley: We expect network capex could be 12% to 13% of revenue for full year 2025.
Ashley: Turning to operating expenses.
Ashley: Fourth quarter operating expenses as a percentage of revenue decreased by 5% year over year to 63% as we.
Ashley: We remain committed to driving higher productivity and greater efficiency across our operations.
Ashley: Our total number of employees increased 16% year over year, bringing our total head count to about 4300 at the end of the quarter.
Ashley: Sales and marketing expenses were $166 9 million for the quarter sales and marketing as a percentage of revenue decreased to 36 from 40% in the same quarter last year.
Ashley: Research and development expenses were $74 8 million in the quarter R&D as a percentage of revenue remained consistent at 16% compared to the same quarter last year.
Ashley: General and administrative expenses were $47 8 million for the quarter G&A as a percentage of revenue decreased to 10% from 11% the same quarter last year.
Ashley: Operating income was $67 2 million.
Ashley: An increase of 69% year over year compared to $39 8 million in the same period last year.
Ashley: Fourth quarter operating margin was 14, 6% an increase of 360 basis points year over year.
Ashley: These results highlight our continued focus on becoming more efficient and more productive given that operational excellence is a long term competitive advantage.
Ashley: Turning to net income in the balance sheet.
Ashley: Net income in the quarter was $68 8 million or diluted net income per share of 19.
Ashley: Our non-GAAP effective tax rate in Q4 was 25% compared to guidance of 16% to account for the full year impact of certain tax elections made during the fourth quarter, which did not increase our cash liabilities in 2024.
Ashley: <unk> to mitigate cash liabilities in future years.
Ashley: Excluding the impact of these tax election or reported diluted net income per share would have been 22 for the quarter.
Ashley: Maintaining a strong commitment to being fiscally responsible and acting as good stewards of Investor capital we enter.
Ashley: The fourth quarter with $1 $86 billion in cash cash equivalents and available for sale securities free cash flow of $47 8 million in the quarter or 10% of revenue compared to $50 7 million or 14% of revenue in the same period last year.
Ashley: Remaining performance obligations, our appeal came in at $1 $687 million.
Ashley: Representing an increase of 12% sequentially and 36% year over year.
Ashley: <unk> was 70% of total <unk> during third.
Ashley: 30% year over year in the fourth quarter versus 29% in the third quarter and 26% in the second quarter respectively.
Ashley: Moving to guidance for the first quarter and full year 2025.
Ashley: As a management team we remain deeply committed to the unit economics of our business and focus on the two fundamental drivers of long term value creation growth and profitability.
Ashley: <unk> always taken a disciplined data driven approach to scaling thoughtfully balancing investments for future expansion with financial and operational efficiencies to ensure that every dollar we deploy drive significant returns in the form of durable and long term growth and profitability.
Ashley: Over the past three years, we've demonstrated our ability to drive operating leverage while transforming our go to market operations as we pursue the massive opportunities still ahead of us.
Ashley: Our disciplined approach gives us the flexibility to lean in when we see the right opportunities and as we enter 2025. The data that we have gives us confidence that nellix. The time to continue to invest to reaccelerate growth.
Ashley: Importantly, this was based on tangible data we.
Ashley: Have real visibility into the effect of the <unk> III accelerating growth improves.
Ashley: Improving sales productivity entertainment level ramping capacity of account executives already in seeds.
Ashley: Seeing momentum with large million dollar plus customers growing pipeline higher win rates and increasing traction in key areas, including workers AI and sassy.
Ashley: For the first quarter, we expect revenue in the range of $468 million to $469 million representing.
Ashley: An increase of 24% year over year.
Variable revenue still and you're incurring parts of our business model, while we saw strong signals during the fourth quarter, reflecting increased usage, we're maintaining a prudent outlook for the first quarter given more limited historical data on consumption patterns and seasonality.
Ashley: We expect operating income in the range of $54 million to $55 million.
Ashley: We expect an effective tax rate of 21%.
Ashley: We expect diluted net income per share of <unk> 16, assuming approximately 362 million shares outstanding.
Ashley: For the full year 2025.
Ashley: We expect revenue in the range of $2 billion $90 million to $2 billion of $94 million.
Ashley: Representing an increase of 25% year over year.
Ashley: We anticipate the weighting of revenue in the second half versus the first half of 2025 to be approximately 40% to 50 basis points higher as compared with the relative mix in 2024.
Ashley: We expect operating income for the full year in the range of 272 million to $276 million.
Ashley: And we expect an effective tax rate of 21% for 2025, we expect diluted net income per share over that period to be in the range of <unk> 79 to 80, assuming approximately 366 million shares outstanding.
Ashley: In closing we are excited about the road ahead and comfort that our strategy will drive continued innovation with accelerating growth.
Ashley: As always we will stay focused on creating significant shareholder value with our commitment to disciplined execution durable growth and operational efficiency.
Ashley: We look forward to updating you on our progress in the coming quarters as we accelerate cloud listening page.
Ashley: Of growth at scale and with that I'd like to open it up for questions. Operator, please pull for questions.
Speaker Change: Thank you Sir if you would like to ask a question today. Please press star one on your telephone keypad, we do ask that you limit yourself to one question and one follow up again that is star one to ask a question today, we will go first to Hamzah firewall a Morgan Stanley.
Hamzah: Great. Good evening and thank you for taking my question and congrats on a strong finish to the year.
Speaker Change: Matthew.
Speaker Change: Obviously deep seek was a big story so far this year I am curious as we see the rate of improvement in the efficiency of these models, whether you think more and more of these inference workloads start moving to the edge. Thank you.
Speaker Change: Yes it has.
Speaker Change: First of all let me apologize I have a bit of a cough. So I will try my best not to cough into into the fund too much during this but deep seek was.
Speaker Change: First of all I think there's been a lot of noise around deep seek.
Speaker Change: Because it came out of.
Speaker Change: From a Chinese company I think theres, a lot of concern around national security issues and other things I think we boiled it down and looked at the underlying research behind it and the reality from what we've seen is that the researchers of deep sea came up with two very very clever optimization that significantly reduced the cost.
Speaker Change: Training and that's I think that's really interesting if you sort of separated or away from a lot of the noise. My view is that models over time will commodify and will be largely open rather than proprietary and thats something that deep seek I think is is the sort of camel's nose under the tent I think what.
Speaker Change: <unk> is doing a llama is another another effort in that in that area and thats. Good for US. That's good for classified because we can have a broad set of models that are running on cloud So theres network and available to our customers I think the second thing that was important.
Speaker Change: Was that do you think really demonstrate that there is room.
Speaker Change: For efficiency for a while there I felt like we were the only one saying hey, you can make AI a lot more efficient and I think some of the folks.
Speaker Change: In Cupertino at Apple, we're seeing the same thing, although although are much more secretive about what they are seeing but.
Speaker Change: This idea that the only way to win in AI was to spend hundreds of billions or even trillions of dollars I think deep seek.
Speaker Change: Shook that foundation and I think that plays very much to clouds. Our strength. We are extremely good at ringing out as much efficiency as possible and we're seeing the same opportunities with influenza deep seek saw with training and I think that that gives us a lot of confidence that models that are running on cloud flare theyre running using our service platform.
Speaker Change: We're going to be able to deliver the best price points for our customers, while still having those be relatively low capex investments and relatively high margin.
Speaker Change: For us and again, that's kind of a cloud fleurs bread and butter over over the last 15 years.
Speaker Change: Finally.
Speaker Change: I think that inference and agents are the really big opportunities in AI and while a lot of the money that's been spent.
Speaker Change: It has been spent on training for the last little bit I think as we go forward a lot more of that money is going to be spent on inference and agents and again club road workers is the killer application for class a workers is influenza. It is agents and we're seeing more and more companies that are running with exactly that so I think <unk> is across the board.
Speaker Change: Positive sign for cloud player and I think our team is.
Speaker Change: Not to be the only ones out there shouting that theres a lot of.
Speaker Change: Efficiency that we can wring out of these models.
Speaker Change: Okay. Thank you look forward to seeing them next month.
Speaker Change: Up next we'll hear from Matt Hedberg RBC.
Speaker Change: Great. Thanks, I'll offer my congrats as well a lot of good stuff.
Speaker Change: Content today.
I wanted to.
Speaker Change: Focus on the product side P. J is well into his role the product teams built out.
Speaker Change: You just got done talking about a ton of innovation around killer apps in infancy, and there's just.
Speaker Change: There's a lot of really really exciting developments. There if you could just step back and sort of reflect on whats you are most excited about from a product innovation perspective. This year are there things that we should be watching for inflection point this year.
Speaker Change: Yes, I think I was just I was actually at our regional sales kickoff in in London, with CJ and Marc This morning and.
Speaker Change: Excuse me.
Speaker Change: And I think the first thing I'll say is that crossover has always been great engineering.
Speaker Change: At least the last seven years, we've been great at a greater product what I think I'm. The most excited about is that 2025 is the year, where we're going to prove that we can be world class go to market and what I think is unique about a product and engineering leader like C. J is he is so customer focused heath so centered around.
Speaker Change: Making sure that our sales team has the tools has the support that they need in order to win and you could just feel that coming through with the team in EMEA.
Speaker Change: Over the last few days that I was that I was there with them and I think that's the thing that Im most excited about I think beyond that I.
Speaker Change: I think that.
Speaker Change: AI over the last year has felt like it went from kind of interesting.
Speaker Change: Science project, something Thats turning into into real use cases, and I think that that's going to be the turning point here and so I talked I think you can go about how infant and agents. We really think are the big opportunities. Some of the applications that we're seeing getting built are just really really fascinating in finance there is a financial services company to build an agent to.
Speaker Change: On top of workers to perform.
Speaker Change: Diligence on M&A targets in medicine.
Speaker Change: Startup.
Speaker Change: Building AI agent to review clinical trial results is that upstart customer support company that built an agent to pull comprehensive view of customers and then make sure that that's in front of the human agent, that's actually supporting our customer in a really efficient way again, all built on workers and CRM customer built an agent to provide them.
Speaker Change: In depth information about prospects there business the org structure in order to make salespeople significantly more efficient and again all on top of workers in media and existing customer built an agent to answer questions about legal documents and marketing customer built an agent about researching the latest topics and creating Seo designed pages.
Speaker Change: To promote their products.
Speaker Change: <unk>, we built in an incident management agent that saving us somewhere between four and six hours every single day, So I think that.
Speaker Change: I know theres a lot of hype around AI I think that.
Speaker Change: I think over the what I wasn't quite sure how quickly that would turn into real ROI to customers I think in the last couple of quarters, we're starting to see where people are abusing workers' AI to deliver real value not just something which is which is equivalent to a core demo.
Speaker Change: Great Great Great Examples Matthew and then maybe just a quick one for Thomas you mentioned pool of funds in your prepared remarks is there any way that you could help us think about what the impact or quantify.
Speaker Change: The impact of pool of fund deals in Q4, and when you think about its impact in 2025.
Speaker Change: Should we kind of think about guardrails story for what seems like an increasing component of revenue.
Speaker Change: Yes.
Speaker Change: The activity around pool of funds in the fourth quarter was comparable to what we saw in the prior quarter around nine percentage points.
Speaker Change: We are excited by this.
Speaker Change: <unk>.
Speaker Change: Sure.
Hershey marble like ours to revenue as a lagging indicator in the fourth quarter felt like one of these inflection points, where things are lining up our sales head count translates into activity translates into pipeline translates into HCV that drew will be.
Speaker Change: Ratably recognize this revenue over the course of the year and we saw a lot of these early pointers put up are pointing in the right direction sales capacity sales productivity.
Speaker Change: Large deals.
Speaker Change: With customers north of $4 million and pool of funds deals.
Speaker Change: The guardrails, we've put in place or are there are a mix of Ob compensate on how we incentivize because the art.
Speaker Change: And turning these pool of funds deals into access versus you have to get customers.
Speaker Change: To consume consume product and I think we learned a lot over the last.
Speaker Change: 12 years 12 months in dealing with this construct and are quite confident.
Speaker Change: In our outlook.
Speaker Change: How these contracts will be recognized ratably and in terms of revenue over the course of the year, especially in the second half of this year.
Speaker Change: Thanks, a lot best of luck guys.
Adam Borg: The next question is Adam Borg Stifel.
Speaker Change: And thanks, so much for taking the question just wanted to touch on the announcements on this week on fed ramp high.
Speaker Change: I was just really curious what this may mean from a network architecture perspective, you know in speaking with investors does this mean anything about the fact that fragmenting.
Speaker Change: Unique in homogeneous network, so long way of saying is the highest the bedroom.
Speaker Change: Hi change at the latest.
Speaker Change: You could give an update on your government business more broadly just both within the U S and internationally. Thanks, so much.
Adam Borg: Sure Adam I'll take a stab at the first step and although the second debt and Thomas May have.
Speaker Change: Some more some more to add.
Speaker Change: I think first of all the federal businesses is important to us and we want to make sure that.
Speaker Change: That federal customers, who need protection can get that and that means making sure that we can comply.
Speaker Change: With with what the requirements are.
Speaker Change: One of the things that was important.
Speaker Change: Two our product and engineering team was that we did that in a way, which would still inherently cloud flare. So we didn't and rush to do something that would maybe result in some quick near term revenue, but would cause us years of pain in terms of our network and our architecture over the.
Speaker Change: Long term, we also didn't want to make it piecemeal where some clue.
Speaker Change: <unk> products were available under federal high, but other classes or products Werent, we want the entire platform to be doing that and so as a result, I think we've moved maybe a little bit more slowly than more cautiously, but it's exactly in respect to your question, which is we don't want to fragment the network and so we have designed.
Speaker Change: Compliance strategy that allows us to use our existing network.
Speaker Change: And be able to meet.
Speaker Change: The fed ramp high requirement that has.
Speaker Change: Been a effort in both directions, I remember very clearly some conversations with with federal government officials, where there were requirements like all machines had to be in the U S. And I said do you really want us to import the denial of service attack into the U S. Before we stop it as opposed to stopping it out at the edge of the network and I sort of obviously not that doesn't make any sense.
Speaker Change: And I think they've been willing to work with us and figure out what what the right processes, but I think we've built a very very very good.
Speaker Change: Good plan that allows us to run the same network.
Speaker Change: Largely across the board without having to fragment it the way that some of the other hyperscale or half hour or build a specific gov cloud and that that is.
Speaker Change: I think what will allow us to continue to have <unk>.
Speaker Change: SaaS in the federal space, while maintaining the elegance of cloud network architecture, where literally any server anywhere on our network is capable of performing any of the function.
Speaker Change: We need so I think that that's that's powerful in terms of the federal business.
Speaker Change: The list of federal agencies that we work with <unk> continues to grow we continue to do more and more with them in the United States.
Speaker Change: Outside the United States that continues to be.
Speaker Change: Really powerful as well I was just I mentioned I was just in London I was meeting.
Speaker Change: Part of our sales kickoff also with the CTO of NATO, who is the cloud for our customer and and and really excited for what we can do for them and again. Our team is very proud of the fact that that we're helping protect summit. So many of these critical infrastructures around the world.
Speaker Change: Awesome. Thanks, so much.
Speaker Change: The next question today is Jonathan Ho William Blair.
Jonathan Ho: Good afternoon, how do we think about the security performance this quarter and were there any standout product categories that you are seeing congrats again on the strong quarter results.
Jonathan Ho: I think I.
Jonathan Ho: The theme for the last couple of quarters has really been.
Jonathan Ho: More and more of our large customers are buying into the overall cloud flare platform.
Jonathan Ho: And so it's less about buying one particular feature and more and more.
Jonathan Ho: The broad suite of everything that cloud does.
Jonathan Ho: When we say pool of funds.
Jonathan Ho: That's what we that's what we're really saying is is that a customer then coming in saying I just want to laugh for I just want.
Jonathan Ho: VPN modern VPN replacement right.
Jonathan Ho: That they are saying we have bought into cloud players vision for what our network architecture should look like and we don't know exactly what's going to make sense in terms of us deploying that but over time, we see a significant portion of our network relying on the cloud for their products and so we're willing to.
Jonathan Ho: Commit a pool of funds and then draw that down as it makes sense in terms of our own deployment in order in order to in order to deliver that and so I think that that broad platform and <unk>.
Jonathan Ho: Real true platforms, all built on one unified architecture is what is giving us the ability to do these large pool of funds deals and I think the theme has been.
Jonathan Ho: Largely that is a platform that has been the killer feature that people are adopting if you're if you pushed me.
Jonathan Ho: And again.
Jonathan Ho: So not yet.
Jonathan Ho: From from from.
Jonathan Ho: Revenue perspective, but I continue to see so many amazing things.
Jonathan Ho: Happen in our in the developer space. The fact that we crossed three.
Jonathan Ho: Million developers using the <unk> platform is is terrific.
Jonathan Ho: The pace of that growth is.
Jonathan Ho: Is just accelerating and so I think thats the area, where there continues to be sort of the most excitement.
Jonathan Ho: And again it feeds into the overall platform as well.
Jonathan Ho: Excellent. Thank you.
Speaker Change: Next we'll take a question from Fatima Busoni City.
Speaker Change: Good afternoon, and thank you for taking my questions Matthew I wanted to go back to you.
Speaker Change: Your commentary and your very embolden stance about that.
Speaker Change: Go to market organization just in terms of.
Speaker Change: Higher aggregate sales capacity and accelerating productivity momentum into this year.
Speaker Change: So the question for you is this being your two with markets.
Speaker Change: And the whole organization and kind of doubling that to some of your comments in the prepared remarks.
Speaker Change: Changes might you be considering from a compensation.
Speaker Change: And Jim's perspective can make good balance some of that really robust pool of funds momentum, but also.
Speaker Change: Engender more of that mass market appeal for your growth your rock, so, namely the developer services and some of that.
Speaker Change: Zero Trust.
Speaker Change: Services areas.
Speaker Change: That could be a real tailwind for you. Thank you.
Speaker Change: Yeah, I'll start and then I think Thomas Hall, Thomas will have more of the Nitty gritty details.
Speaker Change: That he can share I think that.
Speaker Change: Yes.
Speaker Change: So we're just starting we I don't think we could come up on marks our one year anniversary, but it's but it's coming up pretty soon and.
Speaker Change: And I think the amount that he has accomplished in a year.
Speaker Change: <unk> has been really really amazing to watch building out his leadership team.
Speaker Change: Really just increasing the <unk>.
Speaker Change: Caliber and quality of.
Speaker Change: The overall AE is the <unk> that are that are on the team and then and then I think.
Speaker Change: Importantly, identifying some of the real stars that were already on our team and making sure that they get the recognition.
Speaker Change: And rewards that they deserve and part of that is definitely around thinking about things like territory as being much more disciplined about how territories.
Speaker Change: Signed again I was I was just hanging out with our EMEA sales team and all salespeople always grumble about.
Speaker Change: Territory assignments at some level, but all of them said you know what honestly. This is the right way to do it and it's the fair the fair thing to do I think one of the things that sometimes.
Speaker Change: Sometimes a challenge the blessing and the curse of cloud player is everybody needs class layer, which is obviously, which is obviously wonderful, but if you don't do territories right.
Speaker Change: <unk> you can have a salesperson actually do quite well by selling one product to a bunch of different customers as opposed to going very deep.
Speaker Change: And very specific and targeted on customers I think mark has done the things in order to in order to.
Speaker Change: Deliver that and then as we're shifting to more pool of fund deals we're shifting away from being paid by what you sell it you ACB is we're having aes that are being paid based on the actual revenue. That's recognized as products are consumed and again I think that that's that's important just as Thomas alluded to already about making sure.
Speaker Change: Sure.
Speaker Change: That our team is staying with customers building deep relationship with ships with them, making sure that they are getting the most out of every product that they buy from us and again. These are not nothing here, we're not we're not reinventing the wheel in any way.
Speaker Change: We're in a place where we've got great engineering, we've got great product and now we're doing the table Stakes things to become really world class and go to market as well.
Speaker Change: Yeah, theres not much to Matthews.
Speaker Change: I think one of the reasons why this transformation has been so successful so far is that the avoided made the nature of disruptive moves.
Speaker Change: And what is in front of us for the remainder of the year or.
Speaker Change: Tweaking at the edges, I think mark and his team has done excellent art in a really good job getting everything ready as we start the year in your territory rolled out.
Speaker Change: If aes in place quota signed.
Speaker Change: Good handle around the account structure.
Speaker Change: And avoiding really major disruptions as we move through the year, there will be slight adjustments here and there but.
Speaker Change: The nature of things are in place already.
Speaker Change: Thank you Bill.
Speaker Change: We will go to Gabriela Borges Goldman Sachs.
Gabriela Borges: Hey, good afternoon. Thanks for taking my question Matthew I wanted to ask you if I go to market question, a slightly different way.
Gabriela Borges: About how consistently your market share for several of their products is higher.
Gabriela Borges: Native companies for <unk>, how do you navigate that conversation at the enterprise level or perhaps parts of the organization, maybe pushing leading edge, but the rest are all guys. Thanks, you may not be and to what extent do you still get pushback on the depth of ecosystem on the ARCUS platform and how do you address that thank you.
Gabriela Borges: Yes.
Gabriela Borges: <unk>.
Speaker Change: The whole AI space is so new that it in in in almost any company that you encounter even even the digital natives there'll be AI evangelists, and AI skeptics and they're mixed together I think that to start out.
Gabriela Borges: With cloud flare having.
Having a very self serve.
Gabriela Borges: Easy to use easy for a small team to provision and experiment with.
Gabriela Borges: Low capital investment like you can you can literally sign up with a credit card and start doing inference tasks and build a demo.
Gabriela Borges: As a small team and then we have let that.
Gabriela Borges: That bottoms up approach.
Gabriela Borges: Work incredibly well.
Gabriela Borges: Four four for getting the adoption that we have in those those use cases I think what changes in 2025 is that we're going to be much more targeted with going after specific targeted accounts, where we think there is the right fit.
Gabriela Borges: One is already class a customer they're using us in ways that are interesting they know us They trust us and so some of you have been to like our last Investor Day Ali Cabral who's on that on the.
Gabriela Borges: PM team overseeing a lot of workers actually switched over to the go to market team and she is running what we're calling a speedboat, which is which is targeting a handful of customers to specifically go after them and build that kind of a library of case studies.
Gabriela Borges: Are there, making sure that regardless of what size of company, regardless of what industry.
Gabriela Borges: They're in that we've got those case studies that we can then use to expand over over time, so I think that.
Gabriela Borges: Bearing nature of how clubs there is provisioned.
Gabriela Borges: It very easy for us to.
Gabriela Borges: <unk> bottoms up in a way that doesn't always require a big go to market effort, but then I think we're being very strategic with our go to market team for the first time really in saying, let's pick out the few hundred customers that we want to win.
Gabriela Borges: And prove those as use cases and.
Speaker Change: Im incredibly excited for Ali and her team and what theyre going to be able to deliver it because it's.
Speaker Change: It's it achieved the right person knows the platform extremely well and <unk>.
Speaker Change: And is excited to go show people, what they can build using workers AI.
Speaker Change: Yes that makes sense thanks for the detail.
Speaker Change: Yeah.
Up next is Trevor Walsh citizens JMP.
Speaker Change: Great. Thanks, Thanks for taking my questions Matthew you've talked a lot about agents.
Speaker Change: Within the context of AI today, both in your remarks and from some of your responses to questions could you just expand maybe just giving a couple kind of what in your mind are the two differentiated pieces are kind of product aspects of workers that makes it well positioned for agents or why it's kind of I guess easy to build those.
Speaker Change: There on that part of the platform and then you spoke additionally about.
Speaker Change: Great examples of more startup type company building agents to presumably go sell but what about <unk>.
Speaker Change: Your larger customers kind of building agents internally maybe for their own use and is that something youre doing on workers do you have any examples of kind of that type of activity. Thanks.
Yes.
Speaker Change: The examples I gave you were actually pretty large companies I think the difference between startups.
Speaker Change: Companies often is is how much they let us talk about.
Speaker Change: What they're what they're doing.
Speaker Change: But we're seeing across the board.
Speaker Change: Really really exciting things regardless of the size of company startups are often just a little bit more.
Willing to let us to therapy to their horns.
Speaker Change: In terms of that I think that the platform question is really really important and it's.
Speaker Change: Yes.
Speaker Change: It's important to think about like how to contrast cloud flare workers in couple of workers AI with what the hyper scaler are doing so let me first walk through let's say that you wanted to build.
Speaker Change: And agents on on a on a hyperscale or so the first thing is you've got to contact them and say listen I need to use the machine and the machine has to have some GPU resources.
Speaker Change: And for various reasons that are that are pre.
Speaker Change: Pre technical you have.
Speaker Change: You have a full VM basically to do that so you've essentially got to have a significant portion of the machine and in some cases rent knee entire machine and in order to get the best pricing for that kind of the competitive <unk>.
Speaker Change: Pricing you have to commit to typically about a year of renting that machine. So you got a machine Scott and <unk>.
Speaker Change: Nvidia.
Speaker Change: Processor or more that are that are in it.
Speaker Change: New renting it for that entire year. It has been up to you.
Speaker Change: To figure out how to maximize that utilization and it was actually interesting talking to C. J.
Speaker Change: Previous roles that he has been in and he he told US what do you think is common across most companies, which is that most of the time when you're building anything with AI and inference.
Speaker Change: The level of utilization.
Speaker Change: That you are getting.
Speaker Change: Max has added about 10% and we.
Speaker Change: And what we hear from most people is that the average utilization is in the mid single digits in terms of in terms of that utilization kind of makes sense because.
Speaker Change: Excuse me when these agents get invoked you don't you don't know how when people are going to submit <unk> or not.
Speaker Change: Time of day makes a difference all kinds of things make a difference in terms of win when that availability is and it's up to you. The hyper scaler their job their business is renting of the machine, but after you have the machine it's up to you to get the most out of it and so that means that it can be very very very expensive to have the.
Speaker Change: Peak capacity that you need, but then waste all of that capacity.
Speaker Change: When when there is when there is downtime that's out there and so a couple of we've just always thought of it differently. We have thought that you should only pay for when Youre actually getting real work done and so we just we our business is not renting you a machine our business is selling you the actual in.
Speaker Change: <unk> task the that.
Speaker Change: When the agent is actually invoked and it's doing work you pay for that.
Speaker Change: It's not you don't pay for it at all and so that allows you to actually have much easier startup costs, because you don't have to go and negotiate.
Speaker Change: Year long deal with.
Speaker Change: Microsoft or Google or Amazon or Oracle. Instead, you can just come to US you know put your credit card in and only pay for what you use we tend to have pricing, which is still attractive and the question is then how because again, we don't we don't get a significant discount on on on the.
Speaker Change: Gpus, but what we are able to do is drive up that utilization and so where a typical customer is seeing sub 10% utilization across their gpus are peak utilization of Gpus is now around 70% are the trusts are still much lower than that we are much better still at CPU utilization at getting an average up in the <unk>.
Speaker Change: The 8% range, but we see a path for us to be able to do that with Gpus as well I know what that effectively means is again roughly speaking we can get effectively seven times today the amount of work out of a dollar of Capex spend in this area.
Speaker Change: You can with the various hyperscale and again that either means that we can capture that as margin, Oregon pass that on to our to our customers and so at some level of cloud flow has always been as a giant scheduler. We are really good at moving data very very very low cost in most cases, even free around the world to wherever there are the <unk>.
Speaker Change: Sources to be able to process that data and that then in the in the agent space in the insurance space in all of workers that is allowing us to have this incredibly high utilization and deliver just a much.
Speaker Change: Easier to get started with easier to consume you don't have to have a whole SRA team to run your machines, because we handle that all for you. So it's easier to use it's more cost effective it's fair in terms of the pricing it scales all the way down to zero when theres nothing using it scaled up as much as you need on the other end and we think.
It's just a better a better model. What's also interesting is because we're inventing a lot of this IP and a lot of this tech ourselves how you take a GPU, which was never intended to be a multi tenant thing and make it multi tenant we think that at least in the short to medium term, that's going to give us a moat because theres a lot of hard engineering work in order.
Speaker Change: There are two in order to deliver that and we just don't see any other company they're focused on the same things that we are today.
Speaker Change: Awesome Super interesting I appreciate it.
Andrew Nowinski: Our final question today comes from Andrew Nowinski Wells Fargo.
Andrew Nowinski: Great. Thank you for taking the question and squeezing me in here Congrats on very strong execution again so.
Andrew Nowinski: I just wanted to maybe switch topics to your SaaS solutions, I mean, theres no doubt that the network security market is transitioning to zero trust, but there are.
Speaker Change: A number of vendors in this space I would imagine a lot of the bake offs that you're in are very competitive. So I'm just trying to parse out maybe how much of your SaaS wins are coming from the overall market inflicting higher with greenfield opportunities versus competitive displacements and maybe if you can give some color on why you are winning there. Thanks.
Andrew Nowinski: Yeah, I think when we first got into this space.
Andrew Nowinski: We thought that the right strategy was to go after after greenfield opportunities, but what we realized.
Andrew Nowinski: Pretty quickly with a lot of.
Andrew Nowinski: Customers that are out there.
Andrew Nowinski: We're really dissatisfied with their sort of first generation <unk>.
Zero Trust vendors they.
Andrew Nowinski: They didn't like their performance.
Andrew Nowinski: They tended to be had.
Andrew Nowinski: Low reliability.
Andrew Nowinski: There was there was a lot of arrogance in the market from certain.
Andrew Nowinski: Certain vendors and there was.
Andrew Nowinski: I think.
Andrew Nowinski: Feeling that there wasn't actually kind of continue with innovation in the space and so.
Andrew Nowinski: Somewhat to our surprise, we actually pivoted to going directly after a lot of.
Andrew Nowinski: People who are having.
Andrew Nowinski: With their first zero trust vendors that were out there and I think are aware, our pitch and where we end up winning time and time and time again is by saying we have the fastest network everywhere in the world.
Andrew Nowinski: First second we have a comprehensive solution for your entire network not just the zero trust piece, but for both the sort of forward proxy and reverse proxy parts and so we can bundle that all together and then as a result that bundle has a just much.
Andrew Nowinski: Higher ROI.
Andrew Nowinski: Than anyone else is able.
Andrew Nowinski: To deliver and so that's been a very compelling prospect a lot of the big Zero Trust wins that we're winning are displacement of other zero Trust centers. We also are winning some of the new greenfield opportunities as well.
Andrew Nowinski: And we continue to invest in this space, but the key here is because we have the broad platform, we're able to just solve much much.
Andrew Nowinski: More diverse set of problems for a customer then just zero trust and I think that over time Zero Trust is a feature.
Andrew Nowinski: What people really want is a completely secure network and cloud flare is.
Andrew Nowinski: By far the leader in providing that soup to nuts.
Speaker Change: Perfect. Thank you Matthew.
Speaker Change: At this time there are no further questions I would like to hand, the conference back over to Mr. Matthew Prince for any additional or closing remarks.
Matthew Prince: Thank you so much I appreciate everybody tuning in wanted to take a second to thank our entire team for what was at an incredible 2024, I think as Thomas alluded to we see the first half of 2025 being a real turning point.
Matthew Prince: I am excited for what is ahead, thanks to the entire team I'm excited to see a bunch of you over the weeks ahead as I travel to various sales kickoffs around the world and I appreciate it and go collapsing.
Matthew Prince: And once again, everyone that does conclude today's conference we would like to thank you all for your participation today you may now disconnect.
Matthew Prince: Yes.
Matthew Prince: Yes.
Matthew Prince: [music] ma'am.
Matthew Prince: Great.
Please go ahead.
Matthew Prince: Okay.
Matthew Prince: Yes.
Okay.
Matthew Prince: Thank you.
Matthew Prince: Yes.
Sure.