Q1 2025 Cloudflare Inc Earnings Call
Boston.
If you would.
From.
Hum.
Okay.
[music].
Sure.
Okay.
[music].
Yes.
Right.
Yes.
Okay.
Aaron: Good afternoon. My name is Aaron and I will be your conference operator for today at this time I would like to welcome everyone to the cloud flare Q1, 'twenty 25 earnings call. All lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a question and answer.
Aaron: Session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question at any time, it's just that star followed by number one again, we do ask that you. Please limit yourself to an initial question and then a single follow up when you were given the opportunity to see.
Aaron: Thank you.
Speaker Change: With that I am pleased to turn the call over to Phil Winslow VP of strategic Finance Treasury and Investor Relations Phil Please begin.
Speaker Change: Thank you for joining us today to discuss cloud flare its financial results for the first quarter of 2025 with me on the call. We have Matthew Prince co founder and CEO and Thomas Seifert CFO, Michelle <unk> co founder and President is traveling internationally it will not be available.
Speaker Change: On today's call by now everyone should have access to our earnings announcement. This announcement as well as our supplemental financial information may be found on our Investor Relations website.
Speaker Change: As a reminder, we will be making forward looking statements during today's discussion, including but not limited to our customers vendors and partners operations and future financial performance, our anticipated product launches and the timing and market potential of those products, our anticipated future financial and operating performance.
Jordan, or suggested in 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.
Speaker Change: 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.
Speaker Change: Unless otherwise noted, all numbers we talk about today, other than revenue, will be on an adjusted non-GAAP basis. You may find a reconciliation of gap to non-GAAP financial measures that are included in our earnings release on our investor relations website. You may find a reconciliation of gap to non-GAAP financial measures that are included in our earnings release on our investor relations website.
Speaker Change: For a historical period, a gap to non-GAAP reconciliation can be found in the supplemental financial information referenced a few months ago. Thank you very much for your time.
Speaker Change: We would also like to inform you that we will be participating in J.B. Morgan's 53rd Annual Global Technology, Media and Communications Conference on Tuesday, May 13th. Now with that, I'd like to turn the call over to Matthew. Thank you.
Thank you, Phil. We had a strong start to 2025. We had a strong start to 2025.
We achieved revenue of $479.1 million, up 27% year over year. We achieved revenue of $479.1 million, up 27% year over year.
Speaker Change: We close the quarter with 3,527 customers paying us more than $100,000, a 23% increase year-over-year.
Speaker Change: Revenue contribution from these large customers grew 32% year over year and they now contribute 69% of revenue up from 67% of revenue in the first quarter last year.
We thought particular strength with our largest customer.
Speaker Change: Losers spend over $1 million and $5 million with Cloudflare for a year. Within both of these cohorts, we added a record number of customers, increasing 48% and 54% year-over-year respectively, which shows the strong return on investment from our go-to-market improvements and large enterprise sales.
Speaker Change: Our dollar-based net retention was 111%, which is flat quarter-to-quarter. Our churn rates improved in the quarter. We are seeing stabilization in our customers' businesses and reduced pricing pressure from competition.
Speaker Change: Our gross margin was 77.1%. Again, above our long-term target of 75% to 77%. [inaudible]
Speaker Change: We delivered an operating profit of $56 million, representing an operating margin of 11.7%, and we generated a strong free cash flow of $52.9 million during the quarter. [inaudible]
Speaker Change: As we've talked about before, we have a unique view of the global economy based on the volume and diversity of data that flows through Cloudflare's network. In the past, that's given us an ability to make calls on the macro environment that turned out to be prescient.
Speaker Change: Given the nature of the uncertainty this time, we have less of a unique view into what lies ahead, but even without our privileged view, it's clear to everyone, the world is a more volatile place today than it was even a quarter ago. Let's go.
Speaker Change: I'm incredibly proud of how our team has navigated this volatility. [inaudible]
Speaker Change: That starts on the cost side. We've been able to manage the continued expansion of our network without a significant change to our CAPEX plan. [inaudible]
Speaker Change: We continue to invest behind actual demand to not get too far over our schemes and have robust and diversified supply chains to mitigate tariff and trade risks.
Speaker Change: This is unique compared with some of our on-prem hardware competition, where we're seeing the last potential customer holdouts begin to migrate away from them because of the uncertainty. Terraceful pose if your solution is a box that has to be shipped.
Speaker Change: On the revenue side, our investment in our go-to-market team remains early, but it's already paying off. This quarter we achieved a number of milestones. We landed the largest contract in Cloudflare's history, a milestone deal of more than $100 million driven by our workers developer platform. [inaudible]
Speaker Change: We close the longest duration contract in Clappler's history for zero trust. [inaudible]
Speaker Change: We delivered another double digit year-over-year improvement in sales productivity. We thought quarter-over-quarter improvement in our sales cycles even as we closed larger deals with more sophisticated buyers. And our new pipeline attainment was ahead of our forecast.
Speaker Change: What you see in these results is evidence of what we've been building towards, a company committed to disciplined execution regardless of external factors, a company becoming more mission critical to our customers each day, and a company with growing strategic importance at the center of the Internet.
Speaker Change: The short term may continue to be volatile in terms of external influences.
Speaker Change: But the long term remains as full of opportunities for Cloudflare as ever.
Speaker Change: So we're going to keep a firm grip on the levers of our business. They prudent with how we forecast and invest in what we know works. An incredible go-to-market team, world-class engineering and innovative products that redefine what's possible for our customers and reinvent the future of the internet. [inaudible]
Speaker Change: That's the playbook for winning that has worked for us before, and we're confident it is the winning strategy regardless of the external environment. And that seems like a good segue to discuss some of our wins in the quarter. [inaudible]
Speaker Change: A leading technology company signed a $5-year, $130 million dollar pool of funds contract, primarily for our workers developer platform. This marks the largest deal in Cloudflare's history. [inaudible]
Speaker Change: This existing customer significantly expanded their relationship with Cloudflare. They chose workers, durable objects, containers, and our real-time products. [inaudible]
Speaker Change: The customer was well down the line with a traditional hyperscaler, but made the decision to switch to CloudFlare when they saw our better performance, lower development costs, and more modern platform.
Speaker Change: In the words of this customer, quote, the scale and performance of Cloudflare's network, and its proximity to our user base, with the most powerful driver to doing more with Cloudflare, being close to users improved every element of their experience on our platform, end of quote.
Speaker Change: That's something the legacy model of the hyperscalers just can't match. And with a confidence of deals like this, our team is actively hunting several more $100 million plus deals.
Speaker Change: A large technology company expanded their relationship with Cloudflare, signing a two-year $9.4 million contract, which includes a $2 million worker's upsell, along with zero trust and application services. A large technology company expanded their relationship with Cloudflare, with zero trust and application services.
Speaker Change: Cloudflare's zero-trust products were significantly more performance than a first-generation competitor due to our network's expansive global presence, including our distributed international Fed ramp points of presence. [inaudible]
Speaker Change: Cloudflare is displacing three vendors with this contract, showcasing the strong value proposition of our platform and significant ROI we provide our customers.
Speaker Change: and International Critical Infrastructure Providers signed a $7-year, $12.7 million contract, marking our longest duration contract in Cloudflare's history. [inaudible]
Speaker Change: This customer is going all in on Cloudflare's sassy portfolio with access, gateway, DLP, magic wand, and magic firewall, along with application services. [inaudible]
Speaker Change: The Strength and Breath of Cloudflare's holistic platform for both application services and staff security controls, allowed for seamless product integration and was a key differentiator from first-generation zero-trust competitors.
Speaker Change: In the words of this customer, Cloudflare has, by far, the broadest and most programmable Cloud security and connectivity platform on the market. [inaudible]
Speaker Change: A global 2000 international business services company expanded their relationship with Cloudflare, signing a $5.5 year, $6.4 million contract for our full zero-trust portfolio.
Speaker Change: With Cloudflare's unified platform, this customer will display three vendors as they look to simplify operations, reduce latency, and improve the security gaps they had with their incumbent multi-vendor architecture. [inaudible]
Speaker Change: A large U.S. government entity signed a two-year, $6.2 million contract for Zero Trust. This customer evaluated several vendors to comply with new federal Zero Trust requirements and Cloudflare ultimately stood out as the vendor of choice due to our world-class security products and the breadth of our network.
Speaker Change: This was a partner lead deal and a great example of the progress we continue to make with our partner first motion. [inaudible]
Speaker Change: A government agency in Asia-Pacific signed a $3-year, $4.8 million contract for Magic Transit and Application Services.
Speaker Change: Disgovernment entity was looking to modernize the security posture with a cloud-first testing-class solution for both layer-3D dust protection and layer-7 application security. [inaudible]
Speaker Change: They view Cloudflare as a key enabler to their digital transformation and have been blown away by the visibility and intelligence they have at the network layer with Cloudflare. [inaudible]
Speaker Change: A Fortune 500 technology company expanded their relationship with Cloudflare, sending a $3.3 million contract for application services.
Speaker Change: This customer is migrating traffic from a hyperscaler to Cloudflare due to our ability to offer more robust security solutions and greater automation.
Speaker Change: With this customer also seeing the benefits of our platform, we're currently in discussions on a number of additional opportunities. [inaudible]
Speaker Change: These Q1 wins not only serve as a great springboard for the rest of 2025, but are also reminders that while the world may be uncertain, what's absolutely certain is that innovation wins and no company out-innovates Cloudflare, we invest early and are able to develop quickly with nimble teams because of the power and flexibility of our platform. This is one of the most important things we've ever seen in the past. It's been a long time since we've seen this. It's been a long time since we've seen this. It's been a long time since we've seen this.
Speaker Change: Two products are just over a year old and have seen remarkable growth. The number of Cloudflare workers AI inference requests powered by our network are up nearly 4,000% year over year. The number of requests running through our AI gateway are up more than 1200% year over year. [inaudible]
Speaker Change: We continue to invest in the future, building the first, fastest, and most powerful Model Context Protocol, or MCP, server.
Speaker Change: This technology is key to enabling AI agents. I'm proud that great companies like Asana, Atlassian, Block, PayPal, Sentry, Stripe, and many more are building the interface for AI agents to work with their own platforms on top of CloudFlare workers.
Speaker Change: These companies are choosing Cloudflare because we have a rich developer platform, but also because we combine it with an understanding of internet performance and security. [inaudible]
The security challenges of an agentic Internet are not trivial.
Speaker Change: But the best companies know that Cloudflare will be a thoughtful partner in addressing them as we build the future together. A great enduring story is made up of more than one act. We're not bolting AI security through haphazard acquisitions, but instead building the unified platform that supports the future. [inaudible]
Speaker Change: That shows in the size of the deals we're closing, the length of those deals, and the caliber of the logos of customers that are betting on Cloudflare. [inaudible]
Speaker Change: The opportunity ahead of us is as massive as ever. We have the scale, the technology, and the team to capture it.
Speaker Change: The volatility in the world doesn't appear to be going away anytime soon, but we will continue to focus on our customers and execute on our strategy.
Thomas Seifert: Justice, we did this quarter. With that, I'll turn it over to Thomas. Thomas, take it away.
Thomas Seifert: Thank you, Matthew, and thank you to everyone for joining us.
Thomas Seifert: We are pleased with our operational and financial performance during the first quarter as we effectively executed against a highly volatile external business and geopolitical backdrop to deliver CloudFlare's highest year-over-year growth in net new ACV in three years.
Thomas Seifert: As you mentioned, strengthen our business this quarter was driven by large $1 million plus customers, including our first contract of more than $100 million. $10 million.
Thomas Seifert: Long-term commitments from our customers, including the longest duration deal in Cloudflare's history, ongoing momentum with our workers' developer platform, and continued high prioritization of security by our customers. [inaudible]
Thomas Seifert: We also delivered another double digit year-over-year increase in sales productivity. So an improvement in sales cycles and exceeded our expectations for new pipeline attainment. We also delivered another double digit year-over-year increase in sales productivity.
Turning to revenue.
Thomas Seifert: Total revenues for the first quarter increase 27% over year to $479.1 million. $479.
Thomas Seifert: From a geographic perspective, the US represented 49% of revenue and increased 20% here over a year.
Thomas Seifert: APAC represented 15% of revenue and increased 54% year over year. We were pleased to see continued robust growth in APAC as key go-to-market initiatives in the region continue to produce strong
Thomas Seifert: Turning to our customer metrics. In the first quarter, we had approximately 251,000 paying customers, representing an addition of over 13,000 paying customers sequentially, and an increase of 27% year over year. [inaudible]
Thomas Seifert: We ended the quarter with 3527 large customers representing an increase of 23% here over here, and revenue contribution from large customers increased to 69% of revenue during the quarter, up from 67% in the first quarter last year. [inaudible]
Thomas Seifert: We again saw particular strengths in our largest customer cohorts, adding at a record number of customers year over year spending both over $1 million and over $5 million with Cloudflare, continuing our momentum in the enterprise segment.
Thomas Seifert: Our dollar-based net retention was 111% during the first quarter in consistent sequentially. [inaudible]
Thomas Seifert: These results reinforce our belief that DNR is stabilizing at these levels despite continued near-term headwinds from increased traction with cool-of-hunt contracts, which can impact the shape of revenue recognition.
Moving to press margin. [inaudible]
Thomas Seifert: First quarter across margin was 77.1%, for presenting a decrease of 50 basis points sequentially and a decrease of 240 basis points year over year.
Thomas Seifert: We call that the first quarter of 2025 marks the first anniversary of the extension of the estimated useful life of our network equipment from four to five years.
Thomas Seifert: which reduced the depreciation for assets and service as of December 31, 2023 by $6.2 million or 1.6% of revenue for the first quarter of 2024.
Thomas Seifert: During the first quarter, paid versus three customer traffic increased significantly as compared with the year-goal quarter, resulting in a higher allocation of expenses to cost of goods sold from sales and marketing, similar to the fourth quarter of 2024.
Thomas Seifert: The underlying economics of our network, driven by its inherent scalability and efficiency remained unchanged.
Network Capix, represented 17% of Revenue in the first quarter.
Thomas Seifert: As a reminder, there can be some variability in this metric quarter to quarter, and we continue to expect network of topics to be 12 to 13% of revenue for fall year 2025.
Turning to operating expenses. [inaudible]
Thomas Seifert: First quarter operating expenses as a percentage of revenue decreased by 3% over year to 65%.
Thomas Seifert: Our total number of employees increased 19% year-over-year, bringing our total headcount to 4,400 at the end of the quarter.
Thomas Seifert: Sales and marketing expenses were $183.4 million for the quarter. Sales and marketing as a percentage of revenue decreased to 38% from 41% in the same quarter last year.
Thomas Seifert: Research and development expenses for $76.8 million in the quarter. R&D is a percentage of revenue remaining consistent at 16% compared to the same quarter last year.
General and Edmund Strait of Expenses, worth $53 million for the quarter.
Thomas Seifert: TNA as a percentage of revenue remained consistent at 11% compared to the same quarter last year.
Thomas Seifert: Operating income for $56 million, an increase of 32% year over year compared to $42.4 million in the same period last year.
Thomas Seifert: First quarter operating margin was 11.7% an increase of 50 basis points here over a year.
Thomas Seifert: These results highlight our continued focus on becoming more efficient and more productive, given that operational excellence is a long-term competitive advantage. Thank you very much.
Turning to net income and the balance sheet.
Thomas Seifert: Our net income in the quarter was $58.4 million, or diluted net income per share of $16.00.
Thomas Seifert: Rehabilitation and foreign exchange rates during the quarter resulted in unrealized losses of $2.7 million, generated from the remission of certain monetary assets and liabilities denominated in foreign currencies.
Thomas Seifert: These unrealized losses primarily related to the remeasurement of our international operating lease liabilities are recognized in other income and expense and had a negative impact of one cent to dilute it in its income per share in the first quarter. [inaudible]
Thomas Seifert: We ended the first quarter was $1 9 billion in cash cash equivalents and available for sale securities.
Thomas Seifert: Maintaining our strong commitment to being fiscally responsible and acting as good stewards of investors capital.
Thomas Seifert: We elected a cash settlement of the capped calls associated with our retired 2025 convertible note.
Thomas Seifert: Upon this election during the first quarter. These calls no longer met the criteria of equity classification and were reclassified from additional paid in capital to derivative asset which is included in prepaid expenses and other current assets on the balance sheet.
Thomas Seifert: The derivative asset this recognized that its fair value of $308 3 million.
Thomas Seifert: Which is expected to settle in cash on may 14th.
Thomas Seifert: Free cash flow was $52 9 million in the quarter or 11% of revenue compared to $35 6 million or 9% of revenue in the same period last year.
Thomas Seifert: We are comfortable with consensus free cash flow estimates for the full year 2025, but we would expect the weighting of full year free cash flow generation to be two thirds in the second half of the year due to the timing of roofing capital flows and capital spending.
Thomas Seifert: Remaining performance obligations or our appeal.
Thomas Seifert: And at $1 billion $864 million.
Thomas Seifert: Presenting an increase of 11% sequentially and 39% year over year.
Thomas Seifert: Current <unk> was 66% of total <unk>.
Thomas Seifert: <unk>, 29% year over year.
Thomas Seifert: Moving to guidance for the second quarter and full year 2025.
Thomas Seifert: So as a management team, we've always taken a disciplined data driven approach to scaling our FLIR.
Thomas Seifert: As we enter 2025 the data you gave us confidence to continue to invest to reaccelerate growth.
Thomas Seifert: Our first quarter results underscore that this formula is working despite the higher volatile external business environment.
Thomas Seifert: We are encouraged by our momentum to start the year and remain confident that our strategy will drive continued innovation and accelerating growth.
Thomas Seifert: However, we are cognizant of the broader global business environment in which we are operating and therefore have taken a prudent approach to our outlook for the remainder of the year.
Thomas Seifert: Putting the second quarter, we expect revenue in the range of $500 million to $501 million.
Thomas Seifert: Representing an increase of 25% year over year for.
Thomas Seifert: We expect operating income in the range of $62, 5% to 6% to $3 5 million.
Thomas Seifert: We expect an effective tax rate of 20%.
Thomas Seifert: Diluted net income per share of <unk> 18 cents.
Thomas Seifert: Assuming approximately 364 million shares outstanding.
Thomas Seifert: For the full year 2025, we expect revenue in the range of $2.090 billion to $2 billion $94 million.
Thomas Seifert: Representing an increase of 25% year over year.
Thomas Seifert: We expect operating income for the full year in the range of $270 million to $276 million and we expect an effective tax rate of 20%.
Thomas Seifert: Diluted net income per share over the period to be in the range of <unk>, 79% to 80% assuming.
Thomas Seifert: <unk> 364 million shares outstanding.
Thomas Seifert: In closing, we continue to focus on creating significant shareholder value with our ongoing commitment to disciplined execution durable growth and operational efficiency I'd like to thank our employees for their dedication to our mission as well as our customers for trusting us to help modernize accelerate and secure.
Thomas Seifert: Their businesses during these volatile times.
Thomas Seifert: With that I'd like to open it for questions operator, please poll for questions.
Speaker Change: Thank you, ladies and gentlemen, if you would like to ask a question for today. Once again. It is star followed by the number wondering do your touch tone keypad and again, we do asks could you. Please limit yourself to an initial question and then a single follow up question in order for us to get to as many questions as we.
Speaker Change: Can today. Our first question is from the line of Matt Hedberg with RBC capital markets. Your line is live.
Matt Hedberg: Great. Thanks for taking my questions guys congrats on the quarter obviously.
Speaker Change: Uneven macro environment.
Speaker Change: Maybe to start with you Matthew you guys sit in front of you really 20% of the Internet, it's incredible global visibility and you've talked to talk about your crystal ball and could you comment on trends you're seeing through early may has there been any changes in traffic with all the tariff rhetoric.
Speaker Change: Yes.
Speaker Change: We haven't seen anything and I know some other people.
Speaker Change: Yeah.
Speaker Change: I've commented that they they have but if we look back 136 months.
Speaker Change: There hasn't been a change to what we see in terms of HCP requests in terms of overall volume.
Speaker Change: And that's true both in the U S.
Speaker Change: And around the world Internet traffic has held.
Speaker Change: Pretty pretty steady.
Speaker Change: I think part of that might be the less of our business is sort of a pure media delivery business.
Speaker Change: The majority of that.
Speaker Change: They are going through us or to API is another thing thats not.
Speaker Change: As much video streaming and raw raw beds.
Speaker Change: So it may be that we're just.
Speaker Change: Don't see that as as directly as some other other people. We think those bits are obviously way more valuable than sort of the raw streaming video bits and so if we focus on that I would say that there is one area, which we're watching pretty.
Speaker Change: Pretty carefully that that involves involved AI and media companies actually and that is that the if you look over time.
Speaker Change: The.
Speaker Change: The Internet itself is shifting from what has been a very much a search driven internet to what is increasingly an AI driven internet. So if you look at just traffic from Google 10 years ago Burger two pages, Google crawl. They sent you on visitor six months ago that was up to six to one they call rate Hasnt changed but what's changed is now 75.
Speaker Change: 5% of queries to Google Google answers on Google without sending you back to the original source, but even in the last six months.
Speaker Change: Rate has increased even further where now it's up to 15 to $1 15.
Speaker Change: Crawls February everyone visitor and if you look at open AI, which is 251 anthropic, which is 6000 to one.
Speaker Change: Putting a lot of pressure on the media companies that are there that are making money through.
Speaker Change: Either either subscriptions or are add on on their pages and I think while we have not historically.
Speaker Change: <unk>.
Speaker Change: A big segment.
Speaker Change: All of them are coming to us because they see us as actually being able to help better control how AI companies are taking their information and I think that's I mean, it's.
Speaker Change: An interesting trend to watch in an area that our team is really focused on but the general trend across the internet or traffic has remained the same.
Speaker Change: And we haven't seen anything.
Speaker Change: Caused us to believe that tariffs or anything else or changing internet internet traffic patterns.
Thomas Seifert: It's really good to hear and then maybe just a quick one Thomas.
Speaker Change: The.
Speaker Change: The revenue beat was great to see margins were more or less in line with expectations.
Speaker Change: How do you.
Speaker Change: And you talked about Capex spending sort of within the range that you talked about are you. How are you thinking about margins. This year are you pre spending for some demand that youre seeing just any color on that we're getting a bit of inbounds on sort of the margin performance this quarter.
Speaker Change: Yes.
Speaker Change: Return right now multiple times, our Northstar over a rolling average on quarter to <unk>, 40% rule.
Speaker Change: And if you look at our revenue upside in margin upside and opportunity there and there's still more margin opportunity than there is.
Speaker Change: Revenue opportunity. So we will continue to reinvest in the business. If we think there's opportunity to invest in the data points that the way we've done that in the first quarter.
Speaker Change: Especially investing in our go to market activities and we're seeing good returns on the data that makes us confident to continue that but the guidance will be moving forward as it has always been.
Speaker Change: 40% or so there is some more opportunity to invest but we will make sure that we keep the balance.
Speaker Change: In mind.
Speaker Change: Got it thanks, a lot guys.
Speaker Change: For your questions. Our next question is from the line of Joel Fishbein with true Securities. Your line is live.
Joel Fishbein: Thanks for taking the question and congrats on the excellent execution.
Joel Fishbein: I know you commented a little bit on this in the prepared remarks, but I'd love to get a little deeper on how sales productivity and sales capacity is tracking, especially as it relates to the enterprise segment and do you still expect the capacity of ramp reps to accelerate into Q <unk> and <unk>.
Joel Fishbein: Again in the second half.
Joel Fishbein: <unk>.
Joel Fishbein: Yes, thanks, Phil.
Joel Fishbein: We've been really happy with improvements in sales productivity.
Speaker Change: Cross the team I think Mark Anderson is doing just an excellent job really building up into.
Speaker Change: I think we've always been a world class engineering work I think we've.
Speaker Change: For a long time that a world class product org.
Speaker Change: We're building a world class go to market Org.
Speaker Change: Station and we're seeing that show up in continued quarter over quarter improvement in sales productivity in terms of capacity.
Speaker Change: That.
Speaker Change: We know that thats going to increase because.
Speaker Change: You hire someone to whom they work they ramp over time. So we do see that that is going to continue to increase over time, we're hiring.
Speaker Change: Dramatically across across that or getting incredible candidates.
Speaker Change: Two to join Us and I think the word it out that if you.
Speaker Change: Want to be at the next World class sales organization.
Speaker Change: Players in place place to go in that.
Speaker Change: That's showing up in the results and that showing up in just the caliber and quality of the people that we're getting onboard and I think that will that will very much turn into.
Speaker Change: Sales sales going forward.
Speaker Change: Thank you.
Speaker Change: Thanks for your question.
Speaker Change: Our next question is from the line of Mark Murphy with JP Morgan Your line is live.
Speaker Change: Thank you I'll add my congrats.
Speaker Change: Matthew could you comment on.
Speaker Change: This extreme volume of Ddos attacks that you saw during Q1, we were looking at your stats it looks like they were up more than 300% year over year and the the complexity looks like it went off the charts as well.
Speaker Change: But as the hyper volumetric attacks.
Speaker Change: So I think our understanding is that you do not.
Speaker Change: Actually charge based on the size of the attack but.
Speaker Change: I am wondering if you could see a tailwind from that kind of environment.
Speaker Change: And how you feel about defending against that kind of an attack relative to your competitors.
Kevin: Yes, Mark I think Kevin.
Speaker Change: First of all the attacks are just getting to a what what a few years ago would have been inconceivable.
Speaker Change: Size, where.
Speaker Change: There are very very few networks that can absorb the size and scale of the attacks that are there what I think it is striking is that our cloud flare.
Speaker Change: It's not an all hands on deck situation, it's kind of.
Speaker Change: Kind of like our system just automatically absorbs these and.
Speaker Change: And does it without without anyone having having to respond and that goes back to something.
Speaker Change: I think we have talked about a lot over the years and I think that it's.
Speaker Change: It isn't always appreciated how important and powerful it is most of our competitors run separate scrubbing networks that are that are.
Speaker Change: Completely distinct from the rest of of of their networks and that inherently means that they have.
Speaker Change: Some limited capacity.
Speaker Change: There is always done it differently and took more engineering work, but it's showing in our ability to defend against attacks that that others just can't and that is that we made it. So that every single server that makes up our network is capable of running every single one of the different functions that we have.
Speaker Change: Including the tax.
Speaker Change: Getting in the weeds, a little bit, but when you buy wholesale bandwidth you pay for the greater of in versus out so youre sending traffic out.
Speaker Change: And you are spending 10 times as much traffic, how you pay for that debt out rather than rather than the yen and we're casting proxy. So we are out as always significantly higher that are that are in and what that means is that when a ddos attack comes it pushes the in op, but even at these hyperscale attack the end is not ever getting her.
Speaker Change: Higher than the out and what that means is that from just a cost perspective, because again, we've designed it to a much better and more efficient.
Speaker Change: It means that we can defend against these attacks without having to pass any costs on to our customers. Because we don't we don't suffer any additional costs to be able to defend these visits.
Speaker Change: And that architectural difference.
Speaker Change: Is radically different than what anyone else in the industry does and it's part of why we're able to defend against that.
Speaker Change: I don't think that directly the size of the attacks coming up is something that is going to be a tailwind for us, but I do think that we're already seeing that.
Speaker Change: The hyper scaler some of our competitors are actually referring customers to us when they get to the point that their systems arent able to stay in front of these attacks because they know that the architecture and design of our system is allowed is allowing us to.
Speaker Change: Mitigate what others others can't so I think what we're seeing is especially in places like financial services and others.
Speaker Change: They are recognizing that their existing vendors can't necessarily take on some of these hyperscale attack and theyre, adding platform to the mix in order to make sure that when that attack inevitably comes.
Speaker Change: They have a way of doing it and again that goes back to just what is a much better architectural design than anyone else in this space.
Speaker Change: Thank you so much.
Speaker Change: Thanks for your question.
Speaker Change: Our next question is from the line of Andrew Nowinski with Wells Fargo. Your line is live.
Andrew Nowinski: Great. Thank you for taking the question and congrats on another remarkable quarter.
Speaker Change: Matthew you highlighted the longest duration contract in zero trust to date as well as some other notable wins I was just wondering if you could double click on the trends that youre seeing in the SaaS market and why cloud players kind of winning more of these larger deals and then we've heard in the past.
Speaker Change: Yes, Andy I appreciate it and I'm really proud of.
Speaker Change: Our team for this this is.
Speaker Change: This is a market that we didn't start out in but we realized that our network could provide.
Speaker Change: And just a better experience and so we invested in it and for a while we didn't have all the features that people who had been doing this for a longer than we did.
Speaker Change: I think two things.
Speaker Change: First of all I think we've caught up on all the critical features that are there.
Speaker Change: And then I think when people actually go to test.
Speaker Change: Our solution versus others. Our performance is just significantly better and again that goes back to the fact that every server across our network can do everything. So if you are in <unk>.
Speaker Change: Wanda or if you are in.
Speaker Change: The Pakistan or Youre anywhere in the world.
Speaker Change: We can actually deliver a SaaS solution.
Speaker Change: Local to you that has just significantly better better performance than that anyone else I think the last thing is that I think we've had a lot of success bundling together, our various various solution people customers say they don't want to have to think about.
Speaker Change: Please that reverse proxy versus that forward proxy.
Speaker Change: Who is doing all the things they really want one solution that gives them a platform to solve all of the various problems that they may have with.
Speaker Change: Our network and PREPA is unique.
Speaker Change: And being able to deliver.
Speaker Change: Both things like we were just talking about the Ddos mitigation, but then also safi and I'll come to that one.
Speaker Change: Contiguous bundle and so I think thats something that really stood out and caused us to win more and more of these deals and again I'm proud of the fact that people are confident that our innovation isn't going to slow down and that gives them the confidence to sign these longer duration deals.
Speaker Change: But they also then say.
Speaker Change: Head to head versus first generation SaaS.
Speaker Change: <unk> providers.
Speaker Change: I was just a better solution and that's that's.
Speaker Change: That's causing us to win in these head to head situations.
Speaker Change: Thank you that's great.
Speaker Change: As a follow up Matthew I think you said you want a number of SaaS deals with government agencies as well in both the U S and in APAC and I'm wondering if you could just expand on the traction youre seeing in the broader government sector. Thank you Andy.
Speaker Change: And the.
Speaker Change: And even that.
Speaker Change: The deal in Europe.
Speaker Change: The long duration deal in Europe is that.
Speaker Change: It tangentially government quasi governmental agency as well so I think in these cases the governments are around the world are seeing that on premise hardware.
Speaker Change: Just doesn't work for what they're what they're what they're doing and so there are mandates to adopting zero trust approach and when they do.
Speaker Change: They see again that cloud flow can provide this broad set of solutions across the entire platform and and.
Speaker Change: Again proud of the fact that for what are these critical services governments around the Walter choosing cloud one.
Speaker Change: Thank you.
Speaker Change: Thanks for your questions.
Speaker Change: Our next question is from the line of Keith Weiss with Morgan Stanley. Your line is live.
Speaker Change: Thank you guys for taking the question congratulations on a strong start to the year.
In particular, I wanted to dig into that $100 million workers led deal.
Speaker Change: Not too many platforms out there that can accrue that much value from one deal. So just congratulations on sort of building that out can you give us any detail in terms of the use case or.
Speaker Change: What they are using the platform for give us any more color on what are the $100 million workers deals look like in reality on the ground of what theyre going to be doing with the platform.
Keith Weiss: Yes, Keith.
Keith Weiss: I think that what we're seeing is that plateau workers has become a complete solution.
Keith Weiss: All of the components.
Keith Weiss: Compute storage database.
Keith Weiss: GPU capacity and and so as people are looking.
Keith Weiss: Two.
Keith Weiss: Whether theyre going to go with the.
Keith Weiss: Traditional hyperscale or we are increasingly in.
Keith Weiss: The decision mix and we're seeing places where.
Keith Weiss: People are realizing that they can develop significantly faster they don't have to.
Keith Weiss: Think about scaling issues. They don't have to think about a number a number of things that even if you're using a hyperscale or you still have to have to worry about.
Keith Weiss: And they can do.
Keith Weiss: Just get much better performance.
Keith Weiss: At a lower cost.
Speaker Change: In this case this was a customer that was well down the line.
With one of the traditional hyperscale or <unk>.
Speaker Change: And then the Hyperscale was confident they were going to win the business.
Speaker Change: And we met with them.
Speaker Change: Demonstrated.
Speaker Change: What it was that we were able to deliver help them build a proof of concept and they just saw.
Speaker Change: Inefficiently better performance and I thought how much easier and faster it was for their developer team to be able to deploy across cloud for their workers and so.
Speaker Change: The we've always said and it's still true that you can't do it oftentimes lift and shift.
The traditional.
Speaker Change: Legacy workloads to cloud our workers, but in these cases, where somebody is building a new feature.
Speaker Change: We're extending that that feature.
Speaker Change: We're finding more and more that we're able to win those.
Speaker Change: Those deals and.
Speaker Change: I think that I've tried to caution.
Speaker Change: <unk>.
Speaker Change: That it was going to take.
Speaker Change: Probably probably a little bit longer for for our workers to be delivering real revenue.
I think I think this shows that that that is way ahead of what I would have thought that that timing wasn't can I think that that comes back to the fact that the team has just built such a robust platform at this point.
Speaker Change: That people are saying, we're going to move off the traditional hyperscale and move to cloud for because the rois are so much better. The performance is so much better and then develop and velocity is so much better.
Speaker Change: Yes, definitely seeing that in the developer community for the platform.
Speaker Change: As a follow up this is more of a go to market question in the quarter you guys saw a really strong growth and overall customer as I think that 13000 was up almost 80%, but the net adds on the 100 K side was a lot skinnier.
Speaker Change: Only 30 up on a quarter on quarter basis any changes in go to market strategy that caused that or is that just kind of timing.
Speaker Change: Kind of when deals are coming in.
Speaker Change: Hey, good time.
Speaker Change: I think that that really.
Speaker Change: I'll start and then Tom Tom It's Mike. So it's more my sense is it's mostly timing and then also we actually are really strong.
Speaker Change: Last quarter with the 100000 ads.
Speaker Change: So.
Speaker Change: It moves around.
Speaker Change: Some extent I am I am very excited that record quarter for $1 billion ads record quarter for $5 million ads.
Speaker Change: And so.
Speaker Change: Largely set at the time I don't know if there's anything else you get.
Speaker Change: Yes, a couple of small things came together.
Speaker Change: And more importantly, what we didn't see whilst we didn't see increased churn or contraction actually the opposite.
Speaker Change: <unk> for that cohort, even improved five percentage points I think instead.
Speaker Change: So there are fewer customers will spend less than 100 K, graduating in the last in the larger customer cohort and then the part I had also two days less which means fewer recognized less ratable revenue in the quarter and Thats hurt our customer group that was tested that threshold of moving in there. So.
Speaker Change: Even the two days missing later were also a lot of small things coming together and impacting the account but.
Speaker Change: Nothing that disturbs the long trend trajectory do you see here.
Speaker Change: Yes.
Speaker Change: On the reverse side anything that propelled those 13000 net customer adds overall again any any change.
Speaker Change: On that side of the equation.
Speaker Change: I wouldn't think so other than what we said at the beginning we took the pain that the investment in the go to market front finish line front formation is paying off and that is in those results you'll see across all customer cohort sizes.
Speaker Change: In various ways. So we are we are quite happy with that trend.
Speaker Change: There is some noise quarter to quarter.
Speaker Change: No.
Speaker Change: Got it Super impressive guys. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of shovel Eyal with TD Cohen.
Speaker Change: Your line is live.
Speaker Change: Thank you so much and congrats on solid performance and guidance.
Speaker Change: Matthew you mentioned tariffs as potentially being the final straw for some of the final holdouts, we're still using boxes could.
Speaker Change: Could you elaborate on those conversations and discussions and.
Speaker Change: How are you managing your network supply chain.
Speaker Change: Yes.
Speaker Change: I think one of the.
Speaker Change: The unsung heroes that we don't talk about.
Speaker Change: Always at clubs or is our infrastructure team and just their ability to.
Speaker Change: Just deliver incredible.
Speaker Change: You'll just constant better pricing.
Speaker Change: And getting getting equipment delivered to every far flung corner of the universe managing that.
Speaker Change: And I think that was real.
Speaker Change: During Covid, where we went from good to I think world class at being able to manage that and that gives us the ability to.
Speaker Change: We have multiple distinct.
Speaker Change: Ways to deliver the servers and networking equipment that we that we need.
Speaker Change: We're not we're not dependent on any any network vendor, we can buy from any of the big.
Speaker Change: Network vendors or we have our own white boxes that we can deliver.
Speaker Change: And that has allowed us to have.
Speaker Change: A lot of flexibility.
Speaker Change: And then existing.
Speaker Change: Treaties.
Speaker Change: After an otherwise allow us to do assembly of equipment in places like Mexico and bring it into the U S. When we have to have to do that in a way, which is very efficient or.
Speaker Change: Deploy outside the U S. If we need to.
Speaker Change: And then route traffic to be able to handle that.
Speaker Change: Using used equipment and moving that around us.
Speaker Change: Again.
Speaker Change: Very sophisticated.
Speaker Change: And way of US just making sure we can continue to invest in.
Speaker Change: Our network.
Speaker Change: Build it out around the around the world. So I feel very good about our ability to do that.
Speaker Change: We are hearing from especially in the financial services and healthcare.
There is concern.
Speaker Change: From.
Speaker Change: They're trying to use on premise.
Speaker Change: We're from from existing vendors in that that.
Speaker Change: Is it slowing down the demand for what was sort of the expected firewall sort of reset that.
Speaker Change: That was being there was none.
Speaker Change: <unk>.
Speaker Change: Vendors in the space, where we're seeing I think that's going to put.
Speaker Change: More emphasis on using services like SaaS services, and I think clouds, there will be a beneficiary of that along with others that can they can actually do this as a service rather than as a physical piece of hardware.
Speaker Change: Thank you.
Speaker Change: Thank you for your question.
Speaker Change: Our next question is from the line of Mike <unk> with Needham.
Speaker Change: Your line is live.
Speaker Change: Great. Thanks for taking the questions guys.
Speaker Change: Just wanted to start I think going back to the prepared remarks, Matt you had cited a sequential improvement in sales cycles, which is.
Speaker Change: Which is something that we would not have expected just given this environment and kudos to you guys can you just spend some time cashing out those dynamics.
I'm just curious what's the what's the sustainability of those those improvements that you guys are driving that.
Speaker Change: Yes, I think I think that I was surprised by that as well not only because of.
Speaker Change: Of the environment generally, but I also think because we are selling to larger customers bigger deals.
Speaker Change: And you would naturally expect that that would.
Speaker Change: Good.
Speaker Change: Slowdown in sales cycles, and again I think that that's something that's expected and thats something that we can we can manage around that is not what we saw this quarter.
Speaker Change: Hi.
Speaker Change: I think that we've always been very good at managing sales cycles, I think we've always been.
Speaker Change: Good at delivering that and I think it really is the operational excellence that mark and his team are.
Speaker Change: Our driving across across the entire sales team and also as part of the fact that we have so many existing customers that we can sell more to and expand with I think that those obviously are much faster deals when they when they come in but I don't know that I would expect in fact I would I would.
Speaker Change: Not expect that sales cycles will.
Speaker Change: Continued to trend down for a long time, but I do think that we have been better than most at being able to deliver very efficient sales cycles.
Speaker Change: And I am surprised that as deals have gotten bigger and customers have gotten more sophisticated.
Speaker Change: Debt.
Speaker Change: Sales cycles have have not.
Speaker Change: Ticked up.
Speaker Change: Dramatically, but again I don't think.
Speaker Change: We don't forecast that that's going to be the case forever I think that it's.
Speaker Change: I think we will always outperform our peers, but I would expect that sales cycles will tick up slightly over overtime.
Speaker Change: Thanks for that Matt you and just a quick follow up for Thomas.
Speaker Change: I know, we're talking about less certain environment you guys, obviously had a larger magnitude when thinking about the <unk> topline beat can you just help us think a little bit more as far as the guidance construction here with the reiterated calendar 'twenty five guide.
Speaker Change: How much of that is potentially incremental conservatism or prudence. However, you want to phrase it.
Speaker Change: This is.
Speaker Change: Visibility moving one way or the other over the last 90 days as it relates to pool of funds deals.
Speaker Change: Well you used the words.
Speaker Change: That I used.
Speaker Change: We're giving guidance, it's prudent in light of the uncertain to see we see.
Speaker Change: We started the year, believing in the data.
Speaker Change: That we that we looked at that investing to reaccelerate the growth, what's the right thing to do.
Speaker Change: The first quarter results proof than that was the right decision to be made.
Speaker Change: You heard from Matthew about our confidence in the long term outlook.
Speaker Change: Anything increased based on some of the changes we have seen but we have to be cognizant that the world and of our investments there is a volatile place and the guidance reflects that.
Speaker Change: Yeah.
Speaker Change: Thank you for your question.
Speaker Change: Our next question is from the line of Adam Borg with Stifel. Nicholas Your line is live.
Adam Borg: Awesome. Thanks, so much for taking the question.
Adam Borg: Maybe just for Matthew one of the things when we go back to Investor day back in large that lock aniston talked about was just around the developer speedboat launching this year and obviously with the $100 million plus workers deal, we'd love to get a sense of if that team was involved and just maybe more broadly get an update on the develop of our go to market motion more broad.
Adam Borg: Thanks, so much.
Adam Borg: Yes, I mean that seems definitely involved.
Adam Borg: I don't think that had that team not been involved that we would certainly have closed that deal or close it as quickly.
Speaker Change: What I love is that Ali Cabral is running that team.
Adam Borg: It really came from this from the product.
Speaker Change: Side of the developer platform and said.
Speaker Change: And I feel like we've got we've got the product nailed let's go sell it.
Speaker Change: And.
Speaker Change: She and the team there.
Speaker Change: Are being very deliberate and disciplined.
Speaker Change: They're going out and talking to.
Speaker Change: Customers that we think could really benefit from the increased agility.
Speaker Change: Performance ROI that our developer platform has and.
Speaker Change: It's amazing to see that as they go into these conversations and even help.
Speaker Change: Our customers build out kind of proof of concepts for whats there that that is that is turning into a very large deals that are coming across.
Speaker Change: Across the transom and I think.
Speaker Change: It probably wouldn't have been the right time to do that a year ago, but today when the developer platform is as robust as it is that.
Speaker Change: Thats speedboat and those efforts around around it are are yielding really significant results in and.
Speaker Change: Why I still always want to caution people not to get too far ahead of themselves.
Speaker Change: I'm very excited with what we're seeing.
From the developer community and we are but more active at pursuing large deals.
Speaker Change: That we can deliver real value for them and that speed bow team has been critical to doing that.
Speaker Change: Excellent. Thanks, so much.
Speaker Change: Thank you for your question.
Speaker Change: Our last question for today will come from the line of Jonathan Ho with William Blair. Your line is flat.
Speaker Change: Let me Echo my congratulations as well Matthew could you provide us with an update on the model context protocol that you have.
Speaker Change: The work that Youre doing there and maybe what this implies for cloud players ability to power AI agents as well as the data sources that AI models are accessing thank you.
Speaker Change: Yes, so just a little bit of background for people, who aren't following us closely anthropic.
Speaker Change: Put together a specification called model context protocol, MCP, which is essentially <unk>.
The API to give a standard way for eye AI system to be able to connect to a third party service.
Speaker Change: And interact with it.
Speaker Change: In various ways.
Speaker Change: If you're if you're a bank had in MCP system than an agent can.
Speaker Change: Log in and analyze what youre spelling or spending patterns.
Speaker Change: If if if.
Speaker Change: If you've got MTP server at a media organization.
Speaker Change: They log in and summarize the news that was out there initially the servers win win Anthropic first released the protocol.
Speaker Change: We're run locally on your own machine.
Speaker Change: Which meant that the barrier to entry really really fell on developers, we worked with anthropic to be able to take this the standard and run it instead of locally on your machine run it in the cloud run it across cloud service network and it's been amazing to see.
Speaker Change: How great companies like stripe Atlassian block many others.
Speaker Change: Adopting our approach.
Speaker Change: Two these these.
Speaker Change: These platforms.
Speaker Change: And using cloud flair to give agents AI agents, a way to interact with their underlying platform. There are massive security issues here and again I think one of the reasons that people Trust us in this space is that they know that we understand how important security is and that will help invent.
Speaker Change: The protocols are for a secure ability for agents to interact with the overall internet there'll also be competing platform. So Google has released a extension of MCP, which is slightly different our strategy is just to support everything to be the universal translator.
Speaker Change: And make it so that you can connect to any service which is online.
Speaker Change: And if there are multiple protocols will help rationalize that and again I think it's something that is.
As important so I think it's amazing to see how quickly.
Speaker Change: They are able to use our platform in order to stand up these.
Speaker Change: These agents in the the interaction between these agents I think.
Speaker Change: It may well turn out that the killer app.
Speaker Change: <unk> workers is going to be around AI, and the interconnection and the fact that so many of the AI companies. You know today, our estimates are that about 80% of the major AI companies, our cloud for our customers and so much of the Internet users classifier. It puts us in the center of all of those.
Speaker Change: Conversations and it is incredibly exciting to see people building built in the future on cloud flaring.
Speaker Change: Totally know where its all going to turn out, but I'm pretty confident that no matter, what youre going to need networks, and youre going to need secure networks and <unk> is the best at being able to provide that for whatever the future holds.
Speaker Change: Excellent. Thank you.
Speaker Change: Thank you for your question and ladies and gentlemen that will conclude our Q&A session for today I would like to turn the call back over to Matthew <unk> for any closing comments.
Speaker Change: I just wanted to say thank you for all of <unk> customers all of our team members.
Speaker Change: For just what was that really.
Speaker Change: Difficult quarter in terms of the macro environment, but one that we executed.
Speaker Change: In a way that I am incredibly proud of so I can't wait to see what the future holds no that it is going to be built on cloud flaring, our network and look forward to seeing you again.
Speaker Change: Time next quarter.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: [music] ma'am.
Speaker Change: Okay.
Speaker Change: Amy.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Good morning.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: So Alaska.
Speaker Change: No.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: <unk>.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.