NET - Earnings call transcript Q2 2020

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Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Cloudflare Q2 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jayson Noland, Head of Investor Relations. Thank you. Please go ahead.

Jayson Noland

Brandy, can we start the recording please? Brandy? Operator? Brandy, we don’t hear anything, this is the company speaking. us XXXX. Cloudflare’s joining the results for quarter second you to financial discuss for Thank on call, and me Michelle With the Zatlyn, and Prince, Co-Founder CEO; Co-Founder and COO; Thomas CFO. we Seifert, have Matthew everyone now, announcement. should our to By earnings access have our well found website. financial information This on as may Investor our announcement supplemental as Relations be

and not non-GAAP on are we’ll impact operations of but tax the reminder, statements financial our a and which to, our free of future the making and of duration but As vendors subject during statements adverse pandemic markets. and uncertainty, today’s net product COVID-XX retention pandemic anticipated flow, limited revenue, launches customers operations, of and the margin, the forward-looking those per be discussion, COVID-XX expenses, launches, time and global customers, large domestic from guarantees including, to, cash of performance, outstanding, conditions and but performance, not economic rather performance are and beyond and limited dollar effective of net customers. non-GAAP the rate, market and the potential company’s including, and operating rate, shares some future anticipated are the financial loss extent operating share, gross other These impact paying and general the non-GAAP performance, our risks loss non-GAAP net free control, to comments in non-GAAP not future partners

these our this of the statements. rely and significantly after We not differ views forward-looking you may results projected representing as call. to no suggested obligation future. them any actual those today as in on update undertake These Our statements or in statements apply from forward-looking should

with All operating non-GAAP on Unless today’s numbers than release. current could Securities and earnings and Commission we filings discussion well otherwise be adjusted today under will more a our about condition, are as ASC financial financials period Exchange see press an please discussed and future and of complete revenue basis. For our reflected other as uncertainties results in the risks that all the prior impact noted, talk XXX.

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

Matthew Prince

very you, Thank had quarter. Jayson. strong We a

$XXX QX grew all customers of paying large accounts, revenue We came XX% those from XX% up customer Our sizes. shy million, year-over-year. strength of $XXX,XXX in our more saw us than We year-over-year. by just our annually

platform. nearly also base paying more Cloudflare our new growth existing strong the We same At we customer our as across saw X,XXX count total of features to added XX,XXX. paying customer adopted over they time, customers, the bringing

are lookout with very on happy could be results, for to always our the we While wrong. our is go what nature

tailed foundationally call, COVID-XX last about and bad concession below our our Today, effects a We detail the and as than concessions competence and annual given to raise our clear we Thomas were earnings of have business not comes the of much about debt has on both we will confidence well QX pandemic that see us of As guidance. came I pandemic, feel, risk woods. of into That visibility the caused visibility had quarter, business good peaked from on been We of the generally talked what last revenue, requests the future a potential result us predictable early The our basis COVID-related concerned subscription as more are built the we out good off. to in on more we’ve our we we downside. for our that majority while upfront gives and forecast in be model. than so optimistic. very consistent into XX% April our results. reasons vast

staff a peak bills large consequence only One Another also believe and builds now is customers usage our over the to were us that we coming one for that surprised wins saw trust surprised been predictable in for have consistency long-term. is bill. to pricing. to appears earlier vendors likes arrears the basis. customer predictable we not companies seeing fill and are loyal increasingly we more than consistent by No other usage a And approach thing of their be but the based concession by requests in other volatile who us, on more customers

These times While partnerships then are Great businesses. partner thankful works concessions team to, and filled tough accommodate during many a been I’ve that good them through customers our ended the with and the are last for consistency we tough forecasted, proud had especially but COVID. they’ve much The been to seems to times up we’ve else valued, customers are talked five reliable months. uncertain. that due challenges predictability of as lower over I’m how of so were struggling there than often those our

are we paranoid. relentlessly business, own our For

unusual to metrics So we’ve impact handful been order in of these help watching the times. understand of a

As days sales a well quarter in remains I of our trended mentioned last down and at up and cycle earnings and back has historic in by end the QX under range. QX few on a our low kicked our call,

our working struggled last ramped hit Deeper into We period record period closely. surprised a over during our as stay high. new as the per may productivity to rep watch the collections that businesses sales our weeds, to collection speculated receivable collection we productivity adapted quarters. team worried We remotely. lengthen. sales stable pleasantly We’re the slow Instead, pandemic, two see our period were made

squarely All companies force to the Cloudflare indications as well distort the in pandemic watching customers we’re We is two the as from with having have their we’re the So quantitative metrics have. believe vendors must and bucket. what’s buckets, qualitative are conversations nice must into going on? that have

Of are larger global in forget less global we’re course, we part the we pandemic. the a economy of midst still of and

risks are uniquely lots see So remain, we crisis, exposed the but opposite. of really of to the effects that indication we no the quite

segments, have allowed strength think to For to are slow in customers ever. change attacks. remain of companies for to What in there their largely did internet customers believe in segments are not were saw our cloud example, In sales embracing We’ve segments team segments go-to-market for to and these survive. more need and in help. their turning about order us for in new of customers, small The Europe, cohort they adopt day traditionally cyber businesses. that cloud that we industrial slow QX more QX blocked and will earnings helps first the not per been to it traffic we increasingly growth traditionally attacks our think flat about QX. XX% cyber internet of for particular in us nimbleness largely QX, services customers be services QX. plans. and when consumption same And and the has customers three to and accelerated playbook plateaued yet are in global plateau Those you The digital We the increase than adoption. the cycles adapt COVID new talked digital last generally. than even those our transformation you short call about as network also unexpectedly adjust of of our the It incredible have transformation caused

sales. I think as metric attack equivalent same-store that of our of cyber

use again customers all flexibility include XXX crises seen what’s at repeated never million them. secure future, QX growth the The to Cloudflare. of anything through for has to helped I’m with I fast, saw call and four to we internet didn’t it companies on I swore We Back emphasized our and the lasted has. cyber I time, a team us it our attack never we’ve per alerted attacks. they in invest say aware distributed when customers’ reliable team based back. in April, proud packets ensure would literally unprecedented, at increasingly way systems even network word times. the threats, have companies expected are. month our focus our work but days but was spoke the challenging the busiest targeted until to and others none one great in technologies that I flinch. XX%, immediately to our while where thankful denial out pull to and that these of ever they for down customers the kickoff. call, Suffice second, also customers important, most against the our and four an mitigated of I earnings peaked You new of slowed online attacks than in internet turn service May XXXX infrastructure weren’t last more here our to

nearly we hiring hiring. even for Our that a environment. We challenge. behind to others many QX, in of numbers team that place in up industry, is continued to is new plan. new to not Unlike and our the XXX% which what’s slow hired One did applicants see ahead But had that in XX,XXX fact, in incredible as impressive. record is year-over-year. measure We members of team down. accelerated, the been had even a It’s you us and those innovation rose XXX rate more has adapt to investment we’ve can work

that in XX% math, XX% days turns If this from hear Cloudflare now when were The parents people X.X% the the brakes. big then we of seeing getting customer on feature investment a XX you had When is months some My proud stepped offers during a job company-wide incredible. you or at that we’re that were offer of win applicants. got in when new made these our happen less HBS, odds than pumping the while others incredible the into I We acceptance came much know time, rate about the sales are who extended a gas, the harder. organization. do and out to talent rate means we

make Even as we continue to our investments, progress path substantial on we profitability. these toward made

any of This in XXXX we model. our I metric our win traffic a basis no gross more remain But through in unprecedented of judging customer operating within wanted to and new customers. XX% delivered to its stories To the quarter, that as important attacks, to the target quarter. trust cyber of And health points long-term year-over-year. nearly of spike saw we leverage and handful there’s north of the and margins business course, ability for walk end, even

they’ve Cloudflare of technology. computing developers us their giving turning our a This employees. nearly firewall developers customer. web Services Cloudflare possible Cloudflare’s by them deal year-over-year. Workers Workers due adopting major who as them to up offering, them platform, deal the signed our opportunity security. zero and best as been as will we They firewalls. our to is was a years trust how Cloudflare quarter, tell In the But They’ve moving Teams, hardware solutions organizations, year our trust are network. going our include of with home, publish are Cloudflare security as platform. Cloudflare established cloud-based finish XX,XXX worldwide. platform. that for $XXX,XXX for there last $XXX,XXX certainly to it computing per about of in relationship their shows an an build to chose talked the network We manufacturer an for edge experience watch expand Workers financial as developers year. almost customer you excited transformation, first provider for our generally XXX% alone, customer large $X.X and from the Today, platform seen or workloads have per isolation browser to that at true identity annually. run capabilities trusted their platform what how many winner new approximately QX in for adopting example cloud of on Cloudflare team, They of they’re to They scale launched half all largest trend, Workers a better are of digital users of VPNs growth of Cloudflare that of away for About our of a signed million XXXX. XX% part Born general three-year the expansion to proof what to a wrote to deal platform, ensure ago. I A and this additional to signed this great Part gaming firm applications two-year to you in A first technology Cloudflare to wanted picture XX% adopt their application industrial seeing further the using European replacing serverless serverless using and three our on-premise platform use rolled quarter, our was described complete empower zero computing oldest our and explosive future serverless speed ability from One their of leading is talking Amazon allowed services signed across cloud large half access they over savvy year. to second part the management of entire was were of to million about That’s a and a a by Cloudflare sophisticated we powerful this with worth legacy for A our five and team through they and players, XX,XXX year our replacing most clear the Cloud which flexibility is out $X.X well roadmap. will in deals security contract edge a U.S.-based I’ve Workers, one Web they per trust Having are respect believe kids be powered existing current with The solution. Cloudflare saw continue leave legacy Workers. new and innovate moved Workers. embedding the And traffic application

even we computing expensive We’re for us. edge support customers not platform We Scala a AWS is number to developers for of computing pricing our C++, want raised Python, week, platform. COBOL. like already satisfied workloads sophisticated allowing C, And announced and the go-to-serverless languages the love even all developers released Rust, Cloudflare same just still a to we to To expanded We applications. build the niche that less up being end, CPU while applications. XX%, features. Lambda, than margin accretive being limit, and know be new We for tools to JavaScript, that Workers significantly more and last

It’s and help as to thorny the is secure, but Workers, for doing them While I’m issues, because fastest, excited increasingly because watch the care this most consistent, see, cost-effective compliance developers just about, the CIO computing Cloudflare choosing to so also it’s global platform. aren’t the space. easy it’s their use solve

As we’re I’ll take the Michelle through it walk Thomas likes results to for Thomas, financial say, away. that, just turn over quarter. our getting started. With to to it

Thomas Seifert

Thank everyone And us. joining for again you, thanks to Matthew.

from As quarter. we continued Matt mentioned, momentum our first the

our as quarter second and Total million. another new with previously XX% by quarter expansion So driven the strong less well perspective, XX% than of revenue COVID of pandemic revenue and from was within From for as a revenue strengths XX% the anticipated multiple geographic acquisition, in increased the growth headwinds another both represented in outstanding demand, the business. deliver $XX.X to customer quarter of of existing year-over-year. areas year-over-year U.S. grew in logo customer terms base. The

represented revenue product business and increased helped primarily large year-over-year. which record international year-over-year adoption was of XX% growth EMEA, International Our growth new enterprises. driven of saw by by XX% from XX%

paying and of more total metrics, we our customer to the with free customers, X million than year-over-year. XX% increase an exited quarter Turning representing

customers to added quarter, We shifted other more over sequential of and than and which than year quarter, XX% added second than quarter number approximately billings paying testing in year-over-year bringing with large one-year. less basis. revenue, away in last a on than the large customers more the the $XXX,XXX large of the greater KPIs. the ending basis for both sequentially a was As number customers for customers which the quarter XX the platform for the total XX,XXX. paying KPIs is the XXX roughly, customers, of as half year-over-year, and and customers, reminder, We paying annualized XXX on half from second X,XXX record up in the added we We beginning to all revenue-based paying

that For second the year-over-year. driven primarily and XXX%, of healthy this Pacific retention yet view from with the net deals from new customers our terms our quarter, retention. A and ability Asia half yet therefore, was platform. deals, to X% Pacific newer contribute accounts a which overall of accounts. expect expand quickly expansion large as trend in dollar Outside decrease dollar-based The second enterprise meaningful customers been existing continue our the decline ACV X% from quarter on turned this indication came off to region, XXXX. large that expansion Asia of We have net coming the number was non-strategic platform of a sequentially our by strong, to customers was into XX in of to top and for nine haven’t of in year,

with quarter Second basis of XX%. and was last and points we XXX which XXX points is basis quarter XX.X%, year-over-year, the margin long-term to expectations in gross line down XX% sequentially shared target our

Internet We able without than levels gross to to absorb been traffic have a XX% XX% significant margin. to higher impact pre-COVID

long-term growth, focused Turning building to with business. a remain sustainable while operating operating improving leverage expenses, a we our in on the business

a of expenses, and decreased year-over-year quarter sequentially, revenue, X% as to Second XX% percentage XX%. operating

total quarter, million in and at like our Austin hiring As quarter, the key Matthew number the and and of an employees representing million of second X,XXX last quarter end of a progress percentage focus remained flat $XX.X we where To expect the long an year-over-year the of the term on decrease XX% were XX% mentioned, million were revenue, in increase Lisbon excellent to as and $XX.X reduction and increase to quarter, hiring, a X% X% the expenses fiscal XX% by XXXX. which our to quota from The we revenue, XX% sequential what and office, were at Sales year. out XX% G&A bearing the G&A, reps, quarter our sequentially to of building increasing debt year-over-year. of primarily seen as quarter expenses. a marketing was expense representing of X% year-over-year. expenses contribute quarter and R&D, lower is Lisbon the sequentially in for the and headcount to achieved sequentially record bad last We’ve sales with geographies by constant bringing we in and same development marketing, and the of leverage. year-over-year. record add X% to R&D important decreased a including was expenses and XX% as the office sequentially representing for X% as mentioned, decrease and terms out look in events XX% year-over-year. and driven Research XX%, year-over-year. year decreased of revenue, than Matthew percentage $XX.X sequentially representing expected percentage decrease of which quarter. Sales XX%

per to We forward. leverage quarter to magnitude to Net as the order continue in compared in to in the or achieve see $X.XX. was net plans margin the second accelerated XXX quarter such the as year-over-year $XX.X and million points expect leverage X,XXX share to full quarter, hiring basis the business Operating last operating on see going of in million of basis loss $X.X and lost improved points hiring track variations remain second same period operating We by $X.X was loss operating in sequentially. over the year. million in

tax rate QX XX.X%. for was negative effective Our

protect with the million in $X.X for We quarter with call and Early of shareholders convertible connection capped have flexible with to bought In cash, with in dilution. available in strong premium ending sheet issued common cash we securities. proceeds million. the equivalents $XXX our the quarter, a total and offering, sale order we balance second from XXX% note offering net $XXX a billion

year. negative was quarter. $X million strong by revenue Second $XX.X create million of improvement same was positive XX% collections. to cash quarter the compared improve free primarily second help The working in or of revenue period profitability the capital XX% Operating cash flow negative in $XX.X flow last million the was and to or

we well as environment. view Our DSOs a against range, within remained encouraging the which recessionary historical

in in ongoing see flow enterprise the business. and to expect capital We variability to due in operating cash fluctuations working growth our

quarter this and disclosed particularly to like would COVID-related on customers’ that moving industries, as remain retail, full approximately competitive. out quarter, business. last guidance are to slightly as impacts hospitality the these shared and I challenges, related and provide associated sequentially, seeing in mid-single-digit cohort provisions year, invest industries total relevant of highly for third challenges, in such in revenue. but continue build by X% our Before update those an we represented by of In to percent quarter, COVID affected quarter. we the second to as of macro-sensitive and to the transportation, a Last decreased Customers web presence order through

last concessions We quarter customer declined and we April. March also in saw in that uptake disclosed

to We having in anticipated, modification share are that quarter below with these customer the quarter came we printed to levels. $X down the well second during historical pleased modifications requests contract million headwind

decrease During in observe a range slight pleased the to and remaining cycle within seen the quarter, historically. sales were our we’ve we

we addition, uptake our productivity, sequentially. which saw improved also In X% in sales an

as observed the continued growth trended perspective. XX% our current business for a of year-over-year. win we Also quarter-over-quarter confident uncertainties remain We customer revenue. are environment, we the continue revenue up year. are the X% performance to of ARPU ACV pleased fiscal the the and Therefore, and less renewal planned sequential and Remaining or our third of new than variable we be million, model, in the net environment, $XXX with total to both current quarter, our as rates, guidance durability subscription ended for targets. applications, has continuing July raise ranges. well the in to up And historical in which new increase XX% ACV as to despite quarter a renewals from exceed and returned

XX% the $XXX.X XX% in million of range year-over-year. quarter, third to expect revenue $XXX.X we to For of million, representing the increase an

million. of loss expect in We operating $XX million $XX to range the

of outstanding, $X.XX to common in approximately expect of $X.XX tax effective negative the million X.X%. range we XXX an We expect and per shares rate net loss share assuming

XXXX, full the an million, For year $XXX representing to year-over-year. the increase $XXX to XX% range million revenue expect in we XX% the of of

loss operating in for the $XX million. to of the expect $XX full range We million year

We of $X.XX, XXX range expect the over outstanding. million share shares assuming $X.XX net loss the period approximately per to common in

of about we’re We durability X.X%. closing, the of platform. optimistic In XXXX of expect an continued our effective and negative tax rate the business efficiency for our

We’re we thankful times. the employees, for our as up overall for I’d of a relationships work-from-home are resiliency please believe productivity questions. that, poll positioned to such, for the strength well it we our customer of environment, and in execute, questions. open challenging to With despite like Operator, these

Operator

[Operator question Your line first Instructions] the Capital Matt Markets. RBC comes with from of Hedberg

Matt Hedberg

And to and stood for in congrats customers. my out me taking really that now go environment certainly, What it’s Thanks Okay. is, really quarter. strong does on a unnoticed. tough growth a questions large

trends typically it guess, XX% here. was accelerating these pulling vendor? record to talked are new also displacing I rather about net seem greenfield new Matthew, I productivity like winds and this Large think be given strong Or it’s does legacy just mean you enterprise some support on-prem and others back. to workload? you’re really expansion, hires, cloud a

Matthew Prince

Matt. with and larger larger our Yes, We’ve ability the for question. happy really the for to been close kudos. customers. Thanks Thanks

Fortune QX. Cloudflare to XX% about from up the that’s are We’re XXXX of now in XX% up using

world. of our number belief there a us. places we are I But to is think in see that the no new come people dollars different

solution as planning that right hardware-based opportunity, traditionally part a not. now, going through rather on-premise we as is it on whether were of are enterprises of a usually doing what the think replacing don’t existing in but we digital are or that XXXX they greenfield transformation so And that

Matt Hedberg

there’s when the news helpful. obviously it, of give Could highlighted be me of on strikes there, to of and but give them, more one positives other could then, we a have. of in you opportunities talk It little Workers Workers bit biggest means and the little with number more about for a just long-term did customers Unbound. been actually Unbound metrics Personally, that the details it’s think partners helpful Got thing, to that details a this bit opportunity. you lot just what And you alike, think a maybe about And you Unbound? that’s some service? we of adoption

Matthew Prince

Yes.

you had nearly from period I we’ve the edge computing time, And what think I and of talked a learned spoke and for years. product. over probably how that a killer that faster lot about edge three computing think cars three in that really a and ago, So I powering feature platform. want market now driverless years about, developers have computing offering we’ve devices IoT And for when being was I the really

the think three developers actually, about last years what doing. that over learned we’ve when I is think they’re what

One of mistake. a is the to want Science actually optimization. terms that premature you in have don’t Computer That’s real

not It’s the think Maslow’s is thing you of the so fast first. that as of self-actualization. And if you developers sort get, But it great. like the hierarchy of needs, last is fast

enormous application we’re is be a have just edge of platform, that building think as that Unbound computing something we think are it niche interesting which an and with largely this encouraging application. But one to what is just compliance. really for boring provide instead, so think in can serverless of functions. respects, number the And that is is you And going an most something true we And us. some opportunity incredibly that’s think a which I is different the around

the in to a you And countries and already a around as their and and XXX That’s keeping than data you we’re we need world, – today, As network more like one increasingly requirement. where their can, that fact complicated the have the more developer, platform Cloudflare. be countries. write with their localization borders world. keeping requiring And around inside of data a countries those in customers the citizens’ compliance more

opportunity be we’re hearing that to us. from going interested largest Unbound. are that’s And for very think what I a in really the that’s customers large

Matt Hedberg

Thanks a lot. Congratulations.

Operator

question Sandler. from next of your line comes Piper Fish with And the James

James Fish

see coming go-to-market how channelizing, quarter quarter in the who call, you to conversations between appreciate our disclose about as more can there, the Matthew, is the expansion? and this integrators indirect how regarding quarter, sources. more out have lot on don’t channel landing the customers color really the a traditional than Thomas. is into what can on you much from the were you congrats talk But on there, the normal including we fact, changing and Workers able and your guys, much Hey Cloudflare, we guys, and from seeing details typically versus And checks net heading new you’re

Matthew Prince

Yes.

see think to the grow that channel is continue us for to we and where I of opportunity lot something improve. a

that about. that particularly excited And we’re move to continue help do and I partners that. can up We us market think I’m two with areas are working there

of the about as up things for, wasn’t a beginning to clear us so value we reseller. One the a – it sign channel difficult made reseller Cloudflare there value-added could wasn’t the what for that add easy was in was

And our real again. was for over seeing we’re a that able place so and trickier I real that value Workers, like what IP channel to really platform, With can being products that bring and increasingly certain specialties have partners is, us. sell on think over over and develop in areas, they then

value days still able we’re And that traders to and deliver from think large across seeing systems other partners so that seeing of But like that. IBM platform. it’s and really early our an are I that

lot class [indiscernible] at market thing a second through the is other have cloud-based zero partners. trust think you look if the solution, them to that Teams companies I that channel have suite, of gone

of I tool hopefully those relationship be us channel as sell of build a I an think partners, to really are that we full going to And think so and partners. with bags extra the educate that’s the for time putting Cloudflare an taking them over in products. And those then opportunity suite that and to

James Fish

But follow-up. of expect that the of kind there’s political we out impact kind any if going frame related can to just Matthew, you Obviously, help on. up, going year related you then there of on of how a any China that back of us news lot business, are And the bans China relationships, guys your potentially? to a for thinking more the you to including presence, of couple do large I about guess, a have guys half larger are shouldn’t

Matthew Prince

as revenue On is X% something a low metrics that pure closely terms ball single and have don’t scenarios, those What obviously, U.S. think less case more strategy see than long-term important more following worst Chinese Dip] that the China total in across change of is digits revenue a in to is we of [Audio we that’s we’re so So United business. much company market. relations our crystal the sell developed. don’t we the that how significant even basis, – of that a as States and in I

by And of on that’s political Pacific the sides Chinese being companies aligned think infrastructure that the actually both U.S. are. the actually sides that better sell market, with long-term both the so the actually we – Ocean to we interests, think of helps

we And so business. anything face makes again, will our haven’t do even part small suspect this we but we that far be – us of challenges, that seen unusual if

James Fish

Thanks Matthew. Thanks guys. sense. make That’s

Operator

the question comes next from Sterling Your line of with JPMorgan. Auty

Drew Glaeser

on is Drew Sterling. for this Hi,

seeing you’re this just of kind a touched could ramping, of additions I opportunity with wondering demand data bit, color kind the is on You was more the particularly and China that but provide what some JD on in if center you how region? Cloud

Matthew Prince

Yes.

see to companies we from let differently. state a or it me continue Chinese So demand

I directions think seeing are there we’re that different demand. two

trying sell the want one China. and which China U.S. of are to that Chinese So companies, outside companies to second is into sell from is for

I I think partnership going in – relatively bit seen is a the of Cloud business. those strength it’s well. we’ve been piece very our former of of ladder. little think around continued The JD But uncertainty again, the a there’s small

again, so We expect is terrific Baidu. partner have They’ve been over unique that much a companies on China. think a the first it in a And for the that of sell on us true And they for to is into partner we we the far very five which that that’s schedule same and infrastructure help for. will for the more it’s now us, half can that of being was turn what very market. been opportunity that can XXXX, And aligned think we and years. that provide

Drew Glaeser

Thank you. Great.

Operator

comes Your Winslow from of next Phil Wells question the with line Fargo.

Phil Winslow

have just my on Congrats I actually Great. Thanks of great two guys them. for question. another quarter. taking

because one It what things that of their customers the COVID of how you Are of just point? from are to have COVID you guess you you’ve about, functions point, a just of changing the of to I one starting First, the about sort sort from multiple new network having world, especially of of that And world follow-up products infrastructure. the your that? benefit is Cloudflare? way talked see think then do tipping tipping functions about more adoption without because how in thinking is built,

Matthew Prince

think help platform. from strategy customers is, of Learn customers we that more what beginning and flowing traffic use network? the more How from I can our and our our get our onto migrate has then to can been, how through get we network?

are And to so able technically two to that we One customers. I are we products in think other is recommend directions. seeing

application. of and play solution that now running traffic. see analysis very experiencing firewall So an them. they automated somebody a may But that to we additional helping We as on that lot right then that we bot do traffic with consistent can their be basic we’re are bot recommend is,

helping those is And customers. us so across that expand

trust second offers we’ve technical, less that made. is really enormous a just much investment compelling they’ve the and as built an on return The that part but very that simply provider

And trust that dynamic go sales. long-term them of inside so much get and build our organization, allows laterally us and sales the let with move to driven relationship introductions to back team that

customer over that of now with little of Cloudflare Thomas in over One very expand land And we what then happened that’s quickly the one that product. what interesting the so equals and might how be are that’s plus said, is that that And and seeing as additional is due you’re has think really bit having that been a customers think we’re that really thing, the our think seeing an happening. market you’re And we’re COVID, – same pattern I next again. from And with secret one product. I seeing three. sometimes been quarter just coming we oftentimes where a to one

strong And and that always seeing doesn’t over so expansion multiple really necessarily years strong adoption happen we’re though. really

think specific. see something like I might expansion in ways, stronger that And a that internally, some see in much you why much, so actually we that’s retention that dollar-based net

Phil Winslow

and I And Transit loves real Great. products, obviously, more to it. Got Magic But Workers one just other Teams. to your nobody talk a us. then want about a new than follow-up,

just a of customers up For you don’t also to or of then any update us Transit, users, the sort give on And you’re progress? sense now with many Teams, how just just there Teams? why Magic

Matthew Prince

Yes.

up customers So with But on we been exactly base. been, disclosed on said the call, the have many a promotion to many companies Teams, we our product have gave been away able we by people that seats heartened we have for of we had over that how platform And really in during we’ve as last how that’s COVID. September X,XXX year. sign help this sold we’ve through

plan on and out have to now that and reaching encouraged driver conversations about been been customers been converting by XXXX. the we’ve of pre-COVID paying Teams of think what revenue, that we products And customers. those meaningful early those so in a especially very that be And most have of is we’re will excited into one

week that interconnect one Transit, that’s can this that you those Magic of into announcements one And of ours. directly into, taken For it really is products your earlier directly now the network is off. had super we

integrating makes we’re allows and customers think solutions our very larger deeply to and customers, infrastructure term. wins, long and the us Cloudflare, which so think that we our And more to product a over us sticky is into I space getting more of the provide that larger watch

Phil Winslow

Great. All work. guys. Keep right. good Thanks up with the

Operator

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

Alex Henderson

Thank you very much.

And step term the to little XX% what to with billion orchestration going quarter, from XX% Kubernetes me the those from to accelerates? at probably applications other that tissue best of It the context, key applications back So longer growing you clear this from domain three the guys I seems to you I pretty between the clip. to picture. view XX years think picture, a bit plus that a broader So that granularity with being wanted of applications and do new adoption users? Kubernetes applications next applications over as connected to the domain deployed in to in really how is are

Matthew Prince

Kubernetes say think the scale Can infrastructure? of what get can about magic to that’s that, Can ourselves. underlying what really that’s down really delivering. which having on or code And you big of is you write and serverless user is, a a step it towards Workers, just we’re you developers and stop we really the TechOps have up are of internally What scale the automatically of to with a will hearing you Kubernetes what the we’re platform. promise from having built So rid is even team nirvana, is journey of fan I developer that entirely? and a sort will

ecosystem us ever TechOps on the orchestration is And own world world developer beyond And tissue the platform of the the the that that’s what And team. is having a developers to that that are so taking products where in we’re a Zero Google in effective, build development VM, that billion to time. able a to more actually of relationship. Workers kind puts targeting. deliver consistent, time, Cloudflare workloads and that something world have over more could to those you’re way is Cloud as promise individual best I function internet be cost especially exactly an think really I think to the compliance that and easier strategic without gets dollar right, fact going like their company friendly over being a think as that use. very much complicated network Functions, is beyond containers, more is platform, more AWS And that Lambda, connected proud is we a faster, the that think that more But beyond I is

Alex Henderson

the of question. going second So to the part

competition? you in bit competition’s to to. and is the probably better that most is it’s a talk open the serverless cold coders the heading critical of writing little the directly Because why and which the yours starts for most point way drives than way to your differentiated the enabled with is X that extent have platform only isolates move going, platform about not in it. designed you I the terms was why You’re platform workers Can and is a particularly efficient versus that you’re the the direction guys for so

at platform And coders language want. same the and rather customers, the security of on the delivers time, i.e., You’re the not but just the languages edge. all programming very exceptional doing, that one like performance say fast doing varnish, in a

Matthew Prince

came to administrator and network servers new actually physically fun. when college, we boxes my in bought the out run to Yes. so a were server. the they wanted a at time and first XX’s covered And buy had lot of When the a the ran. I was providers actually virtual a And new application, as turn applications overhead allowed a cloud machines a had a we multiple that of on to I Gateway, turn machine. up VMware different up the from we were even very But along time. that there. And to single And to back what at then cow new early application, was rise took thought virtual that time lot gave And machine.

run secure, those to and that’s code a like dotCloud, make where The lighter goal in the Docker that companies real of So containers, a which machine. sure you weight which always became environment virtual safe were multitenant here a is you had revolution in containers containers. out that can a version downside and scale slightly that’s it of, And And there today have of you serverless lot up, those top what on most building is, are – when will of to the be of the platforms takes time. weight containers lighter version. are

it to really we that the to it make moved today. a to Lambda to inconsistency that with for powerful something will which that So as And when as what that’s it. problem of wanted And container a there’s we automatically to up get take of is be make AWS demands it there bad more for on with is experience be, hundreds knock was platform that platforms milliseconds can isolates. machine spin efficient could another like containers. out low the workers ready. even it that are why we really users, technology another to up needed in than that seconds for example, we application the was lot with But order serverless called to is a you a that realized What

time. us we last have they’re so And It the zero next week, and just that microseconds start generation, advantages. can means, cold literally announced zero it gives some isolates, – real we nanoseconds, –

has minute language. and I is to important different means We it to wide you want us. things them developers to want of We to to of it do variety Lambda in XX%, efficiency that and for to that overhead. is less the much don’t can And that less product much that we require which actually learn our not is go run them And because the we allowed AWS price have again, as have us languages. that ready, a – it, data one So expensive exact a really competitive, have than as incredibly way, can support same is think means the workloads. to we just come the

bare excuse and be next were isolates the efficient VM. were we and from So same that next we from can that as containers way next we’ve We and as be – become. think a flexible that’s that’s workers, able think that the And are to are this step VMs evolution been powers in and generation containers revolution is how the what me, the metal step.

Alex Henderson

So just last point follow that. one I if just on

constantly those consistently and out cold starts are pulling frequent. So microservices very as I’m

right So has that order would pipeline it to way conclusion? that happen that Is CICB the that, mean in that work in the environment, to right? have

Matthew Prince

able nature – machines, distributed network But load worse into a been And makes faster distribute, reduce reducing across of think is you makes spread that’s latency. more down the good I and is hadn’t cold you more it to problem. that which we the think the have this right. network – we I worse it that actually, think then then by because far, as that starts that we if building wouldn’t

this solving three the So platform. think computing developers it amazing it’s edge by XX,XXX vaporware, isn’t market isn’t in first quarter on. it this their will the the something, just last watch one an to – of worker’s this limitations that application over something years. of last really develop been wrote biggest that again, be I beta, overcome isn’t this And a And is

Jayson Noland

Operator, please? the can to analyst, on Thanks. move we next Alex.

Operator

Thill Jefferies. Your with of comes the line Brent next question from

Brent Thill

Thanks.

of us to how shaping Just I’m even things What make what back today? that enterprise you year curious the than back now the half pipeline your you for in move you in view you need and really key open Matthew, kind biggest up? this just And give do are could right to the the Thanks. enterprise through to up have pass the you constraint hearing momentum. more quick? of

Matthew Prince

backlog. answer a question what we’re the in let I’ll of and – half terms through of Thomas Yes. I’m talk I’ll second seeing going let bit of to little the

I think well over done and low beginning from to incredibly XXX that the move our over XX% we’ve features strategy, of year, when I XXXX. a launched up was well are start those that So, more the the that time. lot end in that with customers we taking larger, more are at And has. customers now the requiring paying other us over think that a Fortune requirement $XXX,XXX sophisticated off of a and terms of And compliance sophisticated customer

really the So that of those can largest proven I we think land have large we that customers.

think over want you demonstrated time. about think expand that can We’re we’ve building to once our I adopting of using platform, products, talk more and any start the we enterprises the Cloudflare. around the And world I in someone largest on just They that but of that Thomas, of studies case have again, may our backlog? part we you’ll more one that. see do

Thomas Seifert

strong from perspective, the means that quarter of up job. team year-over-year. perspective. XX% new And a really done sheet. off ACV XX% already XX% an outstanding seen we’ve from the would’ve rolling of And third that, we for So quarter-over-quarter, a RPO performance backlog has gone because sales generation our balance guidance The is

we’ve deals of expansion is to on half nine the existing we we look that XX seen customers. our continue with large large deals I XXXX. trend think the where mentioned that large also strong momentum going expansion out second If of in that think also pipeline, the my script We at deals, for

Brent Thill

Okay. Thanks.

Operator

Your line with of Eyal next question comes from Shaul the Oppenheimer.

Shaul Eyal

appeared getting might performance I’m get Thomas off building afternoon, be us question on it on respect to historically with we in the sense all directionally. conservative respect just call fronts, and a and thoughtfulness as Thank in you. we tack race. positions, guidance, beep last to correlated, But to to Congrats well the Good and for level. your I’m A working Clearly guidance. with was question. prior on the defense to pandemic guys. trying quarter, quarter playing are quarterly end my what kept it this on say be in a kicked Those with guidance, of your guidance you more maybe mostly. prior just

quarter trying Just on compare maybe to the and follow-up. guidance this versus of I sort have gauge And understanding, a and contrast prior. some

Thomas Seifert

the Yes. was we it guidance were open we call quarter as our business, out Guidance the of about of would was conservative. you there you’re getting – the called keep think sure question. We was more the we wanted call in and show protecting a And of that there wouldn’t prudent. Thanks lot that, us last We guidance on it right. the for wheel steering we were. very year. for making hands most And reiterating control communicating to the and the it, downsides that leaning we uncertainty

data points. this For lot more we have quarter, a

is we finished second So that our already strong. quarter

pipeline. put have insight old We into

from visibility roll perspective. a good is have sheet We of what going to off balance

debt So perspective. there’s from seen can significantly control. less concession what a we less We’ve and a from bad headwinds from uncertainty

so But there. out in that, bit maybe there’s still uncertainty allowed huge still a to us more. despite all lean of amount that And a

but the simulations. call have, a and we models visibility I we our lot our our light updated what customer looks it, we ran have points So of a and we And and momentum in like for data prudent, would still pipeline half. second lot more more

Shaul Eyal

whether And to It want enough. I Thomas, was fair That is also it, it one. want you a asked but differently. fair take find Matthew? don’t think maybe I approach to a it tricky was Phil, and enough. little maybe That’s by know I –

generating? be a service new you that quantitative analysis? back So public that. of team commentary, you given the some users potential the envelope run of been you VPN September the be doesn’t currently free to have the or X. appreciated. sort until a any product will What’s Have access could maybe to some revenue It for highly Thank color on have qualitative as

Thomas Seifert

are the really to of guidance we’ve be a crisis. we Europe team struggling is And crisis not in of that on it talk of reflected conversion fair product, signed on that that Let And today customer. we in. that for considerate me what looked and how a like Cloudflare that, mentioned that none signed Prince at Matthew first, of us his have It’s we in to almost opened financial run approach up, business lot beginning of that partner. The There being done. about a free, it up paying a in good is little jump It’s script are – at can want the depend at and scenarios. When for Matthew when the the little our say no have about that. customers customers we we one the that up access. then institutions is because not oldest of there year, we three customers course, is still paying

when will a our to you we think we about call. to next earnings talk to lot I more have So come

little in conversion of terms the forecast reflected is very of forecast, today. So in this

Matthew Prince

Yes.

by going We’re for and customers for right doing optimize our the long-term. to

in anything right very customers forecasting think of And terms I be trying so, again, to for those now. prudent we’re

Shaul Eyal

Thank you.

Jayson Noland

questions take more we can from Operator, one analyst, please?

Operator

Yes.

line William Breen with question comes next the from Blair. of Your James

James Breen

the taking for Thanks questions.

Gap] couple a [Audio Just

Thomas Seifert

you are breaking I’m sorry, up.

we think the to I question can next in jump line.

Jayson Noland

take analyst, one from please? Operator, questions more can we

Operator

Walravens question the with of Pat from line your comes And JMP Securities. next

Joe Goodwin

And on you prospects? conversations us of ago. just our on an having opportunity, salesforce? you size were some the for around it I what is This in the key then you not you’re perhaps update much changes long the so that for XX seeing taking Joe or customers enterprise Pat. with enterprise too and the believe Thank Goodwin Can question. of XX are on was give the

Thomas Seifert

especially and have answering to and talking rep also in first part. heard hiring specific a jump Matthew Let was and in not is But heard give lot in to a the us side, sales perspective. it that strong second take is are This you going the developing. part carrying quarter a color me you about a going perspective. the so numbers, quota very for script from we the from then Again, of

behind from headcount expense demand see. we So the perspective from making an it and with are letting the the really out building happy progress the team are and we we curve scale at

perspective was one and and staying and we our that geographic are go-to-market size our But model to decision up are you perspective, customers a follow true think about keeping our invest we cost but good from don’t the progress. with in have a things making I unique of a that line. ramp to from customer business of acquisition is ahead our demand, model,

Matthew Prince

perspective, that us. the adopt regions by world customers’ have been has little with the like and areas it. I Europe, longer. industrial, really customers we that like think We slower thing and most from which conversation that a to from to the wait conservative from think of COVID surprising a think say, have has more slow been bit that we I been the think has hearing more traditionally get And little a of been I traditionally, cloud this okay, them driven, bit to And we it’s a are have which little more been that manufacturing any I can’t and do

of positive they their And part large that that’s that sense that lot that digital really the boxes the network a and they Cloudflare used is thing to makes a can as strategy. problems are and that starting I part the to of to think transformation buy for. understand very that solve hearing overall And so of been have we’re next-generation

Joe Goodwin

Thank you.

Operator

back no the questions speakers to it time. for at there turn further closing this remarks. you. And any And Thank are over I’ll

Matthew Prince

as Just environment. thank wanted to to our last say months, five working to you Thanks team adapt a It’s shareholder. watch over how the of everyone remained. entire I’m has to everyone to proud Cloudflare. remote amazing really everyone been productive a

say, going We’re Thank Michelle started. forward. And just going we’re likes you. to to keep getting

Operator

conference today’s call. concludes This

disconnect. now may You

Cloudflare (NET) 7 Aug 202020 Q2 Earnings call transcript