NET - Earnings call transcript Q2 2022

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Operator

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cloudflare Second Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background nose. After the speakers’ remarks, there will be a question-and-answer session. you. Thank Instructions] [Operator of you VP conference. begin Investor Noland, may Relations, your Jayson

Jayson Noland

COO; the Matthew you discuss Zatlyn, of second on to Seifert, on financial supplemental information now, be found joining CFO. everyone Co-Founder, to XXXX. we website. have financial access me our and Thank earnings well announcement. as us the Investor President Thomas our Relations Cloudflare's and for CEO; Co-Founder Prince, and results our for With This By should announcement call, as Michelle may have quarter

non-GAAP of cash uncertainties, guarantees and and not are tax revenue, making paying reminder, margin, rather income non-GAAP non-GAAP we'll financial and performance, subject vendors other statements some comments to a These customers future retention those of including, large launches are shares per As discussion, risks customers. conditions, but rate, operations performance timing statements rates flow, ongoing but potential but future are dollar-based operating control, non-GAAP our which general net partners non-GAAP net income future rising gross or limited be and Russia-Ukraine financial or customers, forward-looking loss, loss our limited expenses, free pandemic and outstanding, COVID-XX the inflation, including, of challenging share, during to, product economic other beyond impacts the including anticipated interest market products, not and the of operating to, today's conflict. performance, and anticipated expense, net not performance, and and Company's

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

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

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on periods, Stifel to historical the be XXth, inform GAAP found would Piper also Conference the moments the be can and We Sandler referenced For financial XXth. Tech Technology in a on our Summit information you reconciliation Xst non-GAAP Executive September August will Conference in Deutsche September that ago. the Growth to Frontiers participating like we supplemental few Bank on

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

Matthew Prince

you, enterprises per This threshold. business. up now large large, customers foundation how represent record year, Even established uncertainty, XX% more illustrates ago. large the and quarters trend the revenue, Jayson. we us have X,XXX now our XX% These very new six customers QX, strong economic revenue $XXX,XXX added than achieved a had XXX quarter. of with increased paying year-over-year. In XX% We from Thank $XXX a increasingly Cloudflare's over of those customers, of up form million, we this

Fortune than less X,XXX went we three Cloudflare years XX% over increase today, are the threefold fact, when paying In nearly a public of ago. customers, already

down dollar-based X% quarter. net remained at strong retention XXX%, Our over last

XXX% noise consider companies be and won't While until the from we quarter-to-quarter, best there satisfied some we among number of may peers. this breed be in above it's

XX%. remained basis of XX% margin gross strong year-over-year long-term XX still points up Our our to at over and target XX.X%,

year. On showed is second quarter-over-quarter, it to flow which positive be right the forecast continue at was to significant long last margin. our cash for earnings I'm and popular continues we the raised is improvement got so me be the be margin our a our growth. It as in since of XXXX of breakeven, What plan operating closely hardest said can will CEO strong Our deliver club, watching free would half prove of call, quarter I you around to to industry the recession rule QX where recession. the first make of It of not talk from I particularly didn't of many about our we eyebrows when lot QX XXXX.

saw saw transparency They're closely and sales yet, share metrics all are However, it. extended, seeing. where QX, let In longer I'm and We call the slowed, right stabilized. has QX our but at throw pipeline some values, took and what them I core least the generation one customers more spirit, to like hooray see metrics of we pay details trending always me throughout that been so not to Cloudflare's watched In going of it direction. those cycles we in their bills. up are

multiple using platform. Given broad fewer our year into to consolidating downturn, particularly messaging saving they is vendors platform problems point save money Having behind vendors shifted superpower our times in ROI, we focus customers rapidly message. early a many solve the broad We our these. do so from Messages ago, saving and visibility money while money and but the the Cloudflare's resonate like to economic solution adjusted customers' didn't go-to-market at a a helping about today. spend same on time

suck. while a recession the about can in was not of so to Advisers, that wins year, we all may easier existing how about gotten be the than doing business our But of their to a up say in to Cloudflare. Economic talk our customers quickly save I'm member at I it's reliability. I person am IT I'm the As but us. bad broad CEO and National strong, team so today rebound. it about a or is throttle. ago complexity, may security, the whether year our say car caution. been and And driving how ago, half remains year so grandmother used our and we we're while some we the the see not recession-proof. to what of talk hands Board more or using certain, let performance made the it we're reduce eyes sense A is the our the first makes road in not, may increasing believe it's in it's time to to bit customers of The of is company money, to you it their a new we up set the wheel, a leaning with harder the And fair how sign recessions with customer, sense this hear I forward than look hurt are and believe Whether was road different everyone. No or ourselves for for open face clear, conditions the one on our ahead to But recession-resilient a the less could my on The on on I a to I've tule more fog. accelerator. call prudence it Today, is miles keep it road. metaphor They are others. up to road find not,

hitting the to packaged I true. get, recession software. not on go No abandon going for remain already the Hackers things are to we up with companies evidence have. will renewal They're on-premise cybersecurity all-time to first this bad And aren't matter must-have, of year, highs universally may this, all seeing how going went boxes nice Some of the and every give know to a we're gross half so rate and back public. hacking, the cloud not aren't of our since region going Internet. stop a to in

from reevaluate last pay have margin never would the my when their my me pulled Cloudflare, Recessions has summer the Google We Personally, people’s probably which right full-time first, free At a at come rest at dotcom their happened, an everything been supposed the It's for to securities and XXXX, XX born. but CEO in are cash went to you I are. hard, tough spot my career call if was in it's need I with that hadn't workforce they Tough formative done this think I That's cash why literally become wouldn't right what recession, to Cloudflare on all included now. offers pivoted and in always been as firm to borrow same practice. with than go bubble is first have of a my force simply that Cloudflare become companies I ultimately I trade entrepreneur. co-founder to times whether the of law just the what best back, recession-proof, stronger that been recessions, an and, but ago, by of the flows mom think times flow interns, time, I'm companies prioritizing At a time global that of to places of Michelle uncertain any also out didn't years time, extremely money learned positive. in. importance moments to rent. life watching lesson XXXX, not they the onset In you but their on flow, being my embarrassingly, now do they're ensuring I the bankruptcy had and got why free any could lawyers, Zatlyn. other wanted better. defined you've personal focus was If find they reflect and I improve. and lot for was more even

web replacing great easy-to-manage other deal. economy Trust broad XXX of their and using bit retailer to a products. with in better easier With them found their have So, it to a being Cloudflare likely seem that firewall, $XXX,XXX three-year deal became talk now Zscaler. system of be some million too. Fortune a looking across accelerator. point masochistic some ahead. the by provider, security solutions on forward wheel, it's a their company their a They reduce about global had to in of about A Fortune to and talking bit the we're content the Europe times use, number the maybe wins been that number even to integrate protection network, wanted services of A energy a but more platform. complexity to our eyes background on Cloudflare protecting and multiple signed management up Having quarter. for with plane. infrastructure, the platform. application tough bummer, expanding bot Zero letting the I'm too signed road, operational Cloudflare on XXX a for get their application They performant three-year much avoid Hands $X control let's customer They solutions during We success Cloudflare's proven delivery full

more hardware, in them I against and last Trust platform this we is State And our have also are Zero Arizona Yet Cloudflare agreement. Networks method of and five-year We I Zscaler vendor. still time while our the going expanded industrial As top we use when we $X.X they PO continued which a Cloudflare go upsell to one. our quarter, signed products. us the can and XXXX complex million head-to-head one-year already And our We their ways as Fortune more has the with been channel Alto specified $XXX,XXX of are sales of space. believe a platform, us new meet with we're Palo The products working because deal. increasingly a and This new of us customer of the and expansion ever XXX Trust win hardware of notable especially Cloudflare often. of still partners. channel of with said and address years a platform. rates can and as to shipping of them like expand Zscaler's half first What's signed another partners customer of we're company relatively needs we use we shipped continues if use back, remember several Zero launch seeing an successfully not with channel is they is long head-to-head more scale from up important grow to to signing T-shirts, example partners. in QX this space, is first as our better like since. the adopted product Arizona their our organizations new in QX,

Russia. of conglomerates use. of vendors. we're of against and again, engagement. world's our everything was $X.X power chose other deal. of Trust largest the In Like this words leading they an us strength head Cloudflare over because works, Zero customer platform hearing a advertising the deal the and expanded came originally cloud, another Zero platform, attack yet Seeing competitive under this are signed Cloudflare one-year issues”. quarter, One “With out their our broad over there Trust of of our They that to last This no of of their ease quarter the million originated

a the largest a of of Workers shortcut web adoption. about revenue firm and workplaces. entire to increasingly from far, They the the we building three-year the us who as dollars promoted. to we're their of to he deals themselves as a $X.X to service for more seeing an we database the around of they million Workers example its grows. our represent QX, These platform, champion get In and our fastest-growing But robust community previous of to developers. were, catalyzing exposing among a they Workers traction end, recruiting signed don't also developer his one with talked technical the deal. was Cloudflare and broad signed of a his path gain an executives its developers. in upside fired breed. Cloudflare”. that we one power of “You put platform is best One this I hundreds believe buyer into importantly, words, position the next-generation thousands best In was ecosystem call, with case, extremely were platform to online fastest importance to demonstrated In earnings of the as development Workers platforms how largest e-commerce new continues This buyer bring development and knew other paces. by Cloudflare environment. jobs the of deals the embed for as preferred usage moved guaranteed buying when Last are In platform

to best-of-breed grow Cloudflare This provider leader. we $XXX,XXX. of all peers our over are more the from other security contracts be we of our Cloudflare data of ahead. to One the use Another our your and mitigation we're your I'm the where stronger the why best-of-breed through bug times how spirit in even to may confident before quarter the when and pay-as-you-go turn related security I endpoint for services our product. public interesting adopting in for is clear competitors billing Thomas. continues had products security unused recognition peers a than other economic companies that largest Cloudflare solution. continue security It's by expire seeing increasingly customers. incredibly often transparency as to affirming compliance direct Even DDoS vendors one We last thing note multiyear each leading validate tough system A the a vendor, signed thing choose will it credits to worth

in quarter. over-report it revenue a of XXX,XXX The than spike in total are to material, XXX,XXX reasons, customers to expired QX and three Before in paying year. we a this involved is quarter. and $XXX,XXX, customers not we QX. time put went less place we it where systems caused public earlier in caused policy for after us Unfortunately, report credits our years. good the triggered last first number in correct unused system accounting That last the bug numbers paying a The for

it's we entire to by pay-as-you-go own and the XX% it our fixed to which addressing to think be to more on protect I'm we leaves it put Thomas, when It do is away. future. only don't order checks that, hand in But today. mistakes. embarrassed like I of transparent market but insisted in we've I them With fun important I'll Thomas. off we and walk financials. serve it's why is topics do, today, invest we continue errors take through business important also I similar it in place it Thomas for mistake, make bug when the this the in any designed the and catch believe to to revenue our the and Our play.

Thomas Seifert

us. everyone large large as Matthew, with another delivered engine. of our our thank you a strong build customers driven strength quarter joining you, and Thank to for by customer We continue to we in number expansion additions record

large in innovation our model. Our first durable, a half benefits the operating enterprise investments the as subscription-based success of initiatives this year well go-to-market as and revenue reflects in the of

of of U.S. increased From year-over-year. driven second Turning saw traction revenue both, revenue XX% XX% Area to X% strong security we XX% we customer base. our than year-over-year quarter $XXX.X and The contributed enterprise XX% for revenue. acquired in April, perspective, strength product and portfolio and represented The e-mail adoption represented company the with XX% geographic a revenue. in was revenue revenue Total million. in X, represented less internationally. and the XX% APAC increased continued our to EMEA by growth U.S. continued XX% the of revenue of increased year-over-year. and year-over-year. increased of

to growth We are APAC. to continue accelerate in see pleased

the In due metrics. customer XX% a had customer increase in year-over-year. level quarter, We of shifting to an paying higher XXX,XXX down our free tier. go our of representing second pay-as-you part to to Turning customers customers, we saw churn

our to SMB reflects our up the in disclosed of as XX% XX% the quarter, move total As business revenue at continues down from largely decline, Day pay-as-you-go our market, Investor in which revenue May. from continues XXXX contribution second in representing to business

large customers. of were to We large X,XXX an large to and record a revenue quarter increase in XXX the contribution Turning year-over-year, increase customers, see with again We quarter. representing large pleased addition sequentially. customers XX% the customer of ended

continue increasing is a net sequentially enterprise dollar-based to our points our are move XXX expansion grade, year-over-year. that large size of features points representing contribution. and up Significant cohorts, an that reflected market, a of products contributed and and decrease We consistently increase to basis and large XXX retention in customers basis from shipping revenue XXX%, of customer

continue expect time, we variability to some trend we quarter-to-quarter. DNR to expect over upward While

to margin. gross Moving

sequentially. revenue points CapEx basis increase quarter. representing Network gross of quarter XX.X%, the second XX% XX in Second margin was an of represented

CapEx and XX% quarter-to-quarter to purchase XXXX. to for revenue strategic given continue fiscal to network XX% to decisions expect variability be of of We continue some expect level

Turning to operating expenses.

operating We of Second the total at of a end our of quarter sequentially X% revenue number employees quarter. XX%. decreased as total employees where quarter, saw we to year-over-year had to X,XXX year-over-year, another and expenses the approximately our increased percentage bringing XX% hiring strong number X% of increased

second into half the slow forward hiring look of we plan global As uncertainty. given we XXXX, of macroeconomic to velocity the

decreased see marketing million hire the dislocations in and year. a Sales expenses on the to $XXX.X and as of revenue additions Sales marketing from and bar R&D increased given X% percentage $XX.X were XX% last the sequentially an last market. G&A also new of XX% million opportunity of was quarter. quarter quarter the quarter revenue to for loss the $XX.X and and year. million a compared revenue as XX% X% from the We same an flat stayed in flat were as in same quarter. percentage General the in sequentially for XX% million were operating last development decreased quarter. same and in same sequentially and last increased to the expenses the of raise in Research to $XXX,XXX from administrative a $X percentage year. XX% stayed Operating loss period expenses year.

Second investment our continued for margin quarter basis Area in acquisition operating If been profit and improving year-over-year. would negative not positive. XXX X.X%, operating was points X, have we

income sheet. balance Turning the to net and

revenue was the the the $X.X last in X% in ended $XXX,XXX the billion of cash second last quarter million Operating cash, million in net $XXX,XXX. We Free period million in period income a the and revenue cash XX% same of cash equivalents with Tax expense for negative million per or revenue was X% net share second or quarter compared or Our income the $X.XX. of same quarter securities. $XX.X or flow $X.X available-for-sale second the of in quarter were negative was or year. revenue flow compared year. X% of $X.X in to to quarter $X.X

operational We forward. diligent discipline will moving in be balancing

cash while address We to have or maintaining opportunity front near on the a free focus enormous with heightened in us. profitability at breakeven flow investment continued of

XX% second we an representing RPO or performance of of to sequentially RPO, in continue As and RPO. obligations, was at total to XXXX. Remaining XX% half return free year-over-year. flow prior million, cash came XX% mentioned quarters, $XXX in Current increase positive in the expect of to

and quarter days understand COVID, to in color of provide Similar move our performed in environment. additional full and expectations the we early rigorous the to would like to analysis I the of Before both we to current year, guidance third opportunities in the the uncertainty risks macroeconomic for the on light environment.

industries, Headwinds accelerated. important However, verticals, also is narrow of the particularly broader be challenges foreign for prudent guidance. set believe from have while a COVID exchange affected impact it's a why current And this business. in of we which more the seen us our behavior are set to U.S. with priced internationally. sales we change while becoming our elongated expensive high to our we in a customers' dollars, more material cycles of And portfolio our products product end haven't in are at date, quarter's seeing

environment this that We factor are the cognizant of our into increasingly outlook. cautious

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

the in million $X.X income operating range to expect of We $X million.

We million of expect common share $X.XX, approximately breakeven net outstanding. shares assuming XXX per income to

a tax of We expect expense million. $X.X

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

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

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

$X.X tax expect We of a million. expense

communities. the in a of for for that, the with economy, to employees and front continued and And to Cloudflare provider to questions. to customers. positioned as we customers, like We'd about the like exceptional of please while thank fortunate uniquely And our mission-critical our open remain challenges dedication to Operator, there us. for it service partners services excited questions. are poll delivering their We I'd up in be resiliency are in opportunity

Operator

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

Matt Hedberg

question. helpful think for commentary, a I Maybe a appreciate had the you, Matthew results tough in for on and much of the very Thomas, environment. you the And candor. Thank congrats we Great. lot

specifically of a get kind embedding year or $X Can sales assuming still conservatism? little your full from about how And you are about -- you longer million mentioned same than You of things here? the you more QX increased by maybe worse or stay the levels $XX cycles, talk more levels you thought but bit guide beat. million

Thomas Seifert

you Yes. We this impacting picked looked at some and guidance up already. a lot year, of different factors

we million also So, was the of in to European saw we bucket, continue. at We our business end the especially first over business second this high quarter. second deterioration see is and sales that $X.X our to best-performing we've million in expect quarter, performance, especially to continue seen that the elongated cycles of $X Europe and region and the that

the we to So, that trend sure improve. for not expect

also are We in see business and once. they the to across that like approach been becoming that the has discussed make more board, I us things companies only think, are the order done in how cautious twice that sure

factored on from have that a improve in more the why guidance rigorous of that's and our cohorts. we So, forward, And and and regions analysis cautious things year. the see customer quarter verticals, perform would you various more across moving prudent the end across and not here for guide third

Matt Hedberg

and said, the in cost-effective ways road Workers exciting. Matthew. if sense. us? for for of makes just they maybe guess, kind and would that you Workers fog maybe out so, start is times like use no an or otherwise I'm creative, are clouds to The of even there customers maybe to one And more opportunity ROI higher challenged economic in front clear wins That it. I ahead called done then have was Got than you more wondering,

Matthew Prince

Yes.

powerful really about Workers the of is things efficiency. think its I one

on the that magic Microsoft Workers sort expensive public workload, is running delivers. of a AWSs, running workload Google technical run. Azure, what of traditional less clouds, Workers typically of part happen is work significantly Cloud versus an And to the so in the And of order any equivalent or to make or on

And especially startups money wildly can many seeing standard spending new a behind who really bill, well people some in your to on save definitely they've money. as cloud, often of cloud realizing are days or typical think, Workers if ways, we you make our of either got we The there us. as that public of just of your I are front are further. so, that different And you in just put are quite products, us bit with both go

was year it I any people out that were really was there. problem further, money my seem was ago, a where dollar again, and is a at people how that didn't so And out and particular But was everyone save very money. that are message a think to much that throwing whole people just platform resonate a helping free Workers very I environments as these effective where Cloudflare's trying think in stretch at to figure -- even

Operator

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

James Fish

Actually, release your impact your Matthew, security? over mix one top of terms guys? partner of this going And you over this details from channel Cloudflare of guys Can indirect about go is expect in talked that the to that you the interesting is and couple remarks, intra-quarter years? partners. was and profitability your an you competitors’ program in how to some going focused program, on of mentioned prepared work you the for you Is next taking how some solely it you

Thomas Seifert

Yes.

we they and box, that early worked from reseller. products so of -- the the was sign challenge X the to that And a wasn't add think lot a our minutes of up, just of and partner Cloudflare, I explored of value-added early a programs. for value lot days took there out as to various

all working order would the out in our partner we the And is partner while an partners, SaaS And of especially, had a don't call not then really if that's most the lot industry facilitated I for so, taker, products getting of fairly standard value. a ecosystem. success with what think I

richer. more handful and ability become has complicated, in a to think of have I them things the much have products happened. that is our customize various ways One gotten

great IP It from a through sell that them. we're in and then that again. own they Workers, example, for vertical, it's to can for So intellectual getting we more that really drives services revenue, leverage us That's able and over with for what like their for same partner that over what Workers, industry great particular are deliver is develop it property partners. means seeing because and a IBM actually we're their deploy on

think in success deploy to take of The with products setup. second with actually and selling a successful. handful was work we thing that an saw implement more that their is Zero Those products partners Trust within Zscaler X-minute a I not It's really organization.

kind be that we're their And that's to And in to partners solution to work extremely bring a global more coverage cases, all they bottlenecks, Because very of able of the services, not ability partners. of where in addresses basket either performance Zero having are we companies Cloudflare And lack able area in Trust the to want Zero playbook. case, and all particular, we previous customers. talk that global scale, so, to those suffered have total selling lot much the when in solutions that of following the an things from need, are Trust to well. to with a real

that So, I think that's opportunity an for us.

the profitability, the news we complex think that these margin actually more products to of highest terms I products is be tend good In that have.

while it that margin to being And program, very thought market. Cloudflare that accretive potential attractive both we still are so, the were have could to partners that the also as we we designing to bringing be

that area watching so, that is we're an I very And think carefully. this

with us we're going It had a with of I a part experience that actually channel X of the more and hidden think invest in. to -- benefits Area partners. the they also to is it's is lot one continue acquiring is

the has great, from terrific. reception team that the design and with been really partners working so, to has there And been program

us think partners. So, for our and win-win for I a it's

James Fish

And are big me Matthew. you that one the quarter helpful, integrated FedRAMP just up program? a here. guys. you guess, on Thanks for guys relationship. government Last what government agency -- side I is some seeing have obviously, Very and coming

Matthew Prince

it. appreciate I Yes.

it's to up for for line our are ramp pulled like come being waiting just number -- We've are it We our DMV. with FedRAMP certification. in to and us get

And at showing board so that have news we're we'll counting we -- expect that the the positive red of quarter. we're on and number XX basically number next number at for number sort XX But very it's DMV.

government space. the adopt board, see of example we're just in services across but So, federal, that's lot more We people positive. seeing is I that that the gave Cloudflare not the a State with Arizona,

think a we various I that it allow faster. that the go strong to to us certifications, continue have continues even where to And so, place as will And relationships. very get be we

Operator

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

Alex Henderson

sound all the if It a But a side cautious of of I you the you're economic in thought more those like so on you forth. rolled process two. two, a little start But It's to more economies that your decelerating. around really duress. has disconnect actually doesn't the more of And much sound comments being I'm least was got planet, little are there's or those the that pretty other or your at particularly, And improved tone and at business lot saw could wondering the Europe lot talk entire outlook. of between of of a XQ you hoping on was tense. coin, the obvious, your manifest that sequentially and conservative it worse your initial like in and XQ, stabilized sound bit in the context you a commentary somewhat yet sort globally conditions. under about bit is

two a bit? parse little between those could So you

Matthew Prince

Yes, Alex.

we've didn't see situation. paying people that really talked that? of QX that we to the normal, in think to saw bills call. do, the though, What do actually were earnings think We was we really I customers signals we of XXXX, think been about last that everything I that, we take would in going advantage quarter their manifest pretend of environment to started they and we of And why questioning was it. the saw of like ways, adjust December pipeline, And is we has back various on I And year. able some this harder. to that. of I What slowdown acknowledged first the think because gotten slowdown

lot again, call, still of so, allowed to my filling of is up we're with able both go the tule And got able what go And customer think to diversity and products, good be multiple back think continue sets, you in us also of real allows the difficult and much go powers team the year analogies I of levers I geography Cloudflare's what's to out and diversity going business even the products, COVID of tough. get grandmother on situation new customer industry what of our basis, of like We've what times quarters, every I most one to ago. the think mistake, the diversity to the the like that to deliver that than to it customer similar when deliver. sort and sizes, And us have if our has a from we our on. our we to no to a transitioned a what to there focused do ways quarter And really new think customers I that them But being this. a that is, getting to done leads, definitely sifting about go of to what in more. But through to adapting are it's to had to would is can expertise wheelbarrow customers of to how and logos went types, the across existing are a did, fog. how types one adjustments and a more was adjust time it promising to for work primarily from we've our a business are business-driven a to We we real that job market. look we a developed day that a being have market, we still was I be where that sell make made today

Thomas Seifert

especially and out also Europe. didn't additional Alex, currency it feel maybe mention point. headwinds, that but I pointed one in in script, previous is What do in the we my I answer. --

activity that the currency deal terms in see example, we if of even the would us of for same, Japan, from a Europe, in perspective volume the economic in to be for other world, the we but also parts headwinds digest. So, need

James Fish

they're the And and in plus on environment, translation interest Yes. dollars X.X% wanted EMEA of systems fact. England with fairly rates, I rates budgets the given to environment currency leads is rising to inflation, the today, That or ask their raised is that particularly are just in local flat. struggling question with XX% European headwinds Bank translation particularly huge -- me actually currency in in onerous second increases, price that

companies more talk price? a that who Now, selling selling is geography low about my I And that higher, relatively separation seeing seems understanding whether be are that you're high-ticket big ticket bigger advantage of that between are aggressively think because companies lower a loses fact low-priced/high-value higher the technologies. and you a the you're technologies to you between rod seems and whether divining Can there gives ticket to value ultimately, characteristic in be because that pressure with the wins the and on transactions in you're Europe. upfront

Thomas Seifert

where takes are a bigger benefit think products even certainly decision ACV our end it's mission-critical. at then, That's see cycles. and sales elongated the that Well, I high the longer. But deals, you

our points is makes The we of the model. factor second one as bit we in strong that that a favor is of a web deploy talked When weapon the and where audit always margin gross business strategic sense. it

and it margin without build relationship So business. mean for strategic We doubt. think using that to and But, we business try sense to cutting. be to price our where makes accommodate we're any that doesn't accommodating

Operator

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

Your line now open. is

Shaul Eyal

the first of on set Matthew, you. a question for Congrats results.

exposure, chatter address recent a we've exposure, implications. Cloudflare's throughout So, potential the maybe crypto your seen months. maybe on some opportunity in thinking to vertical, quarter, this Maybe lots of the discussions current given here dynamics around good changing

Matthew Prince

know that are think be has a a as crack add it I it. that in a not of top But as customer. large will that we the enough been Thomas the up being risk think a that of are to internally. item that whole, may And big I space, customers I I there would say mean, don't to them that don't number exact able XX it's any But I Sure. exchanges. significant including think exposure, brought have I that

emerge that or So, I around crypto. we there's of same the have pro things there are of have definitely not that kind that we against on either But we're where But -- always those. I only agnostic where people us. think bet I heavily have I lot time, mean, don't it. had religion made I -- never has of the hyperly it, position headwind I'm sure if think in personally space, on like advantage from that meaningful crypto are a take feel to the to at crypto, a that crypto hyperly been a we've

Thomas Seifert

color. some maybe And Yes.

X% percent for was crypto -- mid-single less Our digits exposure the quarter. than single second was to -- in revenue, under of

and part to size but of a -- amount So, big the not not a big an of revenue. interesting the terms in customers exposure

Shaul Eyal

sales you a one -- us for bit on know But from maybe elongated Understood. it's generalize differs Thomas, it can customer. question I And long tricky, how you, for to maybe cycle. customer Are very elongated are How talking how about be being term. we thinking general we three than much that? these two word more cycles elongated? very, it? weeks, could is weeks, a The

Thomas Seifert

for below sales perspective. from still I say a our are would part the XX Well, far cycle we days business, main of

you look by moving out. elongated So, there, at we about ACV where end days. out moving the it's it's not sales But cohorts when cycles, it's by to weeks, million in where of our the of upper talk bucket, $X $XXX,XXX

Operator

Citi. next line question of the Your Instructions] comes with [Operator from Fatima Boolani

Fatima Boolani

adoption less your or supply pillars, whether installed against more base versus the under observations around has purchasing or of last your us this just of versus maybe to has of back expansion this sort that logo slower Matthew behavior certain of put months. you lens for of a customers, if or in the changed all the jump commentary about contextualize curious you product behavior chain others I'm right cycles changed procurement deal just is shift new or Thinking expansion can elongating constraint customer either pillars Thomas, three now. certainly land help usage and or there we're the over for that some and addressed. how you. take step And one and if bifurcate hardware pay-as-you-go and can backdrop you

Matthew Prince

Sure.

our platforms I I of new our remarks, easier platform has the to year, to in more sign they since actually order gotten in but using up it's logo solve customers as a their prepared So, gotten the to it think beginning the more of that problems said -- talk have. the to existing about harder of that

such existing is can money, we customers We a save up even us so, that think new because And allows go in can conversation we them stack, these our how where how make that secure. more and can broad signing their them benefit I And is think product logos about a hard. simplify have portfolio can to times have I how where that attractive. we that we we IT that's

it has and it still of plenty on our gotten have our logos. But harder easier products part platform. platform we're of has gotten think definitely that expanding I especially of about and up conversations are balance, that new So, signing to adopting different up usage new sign logos to

companies. from is I concern Russia that are terms -- be way -- what I how of security a of mind under lot start around yet, it That In seeing we're and trend happens. people wouldn't actually in products did more invasion the Ukraine come went it of -- mix of materialize to of call QX. would It's more was that in I changing, real that kind a attacks of Russian started the the think top that I retaliation products companies we western turning us attack when not to of but QX, that materialize think to against think there out be in would. But still continues see when to there that thought happened

I across is environment an do products seeing very And And security well. this our where think we're so, portfolio, security strength.

Operator

comes of Your Fishbein the from line question with Joel next Truist.

Joel Fishbein

large just right around markets macro data or maybe these specifically Day, talked us that big you Is update has you're big and you. on that the an acts Cloudflare maybe you And philosophy positioned RX give changed going and on the macro at markets? Analyst there now? these you to environment, can Thank have where large go anything Matthew, in these your after, that current acts about notwithstanding environment. markets in about is

Matthew Prince

Yes.

one So, multiple curves we another. think S of Cloudflare stacking adoption as behind

I really that public is think QX. right we start that that to our go sell of adoption We're so way very And it really been in in GA which three than more earlier for where now of products, XX% that been our that but how is you protect that have three is than we first And the Trust Trust all is websites those "Hey, products, curve world. do do now. see were how sooner And is around faster can and our happened to into I all a able went And application and around people Workers. help the around the will infrastructure. to to we with competitor five continuing Amazon expect last who of think us, surprised the Zero say, to go beta right Act and Zero we're we those end I adopted products and incredible think will successfully quarter, revenue which as customers our pleasantly years with that we at big has where hit and how act are think focusing that to infrastructure expected. we we're well." RX, on to we've acts it our of today, material able and use in store into security S object our I earlier SX

continue behind we're again, so, nature able Cloudflare And And another do of in that to to that's we invest these another. behind an us I durable stack we that one think think opportunity it. that more and continue for acts to is the real to

Operator

with line question Your Fodderwala Stanley. the from Hamza of Morgan next comes

Hamza Fodderwala

a maybe the security angle on for question you. Matthew,

you customers. willingness to existing to You security their date? platform versus architectures continuing customers, comment CIOs, larger these conversations at want talked a their is lot really transform with and existing to CISOs talk perhaps to about you on-premise on when what existing refresh Can modernize their your having

Matthew Prince

an a customer, organization over Yes. has terrific team is willing Cloudflare I embrace great been Morgan I it's have think that Stanley to the a mean and and there, definitely we CIO with relationship most they that willing -- to think make conversation. they're that that's And big And very change. change, have that that have piece. to I and understand I that we think today organizations a

changed the firewall want before continue raising get new to the hardware those that today, firewall be extent thing can you thought you even on-premise in prices. the to could get to months lead situation finding difficult, are some they X organizations think current the very times if time, has are is at a I vendors that invest their And same the it. where

have product traditional basically it's was a I people not when the customers so, more think make happy, RPO that going in And the pay telling in in that be saw and a of a to firewall delaying -- holding the then of their them lot to of lot you to is line. But they place vendors results, way the sort there.

this solve some tune in that cloud for don't think said, starting change, very that, believe direction," much even to the minority with it's or believe so organizations can And the these had that the becoming traditionally and we in I don't problems in "We you moving is opinion of that hardware. on-premise

Operator

Borg Your Stifel. line next question the comes from with Adam of

Adam Borg

you're Maybe areas you for the just hoping the a could in of kind talked in being back bit a ones prioritized more which script slowing Thanks talk about in was hiring terms still the of are which little I more half slowing think you Thomas, bit much. year. hiring and more. I maybe and of about judicious And so

Thomas Seifert

Yes.

go-to-market quarter. moving headcount open the positions prioritize We employee down the take the wise we said a quite quite grew We people still protecting we second a bit. into half. So, in bit second velocity and

functions, but G&A the still go-to-market their going is So, slowdown to of some hire. to in and continue is R&D

Operator

next Andrew of Fargo. the Wells comes question from with Nowinski Your line

Andrew Nowinski

the a income just on follow-up for operating question Maybe the Great. year.

is than Your actually better your guidance. loss in QX

just of you you're hiring think half slowing said the year. I the second in

full the assume Maybe acquisition. income 'XX acquisition? income been out? have you year fiscal lowered was pull us operating organic your if would the revenue operating that of the just tell what to so, that I And outside So, could Area X due for and your reason you

Thomas Seifert

X, parts. than have operating million we much couple in margin our Area range our dollar would been single-digit, the color the with Without continued Yes. want for quarter. But more -- to gave is we a investment the I probably in mid-digit second don't give more the it specific in -- true more positive, on of moving script.

Andrew Nowinski

And I acquisition operating the of year up gone assume absence in the guidance that for then? have would

Thomas Seifert

am parcel for guidance I acquisition. quarter Area with going took lot not hadn't out to would now -- a have of been the that gave into the variables, that account specific if we We done and impact X of

So, things and it picture guidance move, should that holistic many take you is the as that. on

Operator

Securities. line Walsh Your next Trevor the question of JMP with from comes

Trevor Walsh

Matthew, maybe your one a quick for comments you around around DBNR.

kind do of your You what's Is of mentioned where aspirational and Thanks. a -- you on goal on based do kind terms up? budgets, looking What macroeconomics of in you're internally now maybe change of just think there? XXX%. right drive you are it you is get function going order on is of refocus efforts to that something or number there guys that to in kind and/or how

Matthew Prince

Yes.

Cloudflare already customers. is about are together. products Today, really we of it that us think bundle the I XXXX for Fortune how XX%

I that, significant of forward think very with fast a Fortune that you XXXX are be customers. If percentage going the to

Cloudflare is got of platform. customers we those what really have every is we a platform. of adopt can about single what products use we And so, do in contracted single uses more we've customer where on Cloudflare's unique in get -- more focus I want to our the our that to And customer. not how is them and is our place think terms already more feature There today platform a of

to to sure happens, making And sure is have more and be a Fortune they're we the see really no more relies What internet, with network XXXX critical. matter that think that's to that that be think to connecting their the where very I growing. making and customers we become so, best that employees the experience for always And expand I way possible what spend that's they're online. sure secure, on healthy the making that is want to going

Operator

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

James Breen

the the little talk higher the this about And range the year. cash areas spending puts going growth relative a how and are the that the can some up about guidance takes It's cash the line where greatly of CapEx? Could flow forward? think top for than on Thanks. bit where bit quarter, without line? impacting to a a year, you top too maybe generate you And for and bit you little just

Thomas Seifert

and mean, before, quarter-to-quarter, chain we of we're we the the around you stay terms in disruptions variability on purchase, within start guided we guided make of could you We variability see a maneuver stay pretty I range sure I range driving opportunity that said is flow in for CapEx. year. going pull will supply but just will the for said ourselves that This smartly how at From Maybe hand. to see spend perspective, we we to quarter-to-quarter the free see. a much within we we we lot year. cash have the levers where the

large is levers to biggest the annual moving of One our for billing customers.

coming a even was credit billing. of a history card from majority the the monthly quarter, We gave our of from people where a are, revenue business beginning at pay-as-you-go company the us second perspective

of billing. lot ride And of made is that into in we've of direction first front So, a opportunities annual there us. still

that in it's across we project impact numbers. the cross-functional cash say, you biggest looks second would the flow that it's -- cash into And already but a lever, the this, making good and progress, holistic literally that Company free and generation. So project, anything quarter I conversion a saw run is reflected we're pretty can positively

Operator

line next Your of the BTIG. with Powell comes Gray from question

Gray Powell

for strong All Thanks right. Great. -- the on the results. the question. Congratulations for taking

talk or those? about with well? can mainly Fortune into like Matt, correct. the combination those company Are to you little about Access, technology gateway maybe I XXX some And wins. a replaced it there of Is And similar wins won. called yes, more want you just some out ZTNA So, sure talked have on it were or Zscaler. other why as side just you drill a you you and make the more energy where on bit Cloudflare then price, I then,

Matthew Prince

Yes.

So, all when that Trust the pieces our believe we solutions, Zero together. fit sell we really

typically are wins. And those so

see -- together. just but pieces adopt one holistic the portion will sell to fit solution, like really Sometimes somebody that will how all we just of of and solution the

of I terms we think is space products win, from more our we what performant. In hear are that significantly where the

devices the I this holistic We of was, in year, We lot a that protect have work providers can I geographies. much a solution in network much mobile a the Africa way using across other of more time we When can last that can traveling where our And don't whereas that great, we scale the more just able are space significantly. think products, that. have that they most deliver broad people in a to worked can't.

We lot forward us think the able to have tried orders the in more have proxy that of magnitude, across able be to to than why capacity we've handle the literally providers found been other two of not Zscaler less user-friendly I IT of tickets. and and it space. that's generated adopt to traffic that that any some that support our have -- But displace that's companies a used really focus. it And

VPNs Our exist in hardware the firewalls the of after on-premise that and focus is and universe. going all

but we product. I think And that win. can they help have be think a can time, us successful, better think I will successful so, be and And over we I

Operator

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

Brent Thill

Matthew, X, but know give I you're can early, at question, And the on an of update one it's there? I end? you Thanks. guess, in what last on Area seeing can us I again, the squeeze

Matthew Prince

The Area amazing. X is tech

So, Trust product to people their journey. gateway on as with wins the from think of And product, we a large being we're customers. that seeing very really great help Zero

conversation It's that that If of it have, it helps about conversation well. enumerates then is the you Zero products of organization, the much us going we so e-mail, it Trust and nature other It a also that in got for employee very most an existing and sell the everybody directory think out result of not is problem. It that. our click up has and going to well in to X customers. can Area a terms or customers, test turns phishing one of our is whether sign is talking

-- a is. that successful And so, which short just or million-plus days number prove in we're just oftentimes a how because $X that of can seeing is matter wins weeks, -- of in close we

think that, X which program, you and develop going have talk One, other earlier, a I think, number they being board. because channel ways. channel has us is And third, think you will in sophisticated Area I us has really helped a as which entire on you'll much now of beyond turn team about like question. our threat have I had mentioned that more think I'll we're that intelligence the more more is I more And Brent, hear I products helped a for then, program, that I forward world-class they really our one across that, team. platform. And into thankful let

Brent Thill

appreciate I that.

think where What's were worse. from extend to and just I than trend felt. you're candor, of your hasn't you when feeling that in things now? rest different appreciates you seen and and I have mentioned have from the you everyone come are sense come seeing, it to your to into what's the the your the we just that and that understand you they of summer. ball kind -- came the little one It's say, crystal the at had of the things at trajectory make trying want understand, things of gotten perspective You've stabilization look in, July where your sure stabilized. hey, perspective, happening I first a you now, was are out I mean,

Matthew Prince

a of people not said was my I as QX. your Yes, economy you you've as heard think I the that now those me a lot lot at conference, those and in think, in with trouble got rosy comments where peers echo folks of

be clear. me Let

able customers think in economy I and I difficult economy from the deliver think be continues an difficult And an environment. I'm That and very customers, -- I value, ROI, haves, had suffering, that prepared have as what puts have still and economy, nice incredible said really from we can the position. being has the to in the the really money environment again, year. products least real still the are member What -- us in difficult, be to with of hear I But to I powerful rest not in stabilized. is say And shape. wouldn't save our places not a other itself But would any are say is not deliver will trade it adapt through to economist. able at that not And the be a rough flexibility incredibly customers' business the haves, an that I'm CEO. I we I of don't know would must to to remarks,

Operator

the portion call Q&A Matthew our call. concludes the turn of back This I to Prince, you.

Matthew Prince

thank going, the I'd and let their hope of to Berklee music, students some bunch the to, all, use for songs in. from Music new of So, going School us first of the original like a of

tuned quarter. Thanks to So, want team all you on the all hands questions. got appreciated I thank eyes the you the road, the our hopefully for Usually, our analysts our We've those who in call get see back all Thomas wheel, next actually of customers. and we'll on the asking and of you our time. questions to this early, also I that. some here

Operator

for you today's attending. conference concludes call. This Thank

You disconnect. may now

Cloudflare (NET) 5 Aug 222022 Q2 Earnings call transcript