- Earnings call transcript Q3 2022

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Operator

Good day, everyone, and welcome to the Cloudflare Q3 2022 Earnings Call. At this time, I would like to hand the call over to Mr. Jayson Noland. Please go ahead, sir.

Jayson Noland

Thank you for joining us to discuss Cloudflare's financial results for the third quarter 2022. call, Zatlyn, Matthew and Co-Founder, CFO. the CEO; Co-Founder Thomas on Michelle and President me we Prince, have and Seifert, With and COO; now, earnings to By have our should everyone announcement. access our supplemental announcement, on Investor website. Relations well This financial our as may be information, found as

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

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

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

in You may release find a on our reconciliation of measures Relations GAAP Investor non-GAAP our earnings financial to website.

to that Credit periods, financial For moments you Annual would GAAP to Media Conference XXth on in information Global like the and will inform the few Internet, Conference Technology Suisse and Capital participating be on also be a Markets ago. found November historical the we reconciliation We non-GAAP referenced November supplemental RBC in a XX XX. Technology, Telecommunications can

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

Matthew Prince

revenue, in of customers. We you, starting paying through strong economic proud is to crossed billion with as million $XXX finished. had Even to in us, economy marked a Jayson. year-over-year. X last annualized X,XXX nowhere Unsurprisingly, this headwinds, public customers close economic those of crossing achieved milestone total have companies we milestone, revenue it, for has the in slowdown We revenue. generated this $X numbers. a even line quarter, Only software up the X% be added to for up quarter XXX,XXX a paying on calls environment so our we're but on top We earnings XX% challenging. Thank continued show the discussed to the

record annual still an account strong million, operating of $XX.X $X at those customers gross customers, year-over-year. XX.X%, margin keep of inflation year-over-year. that million customers achieved XX% above in costs, held getting over gross added profit margin customers large Even large for some year-over-year, And XX%. and margin range with We of target XX% of X,XXX, over total customers representing our more year, The per our than our of grew $XXX,XXX of customers operating XX% hitting to our grew a X.X%. spend new up XXX For we large pay Large us a now larger. revenue. XX% number $XXX,XXX XX% of for

we confident long deliver deliver plan as margins revenue are we're able to breakeven growth. time, near to operating can exceptional as continue but hold over meaningful them to We

the in flat down retention XXX%, net dollar-based quarter year-over-year last was Our and quarter. from XXX%

While renew, will and dissatisfied over still be we Zero on we to contracts there believe that we noise RX. that until add and it's in storage-based when continue achievable number is and based it's Trust seats products very like as XXX%, some

are revenue, next $X has through proud about We annualized it thinking our to in have billion crossed milestones. but us

While ahead business term, is that every long in term near we economic the has the opportunity challenges massive. of there for know are the Cloudflare

and us we achieve than of we're organically to milestone billion tried team, sales who have have X to in made leaders at global He also there. come Michelle is Cloudflare X% over that, sense milestone out, have the today. next penetrated XX economy why further and it to already and he hurry, our Less billion. Chris accomplished public annualized helped years. and he's have X first billion Crossing are build reflect of history the our billion I've for as accomplished wanted to leaders I the than look will up reach today's $X at Cloudflare. Chris headwinds himself floor different to in Merritt, grew with across on out normal confident. milestone. the for us the than someone sales of recognize It's ahead, all in we all X% That's get we years We're life. to the while identified to is software. as us continue say fewer on a software different number a to give second stages an the billion. $X products in past of process unicorn. almost wasn't market take who for We our to $X we $X to thought $X revenue to the hire. quarters $X him he ago we that, a the from And to count as revenue the started the already less sales Chris Even in to available present while products year, path this a have me all billion, our for team. companies next opportunity Earlier confident have we XX market natural achieve reached company's runs else our

Unidentified Company Representative

forward billion to closely to the right I'll do orange. transition that, and and transition Cloudflare the a the continue least leader our to year. to Michelle that Cloudflare the work. with a mark had its remember me bring truly $X team I present and Cloudflare's Matthew. always in as to at for a market It terrific way meeting out Matthew. back great just meeting decided was build first help world-class I growth. involved time organization Back day, it's Thanks, Cloudflare of What said, the had organization. all another is It incredible. with brings to the we've end found with team problems from leader I'll in I believe of to sales phase was for XXXX I great the help that be of was next you, through that as very looking worked been, proud for products and clear Matthew the to someone was the Fast opportunity the journey run, so solve real we the built identify I'm and customers. a for amazing to And doing smooth Cloudflare's XX-year to very

Matthew Prince

gotten couldn't We here Chris. you. Thanks, without have

a As to a we during for workers he identify terrific. going $X last us experience is run a Twilio, into turn understands as leader Chris recently time on about take person He is said, the us senior Software-as-a-Service with worked forward. massive we organically to to another his help team and he which to a person his from the Trust tenure access sales Cloudflare. the beyond. several I our joined XX% the grew why billion to as bit annualized sales space, its Zero uniquely over rate. our compounded found closely more cracks business Boroditsky enterprise milestone and Oracle, developers company, than and give months him at the wanted next sales to management talk right accelerate lead led Marc to desire in identity our go-to-market floor qualified based The can to

Unidentified Company Representative

with team Thank little couldn't a Day more fortunate and similar strategic in more Francisco. San I on all the a engaged was be do at I've seen events, to partner. recent now you, us who I more very over eager for In a all years customers types week, thrilled. been are my as to Customer Matthew. attend of never I've Cloudflare's

a the clear path don't X customers breadth me compelled about of need buy simply compelling companies. you don't we tell Cloudflare Cloudflare, have new solutions to need platform join to already are We of you, bag me invent $X the team. what's Let what today. an the billion selling to in That's and that know We in us. is see part Back especially a already by I to to technologies. go to incredible years out Matthew. what our the opportunity that in

Matthew Prince

Marc. Thanks,

competitors. With team excited larger for larger as us build of mature products tell has some technology They and are services $X.X you up, on sophisticated we They against We faced customer X-year XXX signed put Fortune last to wins contract. you more customers. million to about Chris that all attacks. place number further of quarter. increasing nearly company great a our compared and our sell the A efforts financial me let an set cyber in go-to-market

Trust features telecom localization the reside. leader offer to They customer didn't matter. value an Fortune X-year to this approach, total that A security They're a industry bringing to we moving see adopting technical us was pharmaceutical increasingly from $XXX,XXX highly hardware X-year relationship This more clear was competitors customers services a over our countries integrated customers to deal. million. Cloudflare and so XXX $X.X well. where to Cloudflare. important of that powered on-premise company of pricing, were signed for our us million that customers While services. $X.X our The contract the one. and tried Workers. process Cloudflare to XXX premium period are with the they their They regulated paid the convinced by their their data expanded their Zero it cloud. company evaluating like locally deal, are signed their suite, A lower This the as be to European Fortune in now unique allows the additional in These provider data product with

annual and across using bringing vendors for route scalable evaluated to as had They data they hyperscale their including localization commitment stopper a signing their $X it our for see the the they the of is in achieve an they help public Cloudflare's Seeing EU cloud, the experiments of multi-cloud the becoming public using application. only again retailer was breed, requirements have deal Workers We're equivalent Fortune to None vendors also seeing and residency million. companies our being e-commerce our RX, and priority best their functions other data solution. considered, While vision. and to services network database. show relationship localization are cloud between they security them They're with meet hyperscale order is store, different use. more traffic able Cloudflare, XXX vendor law data adopting Cloudflare highly A They increasing nearly DX started $XXX,XXX to to a more in and the with region. our expanded Cloudflare them, suite. object first their them build

we Fortune believe expressed signed to one Transit, they've we A to can be financial this to signed forward. with general opportunity and of an company's cofounder, handing completely service products, with conglomerate $XXX,XXX will of us We Fortune They services, They of product, my consumer an life use customers. is traffic company other and large how are bought using spend this Workers. $XXX,XXX of with a a our $X.X us them They A data that modest, ISP. and to going their sciences time. opportunity their Zero them, partner their nearly sign their spend fun our X-year a their channel across significant Trust as fact XXX our their $X replacing centers. subsidiaries. million be think chief XXX total is win expand over making per network, protect XX land on-premise They're vendors A and us, security school. set as product, year. deal. signed expand start there's deal. in brings directly worked X-year Magic their there's our expanded and X-year example Fortune well including still That While full a another deal. X-year We've as had services signed apparel A A and Instead, she customer. an relationship believe interest MSA Cloudflare opportunity, of out XXX better range signing a company to we a strategic their chose a a Michelle Fortune with then with company staff of $XXX,XXX additional to MSA million CEO's deal. XXX product X to business Cloudflare, now an

Fortune solution, XXX. $X.X employees. e-mail attack e-mail the signed XXX to deal. the Fortune as and security that But a team's adopted have XX-month large counting, Area is [indiscernible] provides you've included then Trust have XXX a materials security up expansion a Marc been Fortune product them as and part and the our Trust path And to now that's Fortune They job for If by something company. Zero for using companies, company those the We be vendor actually year XX% across using relationships a existing us their aim big get a XXX their in Europe part of building broadly us catch. use for hit products this failed to we're the network us. XXX We expand They earlier of just of years. see been X QX, other integration. native Fortune X in every to In no nearly manufacturer their Zero every I to XX,XXX something then ransomware not vendor our million clear Zero next to Trust everything. a

the we later. to deal an They've POC, X vendors a customer turned delivered. They in existing for a network we miss. And our messages our previously, cut a need. another us had phishing been that from solution they to POC and other During but live small integrated went signed week security minute days,

bringing than Week, few for incredible applications large now. September. performance from software Developer Finally, some They Workers in annual Cloudflare They're AWS sharing easy Cloudflare but In be trillion more their a migrating to user big $X.X scalability. milestone, signed Innovation where spend a company we our Cloudflare upcoming monitoring more their expansion just million. new I and weeks, have of our to we'll a million X processing a deal, of are Workers, $X couldn't a resist Workers here announcing few and more requests

portfolio, applications As within May. of products, our up available, running Cloudflare is has announced Worker QX, Workers and available which X.X the RX other we're doubled to Cloudflare we projects end on In up along Pages, [indiscernible]. million a generally Workers. unique of is is XXX,XXX product now September, storage and since the Cloudflare with generally Workers that KV to

tech XX stacks of and building public program the the $X.XX hearing We and LaunchPad on quarter, cloud collectively earmarked were up Workers. because the the that are available first came we investing are companies of DCs more coming innovative now they program, do Reflecting diligence their Increasingly, customer on over by before in database which will scoring data. were billion for the September, companies in be new to capitalists exclusively open hyperscale Funding in on kept of we're announced Workers. Cloudflare that in a beta. exclusively funding venture And skipping start-up when product, to The more of Workers considering DX, and end funding due trend powered to us start-ups Cloudflare Workers. about more petabyte top our about more in building

graph local wanted Through that we future in so-called country. have to U.S. our we Workers. election. So participants states free the a by project. the ballot more the the and half Tuesday. the powered an time next officials provide heightened I of Today, Cloudflare's to for everyone oversee this new concerns seems by authorities of makes election who That States Athenian and are in states startups, close services cybersecurity project, to in most any from United the reminding election help state Athenian than of Cloudflare XXX hottest the Fortune increasingly, for

of the help our be either. story we cyberattacks cyberattacks proud the we the election, part team not had be they'll are available and XX/X story next week to for that in and standing We have over ensure won't help XXXX by, part be of XXXX the

thing we'll you that, we're at, over the take best to do So vote. forget don't Thomas. With turn it Thomas, away. to I'll it

Thomas Seifert

and Matthew, you, Thank joining us. everyone you to for thank

revenue opportunity, market milestone $X and important revenue model. expand for customers first durability enterprise an to achieved we surpassing the subscription-based mentioned, enormous to billion our quarter, rate third time. land a large our and milestone Matthew As the our the This is ability run testament of in

to April, XX% company $XXX.X year-over-year for quarter. Total the in revenue to Area we revenue million. less X, for of Turning acquired than this third the contributed security again X% quarter. quarter e-mail the increased revenue

EMEA While that impact we revenue, uncertainty well a of year-over-year. represented we are price meaningfully region. economic XX% and global The XX% XX% U.S. are of increased seeing perspective, seeing improved and increased are and this represented very XX% From geographic foreign traction in XX% from year, revenue, APAC positioned sensitivity the buying year-over-year. we and XX% revenue, environment. performance believe exchange increased but in APAC has headwinds we delays decision upmarket the the and APAC business, more and last of represented year-over-year. continue

a paying the primarily churn saw Turning quarter, pay-as-you-go of more We to quarter, shifting our is higher tier. think our challenging customers customer of customers, third an to customer down of representing level free last year-over-year. to more we XX% base, environment. we had a our due to increase in metrics. XXX,XXX macro In Similar function a customer this

these on our pleased to remain are we to see customers platform. However,

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

of We in pharmaceutical, the to financial services. including and telco Fortune consumer, are a XXX also industrial, wins across broad quality increase encouraged retail, to see continue of health care, verticals, science, life the array

elongated, at business line have than cycles $XXX,XXX-plus faster of continue sales cohort plus scoring While high revenue. see million we the top the end to $X our and

larger of in million achieved the milestone than customers third We also XX quarter. a $X

elevated we net net XXX%, sequentially decrease year-over-year. consistent representing was by Our basis not have a seen retention and points driven expansion dollar-based of The decline was primarily XXX less churn.

we As some over DNR variability expect to to we we while quarter-to-quarter. mentioned previously, continue upward time, trend expect

to continue net retention with and dollar-based of solutions. given the XXX%-plus We enterprise customers seed-based target rate characteristics momentum our net large expansion

Moving to gross margin.

quarter margin in sequentially. revenue XX.X%, was Network CapEx decrease basis gross Third the representing represented of of a quarter. third XX% XX points

We to efficiencies of due come the timing XX% XX% at of the end network in XXXX fiscal expect in CapEx to the and to lower purchases network. the inherent range

Turning to operating expenses.

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

total quarter. increased X,XXX bringing approximately number our of end to of Our at employees year-over-year, employees of total the XX% number the

We in to will continue the invest business.

revenue as from quarter, expenses as Sales year. of $XX.X and quarter. from conditions. expenses administrative decreased $XXX.X continue Sales $XX.X percentage million to General quarter the by revenue last as quarter. based million hiring $X.X the the same same XX% current Research expenses an to operating marketing period in last revenue last XX% the quarter. a and quarter the marketing a decreased income year. year. quarter and on decreased XX% for and in in Operating and same were of same were development and for were percentage G&A sequentially, in we of to decreased million $XX.X compared XX% X% sequentially, million was mentioned last the income of and pace the from we XX% year. to So X% a sequentially decreased decreased X% in market percentage as last R&D XX% to million

dollar, Third contributed year-over-year. the the quarter basis in X.X%, benefited increase which an margin from the operating of points operating expenses of to was strengthening increase profit. operating U.S. XXX Overseas

Turning to the and sheet. net income balance

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

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

and Before of our moving full the I uncertainty the like to year, would guidance expectations light macroeconomic in to for quarter reiterate the in fourth environment.

we dollar FX saw our to sales headwinds leading increase a expect U.S. offer in to strength saw we to closures. deal an continue, quarter, also time the benefit foreign concessions While of expenses, lead longer and the we similar sales exchange operating as offset internationally. to to In observed cycle we dynamics the revenue

our We are factored of and cautious environment the into this outlook. increasingly cognizant have

turning guidance. Now to

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

the $XX of expect of per expect we range of shares to income to XXX $X.XX, $X.XX net And assuming approximately expect in $X.X million we We income million. share outstanding. million million, tax common operating $XX expense and a

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

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

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

growth in the our the in our challenges durability Although confident subscription environment, current model. are of of and the continued remain business we

In and you want him Investor first and Happy I know closing, let lose thank his a but Relations, at to to of member This success Jayson team. for that dedication communities. And pursue him exceptional employees I'd Cloudflare sad service great customers, integral like our in Matthew their have software to Strategic as closing, to wish chapter. his for to for now reached we a happy and pre-IPO delivering mentioned, and $X leadership his such is next continued us. an to thank rate, please run I like questions. the milestones billion setting personally would the company, are Nolan, like up of partnership, of revenue Before we and poll $X news. that X Operator, in Finance on With open I'd our for sights is our sad for years. that, him questions. leaving to next partners Head it opportunity CFO in billion

Operator

we to Phil Winslow, Instructions]. Credit Suisse. [Operator will And go first

Philip Winslow

and you for now. portfolio, follow-on the services, platform, most? have When a Michelle then Thomas held then look broad, Zero application And Matthew And quarters you about up talked for the Thomas. obviously, for a developer it's across and and Trust conversely, network couple a most One you've has Matthew, macro where then services, follow-up Michelle. Cloudflare's services, of what seen the impact business? actually for the to obviously,

You and $X the balance, talked billion are the of revenue seeing hiring eye near-term also obviously, to there that growth. -- your to on What it about trying relative target to keeping the takes you're realities? long-term being sort puts

Matthew Prince

and it to Michelle. going Yes, to Phil, off Thomas I'll than I'm hand start,

talked line. What seeing and new of like to of slowness we've velocity cases, acceleration, feels top fact, portion twice new extremely that I slowing It been is think large hold companies, that, So that I about and to in in now, I down. been and that I see December we getting the is especially some think sales everyone right about logos, and right of our cut talking have now seeing last very as in we've you're security at think started up flow business. our transparent through business what the And previous once. to in of think some on we're seeing now measuring in calls, continuing is year, and hit is is well about we in

world, putting in While sure that we is make more of place. on it good is all worrisome to their the conflicts in multiple is security the that companies watching are parts pressure global that a

I while, think, X I as and think said wouldn't last I the that we said And for CEO other do any to have say places I consistently I we is calls, now, believe economy, trade continue and we that right are the macro with so challenging very that, economy other well the any quarter, that last at positioned, company.

Philip Winslow

on... Great. And then

Thomas Seifert

So headcount that XX% quarter. you in saw the grew year-over-year employee our

I core sales think but we've our and in us. a hire been to made front we the functions not that are hindering the functions that that have came expenses, potential sure corporate very we and go-to-market in G&A restrained it when of in way opportunity we is capacity

of footprint terms a balanced we very but in of be strategic from also to we down, in headcount try regional perspective. we slow terms where So and have very been added numbers, where we

Operator

comes question Markets. from Capital Matt next Our RBC Hedberg,

Matthew Hedberg

in do you of force or motion? that a bit couple to can these prepared of sales have engage you talk with about wonder about to Is headwinds. if can your a it headwinds it of Is is Matthew, these headwinds? organizations different what curious quarters different adapt customer? the sales if up to showed sales remarks, way too, talking navigate perhaps on you kind I you've little here. the room, Just a how in sort economic last been your noted the Marc

Matthew Prince

Yes.

the were don't we changed there's in seeing time So think first all, anything that at earlier this year. of what has and quarter this versus I dramatically

we that see from they beginning will of that if that But show and the broad to the The are to I focusing up do positive in have. they are slowdowns actually made we getting companies on things And in thing customers spend? from from make you How think go-to-market terms get how how get more get dollars seen again all help year, sell that that that make save about they trust I that think us. able can the are and over companies we've can the out did over is changes. nature that of we that we do those of do portfolio one performance, in reliability, secure. How we it? those we are they player. of the are deploying? successful things is again, really can multi-cloud line most that get how And How cloud deliver top of we've of the strategy know is they so successful And that us higher year. customers subscription value better money, environment and over and know more they sure in are adjustments our to the make and and products have benefits sure your of their as they over later think sure continue that thinking getting been cloud made I they're the we IT already reduce the the rationalize in Over we're and hearing businesses the variability a be that to previously that services

us every making our look a as dollar And they out they're strategic that sure getting IT spend. as most on customers, they we more more and at of see so partner the

Thomas Seifert

put to want just on an it. I additional Great. comment

security security we the the out the the said, leading this opening there, products new at especially in on up concerns from all heavier we coming intelligence were with have intelligence logos. weeks time product, We holding Just in back Europe, of see insight us, helping asset we launched on threat and have of have. is couple nicely up light are intelligence leaning terms threat a customer-driven of Matthew a of and the we Cloudforce, just doors the ago,

Matthew Hedberg

the that maybe, these? to super customers with of sort little Can is storage. early, RX about color bit And these you That's you're just already seeing talk on -- where biggest great of some customers? usage. it's what success a of hear petabyte of seeing your you're then they a but Are maybe clear. obviously, Matthew, Are leverage strategic

Matthew Prince

Yes.

beta So our the still period. mostly the in usage quarter, during was

of of see teams have now beta And larger small that What build the it so primarily using been users the their it are that I product how of can companies much to services new that and as or developers out think RX that is that of within have are out organizations. presence is make we'll can looking services. to end the adopt more very sure large a who they you'll multi-cloud spend quarter, they figure cloud that our reduce see

the talking to save cloud benefits use more companies can not so any their fees, store but is more the very one then of help platforms are them it they're large RX. across with to them of egress the money using. stored we can on moving allows and to of about And objects And different we objects where only those we that

those bit So vendors adopt of all by little data bit we share that a people a across a data that SaaS little case little the of bit of little a a party, neutral can in of Microsoft, third actually network. use It Amazon, different Google, being places. makes that let of bit and putting is

companies come, adopt larger things the of the which company. for and think quarters the you'll store larger to object in and that their as -- One valuable, is really I

Operator

is Jefferies. Brent Next up Thill,

Brent Thill

Is one organizations, Matthew, consolidate. of of wider feel, the in that themes starting your you license an they use to there keep next more to lot that many that hearing key you're a to you're on see a the take motion and advantage? solutions? of where you're opportunity the and pockets theme over consolidation more can or used could you enterprise sales year, are is we getting Do of saying agreements

Matthew Prince

Brent. Yes,

growth of a $XXX,XXX that, think as is spend spend, we're any that vendors Cloudflare critical vendors what numbers rate overall customer adopting million network. really of savings the growth of can do consolidate And a I the year very companies shows way are conversations find positioned the they more I much a doing fare having The $X the the think growing we're faster portfolio extremely fact across more are and over are companies help revenue means we've our complete type that over that that. around that our organization. overall broad money we to out products that of save that their And year we in companies well and it services can they in is how are of can got provide than what our fact and into that those seeing customers process that are how up rate. are that their the

the network down strategic that's customers. that become for going we are more more to customers and doubling environment that solutions that's using the it vendor increasingly our And indication I challenging our a that a good that share take and help And for so of think I to services, cloud be will think point make those out are there.

Brent Thill

I Thomas. And can clarify quickly just with

more you you Or you're versus With did SMID small that large. the and seeing, and do against that slowdown pronounced large? it in see mid see

Thomas Seifert

about stay one down a the I see, Churn? platform expansion cycles segments see churn in the in the trading saying each see large bit talked at segment the see on very our very some mentioned, but impact. we a by end high the cohorts. didn't see elongated in sales customer We you And mid-market bit. to the We the They customer downgrading. pay-as-you-go down of slowed you free, was expansion off, you harder.

it you what at. on look depends really So segment

Operator

today Our Sandler. Fish, comes James next Piper question from

James Fish

your billion other highlighted out? retail or that infrastructure-as-a-service over of hyperscalers? change with between see hyperscalers. getting to that does that And success kind glue between of also hit I the you are Matthew, XXX% that or the win that penetration to XXX ability how said of XXX versus balancing hyperscalers $X And fabric being you glue X goal guess, you or one you strategy full the to alternative the offering that being years view Fortune how Fortune time. that Cloudflare

Matthew Prince

connect be we to things Anything want the branch office. live are different office, starting and is is and having that There to sense we anything network to a cloud ton The network mean network. to sort our cloud to out, home way Cloudflare the make outside of hyperscalers. than office, what be our to are And what of their fundamentally, be and is, best to in. cloud-to-cloud, remote to itself. inside cloud from a we way I in connect want I And that network, hyperscalers think network. that the online, the is connected from is, to working approach the work start that that very by by a

across a Google object So Microsoft for and shared you're instance, and to AWS. that use going

RX that makes different to a platforms. ton those of to we're you that going So charge on not access to all because be across sense with the able egress tax of

the and You're possible. as as also reliable and for fast as of want parts to going applications, some make scalable as to, some application

to can there But think performance, we're more want of and to need reliability, thing best those reliable. do. be hyperscalers live completely the not and shift strategy what to to parts single the CloudFlare. not that our live And so the be to going live margins the the compliance We is are network the [indiscernible]. more want will which be those building entire that. inside be requirements will the network to inside at with much for I just Instead, is absolutely That's applications there, that that using again, in the reasons. companies places is for that can the increasingly, every recreate that We lift But what for the you much be to Cloudflare is we're able compete network we'll to never seeing a those And do able place either them. and we where way stack same and applications modern build we're that SAP network building. data inside the

the believe today. X see we of products billion organic $X regardless, to with path next that organically to think any getting to is in market a clear -- that We we are market that $X we years in billion products assume the that that today doesn't M&A. can with of revenue. through have that, the I And get revenue in

we And so multi-cloud us not, succeed. between want We all think fail don't for glue -- they ourselves hyperscalers be And the more actually them. have as to don't have companies see to much I that to that to or are. of whether

critically think multi-cloud with to glue is solution And that as are so provide that world. again, we we struggle And the important. companies trying reconciling increasingly see only that I

James Fish

of adoption looking customers understand this maybe actually for for to are to annual you. or staying Thomas, on specifically the uncertainty? to macro given alternatively the just duration, shorter impact infrastructure And there monthly looking side? Or with they enterprise any that Is longer with lock-in quarter? this Are conversion way for

Thomas Seifert

Good question.

to we discount exchange of rates order where North And resistant billing the are world, lever outside want world customers cash we flow. exchange lock are free from our As to contracts delivering said know, in rates. lock In monthly as much America moving lower to is in the difficult and past, path biggest our annual high, on a to especially you in more in. too don't of to in a revenue

materialize environment moving as forward. have, the it's more confident, it is opportunity numbers customers transition. lever have partners in moving and So still an this is of we we hard think, have pushed in and to and us, this will biggest general not been I front in that our in and But cash in flow it forward free

Operator

Shaul question Eyal, will Cowen. next come from Our

Shaul Eyal

you far? How acquired into you them, taking they that you've flagged the Matthew, I thus you've think maybe And win you when rates indicated Palo is in commentary Alto, deeper guys coming any about in X, along on even community. maybe Area Zscaler, assist that recent can versus cloud quarters.

Matthew Prince

Yes, sure.

I team X distinct think things. is amazing. X to Area So they brought And us

The Trust first gateway a is Zero is think to our I a product, which natural overall solutions.

that world-class do. our mature a think way of turning customers some we new matured, create been. and really is product helped has second a to deeper their leadership The channel we sell has around third -- of strategy we what again, then attract both a understanding we've which team, on threat And marketing great some And customers is that have of as to the into are our the I intelligence that mature also and board. the through threat existing now channel intelligence and to more much us brought that a

to especially has we're security We're e-mail And e-mail our we to at looking turn the Trust selling think in got straight the seeing that's product. the natural strength X around Area someone And job it. particular, think I X security product. in Area X Japan, I our of extension once And in Asia, done of for the great have a Zero using a Area particular lot product. sales actually team, very product. it's rest a the product, them seeing

really seeing has then again, team, through deals, X and larger the I with. larger Zero win -- if strategy, help come Trust goes channel. bump and and team Area something helped helped what's more you're addition, the the And channel understand channel the think more is in customers has able going in middle the of us customers been space, us night, on our to our being that again, the our of somebody threat has intelligence in especially

were challenge be against thinking rates strong. that space that's Alto the work awareness and continuing win That our just to well increased Zscaler as Palo in Networks increase very in us But continue we're and going access both Zero their that Twilio, is considering rates think about extremely is that Oracle in on something is to customer the Trust that. we if when to awareness who a and And we the background Our really are Marc's win is Chris, product the and thing we that's is with for there. management market, going competes journey, consideration, replacement market. love I in where, our at and on think help at the right identity I understands in that he them.

think have the today years now And more few going go next so awareness And more our to to to much come. much Zero doing as portfolio. I'm of the our us increase that sophisticated, much company is goes. that story excited the and X might very from job that just a I people is known is And for Trust thing be broad

Operator

Hamza from take question the will Morgan Fodderwala, next We Stanley.

Hamza Fodderwala

comes this already. a and about hearing impacted? the your where to cloud quarters to of a to a just little But we to kind But the too we're it is relates the I from Matthew, are lot get these rationalization. seeing specific, expansion How any dig spoke few wanted do it and pricing little Thomas that next likely out to see bit different service point. to as bit well, be relates model providers there you you company, more you this Cloudflare, spoke high. are Thomas rationalization net getting how as a you expansion around of rates as costs little around in Matthew, as perhaps bit a have of about you over a expect very in. expansion? usage subscription-based as that and mechanically And obviously, continue play And

Matthew Prince

a minimum, is is are think you a model, if is that challenging a layoffs not are it if Similarly, a at do you expand where money. purely environment. a place usage-based, usage-based I areas the Yes, that seat-based or, people seats, as you're to looking model, are seeing for save something that companies their some in current

I think usage-based is today, not and that seat-based. not we revenue our are of most fortunate

that both categories, people that, over that from today, pressure consolidate will an time bills. we their rationalize while to not that us, downward we expansion that we're adding in and be driver are trying or are so those think that seeing for products And of

some actually especially pressure new I in United to making less seeing which of think putting referenced, is we because where States, are pressure, X place U.S. Thomas is the dollars. customers figure use are order about that in existing the pressures our accommodate to though, it's to are we and us. less concessions what foreign Again, trying are how there. exchange of out That some the bill all outside with accounts we

anything, can if you what the some are we're out alternatives which use there. they that more of using are we of fact, how of say, instead In other trying consumption-based are to seeing

been than pure consumption-based less pressure of services some have that exist. we exposed think the I downward that to So

Thomas Seifert

was complete add. have nothing to answer. I That very a

Operator

is Auty, up MoffetNathanson. Sterling Next

Unidentified Analyst

of XX%or that So threshold Matthew, or context margins is kind the XX%, keeping in kind you'll flat terms that $X to of margin billion, a basically you you're of profile? of otherwise, threshold over within there, keep as So about? thinking it you would rate growing there the like as of long reconsider XX% the about think growth

Matthew Prince

for compelling. the to of always Rule that have be know Thomas don't the will kind and pretty idea specific probably this, saying personally, always I've personally XX a me slap found of we sort I guidance. but of of I've

if that. think that on think continue we And have growing of that deliver XX%, so ahead. that would enormous and we that's can And that we're -- I execute I then that, that, opportunity to north the I like think showing we

think on, very the profits. only see Rule have we And going be we're continue X% when while to we're But continue above significant in and to we total want market delivers so to addressable that penetration And us a it that of drive again, market than to a business think for forward. we growth that ahead -- XX. still the we makes have that today, right we know that fo operating sense I -- time us invest living the we to levers it's less

think we've got that. I to time think about So some

Operator

Our next question Guggenheim. comes today DiFucci, from John

Unidentified Analyst

I in rest of slowness. macro in make you Matthew held sure and generally the question your security up given sure But getting well macro portion to want sounds a businesses is Security wanted then to your business. business. Matthew, comments for I just of acceleration so or It for manifesting I a really itself like follow-up against I have quick make the for the Is anyway your even Thomas. have understand your broadly about far comment that that the backdrop stronger in more there. correct? that's continuing

Matthew Prince

Yes.

we Russia that this Russians be the ended and up did their be to of would I that been saw started tailwind that, space. And dramatically of that then threat down that, the expect further have in companies I which has for something year, -- pressures was we of little So X a that into first actually isn't we dig a in there the think that Ukrainian especially talking to tailwind macro since consistent security a we in now of are all, the turned think macro business. the I I about warn to I there when and last think if out the don't happening What quarters. were coming that outside What think, changed pressures business, something up not lot February Ukraine, not materialize, showed the was theater. security

a especially very, started However, in QX, several increase months, drives the cyberattacks both parts coming we That and world. out last an velocity. products increasing at adoption like the to products in high in very of very, see of other and of Cloudflare's Russia

we'll So measure often see that or where close in days. you can hours rates

macro I that lot Ukraine think security QX, so hasn't the leading environment QX. year that, think seeing. to I expected this And the the would on show a of conflicts up rest of we it political based that up in expectation throughout world in QX something the more around we're entire But what war saw more and changed other and actually generally, was and substantially industry business show of in overall the

we're so that big we're clear want saying And I not a that to make it seeing change.

been in there was have seen economy softness we've it macro that QX, about and QX. talking We the since since

Unidentified Analyst

talking just about. very Matthew. was sort quick of Yes. just follow-up clear And that, you've a to been Matthew on what Thomas, a

backdrop? the implied gave sure looking what's about caution outlook. macro when you outlook that effects talked you about I expecting the due you that and talked further outlook. I of similar Or to understand make deterioration? You you your sort in Are are just in to at want

Thomas Seifert

model. subscription-based a about talking are We

macro quarter climate lot of in impact we So we the to of and the change. quarter see started about a in are fourth going things the third see the when the talk to we'll

it's -- flow-through of we a just happened. for the guidance the the in-quarter when already business. you less what when It's fourth of So impact give has quarter,

Unidentified Analyst

on -- if But you you see it, show the to that. can't you understand do I expect further although see business even effects -- do we backdrop, are the your we macro deterioration try I the it do sort seen where it about couple to in expect of stay last kind Or over the is of think softness you've we guess? quarters, you of anyway? to

Thomas Seifert

QX with in We, of signals not And assumed get it's that an there's macroeconomic to soon. the of for anytime nothing outlook sure better that and improving course, environment. QX, going an

Operator

question take Nowinski, Andrew Fargo. Wells Next from a up, we'll

Andrew Nowinski

pretty was to color then wondering wondering QX question. renewals a pipeline likelihood handicapping perhaps of want your renewals just maybe could because start big you're assume if a of provide follow-up I around for any And sales those in changed I'm renewals. sort QX of QX cycles just I the terms if quick I in you lengthening to you're you follow-up. closing John's with seeing? the of given I have how

Matthew Prince

the -- think we has in strong. very again, don't overall churn to That have very, uptick across seen business. continued I an Yes. not hold

how forecast. renewal changed handicapped haven't we so And we've the

Thomas Seifert

And revenue not keep in monthly and mind, gets most our still of built annually.

not this massive have at quarter renewal the we yet. So don't least fourth in quarter,

Andrew Nowinski

it. Got

more that supply like of as the Okay. security they're up. aren't the of orders I to Cloudflare view want months change now they normal security irrational firewalls, change on security now solution holding that deploy how view vendors it suppose view whereas is demand Cloudflare -- from not Just where patterns customers you about. just for also negatively to talking are up. is starting days, of that firewalls But kind a you decisions sort We sort how you a talking One? the purchase the in making I seeing a spending they're can in environment. evaluate just a placing because in XX spending sort dive wondering as for could overall firewall buying about customers advance actually also deeper and of smarter because last heard, the how ordering little obviously, could and over free Fortinet few positive

Matthew Prince

had may incentives mean, stakes the to think eventually people the supply a there's on cuts which not to to chain -- I made tax products was just series of want lights for just going a crisis, scrambling moved of spending, place again the keep where back to the in for then that forward everyone and on space even that head beginning hardware some lot orders think get from quite of the Trump I that you've they COVID have. line that CapEx I time

or a work. problems in in virtual you grand problems can't the can't workforce, history, you is the of the shipping course just it the a by So doesn't distributed of cloud box a solve It solve box.

And that being of sort to solutions. for cloud-based continue incentives of anything is so beneficial to gets hardware I without to invest kind in and artificial security definitely that Cloudflare any think market back other the rational

Operator

Up next is Fatima Boolani, Citi.

Fatima Boolani

Thomas, X about well. strategy, for then you, as question. for to wanted Matthew, one and your ask pricing Matthew, philosophy you pricing you

wondering guess, in for or I that to the then solutions, not, prepared on follow-up heard raise environment. a of the thinking I'm this which, about your I'm we I the of floor a customers? have commentary about rationale about TCO maybe of customers better can so free to you're the of downshifting just And So lot in Thomas, to what's course, down you customers trade for your from sort please. paying that. you how on hold curious have some

Matthew Prince

business small all, business. portion much of It's our relatively a first less than So is revenue. of XX% our pay-as-you-go of

our at. organization large that we what see those being And pay value operate so that is whether something as end I whatever from the inside advocates pay-as-you-go biggest think that us customers, and biggest they champions that they business our or up not,

you our almost customers pay-as-you-go all understood are services, used us was technical that. and able that because to fell of top in you love to us XX leader if us and them organization some go customers, as with look who Cloudflare's originally So at largest inside down of the us, adopt came part

us I think to make we customers that, substantial treating we're want is so that And always that that to those well. benefit so sure

us to What Thomas they and go understand paying something up, us those trying for may not to customers that gas we're as that said, went is isn't work. us, to trying they so $XX paying we're us from us love to optimize prices optimize they something that because well, month take And a for.

XXX X we've who Behind almost how close is every advocated a the Fortune XXX. been they us Fortune do, much to so pay-as-you-go that's and for secret And our customer as internally, of of force. able wins those sales that so is

Fatima Boolani

more to coming net pillar light within your your portfolio bucket? the Appreciate curious ethos from perspective, as some sense moderate sticking levels to kind across granularity a services the that. curious seeing to the you the what dollar to can are where some future you of discussion, I bucket application network on, dynamic? But product shared from expansion rate functionalities enough. appreciate on Fair are the are of you if velocity services on prone a pressures expansion I'm of you Thomas, there. of of shed or Just expansion get that kind

Thomas Seifert

the enterprise. I statement number. think customers number, -- and cohort make minutes, mid-market talked expansion. just as our It's churning our customers, it's discussed over we our last business, different is is something very across segments just the We that free covering behave to first the differently. this an XX a off about and is, pay-as-you-go for that spent all-in true us, becoming hinders pay-as-you-go And

rate and contracting a perspective from accounts. We billing have in seen headwinds exchange overseas

KPIs an be growth expansion that growing, of something faster are those in dynamics And is back cycles the in very growth in lot And average then large go would a you the prolongated shared our about we we that cohorts significantly general, rate. where are at if the high sales happening, talked So end to number. very than reflected is cohorts. that

It does current we away in front movement us, and in in it sales impacting in the quarter. opportunity of is see get large not from number. path very this XXX%, not straight is be that but take the it we that any have that forward be terms a around talked had We But the movement So really there falls DNR the of cycles will DNR. into cohorts will we line a always about gets north when there. to of logic that us

Jayson Noland

we from analyst, one last Operator, question take can a please?

Operator

Absolutely.

come Blair. Our James final William question will from Breen,

James Breen

cash valuations maybe and the you about you there seems down other Can around coming divisions to organically, I $X know going to environment? some opportunities companies? you talk add getting the out a given there are in certain have, just bit M&A about talked it with billion or be to little scale products

Matthew Prince

Yes, Jim.

in are different I different companies think our ways. built --

technologies. if very and M&A, it's And It's you they so at they usually were Cisco, products. whereas but much an look acquisition if an core do machine, for look for M&A not Apple, at you

are like are an Apple a Cisco. I more we we like much than think

competitors space tie not the do. they have of get that is watched and solution really M&A, Frankenstein-type in what some level series efficiency the as building up have same We through effectively the of of in a don't we themselves a

any we that we which high always do a won't we at When a has will we think jump high do on and sort to don't find we always lots great transactions. ways have that, X, especially integrate great isn't I great changed hurdle fall, will deals. technologies, teams, a But to hurdle like multiples, we're markets, Area some to lots so in the to with to relative And I transaction, biased of of M&A, rate we against say think be did will the other we and continue to rate. as that maintain going companies, of and that. that look I private valuations think And very very

that buy got to said there. billion matter to can the We we've or we right the to have on It's in very without any his products believe much a out side. new us go-to-market $X as Marc continuing development. get optimized execute are around companies And internal or having we build today. We in bag think of just responses, products the

Operator

conclude does question-and-answer Mr. hand session. our to back any Matthew or additional that Prince things I'd for to And remarks. closing like

Matthew Prince

quarter. up in luck doing night. everyone for on again, of him much again being strong U.S. make for delivering forward. specifically nearly another to job next as all Cloudflare's do know thank smoothly. all amazing forward SEC team to Thank his Marc service too Jayson, to to to an those going to hopefully, wish appreciate XX that that of to We're we're they investors. of that has I fact wanted won't CFO, the go Cloudflare, board. we're at been, talking the you keep going standing get that on also elections, years at all new assigning by Just he's good he's proud And protecting what role quarter. Look statements, for and and off Chris want his thank I transition and And sure

Operator

Thank conference. all your participation. gentlemen, conclude for you that Ladies and this does

Cloudflare (NET) 4 Nov 222022 Q3 Earnings call transcript