Cloudflare, Inc. (NET) Q2 2023 Earnings Call Aug. 03, 2023

Here is a summary of the earnings call for NET - you can hear the full call on the audio file above.

Matthew Prince - Co-Founder and CEO

Despite ongoing macroeconomic uncertainty, Cloudflare had a strong Q2 with revenue reaching $308.5 million, a 32% YoY increase.
The customer base also expanded, adding 196 new large customers.
And the go-to-market improvements started to bear fruit, as sales cycles return to previous levels, contributing to a record quarter in new ACV bookings.
The challenging macro environment appears to be stabilising, with IT buyer sentiment not worsening.

Dollar-based net retention decreased by 2% to 115%, primarily due to slower expansion from some existing customers - not due to new competitive pressures or churn.
It is expected that the go-to-market strategies will improve this metric over time.

Gross margin remained stable at 77.7%, above the long-term target, and operating profit stood at $20.3 million.
Notably, Cloudflare generated a free cash flow of $20 million during the quarter, demonstrating their ability to remain disciplined and deliver operational improvements even in challenging times.

Cloudflare saw a record pipeline growth in Q2 due to significant changes in the sales team and implementation of robust onboarding, training and enablement programs.
The sales team also benefited from the strong performance of products such as Area 1, which was recognized by Forrester, IDC, and Gartner.

The developer platform, Cloudflare Workers, witnessed a 490% YoY growth, while R2's customer data storage reached over 13 petabytes, an 85% quarter-over-quarter increase.
There were notable customer wins including a $1.7 million contract from a fast-growing AI company, a $7.2 million contract from a Fortune 500 technology services company, a $2.4 million contract from a large online recruiting platform, and several others.

The company's emphasis on AI has contributed significantly to their success.
Cloudflare is a popular cloud provider among leading AI startups, offering unique solutions in the inference market - which it is believed will be larger than the AI training market.

Cloudflare’s Zero Trust solutions also garnered attention, as companies sought to consolidate their security onto a single pane.
The success of Cloudflare’s strategies, coupled with strong customer relationships, and product innovation, underscore Cloudflare's unique positioning as a provider that securely, reliably, and efficiently connects the world.

Thomas Seifert - CFO

• Overview

  • Second quarter results showed considerable improvements despite external challenges, thanks to the implementation of more efficient processes and tactics.

  • Sales cycles have shortened, and pipeline close rates have improved, reflecting the refinement of go-to-market strategies.

  • Collections on accounts receivable have increased, indicating a rebound in customer confidence.

  • The company recorded its fourth consecutive quarter of record operating profit and responsibly allocated capital by retiring its 2025 convertible notes.

• Total revenue

  • For the second quarter increased 32% year-over-year to $308.5 million, with the US, EMEA, and APAC contributing 53%, 27%, and 13% respectively.

• Customer metrics

  • There were 174,129 paying customers in the second quarter, marking a 15% YoY increase.

• Net Retention

  • The dollar-based net retention rate was 115% during the second quarter, a 200 basis points decrease sequentially, due to slower expansion in larger customer cohort.

• Gross Margin

  • The second quarter gross margin was 77.7%, representing a decrease of 10 basis points sequentially.

• Operating expenses

  • This emained consistent sequentially and decreased by 8% YoY.

  • The total number of employees increased by 11% YoY, reaching a total headcount of 3,389 at the end of the quarter.

• Sales and marketing expenses were $125.4 million for the quarter.
  Sales and marketing as a percent of revenue decreased by 1% sequentially and decreased to 41% from 44% in the same quarter last year.

• Operating income reached $20.3 million, and operating margin was 6.6%, a 700 basis point increase YoY.

• Net Income and the Balance Sheet

  • The net income for the quarter was $33.7 million or $0.10 per share.

  • Cash reserves at the end of the second quarter were $1.6 billion.

  • Free cash flow was $20 million or 6% of revenue.

• Despite progress made in shortening sales cycles and improving close rates, the outlook for the second half of the year remains cautious due to unpredictable business environment.

• Forward Guidance

  • Revenue is projected to be in the range of $330 million to $331 million for Q3, and between $1.283 billion to $1.287 billion for the full year 2023.

  • Operating income for Q3 is projected between $20 million and $21 million, and between $81 million to $85 million for the full year 2023

Anne Chapman

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