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​A Flare Across the Clouds : Cloudflare's Earnings Report​

I’m watching public company earnings to identify early trends in the software market to inform startups’ plans for 2023. Yesterday, Cloudflare announced earnings. I’m adding Cloudflare to the list of tracked companies for this series.

CloudFlare’s annual growth rates haven’t slowed in the 5 quarters, unlike Microsoft, Google, & Amazon’s growth rates.

Net-dollar retention did dip below the 130% annual target because of customers’ changing buying patterns, a message consistent with other clouds:

We still see a clear path to a dollar-based net retention over 130% as we ramp seat-based products like Zero Trust and storage-based products like R2,

But, the earnings call suggests enterprise customers’ buying habits remain healthy. The enterprise segment outgrew the company’s average growth rate by 8 percentage points.

Large customer revenue contribution increased again sequentially to 63% of revenue, up from 57% in the fourth quarter last year. For fiscal 2022, large customers represented 61% of total revenue compared to 54% of total revenue in 2021 and 46% in 2020…

Overall NDR fell, but enterprise spending remains steady.

Our large customer net expansion was flat quarter-to-quarter

All regions grew at the same rate last quarter implying no regional differences in buyer demand.

From a geographic perspective, the U.S. represented 53% of revenue and increased 44% year-over-year. EMEA represented 27% of revenue and increased 42% year-over-year. APAC represented 13% of revenue and increased 40% year-over-year. Turning to our customer metrics in the fourth quarter.

The surge in pipeline is notable given the uncertainty in the market but the close rates are low & sales cycles slow : another confirmatory data point for startups to plan cautiously in 2023.

Despite a notable improvement in our pipeline exiting 2022 as compared to with the first half of the year, we have assumed the increase in sales cycle, which we observed in the second half of last year continues in 2023 and have, therefore, incorporated close rates below recent historical lows.

Channel sales have become stronger. This is likely due to a move up-market where larger buyers seek professional services to deploy infrastructure. But it may also suggest that many resellers with large sales teams looking to sustain their transactional businesses are able to drive additional software bookings.

The channel accounted for about 13% of revenue this quarter, which is the highest it’s ever been.

Machine-learning companies are an important agent of growth & seem to be less loyal to a platform as they seek the most economical solution for their data storage & compute needs.

[AI companies] have a real use case for the cloud which is somewhat different than what we see from some other companies. It is, I would say, more forward leaning and that is that they are constantly looking for … wherever the cheapest GPUs are to process their data.

R2 has become the natural neutral place for these AI companies to store their training data in order to make sure it can be inexpensively and efficiently access from anywhere…But it’s a use case we didn’t anticipate. Today, our largest R2 customer is another AI company using us for exactly the purpose of being a neutral place to store their training data.

Cloudflare’s earnings report suggests smaller companies may not suffer the broader headwinds of the market. The company’s security portfolio which should prove more resilient to fluctuations in spend factors in significantly to the results’ hardiness.

As Google also reported, usage-based pricing models may weather downturns betterbecause the products they meter grow irrespective of headcount growth, a positive sign for infrastructure.

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