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Cloudflare (NET)

Participants
Jayson Noland Head IR
Matthew Prince Co-Founder & CEO
Thomas Seifert CFO
Phil Winslow Wells Fargo
Keith Weiss Morgan Stanley
Sterling Auty J.P. Morgan
Matt Hedberg RBC Capital Markets
Pat Walravens JMP Securities
Alex Henderson Needham
Joel Fishbein SunTrust
James Fish Piper Sandler
Amit Daryanani Evercore ISI
Call transcript
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Operator

Ladies and gentlemen, thank you for standing by, and welcome to Cloudflare Q4 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jayson Noland, Head of Investor Relations. Thank you. ahead. go Please

Jayson Noland

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

As share, we'll non margin, discussion, revenue, time future products. flow, reminder, cash GAAP non net launches are not net to large risks be expenses, uncertainty, comments a those and of outstanding, statements making from anticipated gross loss non dollar some the subject during and including non rate, anticipated other financial net loss our GAAP customers. paying forward performance, today's and and per GAAP GAAP limited based of company's operating beyond looking market performance, operating potential rather rate, and but operations, of performance, not The future are GAAP customers product non statements retention tax free control. to shares These guarantees which effective are

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

and Commission, press condition. with future today's in the impact Please as operating financial well risks in release. For and Exchange a as Securities uncertainties our of filings more see the our could complete results discussion earnings that

numbers other all talk noted, basis. on be revenue than an otherwise adjusted non-GAAP today will about Unless we

period prior reflected under and are financials discussed current ASCXXX. Our

to We reconciliation can You a and in website. be Relations earnings non-GAAP find historical GAAP referenced inform and XX. TMT financial on New technology The that would JNP And ago. the information periods, XX. for and Francisco also GAAP Technology conference X and measures to March financial a the our the like supplemental Francisco March reconciliation be non-GAAP Stanley, will in our Internet and conference we SunTrust York a City of you Conference in on moments may release on X San Investor found in San February Morgan participating on few in

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

Matthew Prince

all a public to quarterly of you, dialing Thank great the was in second you phone to for company. Cloudflare XXXX Cloudflare. year Jason. a as call thanks for And on earnings

at Our $XX year on QX revenue finished year. million growing XX%

for with out among profit over We posted a period continue gross larger customers nearly and $XXX,XXX to XX% QX see year. of XX% us and strong finished customers our per QX on year year. XXX and margin demand We larger gross was paying the

We platform. continue of of differentiated efficiency our of network consistent to one base gross view margin broad delivered the through strength services evident and as

which the generate XX% $XXX of For year year. represents year million, an of XXXX, full revenue we on increase

years has four XX%. our growth been last rate compound over revenue For comparison the annual

and we line flexible shifts We spends We've years. believe to us to services. over have on cloud IT to smart and our in from even product a revenue absolute to high our that software made the take continue as are investments network hardware share, strategically consistently rate grown the to number pleased scalable positioned premise top as has maintain revenue been able growth

increase and We sequentially, paying XX% customers, including year with year. of an both nearly free million finished on X.X total XX% and XXXX

use more finishing these of are customers our to literally be many asset than product our and have websites, the an secure, properties properties funnel. application top on the course us mobile include competitors and with We our none of don't API's performance. also by yet. grew able XX sales internet year These development our over the number Cloudflare They the million that using XX been They marketing, XXXX, are pay match. platform. services of reliable million of of and Well, to

We his his as in acquisition, and wants instrumental development rapid From a was believe of for to to thank mine few years. our I mentorship wanted the And our Christensen. over opportunity saddened passing weeks the of gone our earliest theory and to our ago, the Cloudflare hear success. to understand much days theories take guidance has of been him we Professor market, suggest disruptive have who this by I for how articulated friend. strategy and a you became anyone they Dilemma". pick seminal book, about Innovators to learn and us over from our reading lot years learned his innovation "The professor clays, clay up a ultimately Clay work. is a Clay can by a a in of lot copy to cycle efficient His of was customer

to wanted great a walk through last quarter. wins of from I customer the handful

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their and year protected based customers. introducing deal other infrastructure per very are transit worth scrubbing or $XXX,XXX Magic without legacy center signed a year hardware like latency, happy three solution. They

power signed deal the another call listening workers number of to million of allow opportunity there's a more they and We realizing our Workers Here's as per of our trend. to edge And onto we the deals, of percentage them is world, three saw online they large development for that year our services they computing almost quarter Cloudflare year, upon $X.X of maker edge relies Cloudflare particularly speed workers over flexibility platform. to of believe this with the a came to we of Throughout attracted one, and one this as a the applications daily workflows developers not a this new is an something the grow likely API differentiating in everyone largest factor are in this computing, couldn't their anywhere and a find workers. else. customer customer believe unique. onboard leading

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their across find moat attackers into First, the castle. way the

the Second, to virtual corporate it enabled hardware working fewer therefore mode. And be public to third, makes in increasingly a and impossible means these distributed moat new castle SAS can't hardware castles. are around on traditional people protected by and and cloud use shift build the to Mobile workforce and premise

gateway. suite built and around solve complementary equivalent Cloudflare for Cloudflare for the these fast day challenges, is Cloudflare the Ziff, XXandMe, legacy their from powered adopting modern hardware for already a based adoption providing Ericsson, We've access Cloudflare Davis granular products, modern access internal to control and with migrating Team team VPN, is and Cloudflare Cloudflare access two Cloudflare seen terrific away trust organizations VPN and application. a external and model. like zero access of

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hand I Thomas to to away. With wanted that, detail. our take financial results it in who will walk off more through Thomas, it

Thomas Seifert

represented perspective, XX% Total $XXX revenues over for fiscal again scale quarter, growth US the over growth customer accelerating enterprise up million. solid million, driven thanks XX% us. geographic joining were And for expanding compared first strong an in the year growth revenue of XX%. the of to the over was XX% prior with Matthew. for fiscal revenues for year $XX year fourth Total demonstrating performance XXXX you, at Cloudflare's everyone a year quarter XXXX to increased quarter XX% and base. year, by Thank year's momentum were revenue From strong to year and year.

year continue from our and representing Business plan outside significant year, perform see revenue. invest and of International Our operations with US in potential revenue the XX% to international XX% over increasing We to to global well total approximately footprint. continue the

added paying Turning customers paying at in and customers which we at increase over an XX% the total increase customers XXX,XXX We to our the number and total a three paying metrics, sequential during customers. quarter, the the the year. approximately year of and an X% year year represents of million XX,XXX added of to over total fourth exit over brings X.X to record key number quarter XXXX roughly

large large customers, over billings the month XXX customers than the with reflects period. QX quarter. the $XXX,XXX customer Our do XX% as and XX find net count large customers of over We customers more annualized the year over last total increased of XXX year in add which a to large in year

large QX large our cohort, of about Within end half at customer XXXX. the were customers existing

half expand large believe demonstrates this are ability of not combination customers. also other XXXX. and customers expansion the retain to enterprise throughout new but a land We and only While

customers reflects base points the of XX Dollar our and the an of retention from upgrade retention QX an ability of the excludes of basis to free existing period, Our net based to year in is net year. points which dollar measurement XXX over our that prior paid of customers quarter, retain year that subscription. XXX.X% and was last benefit increase and measures expand from increase basis links under churn net contraction,

a We market. addressable ample and and them continue to we opportunity expansion retention see solid growing customer have large give to improve

We a KPI. number for as from receive basis use regarding the you Billings our feedback of the of

more model important future. report billing contracts market, KPIs seeing it's do and longer we in the basis better revenue our business disclosed publicly Billings best for for and to XXXX, duration terms, we'll align metrics away moving with as peer business believe we our in we shifting be base as operational As we our revenue will beginning our to to move Therefore, continue base the align how from we're group, up and KPI believe QX financials scale. we the stipulate with will We KPI.

XXXX quarters for purposes. the report time based first our earnings eight historical call, revenue revenue will including KPIs on comparison QX We based of for

Fourth maintaining and efficiency strengths up gross XX.X% look to upside for we back down to XX% of sequentially model. of points our to invest year margin as long year. target business. basis points quarter XX was to the gross over margin XXX basis opportunities We're term gross continues Network our into use margin key be our XX% business

the representing an our well fourth operating and over to end year for expenses year with The year. to quarter and expenses. of sequentially increases quarter, expenses programs. due to Turning total as increase We for the $XX.X XX% operating the up on were employees. was increase headcount a XX% sequentially Total million and XX% million year increased in XXXX of as largely year. marketing headcount QX $XX.X Sales marketing were X% headcount

we investment from Sales As year. increased percentage sales QX capacity our to have XX% in go Marketing as and of and XX% last enterprise market. revenue to continue in a

XX% and year. we and QX representing X% as products $XX.X R&D for our expenses development to from and to in quarter, add sequentially additional year decrease a increase XX% revenue in of an to continue percentage as year platform. million the XX% last of Research over functionality

year. in to of our million both General increase to to a sequentially percentage for The expenses quarter, year. teams publicly other company. XX% $XX.X decrease traded is become representing as year in to related investments due expenses XX% increase G&A and the additional revenues G&A and administrative on were XX% and QX last of an the from

an are are on our annual model making. leverage scale R&D in We initial marketing sales we operating growth ultimately we in before longer and leverage showing to On the are leverage capitalize progress achieving seeing to as plan investments our making basis. on followed G&A we a by toward show operating basis, term in begin for and

$XX.X the leverage margin $X.XX. driven negative point XX.X% in improved efficiency loss network basis quarter Operating million, quarter million operating both A of improvement to the $XX.X was negative in was same G&A loss XXX net fourth operating XX.X% of per in last period an by share and the year. and Net R&D. compared in loss or

for $X.XX. negative Net effective per share XXXX Our was tax loss was million QX $XX.X X.X%. of for or rate net a fiscal loss

with was cash, revenue ended XX% cash quarter improving million fiscal in $XX Our was million XX% negative fourth last QX XXXX $XX.X effective negative marketable in or period a for tax flow cash and negative year. million of $XXX same free revenue, the from X.X%. rate or the We equivalents securities. of

encouraged the to are continued and see in variability in flow margin working in business. quarter, enterprise capital we growth While the our fluctuations ongoing cash by in to the due performance we expect

pleased are to we mentioned, Matthew team Cloudflare. welcome the As to

to We SX XXXX product fiscal with are built we technology, but available contribution a second year. the this isolation generally meaningful to a revenue browser see be half do using not planning in expect

guidance. moving to Now on

numbers are effects. intangible a amortization stock any As assets based associated of and except which for acquired compensation all revenue, excludes expenses, non-GAAP, reminder these tax

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

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

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

of We expect negative an X.X%. effective rate tax

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

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

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

X.X%. fiscal of We half leverage of operating in second expect an the XXXX. negative effective We anticipate tax rate

summary, an We a pleased our our years and customers, In success ahead. we and over look year we fiscal our employees, quarter, partners year. have to I achieved could building our to execution. in want the close public without quarter with forward company excellent strong the out thank are the strong whom investors, as with not first have to momentum and

With please up questions. questions. open hold for for like I'd Operator, to that, it

Operator

[Operator from Wells Winslow line comes the from Instruction] question Fargo. Your of Phil first

open. is line Your

Phil Winslow

Hey, thanks guys for my taking question.

a year. customers. a had very this added guys on those number to I focus close great the Obviously significant just You in wanted quarter. large

I at obviously reporting that about you've investment then marketing. point think and the any sales talked number increased you've biggest been it seeing we're in and

us I give thinking you the to So in What you terms color of XXXX? just go to you're how do in that wonder time could there terms of that if just market. trends you think in some making and ramp are on productivity the particularly investments about

Matthew Prince

Thanks, Phil.

to that in ways. growth I the So are think we large in able customers achieve X

of ads The first and the that's about that we of is obviously new new customers have. large signing half logos

The with that's that count. other half customers at landing that crossover large then the customers half good that into expanding is the new over and customer we are and other time, of

address Field real out Sales support that. a team to help As larger we we're building customers,

really what continues us think board productivity to confidence That's I marketing been behind from ads to us per and and seeing very what our that that I've really that Mark given behind customer But and Anderson we've to which team the the happy who rate see large be efforts investing in with the salespeople joined in strong. the continue are at productivity continues sales are helpful to ramping and seen. the salespeople invest our been and give that confidence very has that. coaching

Phil Winslow

out you? I'm a also workers if any have we've thanks. that have for surprised use of there sort one that cases [indiscernible] Great, follow-up. is There's jumped Obviously, while. curious

Matthew Prince

public a increased one public had fast doing to last where quarter. were sophisticated spend, had I QX We platform. concerned actually really year. that What just increasing multicloud They spend innovative, adopt think they their setup. the one were times was workers locked very building their significantly from original our cloud adopted a was it about actually into software there's being in provider. of last Cloudflare company growing They multiple specifically

effectively very driving multicloud they used usage example So on between different multiple earlier a providers. cloud mentioned there. I in steer workers traffic order to really lot another is how of

that was in functionality. lot things the think was one terms we're the extending I that about Cloudflare I of of use cases that surprised workers. seeing A of are

us workers most We're So the the programmable the world, have workers in the can order constantly of that using the the in get most balancer platform. you our to think load world. programmable firewall of customers our as in most out ways impressed making by are

Phil Winslow

Great, thanks, guys.

Operator

line Your from Keith Stanley. Morgan next Weiss of question from comes the

Your line is open.

Keith Weiss

taking well. guys question. the nice you Thank Very quarter Excellent. for as

sort seeing up. to to rates addition you good Is large per magic growth as rates rate start the of quarter, new products, increase? start have early particularly Or net up be of for on In the positive increase worker and real a to really we're and these expansion customers, to like too that customer to this net numbers that tick it benefit to saw tick cause the expansion customer to revenue of transit yet? and starting those growth

Matthew Prince

Access really drive think been turning larger research our how customer we've products similar and is seeing very workers that in and total and larger even revenue we're up by is like and in quickly. count Magic as We're rates seeing adoption into transit I the deals. going development investment impressed

something I that Cloudflare our us built. be good this that will in about that is we flexible confidence will R&D. that is forward. think invest will gives to see - What's that powerful that evidence core network continue going asset Again, that continue to extremely continue we've

using, you're as add to without other can ability of to one benefits the that network, the can products deliver we to network is customers of say customer changing a we product, you product. get that's part the new using So our

financial the allows achieved minimis already those we've of margins our that same relatively the facilities because network that building Adding out. built because out borne to the running to we've cost de hardware on from provide gross in us we've services. again, a that products it's cost a perspective, Then the the same additional already also becomes achieve

the products So by the encouraged the of adoption to growth really that seeing. is definitely contributing we're we're and that new

Keith Weiss

noise could do we've a I in terms what of out in people edge and the heard a of of there lot sneak If they lot talking can one about follow up, sort the environment out talk what the to reality, of there like in competitive how at what actually looks programmability and Cloudflare you us you're in edge. about Can that environment? seeing wins

Matthew Prince

I cycle interest a be and development What the lot will be is think by natural there's for of done mean that different. different at people will where edge.

Some we the that of that's That's sort people close different into which mean it you Others very, world. of network the how we around compute people going is to be near hardware think of the where that's really than way it. very it, of deployed. think think are can that

I think developers quarter that differentiated with applications is previously we're building possible who using signing us our are every that edge. up what's weren't single

I see think us. across that really we deploying do that developers real in are production code

looking but space more think now, that the if network, in time, others you're we're deals. saying from programable a competition those see we'll I right for we're winning over edge

Keith Weiss

Excellent. Thank guys. you very much,

Operator

comes Your of the question next Sterling line JP Morgan. from Auty from

open. line Your is

Sterling Auty

spend with you? I popular some Matt, I what $XXX,XXX quarter look answers your of put plus Thanks. you taking characterize on when the the customers finer they're touched is you you solutions Hi, to guys. they that of a hoping at how of most the added would point that mix level get have this to in think was but

Matthew Prince

X we fall I see for that of the mix same across kind us. think categories of that products

then across how that fairly fairly ballpark. of consistent half of to reliability. and a of be in difference performance time what held of are are our security, About terms can are and mix - in rough attributed customers the and XX%, customer XX%. the of We Those spend see a it's going the consistent our is in products then other customers of the that's those significant customer. security terms So so X half held also split of it of don't sort about - to terms product size and shifts size over

Access seeing to are firewall customers buy have come we something that products in to very as So like that product, us like well. interested are our

our are performance about that the and those reliability. XX% XX% extensions. from So and But products comes security natural comes it's from other

Sterling Auty

And That your taking then you in makes prepared sense. one share. mentioned remarks follow-up,

is you're like example, unique when a coming versus in think the vendors of that you that little DDoS where kind moving curious that vendor versus of of much how situation against of taking terms way trend service? wins the compute share you're necessarily don't a can way now compete great. an changing customers in for to architecture. are So the That'd conceptualize if you a computing bit I'm more but that internet their of that say would really against terms in it's you that a you edge specifically, taking I vendor mentioned, not share, versus I know is be force. there's network

Matthew Prince

and taking ourselves direction. is into and legacy is majority one I our replacement we market That hardware software or share the that's from that one network. hear doing just from the that or scalable that definitely that's But see from the particularly doing other just a just balancing is think also cloud doing thing direction at are direction the whether well, the - of customers other SD-WAN. that solutions we from DDoS you majority. load looking the doing or vendors that based But

provides from a that functionalities, those of of unified what functionality customers network that want All is that they all we're together. hearing

sort trend from today. of think beats shifting out coming the customers is network really looking over but and we're we solutions of away We time, cloud integrated hardware that are any the there. see what at of that from point both software the So of majority

for going continue that's to think I foreseeable the future. that

Sterling Auty

it. Got Thank you.

Operator

from Jeffries. line from of Thill Brent Your a question next comes

Your line is open.

Unidentified Analyst

days I Gateway case use so Brent. to This smart extension and Gateway is natural know routing but Howard you my load a players' and taking bit. core exciting the congratulations add in to really Matthew, us. for the jump like of seemed confirms and of to to but the launch a SD-WAN it's potential on [indiscernible]. for It strengths strong a early network want finish our and [ph] the Cloudflare the cloud that is to tunnels. can't of gun year Thanks the question. mentioned and little on I I balancing virtual just help belief still

as So of the we Thanks. on the potential roadmap? where what's network, does market on look forward the your possible to Cloudflare fall SD-WAN disruption

Matthew Prince

joining us. thanks Howard, for

from that built than more think built that I point more cheaper network move on any be to able any else. to more earth on the data is efficiently, faster, point and purpose other reliably, meaning securely Earth to we've anyone

and what at natural still malware. sure access getting so how we're So I out I in secure get can one extend think help care moving move great care provide delivering, sure their them. work how we've you're and look to extension trying internet, extend I more opportunity to about anytime places be that my the it a applications built As think employees Cloudflare of We do that think you'd can all we solve data, of network. to teams that with to provided to that we of they experience a employees need characteristics that That's for they're those natural done is way? about from while can are a you're are you the that what what that us core problems people protected make potential our as is anytime or data my a for I that make probably the

us investments see space. make in that will I think continue you to

that us built. wins expand see real going eventually a the I to start from you're from and we've Gateway that of then continue opportunity browser Again, early network to from leverage think a for isolation, and there's acquisition and to was SX to the and already Access, seen lot

Unidentified Analyst

Thanks, Matthew. Okay.

For large just follow just tractions. these enterprise to on Thomas, I up the had strong

they are seems ASPs unchanged? going or it Also are throughout the to relatively there's they much average enterprise, investments the growing of how be year. continued guidance Our related - implies to that

out is much direct sales how enterprises? the that's related a to at of So continued further larger investments force targeted building

Thomas Seifert

headcount, in guided to sales occur to across multitude also year-over-year. infrastructure Europe in only requires not offices investments XX% in We That a The and Asia. grow of we opening new factors. XX%

along our goes up with running involvement also market. a going are that We campaign brand

the set So a headcount is it's but investment that second across quarter. factors, of in and broader only not first especially in

think I increasing in number expanding is customers of not strategy a path our to It's ASP customers. the rather our prices. result pricing existing across stable and performance with or larger of

Unidentified Analyst

thank you. Okay,

Operator

from the RBC Matt next markets. line comes of from capital Hedberg Your question

Your open. is line

Matt Hedberg

guys, is I'm Well for you wanted taking I I think can as other the different there Hey, us Matthew, you there? strategy half. about ask far of Just with driving some adoption teams? question. my Obviously, Access wondering the with protecting we've though, the quarter. called teams more thanks had strategy but for done curious. it help well. sort go-to-market this success to thus

Matthew Prince

reports products has Cloudflare's Cloudflare Teams We've to isn't Cloudflare same Teams been For would the that For existing reports our next salesforce that But the exact to person products traditional or buyer. sits been take has that the who built surprised person we've to have products what buyer or to sell them. able very pleasantly the It be been usually, market. to we to, our always sold to, the

so adjacency able there's so, far. navigate a we've to And that real been

that For a like and corollary strategy have offering, new seeing Cloudflare's let have where load natural case, that pleasant balancing, And the is first customers firewall, the our out has to is about heard go Teams who as then know that also to been services, to has been and we're add-ons. and been people and to that that well. existing Teams we're come I we're to that's For able extend Cloudflare management, with often worked this and core Cloudflare a Cloudflare surprise service bot What's that. So, the them think us,

we've happy nicely existing be sales think the and so product, our existing able And it far has dovetails the that resources with the way But to sell we've able we're do been have I been together that that that. enablement all team with the been to products sure to so, making very they selling.

Matt Hedberg

very spikes the guys? of That's even just general drive Historically more philosophical a you number the these that year U.S. a of events XXXX, the significantly large great. this or And how of traffic do large help maybe question. speaking, patterns, traffic election, like higher there's Olympics, potential streaming to the wars. then

Matthew Prince

two especially around into the - the they're around divide a under actually, question that that is think let question me so halves. I - So, -

let's So, let's look Olympics, Presidential U.S. at the versus look Election. the at

is what CDN think accurate I us. the fairly number against of to but have companies, revenue. that would a comp sometimes of are it's OTT And I really to big of a been us comp as a for they natural know companies companies, driver not as think So, those try looking space it I and to

stayed tends We that and differentiated just see that on value to isn't bets, in eating is from delivering. terms junk the to it have decay of trying of if very sort level, because some that term. at revenue we over the overtime, of - that it And like explicitly food, long moving bid revenue any away you're you're

And But has a security in to we away differentiated giant other far other traditionally built because been stayed the highly wanted we of deliver we bread network lot a services. have streaming from so, able caching what to and places. be butter products of and

like won't materially something another case. that or our think direction what I the So, in happens Olympics change one

built vast On democracy the no functioning And the XXXX. face something presidential and XXXX because Commission involved Federal are front at with into can security, defending election, might Election majority so we're that Cloudflare to important and candidates Cloudflare we think offer and the and with In thing. States. campaigns going other of We services work are stable similar in important campaigns. a without couldn't the a we that have center hand, has elections in to incredibly customers, risks. campaigns become that's cost an that with were think U.S. cyber trend that unfortunately, elections Cloudflare seeing we've We United worked that deeply digital the so we that's actually

really that in And we're I was less drive of it's into so, can has we're it and effects, saw can work. we that. XXXX we we charged think real that and That we interest, think announced, what that our XXXX, help - where But hopeful we make as interest. cyber corporate enterprise and an spillover that to an it it's is security election proud do protect duty than with to that season

Matt Hedberg

Super helpful. Thanks.

Operator

comes Walravens Securities. JPM from the Pat line question of next from Your

Your line is open.

Pat Walravens

about guys. the the about Great, for operating mean, you. thank I we leverage for and guided XX how you play do should year? QX think think QX, will the you. one for how out? coming Thomas, And QX, full throughout congratulations, How we year, but

Thomas Seifert

Yes.

said through the operating us the has in in the we with As infrastructure, we It leverage us we to guidance XX% do line sure that beginning to making the part the programs, going campaigns at to that second achieve the to show have is in of that I branding before, top half. carry think XX% the year place gave.

for EPS we guided quarter. first So, the

will we be that third, grow. KPI see you as and order I second QX, put think then we we half, the getting in into and that infrastructure fourth flattish in the the up will leverage place on have quarter eat it to in

in flattish and second up half. the So, half the picking in first then

Pat Walravens

little net rate had uptick do? then expansion should And this great. You the how dollar Okay, should think about quarter. what we

Thomas Seifert

not going to we provide this said Well, are number. guidance on we

a it of said also a covers broad funnel because DNR, it's really However, that lagging customers. us, we very for indicator

customers, customer large about our effort. across this is footprint, which now at paying expanding XX,XXX require will So,

see up. a customer slowly product the hopefully is time. and and steadily, to going lagging it is acquisition but to tick indicator number new the up So, the It's of take on going performance we

Pat Walravens

helpful. you. Thank very That's

Operator

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

is open. line Your

Alex Henderson

Great, thanks.

large of process was degree bit as I in through result to takes of you a that a are accounts, superlative of a little and of sell is of dev off as takes the the to able move penetration about what process, selling something. amount hoping and how and the extent, your much specifically, going you're you portion it it and something, community cut the selling benefit as to coding So, you ops sell could friction you talk time to the world, the from get that effort into

a C level direct put a a on would were original go little bit without have development, companies large SISO architecture before as point, where with easy that to probability getting that history to motion have went don't you compare of that, result capabilities a that for and about that of after starting enterprises would done the deal Can without download, frictionless you higher that in closure and it? to faster, don't terms success to you the having trial benefit. you and frictionless the have If your that talk of that your of

Matthew Prince

Alex. Yes,

seen on self-service to that to is, have large in up And aspect And is large made market, signup such is. and is tagline business. large for sales is and But as and we've customers, our can and a painless sales go among trending we That continued growth without quarter. it the be quick, having appreciate even cycle or less I differentiated which understand say it started important average really our of even would phone blog as that's and surprise think go past Cloudflare what see And “take than again, our not to that us nature didn't to faster something flows is. is pace, try proving process takes. encourage that even see easy, anyone. we to actually little five like, it that and try website very think it just our positive that's us. an that able has even was sure minutes and that's the you towards that talk I something try a there's infrastructure.” What that value able think I taken sales literally see internally, we us underappreciated making “Well, as cycle to the the I'd used back has for a as much while anyone than don't it's easy how process that's been to hobby how the to team little incredibly about people a bit, be customers, than sign happening. stems a a that what how why for through where what do probably is suite. bit supercharge and And pace. it just could a nothing onboard slower to personal I talked And it having to towards we easy, that did our better just be goes?” it somebody work your what's we've signup make you our the our entire up, product And think for that a really in how

Alex Henderson

The converse with of relationships that your tight coding community. is

ops, factor really we to power started the as for even penetration towards much an world, that shift about into. competitors? also impediment, thing moat a get companies thinking the ops difficult a and net a able from administration, is of is for that and IT, How coding to As security be away other

Matthew Prince

we quantify it. it's out customers for look to across base, for a are us. say that and when that we that But developers me hard customer of will I are Yes, fans our have lot rooting

the he company. wearing shirts. don't and likely that how any in of shirts or it They several suite. to was have Cloudflare on but - so, RFP committee I meeting And weren't to a handicap other talking the who traditional it's people CIO on win at came FORTUNE And that developers, said site who to process, people want them who wearing addition SISO is your sales they competitors. contract, are to people of a of had one just to of kind is They senior I a XX our that are large prospect. included the formal

pay the so, high-end built low-end kind of not think our business, as in to community dividends, well. but developer continues I customer business the large that also in goodwill we've And that it's only and in our

Alex Henderson

Super, thank you.

Operator

Fishbein comes Our the next from of Joel from line SunTrust. question

is line Your open.

Joel Fishbein

sales the a Can the please congrats how quantify cost are this into Good XQ you a quarter? free-to-try just marketing line? one help for Thomas, year. again, can of us have you in allocated afternoon. us the And great for remind and that And you. I on

Thomas Seifert

can. Yes, I

the to that angles is two two questions. accounting question. there's One think I

angle The second performance more is question. a

address me let So, both.

customer, no the So, because account there and cost customer - if revenue. of to from our that perspective, a paying in customers revenue then one not cost free revenue the for of with an marketing, accounting moves is supporting cost cost in sales those if and customer the we becomes free of and customers of

or into of still XX% reallocate our well free above well GAAP for of a costs our well well to revenue, look However, the over fiscal would QX, above gross And XX% XX%. customers whether XX% over cost it on non-GAAP be year basis. on you would in a margin the if of at 'XX, be we were whole all it

standard, accounting off the the differentiate stack to of in servers run this architecture. We So, all products performance a that on homogeneous is not all result us truly an all hardware, a result. talked It's allows about shelf software one locations.

cost manage to And we what breadth provide. across us from or of manage global is we and we can capacity, with provide and can that, than heterogeneous products network demand, one our that need the more that solution single truly network network, or differentiates point providers providers

struggle with some where for architecture and understand competitors account free our we we of So, a is our network performance, not of but the technical differentiation, it's can customers. that cost truly

Joel Fishbein

Thank can metrics you. in just there follow-up one to Is free the to paid? relative you that of of conversion Can and any terms quick - you provide conversion.

Thomas Seifert

and rain check quarters take you report we on a on and when will We how this? of definition KPIs and historical going readdress the change, we revenue-based about to then numbers. We provide eight - will how discussion QX readdress about is talk with

discussion. that up pick to point right the be would that think I

Joel Fishbein

Sounds great. Thank you so much.

Matthew Prince

Thanks, Joel.

Operator

the next question from Sandler. comes Your Piper [Operator line Instructions] of James from Fish

open. Your line is

James Fish

dollar-based to on question renewal the we're a talking about renewal just to is business back I to Congrats higher asked rates a that the want continues because enterprise little reason a starts become probably really inflect go that's to Is been the Actually, larger the XXX%? guys. rate bit. here above that just and Hey, part, are quarter.

Matthew Prince

you piece can key you missed mind the the kind just Would I of question quickly? James, So - of repeating that. just

James Fish

Yes.

space, where increase. mix XXX%? large towards guys renewal north dollar-base time, usually rates because You about talking Is across having more an enterprise slowly the part that of moving just a rates over of dollar-based are we're were renewal

Matthew Prince

coverage, all, to we're happy so you of along. that I thanks. us - first think so, Yes, Thanks have and following for adding

we always that have one And I as think business Cloudflare's continuous funnel. so, seen

see signs a as able across as hope we to free that And entire we someone customer business to so, drive who the up a be customer space.

a the large our so And retention think we not on broken just We it it internally. that report net appropriate to or as of out it's otherwise. result, way dollar-based think customers we've

we rates likely absolute say churn to churn And or so, business rates, other of because it is things that correct such you're them. go to diverse going higher among a customers, happen small see have because they're of more entire businesses to with out mix

so, I customers. a to definitely net improvement of we and dollar-based comes that shift we are as some from that more anticipate more And the think mix retention large - in shift we

customers, it even comes are, low those how whoever I ability to also customers But at are we and products think that to to to keep and have end, improve, our they able from sell maintain. increased them more

dollar-based and being able expand as help net mix we But think - to - as are seeing customers we're do in see well that to with that customers I And time, we over are So, shift customers. the evidence said, them Thomas then our one we lagging as place time. this a to as is retention going indicator. the landing larger over that's

James Fish

I'm missed in of jumping of new paying quantify enterprise quarter new prior Got terms the kind calls. way the Thanks details. this it And was all it brand were ads between Thomas, it. - script And the much for then any how one you. versus platform customers? to XX for in if those Cloudflare Is the there net to in I sorry what if was before.

Thomas Seifert

gave no color we some problem. in but Yes, the script,

year more and are annualized new customers billings. of over is of logos the that started half of bit the year, ads of $XXX,XXX half expanded, about for a over the that granular. But - north - it So, quarter, it's the we half

James Fish

again. Thank Congrats you.

Matthew Prince

we please? time. more Operator, we're just almost at one from Can take questions analyst,

Operator

Absolutely.

question from Evercore Daryanani ISI. Your comes Amit final from

is line open. Your

Amit Daryanani

place? does maybe SX for what line I'm came opportunity brought something perhaps there, at least. glad guess went revenue snuck was time? you you over And or that it first about what and deal to the I missing piece was hoping market acquisition, thanks. I with as talk about doubt Cloudflare revenues to or a I is that Teams Perfect, in the any just there. start on maybe initially this the led I you bring does TAM the with, For to under touch with; could it the as in

Matthew Prince

Yes.

SX team have They a nine pre-revenue. to employees, so full-time it's add. So was big not about

the slow think as around customers have browser And tended we that at were technologies looking interesting a different companies there about them, are I things had partner seemed we with were a would was there, was lot to handful technologies, very that whether we that them potentially was something are There an to seemed ourselves. around companies we maybe and them, there largely to acquire - potential interest always down. that isolation to looked break very Teams, there it opportunity we of and heard technology For at internet, of not the of when that - of and we have build for out talking that that Cloudflare-y. all was or customers And the space. tended existing Cloudflare it us

our that built because a way initially for could that of them, there to to been they've I spent think I able And better had And And with that be corporate it we skeptical Washington, our like so, felt the it fit at them. wrong this.” development something to know all.” That's no. would team so, down a was time in very internet was with extension just an with “No, a And Kirkland, must the - to was the first I if about whether getting when that they up be partner remember interesting. And introduced and wrote I was not super acquire with play they back, of said, determination and they way of them. “There and much doing I And time team, the looked “Just I the we It's at demo.” made be said, slowing said, them, something over demo. SX great we us

on think M&A our bias from still I away it. is

will capability entire of and more technology seen acquisitions suffer we think I edge systems internally a continue do as teams But their a that think we of like the working or more SX hard have find And their and to see make into try lot of our lines, technology sense. - I cobble cloud public to product do benefits margins that of them we products companies developed to together one really space acquisitions the have in other result. integrate network. being when differentiated is look, have this. to is the we've

to I wouldn't anticipate there's it's that I it. second We TAM, network. the Again, has across no And year. have half deployed the gets I'm new on deployed. too this hardware significant our early but sort probably terms specific of number existing revenue from SX something be just that anticipate to of It put any a or but little a in of revenue in bullish, think year, this we'll

Amit Daryanani

when you XX% just a I look at least customer And think to $XXX,XXX That's 'XX. dollar-based growth, [indiscernible] there in Thomas, 'XX material I I I net your way, what ratio you really about are follow revenue embedding if here growth for over Fair way or seem doesn't in a Because guide in guess in retention count about terms billing? at helpful. of is expect improve could of with like up, the think enough. customers calendar revenue growth either customer to edition it

Thomas Seifert

it that the up the to it the that is already only impression vectors would will get thing the be from continues indicator. always 'XX. that have year, of up guidance. take will not business, course the over we come It momentum a our tick discussed explode. we the the slowly development away of follow across DNR lagging said to will The or Well, really right overtime, you It ticks but if for

business. our core We will see expansion in

new We we significantly will expand our customer customers, existing will footprint. and grow

going That We in also to opening outside new offices invest is with North us, of France help Asia. heavily specifically. and Europe to continue America and Tokyo

we will be across So, have. the broad of funnel and businesses it consistent customers

Matthew Prince

Thanks, Amit.

Operator

to this the call back I'll time. over There are no questions presenters. the turn at further

Matthew Prince

at the selling everyone, forward products you, to work done we in next all really joining have there quarter. hard all and to Thank We're talking QX, proud great you team and for them, look the and what building of in call. is out

Operator

joining Thank you, everyone, for today. concludes This conference today's call.

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