Cloudflare Q3 2024: Building Momentum for Long-Term Success
Main takes from NET's Conference Call and Earnings report, and thoughts about the business short-term and long-term.
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Hello, reader!
Cloudflare released its Q3 2024 earnings yesterday, and while it may have missed analysts' expectations, the real story lies in the details. I listened to their conference call and noted down some key takeaways.
I believe the firm may be approaching an inflection point in its sales strategy, with the CEO hinting at a potential acceleration in growth for FY2025.
Let’s dive in!
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Conference Call Notes
Q3 2024 Financial Results
Revenue growing 28% YoY to $430. 🟡
Operating profit at $63.5 million, +50% YoY, with a margin of 14.8% driven by efficient cost management, and gross margins of 78.8%. 🟢
OCF of $104.7M, +54% YoY (24% of revenue) and FCF at $45.3M, +29.5% YoY, despite heavy CapEx related investments in AI infrastructure. 🟢
Enterprise Sales and Customer Expansion 🟢
Record Q in large customer, adding 219 customers that generate >$100K annually, bringing its total to 3,265 large customers, +28%YoY.
Serving 35% of the Fortune 500, showcasing its expansion into major enterprise accounts and revenue, with 67% coming from large customers.
Lengthening Sales Cycles and Deal Delays 🟠
Some large enterprise deals faced delays, particularly in the US, where the sales organization has been undergoing restructuring. Some deals slipped to Q4.
Delays partly due to scrutiny of IT spending by customers seeking high ROI and value-driven solutions, which adds complexity to deal cycles.
Potential for Revenue Recognition Lag 👀
Subscription-based revenue model is slow to reflect improvements in sales capacity and productivity, so sales efforts today will likely appear in future Qs.
This lag could delay visible revenue acceleration, even as underlying sales productivity improves.
But Hinting at Inflection point and growth reacceleration in FY2025 🟢
CEO Matthew Prince noted they are hitting a critical inflection point in rebuilding its sales organization.
Shift sales focus to higher-capacity, enterprise-focused talent. Prince expects sales capacity and productivity to accelerate, setting up for reacceleration in 2025.
"The third quarter felt like we hit the inflection point in our rebuild of our go-to-market team...Starting in 2025, we expect the number of ramped reps will begin to increase meaningfully again, with a shift toward more real sluggers who can bring in more enterprise deals.” —CEO on hitting inflection point in sales
Increased Demand for Workers AI and Data Solutions 🟢
Good traction for its Workers AI platform, winning multimillion-dollar deals from customers looking to run AI inference workloads.
Their platform offers advantages in cost and utilization, enabling distributed AI workloads with lower overhead. R2 and other data storage services have also become popular for large data sets and AI applications.
They are becoming an attractive alternative to traditional hyperscalers.
"One of the leading AI companies signed a $7 million one-year contract with us...They were able to get significantly better performance and a higher ROI than they were seeing with hyperscale public clouds. This is a story that is accelerating, and we’re deploying more and stronger GPUs to support demand in 2025."
Pipeline and Leadership Talent 👀
Releasing new products, recent launch of tools like HyperDrive and Durable Objects, which improve scalability for applications like gaming.
Keep adding top talent, recent key hires like Chief Product Officer CJ Desai, ex-President and Chief Operating Officer at ServiceNow.
"In 15 years at Cloudflare, there's always something to improve: sales, stability, or shipping...With our team and new leaders like CJ Desai and Mark Anderson, I believe we're on track to make Cloudflare the next iconic technology company." —CEO on On long-term Vision and leadership
Moderating Dollar-Based Net Retention (ST 🟠 → LT 🟢)
DBNR decreased to 110%, due to strategic shift to “pool of funds” deals where large customers commit broadly to Cloudflare’s platform.
"Pool of funds deals, now nearly 10% of new ACV, reflect our largest customers making a broad commitment to Cloudflare’s platform. This structure may impact short-term revenue recognition, but it’s a win for long-term customer retention and expansion.”— CEO on pool of funds deals
Rising Capital Expenditures in AI Infrastructure (ST 🟠 → LT 🟢)
Heavy investment in high-end GPUs for Workers AI led to increased CapEx, projected to reach 10-12% of revenue this year.
Needed to expand AI capabilities but could compress margins in the short term.
Competitive and Market Challenges 🟠
Moving deeper into enterprise solutions, facing more competition from other providers particularly in zero trust (ZS PANW?) and data storage (Hyperscalers?).
Also, US public sector showed slower growth this year, but NET expects its investments and deep relationships to drive future growth.
🧠 Final Take
Financials look solid again, especially the bottom line, but beneath that, it’s setting up for faster growth. GPU and network investments for AI are pushing CapEx to 10-12% of revenue—an essential move for their infrastructure and competitive edge, despite short-term cash flow pressure.
With new sales leadership, they added a record of 219 large customers (+28% YoY) and are shifting to “pool of funds” deals, committing clients more deeply to its platform. Workers AI is gaining momentum too, winning multimillion-dollar deals for AI workloads, positioning NET as a serious alternative to hyperscalers.
While extended sales cycles and deferred revenue from these deals may slow short-term growth, gains with enterprise clients and AI traction point to long-term potential.
A potential headwind is the intensifying competition, especially in zero trust and data storage. As NET deepens its focus on AI and enterprise security, it’ll need to maintain tech innovation and push forward with the shift in their go-to-market strategy to stay ahead.
To me, these results glimpse again at a company on the cusp of something big, driven by strategic shifts in enterprise sales, AI growth, and a revamped go-to-market approach. For those looking for a growth story with exceptional management and long-term vision, Cloudflare’s technological edge and strategy keep pointing at a promising future.
I hope you enjoyed this take on NET!
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