Cloudflare recently delivered first quarter results that beat expectations across the board. As a leading CDN and cybersecurity provider now powering over 25 million Internet properties, Cloudflare is emerging as a structural winner amid global instability.
I closely analyzed Cloudflare’s latest quarterly earnings release and call transcript as a long-time Cloudflare customer and social media marketing expert advising Fortune 500 brands on their digital presence. Here are the key investment takeaways from Cloudflare’s stellar Q1 performance:
Financial Results – Growth Accelerates Once More
Cloudflare’s impressive growth continued accelerating last quarter, evidencing the strength of its product portfolio and expanding customer relationships:
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Revenue: Total revenue grew 54% year-over-year to $212.2 million, exceeding the high-end of guidance. All geographies saw robust expansion, with EMEA delivering 57% growth as the fastest growing region.
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Customer Metrics: Paying customers grew 29% annually to 154,109 globally. Large customers spending over $100k annually expanded 63% to 1,537, with 121 net additions in Q1 alone driven by broad enterprise strength.
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Profitability: Despite heavy reinvestment, Cloudflare’s operating margins expanded substantially by 770 basis points. The company generated $4.9 million in quarterly operating income, reaching GAAP profitability for a third straight quarter.
The following chart summarizes Cloudflare’s exceptional growth across key financial and operating metrics over the past four quarters:
Figures in $ Millions Except Per Customer Metrics
(Source: Cloudflare Financials)
Cloudflare’s ability to drive such tremendous expansion through an uncertain macro environment highlights the mission-critical nature of its global network platform. As Matthew Prince suggested, the company provides “critical services to make sure the Internet continues to work” for a growing base of enterprises and organizations.
Fuelling Growth Engines
According to Prince, Cloudflare’s success stems from two key pillars – relentless innovation and customer trust. The company introduced several notable products last quarter while expanding global partnerships:
New Product Innovation
- Launched enhanced API protection suite to secure and accelerate soaring API traffic
- Announced Cloudflare Edge Functions, enabling developers to deploy serverless code globally across Cloudflare’s network
- Released Zero Trust SIM, bringing zero trust security to Internet-of-Things devices and cellular connections
Strategic Partnerships
- Acquired Area 1 Security, dramatically expanding its industry-leading Zero Trust platform
- Partnered with CrowdStrike and Ping Identity to provide enhanced endpoint and identity protection solutions for critical infrastructure organizations
Cloudflare is clearly prioritizing innovation by augmenting its core CDN and DDoS mitigation solutions with more advanced Zero Trust, serverless computing, IoT and API security capabilities. Simultaneously, new partnerships like Area 1 allow Cloudflare to rapidly address customer security needs across emerging threat vectors like phishing.
As the cyber threat landscape expands, I expect enterprises to increasingly consolidate behind Cloudflare’s tightly integrated network platform that protects across Layers 3, 4, and 7 globally.
Gaining Customer Wallet Share
Cloudflare’s broadening solutions portfolio and reputation for reliable security helped it gain greater customer wallet share last quarter. According to Prince:
New products and an increased interest in consolidating behind a single trusted vendor, for network services have been the key to our continued customer expansion.
Supporting this expansion was Cloudflare’s record dollar-based net retention rate which gauges total spending growth across the existing customer base. This key metric measuring land-and-expand momentum hit 127%, implying over a quarter of incremental sales to current subscribers. Rising retention rates suggest Cloudflare is having more success cross-selling additional services to customers over time.
Prince also cited notable examples where large enterprises ditched legacy cybersecurity appliances to standardize on Cloudflare due to benefits like:
- Consolidated Network Platform: Replaced multiple niche vendors, reducing vendors and simplifying operations
- Lower TCO: Bundled product suites eliminating hardware/software costs saving over 50% in some cases
- Integrated Architecture: Single-provider ease-of-use improving security efficacy across endpoints
- Enterprise Scale: Globally distributed network safely handling enormous traffic loads
Here is a sampling of such large customer wins:
| Customer | Industry | Products | Contract Value |
|---|---|---|---|
| Australian Software Co | Technology | Cloudflare Workers | $145,000/year |
| Midwest US State | Government | Zero Trust Network Access | $5.1M/3 years |
| Indian Media Platform | Media & Entertainment | Zero Trust Secure Web Gateway | $150,000 |
| Fortune 500 Bank | Financial Services | Consolidated Network Security | $1.5M/3 years |
In my experience, once Cloudflare gets its foot in the door, expanded adoption across other divisions or use cases follows quickly. Enterprises recognize the benefits of standardizing on Cloudflare’s unified control plane securing traffic globally across regions and vectors.
This land-and-expand flywheel effect is apparent in Cloudflare’s surging cohort of large customers. The company now has 1,537 customers spending over $100k annually, up 63% this past year.
Navigating the Storm
With recession fears mounting globally, I believe Cloudflare’s mission-critical security solutions and efficient operating model position it well to weather deteriorating business environments.
According to Prince, inflation-related demand cuts have not impacted Cloudflare thus far as the shift towards consolidated cloud security remains a high priority for CIOs worldwide. Regardless, he suggests Cloudflare provides an “extremely resilient” value proposition if macro headwinds accelerate:
"I can’t imagine a company that is better positioned for a situation like that than we are. We’re offering a service which is not a nice to have, but a must-have."
Unlike many cloud software vendors, Cloudflare’s services enable the core functioning of business-critical infrastructure. I‘ve consistently witnessed security and networking budgets sustained and even heightened during difficult operating environments as organizations minimize risks.
And with blended threat landscapes, the operational burdens of managing hardware appliances increase during times of budget scrutiny. Cloudflare’s SaaS delivery mechanism and bundled licensing tiers ease adoption by reducing OpEx strains linked to legacy network security tools.
Beyond defensive positioning, Cloudflare is proactively supporting customers navigate uncertainties in markets like Russia/Ukraine. Despite under 1% revenue exposure in the embattled region, Cloudflare took action during the quarter including:
- Terminating accounts tied to Russian sanctioned entities
- Offering free services to safeguard Ukrainian infrastructure
- Maintaining network availability for Russian citizens relying on apps like 1.1.1.1 to access accurate information
While apolitical, Cloudflare’s actions uphold its values around an open, accessible global Internet. And these small charitable steps engender tremendous customer goodwill and trust. Cloudflare’s role keeping Ukrainian websites operational amidst warfare powerfully demonstrates its network‘s reliability under fire.
Valuation Perspective
Despite considerable business momentum, Cloudflare trades at a reasonable 14x forward sales multiple after 50%+ growth each of the past 6 quarters. Investors can still obtain exposure to Cloudflare‘s disruptive network platform at a discount to slower-growing software peers.
Bullish signs like expanding margins, surging paying customers, and growing enterprise dependance indicate the tip of the iceberg in Cloudflare‘s potential. I continue projecting 30%+ revenue growth for years to come as the company increases penetration across the $100 billion network security market.
While risks exist around competition, execution, regulations and still-emerging profitability, Cloudflare‘s risk-reward appears skewed positively at current valuations.
Conclusion: Built to Weather Any Storm
Cloudflare continues executing at a tremendous pace, evidenced by 54% year-over-year revenue growth and nearly 800 basis points of margin expansion last quarter. More importantly, its underlying competitive moats appear strengthening.
In an uncertain world, organizations need Cloudflare‘s resilient, globally distributed network to ensure infrastructure reliability and mitigate intensifying cyber risks. Cloudflare‘s bundled SaaS solutions continue displacing clunky legacy appliances, saving security-conscious enterprises money while providing the vital protection they demand.
CEO Matthew Prince closed Cloudflare‘s earnings call suggesting "we are sowing the seeds to build what we intend to become…an iconic trusted technology company that will define the future of the Internet for decades to come."
While risks exist, Cloudflare exhibits the technical edge, customer mindshare, and visionary leadership of an enduring industry leader. The company remains well-positioned to navigate any storms ahead while constructing the corporate network of the future.
Disclosure: I am a Cloudflare shareholder. This article constitutes my own opinions and should not be considered investment advice.
