Cloudflare (NET) – Introduction & Earnings Review – February 10, 2024

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Cloudflare (NET) – Introduction & Earnings Review – February 10, 2024

In essence, Cloudflare makes the internet faster and more secure. They have a massive global Content Delivery Network (CDN) to move traffic closer to the end user, which cuts web latency. They actively assist clients in optimizing traffic speed and consistency as well. It also has a suite of security tools (firmly within network security like Zscaler) to protect customer websites from Distributed Denial of Service (DDoS) attacks, which aim to inundate and overwhelm networks with traffic. They don’t sell physical firewall hardware, but instead they offer a virtual, cloud-native “Magic Firewall” to supplant these hardware needs. It offers web application firewalls too for application-level security, while Magic Firewall is for network-level security.

A Few Key Product Categories to Know Aside from DDoS and its Next-Gen Firewall Products:

Workers Platform is its serverless (so fully managed by Cloudflare) product suite for developers to build, maintain, secure and deploy applications. This allows for caching of content and applications across Cloudflare’s global network for faster delivery. Its newer Workers AI product allows developers to access models and infuse GenAI tools like sentiment analysis into the apps and networks run on Cloudflare. Workers AI works seamlessly with its “Vectorize,” (and other vector databases). Vector refers to a style of data querying that allows for visualization of data patterns. Another key example of Cloudflare’s GenAI tools is its R2 product. This allows cloud workloads and data to be freely moved among public clouds with no tax. This use case is popular for GenAI model building and implementation as models are voracious users of data and GenAI work often spans multiple clouds.

Cloudflare Access is its Zero Trust Network Access (ZTNA) program. Zero trust means that a user or device must be constantly verified (or never trusted). Cloudflare does this in a seamless manner to minimize user friction. It considers device type, location, usage patterns (or signatures) and other contextual clues to better authorize permission requests and to know when to block those requests or request more information. It then deploys a minimal privilege approach to ensure only the necessary permissions are granted to workers. Nothing more, nothing less. This uplifts environment security vs. legacy identifiers to ensure an adversary can’t breach the most vulnerable part of a tech stack and move freely throughout it thereafter.

Secure Access Service Edge (SASE) platform is a term for how Cloudflare conjoins web performance and security use cases (such as ZTNA). This drives vendor consolidation, controls costs and augments performance. Cloudflare One is its overarching platform and product bundle subscription combining its performance and security use cases.


Cloudflare beat revenue estimates by 2.7% and beat its guidance by 2.9%. Its 40.9% 3-year revenue compounded annual growth rate (CAGR) compares to 43.2% as of last quarter & 45.7% 2 quarters ago. 

  • This was also its 2nd best quarter of $100,000 annual recurring revenue (ARR) customer additions in nearly 2 years.
  • Remaining performance obligations (RPO) (a forward-looking demand indicator) rose by 37% Y/Y to $1.25 billion.

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

“We continue to believe that our DBNRR is stabilizing near these levels.” – CFO Thomas Seifert


  • Beat EBIT estimates & beat its same EBIT guidance by 40%.
  • Beat $0.12 earnings per share (EPS) estimates & beat its same guidance by $0.03.
  • Beat free cash flow (FCF) estimates by 32.3%.
  • Note that its target gross profit margin (GPM) is 75%-77%. It’s already above that.

Bps = basis point; 1 bps = 0.01%.

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Balance Sheet

  • $1.7 billion in cash & equivalents.
  • $1.3 billion in senior notes.
  • Share count rose by 2.5% Y/Y.

Annual Guidance & Valuation

Cloudflare’s annual revenue guidance met expectations. Its EBIT guidance was 1.3% ahead of expectations and its EPS guidance was $0.025 ahead of $0.56 expectations. Like Meta, Google, Amazon and many others have done, Cloudflare is extending the useful life of some infrastructure from 4 years to 5 years. That means less depreciation and so more operating income. This added $20 million to the 2024 EBIT and net income guides. Without this help, EBIT would have been about 10% light and EPS would have been $0.03 light. There is nothing shady about this accounting maneuver. It’s entirely legitimate and entirely by the book. Still, this is important context to consider. It also guided to $156 million in 2024 FCF, which is 5% light. It expects to hire at a gradual pace in 2024.

“Mixed macroeconomic data points serve as a reminder that we are operating in a business environment that is showing signs of improvement, but continues to be challenging to predict. As a result, we remain prudent in our outlook for 2024.” – CFO Thomas Seifert

Cloudflare trades for 192x its 2024 EBIT guidance and 187x 2024 EPS guidance. EBIT is set to grow by 28% Y/Y and EPS is set to grow by 19.4% Y/Y. This is among the most expensive names in the market; it has been for years.

Call & Release Highlights

The Platform Play:

Cloudflare’s ability to combine app performance and security, network hygiene and Zero Trust all into one interface and platform is resonating. Like other software platform plays, offering more to clients means vendor consolidation, cost savings and better product efficacy. That’s the formula Cloudflare is delivering, and it’s working. It signed a record number of new $500,000+ and $1,000,000+ customers as well as its largest new and renewal deals ever. Average contract value (ACV) booked rose above 40% Y/Y for the first time since 2021. Pipeline closure rates, average deal size and productivity all improved sequentially. All of this is even as “macro remains choppy.” Cloudflare One, defined above, was relatedly called out by CFO Thomas Seifert as a key driver of the strong quarter. Revenue from its largest cohort of clients rose from 63% of total to 66% of total Y/Y.

  • Cloudflare’s vendor consolidation was cited as the reason for winning a 3-year, $33 million contract win with the U.S. Department of Commerce. 
  • It won a $7 million contract due to its simplified delivery of zero trust, easier integrations and a stronger strategic vision than competitors. This client also enjoyed a sharp boost to web performance. 
  • It won a large contract to displace a hyperscaler that couldn’t protect the client from DDoS attacks.
  • It won a UK government agency despite being a late entrant into the bidding process due to tech superiority.


Two quarters ago, CEO Matthew Prince made some harsh remarks about his sales team’s underperformance. He spoke about Cloudflare not doing enough in the world of performance management and how sales team momentum needed to greatly improve. Two quarters later, that improvement has already come. Pipeline generated from its new sales cohort is over 100% larger than the year ago hires. Account engagement also rose 350% Y/Y as the new sales team made its mark. Truly an impressive and rapid turnaround here after the Q2 2023 drama.

Cloudflare announced a change in its go-to-market team. Over the last 15 months, Marc Broditisky has been running these efforts. Per CEO Matt Prince, he did a fantastic job. He “operationalized the landing of large clients” and revamped performance management with the “discipline needed to have a world-class sales department.” This quarter, Cloudflare announced that Mark Anderson will take over Boroditsky’s responsibilities as the firm’s new President of Revenue. Anderson comes over from Alteryx (which was taken private) where he was the firm’s CEO. Prince told us that Cloudflare has wanted him in this role for years, but the timing was never right until now. He’s been a Cloudflare board member for a while, which means this should be a very seamless transition. Boroditsky will stay with Cloudflare as an advisor for a few months to avoid any operational disruption.

“I wanted to take this time to reaffirm that Michelle (COO) and I (Matt Prince) aren’t going anywhere or changing our roles in any way. I wake up every morning more excited about the opportunities now to fulfill our mission of helping build a better internet. If you study iconic technology companies, they are often mission-driven, founder-led, and include a dynamic, experienced and evolving leadership team to surround the founders.” – CEO Matt Prince


Cloudflare wanted to have inference tuned Graphics Processing Units (GPUs) in 100 cities by this quarter. It reached 120 cities and reiterated plans to have these GPUs in its entire global network by the end of this year. That is a prerequisite for running GenAI use cases like Workers AI through Net’s platform. 6 years ago, Cloudflare began leaving empty slots in its servers around the world. It did this in anticipation of Worker AI GPU demand. This means it can simply plug Worker AI GPUs into its existing server infrastructure. So? GenAI proliferation will not entail hefty boosts to capital expenditures. Impressive foresight.

Since the firm’s Workers AI launched in September, usage requests are up 900%. Notably, 33% of all Workers AI requests are from clients new to the Workers Platform. This tells leadership that GenAI will not only create new demand streams, but accelerate existing ones too. While Workers AI brings a bevy of model building and usage options, Vectorize allows these models to be visually enriched with a client’s custom first party data to drive more relevant use cases. Worker AI is driving strong, complementary demand for Vectorize thus far.

Take – Nothing but Net

Cloudflare is a fantastic company and this quarter made that clear once more. Its platform is clearly clicking with large clients and its margin path is impressive to say the least. The report wasn’t incredible or jaw-dropping, but it was rock-solid across the board. I continue to find the firm too pricey to personally own despite the compelling value proposition. Regardless, congratulations shareholders on nearly 200% returns from the lows less than a year ago. Take a bow.

Disclaimer: Third party content is provided for informational purposes only and should not be construed as an offer to sell or a solicitation of an offer to buy or sell any security. Third party content is not intended to serve as a recommendation to buy or sell any security and is not intended to serve as investment advice. Third party content creators are not affiliated with BBAE Holdings LLC, (“BBAE”) Redbridge Securities LLC (“Redbridge Securities”) or BBAE Advisors LLC (“BBAE Advisors”). All investments involve risk, including the possibility of total loss of principal. For additional important information, please click here.

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