When you put up 54% year-over-year revenue growth in a (debatably) recessionary economy, market analysts are bound to listen intently to what you have to say.
The transcript from Cloudflare‘s recent second-quarter earnings call gives a pretty clear sense that Co-Founder and CEO Matthew Prince is well worth the listen and that he and his team are:
- Having fun in uncertain times (what else would you expect from a company that has several services whose names start with the word “Magic…”);
- Kicking butt and taking names;
- Being brutally honest when it comes to describing what happened in the most recent quarter and what the future looks like.
When you consider him relative to some earnings call speakers, where you feel like the main goal is to disclose the bare minimum, Prince is a breath of fresh air:
“At the same time, I learned what a margin call was and, simply embarrassingly, literally had to borrow money from my mom to pay my rent. That’s when I got an extremely personal lesson on the importance of free cash flow, and it’s why I’m ensuring right now in this uncertain time that Cloudflare is prioritizing being free cash flow positive.”
Matthew Prince discussing the early days of Cloudflare on the company’s recent earnings call
Have you ever heard a CEO say something like that on an earnings call? Prince’s LinkedIn profile shows he’s got experience as a journalist, lawyer/law professor, and ski instructor, so he seems to be comfortable in a variety of settings.
While Acceleration Economy has previously delivered minimal coverage of Cloudflare, the company is a prime example of those we cover as part of Cloud Wars Horizon: fast-growing, innovative, and customer-centric. So this is our first pass at sharing insights into the company, which offers a content delivery network, application firewalls, Zero Trust services, and much more.
With that background, I’m highlighting what I consider to be Prince’s most insightful (and colorful) quotes relating to the macroeconomy, customer buying behavior, managing in tough times, and more:
Setting a High Bar
“Our dollar-based net retention remained strong at 126%, down 1% over last quarter. While there may be some noise in this number from quarter to quarter, we won’t be satisfied until it’s above 130% and best of breed among the companies we consider peers.”
Current Financial Priorities
“What I’m watching closely is our free cash flow margin. It showed significant improvement quarter over quarter, and we continue to forecast that it will be positive in the second half of the year. On our last earnings call, I got a lot of raised eyebrows from many of you when I said Q1 of 2022 would prove to be the hardest quarter for our industry since Q1 of 2020. It didn’t make me particularly popular around the CEO club, where the first rule of recession is not to talk about recession. However, transparency has always been one of Cloudflare’s core values, so I’m going to call it like I see it.”
Customer Buying and Macro Factors
“In Q1, our pipeline generation slowed, sales cycles extended, and customers took longer to pay their bills. We watched those metrics closely throughout Q2 and saw them all at least stabilized. They’re not where we throw up hooray yet, but the metrics are trending in the right direction.
“Given our visibility early into the economic downturn, we rapidly adjusted our go-to-market message. We shifted our messaging to focus on ROI, helping customers save money, and consolidating spend from multiple point solution vendors behind Cloudflare’s broad platform.”
“Messages about saving money and using fewer vendors didn’t particularly resonate a year ago, but they do today. Having a broad platform to solve so many customers’ problems while at the same time saving money is a superpower in times like these.”
Matthew Prince
Today vs. One Year Ago
“As I look at our wins in the first half of the year, I believe it’s fair to say that it’s harder today than it was a year ago to sign up a new customer, but it’s gotten easier to talk to our broad set of existing customers about doing more with us. And customers are leaning forward to hear about how we can save them money, reduce their IT complexity, all while increasing their security, performance, and reliability. I’m not a member of the National Board of Economic Advisers, so I’m not the person to say whether we’re in a recession or not, how bad it may be, or how quickly we may rebound. But I am the CEO of Cloudflare.
“And while our business remains strong, I believe this is a time for prudence and caution. The metaphor I’ve been using with our team is to talk about the different conditions you may face driving a car on the road. A year ago, we could see for miles and the road was clear, so it made sense to open up the throttle. Today, we find ourselves in what my grandmother used to call tule fog.”
Recession or No Recession?
“The road ahead is less certain, so it makes sense to keep our hands on the wheel, our eyes on the road, and let up a bit on the accelerator. Whether we’re in one or not, recessions suck. They hurt everyone. No company is recession-proof.
“But some are more recession-resilient than others. Some things I know are universally true. No matter how bad this recession may get, companies aren’t going to abandon the Internet. They’re not going to give up on the cloud and go back to on-premise boxes and packaged software.
“Hackers aren’t going to stop hacking, so cybersecurity will remain a must-have, not a nice to have. And we’re already seeing evidence of all of this, with our gross renewal rate in every region for the first half of the year hitting all-time highs since we went public.”
Managing – and Getting Better – In Tough Times
“Recessions have always been hard, but they’re also formative moments to focus and ultimately improve…Tough times force you to re-evaluate everything you’ve done and become better.
“It’s why the best companies come out of tough times even stronger than they went in. So, maybe it’s a bit masochistic but I’m looking forward to having Cloudflare get even better during some of the tough times for the global economy that seem likely ahead.”
Zero Trust and Channel Partners
“We believe channel sales are especially important in the Zero Trust space. And in Q2, we successfully signed up half of Zscaler’s top channel partners as new Cloudflare partners. The State of Arizona expanded their use of our platform, signing a $770,000 one-year expansion deal. Arizona has been a longtime Cloudflare customer and continues to expand the use of our platform as we launch new products.
“I still remember their first PO with us from several years back, which specified the address and method of shipping of our products as if we were a hardware vendor. We shipped them T-shirts, not hardware, and they have continued to grow with us ever since.”
Full Transparency
“We had a bug in our billing system related to how we expire unused credits for pay-as-you-go customers. Before we went public for good accounting reasons, we put in place a policy where we expired unused credits after three years. That system triggered for the first time earlier this year. Unfortunately, a bug in it caused our systems to report a spike in total paying customers last quarter.
“The revenue involved is not material, less than $160,000, and it caused us to over-report the number of paying customers last quarter. The correct numbers are 148,184 in Q1 and 151,803 in Q2. Our pay-as-you-go business is only 11% of our revenue today, but we believe it’s important to continue to invest in it in order to serve the entire market and protect our play. I’m embarrassed by the mistake, and we’ve fixed the bug and put in place checks designed to catch any similar errors in the future.
“I don’t like it when we make mistakes. But I do think it’s important we be transparent and own them when we do, which is why I insisted on addressing this today.”
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