Cloudflare Q1 2025 Earnings Call Transcript

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Operator

Good afternoon. My name is Aaron, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Cloudflare Q1 twenty twenty five Earnings Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question and answer session.

Operator

If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question at any time, it's just that star followed by number one again. We do ask that you please limit yourself to an initial question and then a single follow-up when you're given the opportunity to speak. Thank you. With that, I'm pleased to turn the call over to Phil Winslow, VP of Strategic Finance, Treasury and Investor Relations.

Operator

Phil, please begin.

Phil Winslow
Phil Winslow
Vice President of Strategic Finance, Treasury, & Investor Relations at Cloudflare

Thank you for joining us today to discuss Cloudflare's financial results for the first quarter of twenty twenty five. With me on the call, we have Matthew Prince, Co Founder and CEO and Thomas Seifert, CFO. Michelle Zatlin, Co Founder and President, is traveling internationally and will not be available on today's call. By now, everyone should have access to our earnings announcement. This announcement as well as our supplemental financial information may be found on our Investor Relations website.

Phil Winslow
Phil Winslow
Vice President of Strategic Finance, Treasury, & Investor Relations at Cloudflare

As a reminder, we will be making forward looking statements during today's discussion, including, but not limited to, our customers, vendors and partners, operations and future financial performance, our anticipated product launches and the timing and market potential of those products, our anticipated future financial and operating performance and our expectations regarding future macroeconomic conditions. These statements and other comments are not guarantees of future performance and are subject to risks and uncertainty, much of which is beyond our control. Our actual results may differ significantly from those projected or suggested in any of our forward looking statements. These forward looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call.

Phil Winslow
Phil Winslow
Vice President of Strategic Finance, Treasury, & Investor Relations at Cloudflare

For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings with the SEC as well as in today's earnings press release. Unless otherwise noted, all numbers we talk about today, other than revenue, will be on an adjusted non GAAP basis. You may find a reconciliation of GAAP to non GAAP financial measures that are included in our earnings release on our Investor Relations website. For historical periods, a GAAP to non GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago. We would also like to inform you that we will be participating in JPMorgan's fifty third Annual Global Technology, Media and Communications Conference on Tuesday, May 13.

Phil Winslow
Phil Winslow
Vice President of Strategic Finance, Treasury, & Investor Relations at Cloudflare

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

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Thank you, Phil. We had a strong start to 2025. We achieved revenue of $479,100,000 up 27% year over year. We closed the quarter with 3,527 customers paying us more than $100,000 a 23% increase year over year. Revenue contribution from these large customers grew 32% year over year, and they now contribute 69% of revenue, up from 67% of revenue in the first quarter last year.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

We saw particular strength with our largest customers, those that spend over 1,000,000 and $5,000,000 with Cloudflare per year. Within both of these cohorts, we added a record number of customers, increasing 4854% year over year respectively, which shows the strong return on investment from our go to market improvements and large enterprise sales. Our dollar based net retention was 111%, which is flat quarter to quarter. Our churn rates improved in the quarter. We are seeing stabilization in our customers' businesses and reduced pricing pressure from competition.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Our gross margin was 77.1%, again, above our long term target of 75% to 77%. We delivered operating profit of $56,000,000 representing an operating margin of 11.7%, and we generated strong free cash flow of $52,900,000 during the quarter. As we've talked about before, we have a unique view of the global economy based on the volume and diversity of data that flows through Cloudflare's network. In the past, that's given us an ability to make calls on the macro environment that turned out to be prescient. Given the nature of the uncertainty this time, we have less of a unique view into what lies ahead.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

But even without our privileged view, it's clear to everyone, the world is a more volatile place today than it was even a quarter ago. I'm incredibly proud of how our team has navigated this volatility. That starts on the cost side. We've been able to manage the continued expansion of our network without a significant change to our CapEx plan. We continue to invest behind actual demand to not get too far over our skis and have robust and diversified supply chains to mitigate tariff and trade risks.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

This is unique compared with some of our on prem hardware competition where we're seeing the last potential customer holdouts begin to migrate away from them because of the uncertainty tariffs will pose if your solution is a box that has to be shipped. On the revenue side, our investment in our go to market team remains early, but it's already paying off. This quarter, we achieved a number of milestones. We landed the largest contract in Cloudflare's history, a milestone deal of more than a hundred million dollars driven by our workers developer platform. We closed the longest duration contract in Cloudflare's history for Zero Trust.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

We delivered another double digit year over year improvement in sales productivity. We saw quarter over quarter improvement in our sales cycles even as we closed larger deals with more sophisticated buyers, and our new pipeline attainment was ahead of our forecast. What you see in these results is evidence of what we've been building toward, a company committed to disciplined execution regardless of external factors, a company becoming more mission critical to our customers each day, and a company with growing strategic importance at the center of the Internet. The short term may continue to be volatile in terms of external influences, but the long term remains as full of opportunities for Cloudflare as ever. So we're gonna keep a firm grip on the levers of our business, stay prudent with how we forecast, and invest in what we know works, an incredible go to market team, world class engineering, and innovative products that redefine what's possible for our customers and reinvent the future of the Internet.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

That's the playbook for winning that has worked for us before, and we're confident it is the winning strategy regardless of the external environment. And that seems like a good segue to discuss some of our wins in the quarter. A leading technology company signed a five year one hundred and thirty million dollar pool of funds contract primarily for our workers developer platform. This marks the largest deal in Cloudflare's history. This existing customer significantly expanded their relationship with Cloudflare.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

They chose workers, durable objects, containers, and our real time products. The customer was well down the line with a traditional hyperscaler but made the decision to switch to Cloudflare when they saw our better performance, lower development costs, and more modern platform. In the words of this customer, quote, the scale and performance of Cloudflare's network and its proximity to our user base was the most powerful driver to doing more with Cloudflare. Being close to users improves every element of their experience on our platform, end of quote. That's something the legacy model of the hyperscalers just can't match.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

And with the confidence of deals like this, our team is actively humming several more hundred million dollar plus deals. A large technology company expanded their relationship with Cloudflare, signing a two year nine point four million dollar contract, which includes a $2,000,000 workers upsell along with Zero Trust and application services. Cloudflare Zero Trust products were significantly more performance than a first generation competitor due to our network's expansive global presence, including our distributed international FedRAMP points of presence. Cloudflare is displacing three vendors with this contract, showcasing the strong value proposition of our platform and significant ROI we provide our customers. An international critical infrastructure provider signed a seven year twelve point seven million dollar contract, marking our longest duration contract in Cloudflare's history.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

This customer is going all in on Cloudflare's SASE portfolio with access, gateway, DLP, magic WAN, and magic firewall along with application services. The strength and breadth of Cloudflare's holistic platform for both application services and SASE security controls allowed for seamless product integration and was a key differentiator from first generation Zero Trust competitors. In the words of this customer, Cloudflare has by far the broadest and most programmable cloud security and connectivity platform on the market. A global 2,000 international business services company expanded their relationship with Cloudflare, signing a five and a half year six point four million dollar contract for our full zero trust portfolio. With Cloudflare's unified platform, this customer will displace three vendors as they look to simplify operations, reduce latency, and improve the security gap they have with their incumbent multi vendor architecture.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

A large US government entity signed a two year six point two million dollar contract for Zero Trust. This customer evaluated several vendors to comply with new federal Zero Trust requirements, and Cloudflare ultimately stood out as the vendor of choice due to our world class security products and the breadth of our network. This was a partner led deal and a great example of the progress we continue to make with our partner first motion. A government agency in Asia Pacific signed a three year four point eight million dollar contract for Magic Transit and application services. This government entity was looking to modernize its security posture with a cloud first best in class solution for both layer three DDoS protection and layer seven application security.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

They view Cloudflare as a key enabler to their digital transformation and have been blown away by the visibility and intelligence they have at the network layer with Cloudflare. A Fortune 500 technology company expanded their relationship with Cloudflare, signing a three year nine point three million dollar contract for application services. This customer is migrating traffic from a hyperscaler to Cloudflare due to our ability to offer more robust security solutions and greater automation. With this customer also seeing the benefits of our platform, we're currently in discussions on a number of additional opportunities. These q one wins not only serve as a great springboard for the rest of 2025, but are also reminders that while the world may be uncertain, what's absolutely certain is that innovation wins, and no company out innovates Cloudflare.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

We invest early and are able to develop quickly with nimble teams because of the power and flexibility of our platform. Two products are just over a year old and have seen remarkable growth. The number of Cloudflare Workers AI inference request powered by our network are up nearly 4000% year over year. The number of requests running through our AI gateway are up more than 1200% year over year. We continue to invest in the future, building the first, fastest, and most powerful model context protocol or MCP server.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

This technology is key to enabling AI agents. I'm proud that great companies like Asana, Atlassian, Block, PayPal, Sentry, Stripe, and many more are building the interface for AI agents to work with their own platforms on top of Cloudflare workers. These companies are choosing Cloudflare because we have a rich developer platform, but also because we combine it with an understanding of Internet performance and security. The security challenges of an agentic Internet are not trivial, but the best companies know that Cloudflare will be a thoughtful partner in addressing them as we build the future together. A great enduring story is made up of more than one act.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

We're not bolting AI security through haphazard acquisitions, but instead building the unified platform that supports the future. That shows in the size of the deals we're closing, the length of those deals, and the caliber of the logos of customers that are betting on Cloudflare. The opportunity ahead of us is as massive as ever. We have the scale, the technology, and the team to capture it. The volatility in the world doesn't appear to be going away anytime soon, but we will continue to focus on our customers and execute on our strategy just as we did this quarter.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

With that, I'll turn it over to Thomas. Thomas, take it away.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

Thank you, Matthew, and thank you to everyone for joining us. We are pleased with our operational and financial performance during the first quarter as we effectively executed against a highly volatile external business and geopolitical backdrop to deliver Cloudflare's highest year over year growth in net new ACV in three years. As Matthew mentioned, strength in our business this quarter was driven by large $1,000,000 plus customers, including our first contract of more than $100,000,000 Longer term commitments from our customers including the longest duration deal in Cloudflare's history, ongoing momentum with our workers developer platform and continued high prioritization of security by our customers. We also delivered another double digit year over year increase in sales productivity, saw an improvement in sales cycles and exceeded our expectations for new pipeline attainment. Turning to revenue.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

Total revenue for the first quarter increased 27% year over year to $479,100,000 From a geographic perspective, The U. S. Represented 49% of revenue and increased 20% year over year. EMEA represented 28% of revenue and increased 27% year over year. APAC represented 15% of revenue and increased 54% year over year.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

We were pleased to see continued robust growth in APAC as key go to market initiatives in the region continue to produce strong results. Turning to our customer metrics. In the first quarter, we had approximately 251,000 paying customers representing an addition of over 13,000 paying customers sequentially and an increase of 27% year over year. We ended the quarter with 3,527 large customers representing an increase of 23% year over year and revenue contribution from large customers increased to 69% of revenue during the quarter, up from 67% in the first quarter last year. We again saw particular strength in our largest customer cohorts, adding a record number of customers year over year spending both over $1,000,000 and over $5,000,000 with Cloudflare, continuing our momentum in the enterprise segment.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

Our dollar based net retention was 111% during the first quarter and consistent sequentially. These results reinforce our belief that DNR is stabilizing at these levels despite continued near term headwinds from increased traction with pool of fund contracts, which can impact the shape of revenue recognition. Moving to gross margin. First quarter gross margin was 77.1%, representing a decrease of 50 basis points sequentially and the decrease of two forty basis points year over year. Recall that the first quarter of twenty twenty five marks the first anniversary of the extension of the estimated useful life of our network equipment from four to five years, which reduced depreciation for assets and service as of 12/31/2023 by $6,200,000 or 1.6% of revenue for the first quarter of twenty twenty four.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

During the first quarter paid Versa three customer traffic increased significantly as compared with the year ago quarter resulting in a higher allocation of expenses to cost of goods sold from sales and marketing similar to the fourth quarter of twenty twenty four. The underlying economics of our network driven by its inherent scalability and efficiency remained unchanged. Network CapEx represented 17% of revenue in the first quarter. As a reminder, there can be some variability in this metric quarter to quarter and we continue to expect network CapEx to be 12% to 13% of revenue for full year 2025. Turning to operating expenses.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

First quarter operating expenses as a percentage of revenue decreased by 3% year over year to 60%. Our total number of employees increased 19% year over year bringing our total headcount to 4,400 at the end of the quarter. Sales and marketing expenses were $183,400,000 for the quarter. Sales and marketing as a percentage of revenue decreased to 38% from 41% in the same quarter last year. Research and development expenses were $76,800,000 in the quarter.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

R and D as a percentage of revenue remained consistent at 16% compared to the same quarter last year. General and administrative expenses were $53,000,000 for the quarter. G and A as a percentage of revenue remained consistent at 11% compared to the same quarter last year. Operating income was $56,000,000 an increase of 32 percent year over year compared to $42,400,000 in the same period last year. First quarter operating margin was 11.7%, an increase of 50 basis points year over year.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

These results highlight our continued focus on becoming more efficient and more productive given that operational excellence is a long term competitive advantage. Turning to net income and the balance sheet. Our net income in the quarter was $58,400,000 or diluted net income per share of $0.16 Variability in foreign exchange rates during the quarter resulted in unrealized losses of $2,700,000 generated from the remeasurement of certain monetary assets and liabilities denominated in foreign currencies. These unrealized losses primarily related to the remeasurement of our international operating lease liabilities are recognized in other income and expense and had a negative impact of $01 to diluted net income per share in the first quarter. We ended the first quarter with $1,900,000,000 in cash, cash equivalents and available for sale securities.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

Maintaining our strong commitment to being fiscally responsible and acting as good stewards of investors' capital, we elected a cash settlement of the capped calls associated with our retired 2025 convertible note. Upon this election during the first quarter, these capped calls no longer met the criteria of equity classification and were reclassified from additional paid in capital to a derivative asset, which is included in prepaid expenses and other current assets on the balance sheet. The derivative asset is recognized at its fair value of $308,300,000 which is expected to settle in cash on May 14. Free cash flow was $52,900,000 in the quarter or 11% of revenue compared to $35,600,000 or 9% of revenue in the same period last year. We are comfortable with consensus free cash flow estimates for the full year 2025, but would expect the weighing of full year free cash flow generation to be two thirds in the second half of the year due to the timing of working capital flows and capital spending.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

Remaining Performance Obligations or RPO came in at $1,864,000,000 representing an increase of 11% sequentially and 39 year over year. Current RPO was 66% of total RPO, increasing 29% year over year. Moving to guidance for the second quarter and full year 2025. As a management team, we've always taken a disciplined data driven approach to scaling Cloudflare. As we ended 2025, the data gave us confidence to continue to invest to reaccelerate growth.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

Our first quarter results underscore that this formula is working despite the high volatile external business environment. We're encouraged by our momentum to start the year and remain confident that our strategy will drive continued innovation and accelerating growth. However, we are cognizant of the broader global business environment in which we are operating and therefore have taken a prudent approach to our outlook for the remainder of the year. For the second quarter, we expect revenue in the range of 500,000,000 to $5.00 $1,000,000 representing an increase of 25% year over year. We expect operating income in the range of 62,500,000.0 to $63,500,000 We expect an effective tax rate of 20%.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

We expect diluted net income per share of $0.18 assuming approximately $364,000,000 shares outstanding. For the full year 2025, we expect revenue in the range of $2,090,000,000 to $2,094,000,000 representing an increase of 25 year over year. We expect operating income for the full year in the range of $272,000,000 to $276,000,000 and we expect an effective tax rate of 20%. We expect diluted net income per share over that period to be in the range of $0.79 to $0.80 assuming approximately $364,000,000 shares outstanding. In closing, we continue to focus on creating significant shareholder value with our ongoing commitment to disciplined execution, durable growth and operational efficiency.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

I'd like to thank our employees for their dedication to our mission as well as our customers for trusting us to help modernize, accelerate and secure their businesses during these volatile times. With that, I'd like to open it for questions. Operator, please poll for questions.

Operator

Thank to an initial question and then a single follow-up question in order for us to get to as many questions as we can today. Our first question is from the line of Matt Hedberg with RBC Capital Markets. Your line is live.

Matthew Hedberg
Matthew Hedberg
Managing Director, Software Research at RBC Capital Markets

Great. Thanks for taking my questions, guys. Congrats on the quarter, obviously, an uneven macro environment. Maybe to start with you, Matthew. You guys sit in front of really 20% of the Internet.

Matthew Hedberg
Matthew Hedberg
Managing Director, Software Research at RBC Capital Markets

It's incredible global visibility. And you've often talked about your crystal ball. Could could you comment on on trends you're seeing through early May? Has there been any changes in traffic with all the tariff rhetoric?

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Yeah. We haven't seen, anything. And know I know some other people, commented that they they have. But if we look back, you know, one, three, six months, there there hasn't been a a change to what we see, in terms of HTTP requests, in terms of overall volume. And that that's true both in The US, and around the world.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Internet traffic has has held, pretty pretty steady. I think part of that might be that, you know, less of our business is is sort of a pure media bit delivery business. You know, the the the majority of the, you know, requests that are going through us are to APIs and and other things. It's not, you know, as much video streaming and and, raw raw bits. And so it may be that we're just, we don't see that as as directly as as some other other people.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

We think those bits are obviously way more valuable than sort of the, you know, raw, streaming video bits, and so we we focus on that. I would say that there is, you know, one area which we're watching, pretty carefully that that involves involves AI, and media companies, actually. And that is that the if if you look over time, the the the the Internet itself is shifting from what has been a very much a search driven Internet to what is increasingly an AI driven Internet. So if you look at just traffic from Google, ten years ago, for every two pages Google crawled, they sent you one visitor. Six months ago, that was up to six to one.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

The crawl rate hadn't changed, but what's changed is, now 75% of queries to Google, Google answers on Google without sending you back to the original, source. But even in those last six months, the the rate has has increased even further where now it's up to 15 to one fifteen, crawls for every every one visitor. And if you look at OpenAI, which is 251, Anthropic, is 6,000 to one, there's it's putting a lot of pressure on, the media companies that are there that are making money through, you know, either either subscriptions or or ads on on their pages. And I think while we have not historically, had media as a a a big segment, a lot of them are coming to us because, they they see us as as actually being able to help better control how AI companies are are taking their information. And and I think that's that that that's something that's an interesting trend to watch and an area that our team is is really focused on.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

But the general trends across the Internet are traffic has remained the same, and and we haven't seen anything that has has caused us to believe that tariffs or or anything else are changing Internet traffic patterns.

Matthew Hedberg
Matthew Hedberg
Managing Director, Software Research at RBC Capital Markets

It's really good to hear. Then maybe just a quick one, Thomas. The revenue beat was great to see. Margins were more or less in line with expectations. How do you and you talked about CapEx spending sort of within the range that you talked about.

Matthew Hedberg
Matthew Hedberg
Managing Director, Software Research at RBC Capital Markets

Are you how are you thinking about margins this year? Are you pre spending for some demand that you're seeing? Just any color on that. We're getting a bit of inbounds on sort of the margin performance this quarter.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

Yeah. And as we've reiterated, you know, multiple times, you know, our North Star over a rolling average of quarters is the 40% rule. And if you look at revenue upside and margin upside and opportunity, there is still more margin opportunities than there is revenue opportunity. So we will continue to reinvest in the business if we didn't think there's opportunity to invest in the data points us that way. We've done that in the first quarter, and especially investing in our go to market activities, and we are seeing good returns.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

So the data makes us confident, to continue that. But the guidance will be moving forward as it has always been, the 40% rule. So there's some more opportunity to invest, but we will make sure that we keep the balance, in in mind.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Got it. Thanks a lot guys.

Operator

Thank you for your questions. Our next question is from the line of Joel Fishbein with Truist Securities. Your line is live.

Joel Fishbein
Joel Fishbein
Managing Director at Truist Securities

Thanks for taking the question and congrats on the excellent execution. I know you commented little bit on this in the prepared remarks, but I'd love to get a little deeper on how sales productivity and sales capacity is tracking, especially as it relates to the enterprise segment? And do you still expect the capacity of ramp reps to accelerate in 2Q and again in the second half? Thanks.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Yes. Thanks, Joel. We've been really happy with improvements in sales productivity across the team. I think Mark Anderson is doing just an excellent job, really, you know, building us into yeah. I think we've always been a world class engineering org.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

I think we've we've, we've, for a long time, been a world class product org. We're we're building a world class go to market, organization, and we're seeing that show up in continued quarter over quarter improvement in sales productivity. In terms of capacity, that that you know, we we we we know that that's gonna increase because that you hire someone and they work you know, they ramp over time. So we do see that that is going to continue to increase over time. We're hiring, you know, dramatically across across that or getting incredible candidates, to to join us.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

And I think the word is out that if you, you know, want to be at the next world class, sales organization, Cloudflare is the place place to go. And that's that's showing up in the results and that's showing up in just the caliber and quality of the people that we're getting on board. I think that will, very much turn into sales going forward.

Joel Fishbein
Joel Fishbein
Managing Director at Truist Securities

Thank you.

Operator

Thanks for your question. Our next question is from the line of Mark Murphy with JPMorgan. Your line is live.

Mark Murphy
Mark Murphy
Executive Director at JPMorgan Chase

Thank you a lot. My congrats. Matthew, could you comment on this extreme volume of DDoS attacks that you saw during Q1? We were looking at your stats. It looked like they were up more than 300% year over year.

Mark Murphy
Mark Murphy
Executive Director at JPMorgan Chase

And the complexity looked like it went off the charts as well with the hyper volumetric attacks. So I think our understanding is you do not actually charge based on the size of the attack. But I am wondering if you could see a tailwind from that, kind of environment and how you feel about defending against that kind of an attack relative to your competitors.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Yeah, Mark. I you know, I I think, first of all, the the attacks are, I mean, just getting to a what what a few years ago would

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

have been an

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

inconceivable, size where there are very, very few networks, that can absorb, the size and scale of of the attacks that that are there. What I think is striking is that at Cloudflare, it's it's not an all hands on deck situation. It's kind of it's kind of like our system just automatically absorbs these and does it without without anyone having having to respond. And that goes back to, you know, something that we we we have talked about a lot over the years. And I think that it's it isn't always appreciated how how important and powerful it is.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Most of our competitors run separate scrubbing networks that are that are completely distinct from from the rest of of of their networks. And that inherently means that they have, some limited capacity that is there. Clever has always done it differently. It took more engineering work, but it's showing in our ability to defend against the tax that that others just can't. And that is that we made it so that every single server that makes up our network is capable of running every single one of the different functions that we have, including, you know, the text.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

And this is getting in the weeds a little bit, but when you buy wholesale bandwidth, you pay for the greater of in versus out. So you're sending traffic out, and you're sending 10 times as much traffic out. You pay for that that out rather than rather than the in. And we're a caching proxy, so, we are our out is always significantly higher than our than our in. And what that means is that when a DDoS attack comes, it pushes the in up.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

But even at these hyperscale attacks, the in is not ever getting higher than the out. What that means is that, from just a cost perspective, because, again, we've designed a much better and more efficient, system, it means that we can defend against these attacks without having to pass any costs onto our customers because we don't we don't suffer any additional costs to be able to defend these these attacks. And that architectural difference is radically different than what anyone else in the industry does, and it's part of why we're able to defend against it. I I so so I don't think that directly the size of the attacks going up is is something that is gonna be, a tailwind for us. But I do think that we're already seeing that, you know, a lot of the hyperscalers, some of our competitors are actually referring customers to us when they get to the point that their systems aren't able to stay in front of these attacks because they know that the architecture and design of our system is allowed is allowing us to, mitigate what what others others can't.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

So I think what what we're seeing is, especially in places like financial services and others, they're they're recognizing that their existing vendors can't necessarily take on some of these hyperscale, attacks, and they're adding software to the mix in order to, make sure that, you know, when when that attack inevitably comes, that they have a a way of of doing it. And, again, that goes back to just what is a much better architectural design than than anyone else in the space.

Mark Murphy
Mark Murphy
Executive Director at JPMorgan Chase

Thank you so much.

Operator

Thanks for your question. Our next question is from the line of Andrew Nowinski with Wells Fargo. Your line is live.

Andrew Nowinski
Andrew Nowinski
Analyst at Wells Fargo

Great. Thank you for taking the question and congrats on another, remarkable quarter. Matthew, you highlighted the longest duration contract in Zero Trust, to date as well as you know, some other, notable wins. I'm just wondering if you could double click on the trends that you're seeing in the SaaS market and why, CloudFlare's kinda winning more of these, larger deals than than we've heard in the past.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Yeah, Andy. I appreciate it. And I'm really proud, of our team for this. You know, this is this is a market that, you know, we didn't start out in, but we we realized that our network could provide, just a better experience, and so we invested in it. And for a while, you know, we didn't have all the features that people who had been doing this for longer, than we did, had.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

I think two things, have have stood out. First of all, I think we've caught up on all the critical features that are there. And then I think that when people actually go to test, our solution versus others, our performance is just significantly better. And, again, that goes back to the fact that every server across our network can do everything. So if you're in, you know, Rwanda or if you're in Pakistan or you're anywhere in the world, we can actually, deliver a SASE solution local to you that has just significantly better better performance than than anyone else.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

I think the last thing is that there's I think we've had a lot of success bundling together our various our various solutions. People customers say, you know, they don't wanna have to think about who's their reverse proxy versus their forward proxy, you know, who who's who's doing all of these these things. They they really want one solution that gives them a platform to solve all of the various problems that they may have with, the a network. And and Kessler is unique, in being able to deliver, both both things like we were just talking about the, you know, DDoS mitigation, but then also Sassy. And it it all comes as one, contiguous bundle.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

And so I think that's something that, really has stood out and caused us to win more and more of these deals. And and, again, I'm proud of the fact that, you know, people are are are confident that our innovation isn't going to slow down, and that gives them the confidence to sign these longer duration deals. But they also then say, you know, head to head versus first generation, SASE providers, Coupler is just a better solution. And that's, that's that's causing us to win in these head to head situations.

Andrew Nowinski
Andrew Nowinski
Analyst at Wells Fargo

Thank you. That's that's great. And as a follow-up, Matthew, I think you said you won a number of SASE deals with government agencies as well in both The US and APAC. And I'm wondering if you just expand on the traction you're seeing in the broader government sector. Thank you.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Yeah. The even the the deal in Europe, the long duration deal in Europe is a it can generally government quasi government agency as well. So I think, in these cases, the governments are around the world are seeing that on premise hardware, just doesn't work for what they're what they're, what they're doing. So there there are mandates, to adopt a zero trust approach. And when they do, they they see again that that Cloudflare can provide this broad set of solutions across the entire platform.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

And and, you know, again, proud of the fact that, for what are these critical services, governments around the world are choosing Cloudflare.

Andrew Nowinski
Andrew Nowinski
Analyst at Wells Fargo

Thank you.

Operator

Thanks for your questions. Our next question is from the line of Keith Weiss with Morgan Stanley. Your line is live.

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

Thank you guys for taking the question

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

and congratulations on a strong start to the year. In particular, I wanted to dig into that $100,000,000 workers led deal. Not too many platforms out there that can accrue that much value from one deal. So just congratulations on sort of building that out. Can you give us any detail in terms of, like, the use case or of what they're using the platform for?

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

Give us any more color on, like, what does the hundred million dollar workers deal look like in reality on the ground of what they're gonna be doing with the platform?

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Yeah, Keith. You know, I think that what we're seeing is that Cloudflare Workers has become a complete solution. We have all of the components, compute, storage, database, you know, g GPU, capacity. And and so as as people are looking, to, decide whether they're going to go with a traditional hyperscaler, we're increasingly in, the the decision mix. And we're seeing places where, people are realizing that they can develop significantly faster.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

They don't have to think about scaling issues. They don't have to think about, you know, a number a number of things that even if you're using a a hyperscaler, you you still have to have to worry about. And they can, just get much better performance for at a at a lower cost. And so, you know, in this case, this was a a customer that was well down the line, with one of the traditional hyperscalers, you know, had had and and the hyperscalers was confident they were gonna win the business. And we met with them, demonstrated, what what it was that we were able, to deliver, help them build a, proof of concept.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

And they just saw, you know, significantly better performance, and they saw how much easier and faster it was for their developer team to be able to deploy across Cloudflare Workers. And so, you know, the the we've always said, and I and I and it's still true, that you can't just oftentimes lift and shift, the, you know, traditional, you know, legacy workloads to Cloudflare Workers. You but in these cases where someone is building a new feature or extending that that feature, we're finding more and more that we're able to win, those those deals. And, you know, I I I think that I've tried to caution, that that it was gonna take, you know, probably probably a little bit longer for for workers to be delivering real revenue. I I think I think this shows that, that that this is way ahead of what I would have thought, that that timing was.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

And I think that that comes back to the fact that the team has just built such a robust platform at this point that, that that people are saying we're gonna move off the traditional hyperscalers and move to Cloudflare because the ROI is just so much better, the performance is so much better, and and the development philosophy is so much better.

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

Yeah. Definitely seen that in in the developer affinity for the platform. As a follow-up, this is more of a go to market question. In the quarter, you guys saw a, really strong growth in overall customer adds. I think that 13,000 was up almost 80%.

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

But the net adds on the 100 ks side was a lot skinnier at, like, only 30 up on a quarter on quarter basis. Any changes in, like, go to market strategy that that that caused that, or is that just kind of timing of of kind of when deals are coming in?

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

I think it's timing. I don't think you're saying that that really yeah. I'll start, and then Thomas Thomas might say some more. My sense is it's it's mostly timing. And then also, you know, we actually have really strong quarter last quarter with the hundred thousand ads.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Mhmm. So there it it moves around, to some extent. I I am I I'm very excited that record quarter for million dollar ads, record quarter for $5,000,000 ads. And so, yeah. But I would love to say that.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Thomas, I don't know if there's anything else you got.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

Yeah. A couple of small things came together. So and more importantly, you what we didn't see was we didn't see increased churn or contraction. Actually, just the opposite. Mhmm.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

DNR for that cohort even improved by a percentage point. I think instead, we just saw very a few customers who spend less than a hundred k graduating in the last in the larger customer cohort. And then the the quarter had also two days less, which means you recognize less ratable revenue in that quarter. And that hurt a customer group that was just at that threshold of moving in there. So even the two days missing played a role.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

So a lot of small things coming together and impacting the count, but nothing that disturbs the long trend trajectory we see here.

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

But on the reverse side, anything that propelled those 13,000 net customer adds overall? Again, any any change on that side

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

of the equation?

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

I wouldn't think so other than, you know, what we said at the the beginning. We just see the pay the the investment in in in the go to market transition and transformation is just paying off, and that is, in those results you see across all customer cohort sizes, in various ways. So we are, you know, we are we are quite happy with with with the trend, and, there there there's some noise quarter to quarter.

Keith Weiss
Keith Weiss
Equity Analyst at Morgan Stanley

Got it. Super impressive, guys. Thanks so much.

Operator

Thank you. Our next question is from the line of Shaul Eyal with TD Cowen. Your line is live.

Shaul Eyal
Managing Director - Equity Research at TD Cowen

Thank you so much and congrats on solid performance and guidance. Matthew, you mentioned tariffs as potentially being the final straw for some of the final holdouts. We're still using boxes. Could you elaborate on those conversations and discussions? And how are you managing your network supply chain?

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Yes. So I think one of the the unsung heroes that we don't talk about, always at at Cloudflare is our infrastructure team and just their ability to, just deliver incredible, you know, just constant, better pricing, and getting getting equipment delivered to every far flung corner of the universe managing that. And and I think that, it was really during COVID where we went from, you know, good to, I think, world class at being able to to manage that. And that gives us the ability to have multiple distinct ways to deliver the servers and and networking equipment that we that we need. You know, we we're we're we're not we're not dependent on any any network vendor we can buy from, you know, any of the big network vendors, or we have our own white boxes that we can deliver.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

And that that has allowed us to, have a have a lot of flexibility. You know, and then the existing, treaties like NAFTA and and otherwise allow us to do assembly of of equipment in places like Mexico and and bring it into The US when we have to have to do that in a way which is very efficient or, you know, deploy outside The US if if we need to, and and then route traffic, to be able to to handle that. Even using used equipment and moving that around, is is, again, a very sophisticated way of us just making sure we can continue to invest in, our our network, build it out around the around the world. So I feel very good about our ability to do that. We are hearing from especially in the financial services and health care, space that there is concern, from, if they're trying to use on premise hardware from from from existing vendors, and that that is is slowing down the demand for what was sort of the expected firewall sort of reset that that was that was being that was the the number of other, vendors in the space where we're seeing.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

I think that's going to put, more emphasis on using, services like SASE services. I think Cloudflare will be a beneficiary of that, along with others that can, that can actually just put this as a service rather than as a physical piece of hardware.

Shaul Eyal
Managing Director - Equity Research at TD Cowen

Thank you.

Operator

Thank you for your question. Our next question is from the line of Mike Sikos with Needham. Your line is live.

Mike Cikos
Senior Analyst at Needham & Company

Great. Thanks for taking the questions, guys. Just wanted to start. I think going back to the prepared remarks, Matthew, you had cited sequential improvement in sales cycles, which is which is something that we we would not have expected just given this environment. And and kudos to you guys.

Mike Cikos
Senior Analyst at Needham & Company

Can you just spend some time hashing out those dynamics? I'm I'm just curious what's the what's the sustainability of those those improvements that you guys are driving at.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Yeah. I think I think that I I was surprised by that as well, not not only because of, of the environment generally, but I I also think because we're selling to larger customers, bigger deals, and and you would naturally expect that that would would, slow down sales cycles. And and, again, that's I think that that's that's, that's expected, and that's something that we we can we can manage around. That is not what we saw this quarter. You know, I I I think that we've always been very good at managing sales cycles.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

I think we've always been, you know, good at at delivering that. And I think it really is the operational excellence that Mark and his team are driving across across the entire sales team. Also, you know, as part of the fact that we have, you know, so many existing customers that we can sell more to, and expand with. I think that those obviously are much faster deals when they when they come in. But but I don't know that I would expect, in fact, I I I would I I would not expect that, you know, sales cycles will, you know, continue to trend down, for a long time.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

But I I do think that we have been, better than most at at being able to, deliver very efficient sales cycles. And and and I'm surprised that as deals have gotten bigger and customers have gotten more sophisticated, that, that sales cycles have have not picked up dramatically. I I but, again, I don't think I wouldn't I wouldn't forecast that that's gonna be the case forever. I I I think that it's I I think we will always outperform our our peers, but I would expect the sales cycles will, tick up slightly over time.

Mike Cikos
Senior Analyst at Needham & Company

Thanks for that, Matthew. And just for the a quick follow-up to Thomas. I know we're we're talking about the less certain environment. You guys obviously had a larger magnitude when thinking about the 1Q top line beat. Can you just help us think a little bit more as far as the guidance construction here with the reiterated calendar '25 guide?

Mike Cikos
Senior Analyst at Needham & Company

How much of that is potentially incremental conservatism or prudence, however you wanna phrase it, versus visibility moving one way or the other over the last ninety days as it relates to pool of funds deals?

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

Well, you you used the word that we that I used, for giving guidance. It's prudent in light of of of the uncertainty we we see. You know, we we started the year believing in the data that that that we that we looked at, that investing into reaccelerated growth was the right thing to do. The first quarter results proved that that was the right decision to be made. You heard from Matthew that our confidence in the long term outlook is, if anything, increased based on by some of the changes we have seen.

Thomas Seifert
Thomas Seifert
CFO at Cloudflare

But we we have to be cognizant that the world around necessary is a volatile phase, and the guidance reflects that.

Operator

Thank you for your question. Our next question is from the line of Adam Borg with Stifel Nicolaus. Your line is live.

Adam Borg
Adam Borg
Managing Director - Equity Research at Stifel Financial Corp

Awesome. And thanks so much for taking the question. Maybe just for Matthew, one of the things when we go back to Investor Day back in March that that Mark Anderson talked about was just around the developer speedboat launching this year. And obviously, with a hundred million dollar plus workers deal, would love to get a sense of if that team was involved and just maybe more broadly, get an update on the developer go to market motion, more broadly. Thanks so much.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Yeah. It's mean, that team is definitely involved. I I don't I don't think that had that team not been involved that we would, certainly have closed that deal or closed this quickly. What what I love is that Ali Cabral, who's who's running that team, you know, really came from this from the product, side of the developer platform and and said, you know, I I feel like we've got we've got the product nailed. Let's go sell it.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

And, she's she and the team there, are are being very, deliberate and disciplined. They're they're, going out and talking to, customers that we think, could really benefit from the increased agility, performance, ROI that that our developer platform has. And, you know, it's it's it's amazing to see, that as they go into, these conversations and and, you know, even help, customers build out kind of proof of concepts for for what's what's there, that that that is that is turning into a very large deal, that are coming across across the transom. And and I I think it's it probably wouldn't have been the right time to do that a year ago. But today, when the the developer platform is as robust as it is, that that that speedboat and those efforts around around it are are yielding really significant results.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

And and, again, why why why why I still always wanna caution people not to get too far, you know, ahead of themselves. I'm I'm I'm very excited with what we're seeing from from the developer community, and and we are much more active at pursuing, large deals, that that we can deliver real value, for, and and that Speedboat team has been, critical to doing that.

Adam Borg
Adam Borg
Managing Director - Equity Research at Stifel Financial Corp

Excellent. Thanks so much.

Operator

Thank you for your question. Our last question for today will come from the line of Jonathan Ho with William Blair. Your line is live.

Jonathan Ho
Research Analyst at William Blair

Let me echo my congratulations as well. Matthew, could you provide us with an update on the model context protocol that you've, and the work that you're doing there? And maybe what this implies for Cloudflare's ability to power AI agents as well as the data sources that AI models are accessing. Thank you.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Yeah. So, just a little bit of background for for people who aren't following this as closely. Anthropic, put together a specification, called, model context protocol, MCP, which is essentially, an an API, to give a standard way for a AI system, to be able to connect to a third party service, and and interact with it, in in in various ways. You know, if your your bank has an MCP, system, then, you know, an agent can, log in and and and analyze what your your spelling your spending patterns. Or if if, if you've got, you know, an MCP server at a at a media organization, you know, they could log in and and summarize, the news that was out there.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

Initially, these servers, when when Anthropic first released, the protocol, were were run locally on on your own machine, which meant that the barrier, to entry, you know, really was really fell on on developers. We worked with Anthropic, to be able to, take this this standard and run it instead of, locally on your machine, run it in the cloud, run it across Cloudflare's network. And it's been amazing to see how, you know, great companies like Stripe, Atlassian Block, many others are adopting, our approach, to these these, these these platforms and and using Cloudflare to, give agents, AI agents, a way to interact with their underlying platform. There are massive security issues here. And, again, I think one of the reasons that people trust us in this space is that they know that we understand how important security is and that will help invent what the protocols are for a secure ability for agents to interact, with the overall Internet.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

There'll also be competing platforms. So Google, has released a extension of MCP, which is slightly different. Our strategy is just to support everything, to be the universal translator, that can make it so that you can connect to any service, which is is online. And if there are multiple protocols, we'll help rationalize that. Again, I think it's something that is, is important.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

So I think it's it's amazing to see how quickly, companies are able to use our platform in order to stand up these, these agents and the the interaction between these agents. I think it it may well turn out that the killer app, for Cloudflare workers is going to be around AI and the interconnection. And the fact that so many of the AI companies, you know, today, our our estimates are that about 80% of the major AI companies are Cloudflare customers, and so much of the Internet uses Cloudflare. It it puts us in the center of all of those, conversations, and it's it's it's just incredibly exciting to see people building building the future on Cloudflare. And don't don't totally know where where it's all gonna turn out, but I'm pretty confident that no matter what, you're gonna need networks and you're gonna need secure networks.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

And, and Cloudflare is is the best at being able to provide that for whatever the future holds.

Jonathan Ho
Research Analyst at William Blair

Excellent. Thank you.

Operator

Thank you for your question. And ladies and gentlemen, that will conclude our Q and A session for today. I would like to turn the call back over to Matthew Prince for any closing comments.

Matthew Prince
Matthew Prince
Co-Founder & CEO at Cloudflare

I just wanted to say thank you for all of Spotlight's customers, all of our team members, for, just what was a a really difficult quarter in terms of the macro environment, but one that we executed just in a way that I'm I'm incredibly proud of. So I can't wait to see what the future holds. Know that it's gonna be built on Cloudflare in our network, and look forward to seeing you again, this time next quarter.

Executives
Analysts

Key Takeaways

  • Strong Q1 Financial Performance: Revenue rose 27% year-over-year to $479.1 million with an 11.7% operating margin, $58.4 million net income and $52.9 million free cash flow, while gross margin hit 77.1% above targets.
  • Enterprise Customer Expansion: Customers spending over $100 thousand increased 23% to 3,527 and now account for 69% of revenue, alongside record growth in $1 million+ and $5 million+ deals (+48% and +54% YoY).
  • Record-Setting Large Contracts: Closed the largest-ever deal—over $100 million for the Workers developer platform—and secured the longest-duration Zero Trust contract in company history.
  • Rapid AI and Developer Platform Growth: Cloudflare Workers AI inference requests surged ~4,000% YoY and AI Gateway requests ~1,200% YoY, as the firm builds the MCP protocol to power AI agent integrations.
  • Prudent Outlook Amid Volatility: Q2 revenue is guided to $500 million–$501 million (+25% YoY) and full-year revenue to $2.09 billion–$2.094 billion (+25% YoY), reflecting disciplined go-to-market investments and cautious macro forecasting.
AI Generated. May Contain Errors.
Earnings Conference Call
Cloudflare Q1 2025
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