Cloudflare, Inc.

Good afternoon. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Cloudflare Q4 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. In a matter of time, we ask that you limit yourself to one question and one follow up. 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 would like to withdraw your question, again, press star one. Thank you. Jason Nolan, you may begin your conference.

Thank you for joining us to discuss Cloudflare's financial results for the fourth quarter 2021. With me on the call, we have Matthew Prince, co-founder and CEO, Michelle Zatlin, co-founder, president, and COO, and Thomas Seifert, CFO. 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. As a reminder, we'll be making forward-looking statements during today's discussion, including but not limited to our customers, vendors, and partners' operations and future financial performance, anticipated product launches and the timing and market potential of those products, the company's anticipated future revenue, financial performance, operating performance, non-GAAP gross margin, non-GAAP net income, non-GAAP net income per share, Shares outstanding, non-GAAP operating expenses, free cash flow, non-GAAP tax expense, dollar-based not retention rate, paying customers, and large customers. These statements and other comments are not guarantees of future performance, but rather are subject to risks and uncertainty, some of which are beyond our control, including but not limited to the extent and duration of the impact of the COVID-19 pandemic and adverse conditions in the general domestic and global economic markets. Our actual results may differ significantly from those projected or suggested in any 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. 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 Securities and Exchange Commission, 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. All current and prior period financials discussed are reflected under ASC 606. You may find a reconciliation of GAAP to non-GAAP financial measures 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 the JMP Securities Technology Conference on March 7th, the KeyBank Emerging Technology Summit on March 8th, and the Morgan Stanley Technology Media and Telecom Conference on March 9th. Now, I'd like to turn the call over to Matthew.

Thank you, Jason. In the immortal words of Bill and Ted, we had a most excellent quarter. In Q4, we achieved revenue of $194 million, up 54% year over year. We added 156 new large customers, those that spend more than $100,000 a year with us, ending the year with 1,416 large customers, up 71% year over year. Our dollar-based net retention ticked up to a record 125%, improving six percentage points from a year ago. For the full year, We earned $656 million, up 52% year over year. 2021 becomes our fifth straight year with 50% or greater compounded growth. I'm proud of two things. First, over those five years, our growth has actually accelerated. But second, and probably more important, our growth has been relentlessly consistent. We've dialed in our business. We understand and are in control of its levers. You can see that in metrics like our gross margins. While talk across the industry is about increasing costs and pricing pressure, we achieved a gross margin of 79%. That remains above our long-term target gross margin range of 75% to 77% and creates some opportunities. We expect to use this exceptional gross margin as a weapon to take business from competitors more vulnerable than we are to pricing and cost pressures. It also allows us to bundle together products into an overall platform no competitor can match. In Q3, we had our first quarter as a public company with positive operating margins. This is our second. It won't be our last. That said, as I talked about last quarter, we are not in a rush to be significantly profitable. Over the years, our team has asked me about profitability. The story I told them was to imagine every year you saw your neighbor shoveling money into a machine. A year later, a lot more money came out. Year after year, the money kept piling up and getting shoveled back in. If one year... you looked out your window and didn't see your neighbor shoveling all the money back into the machine, you'd worry, what's wrong with the machine? To be clear, there is nothing wrong with our machine. We will continue to shovel money back in to drive innovation and reach new customers as long as we can achieve exceptional growth. We think of managing our operating margin a bit like that game Flappy Bird, not too high, not too low. For as long as we can, we want our operating margin to hold just above breakeven and right where it's been for the last two quarters. In other words, We've done something wrong if we beat significantly on EPS. Cash flow, on the other hand, nobody is going to complain if there's more cash in your bank account at the end of the quarter than there was at the beginning. We're proud that this is Cloudflare's first quarter since we've been public to be free cash flow positive. It also won't be our last. We know this is a business that can generate significant cash flows when we want. In the short term, we expect we'll see negative cash flows for the next two quarters as we invest in our network, and redesign our physical offices for a post-COVID world. But by the second half of the year, we forecast we'll be free cash flow positive. We admire and seek to emulate other companies that came before us and had significant cash flows while holding operating margins that break even. And we feel very dialed in and confident in our business as we come out of the uncertainty of the last two years. So what's our secret? It's not one thing, it's many. It starts with innovation. When we talk to customers, what they appreciate about CloudFlare is our relentless innovation. It expands our market and ensures that customers can use us to be the complete future of their corporate network. But beyond new products, we leverage economies of scale and network effects to drive our business and innovate more efficiency. Yes, the supply chain has gotten harder, but we've leveraged our relationships, hyper-efficient procurement team, and fully software-defined network to keep driving our costs down. Network effects are spawned by networks, and we run one of the largest networks in the world. As customers join our network, our network gets better and more efficient. If you want to understand how we've been able to continue to drive our business at this rate, this virtual cycle is where to look. And because it's a flywheel, this efficiency allows us to continue to invest in products. Our team loves launching new products, and we're planning at least seven innovation weeks full of new products in 2022, further extending our network introducing new capabilities, and growing our TAM. The products we announced in 2021 are already thriving. For example, we had over 200,000 domains sign up for our email routing service and seemingly overnight have become a major email security provider. R2, our zero egress object store, has had more than 9,000 signups for its closed beta, including some incredible logos. They represent hundreds of petabytes of storage and demonstrate the palpable excitement around our workers developer platform. We're on track for R2 to progress to open beta in Q2 and then be generally available in the second half of 2022. While our bias is toward internal product development, we will make strategic acquisitions when we find teams and products that can complement what we've built. I'm excited to announce today that we've acquired Metrix, a startup that has built the easiest to use, most powerful CASB we've seen. CASB is Cloud Access Security Brokers. are a category of services that give visibility and control over data stored in SaaS applications. They can be powerful tools, but their Achilles heel has always been their complex setup. The Vectrex team impressed us with how quickly they could onboard any new customer, regardless of size, and instantly give them visibility into all the service providers where the customer's data was stored. As such, their product is a natural add-on to every current Cloudflare customer. They remind me of CloudFlare and our philosophy since our earliest days. The Vectrex team and technology further rounds out our Zero Trust platform, giving visibility not only for data flowing across the network, but now also data at rest in service providers. We believe it makes CloudFlare Zero Trust a no-brainer comprehensive security solution for any company, and we're thrilled to have the Vectrex team on board. Let me highlight some great wins we had with Zero Trust and other products over the quarter. A global Fortune 500 telecommunications company signed a $1 million annual contract for over 100,000 zero trust seats. This customer initially started on a self-service plan with fewer than 500 seats two years ago. This win shows how the ease of use of our service and ability to land customers with individual teams within organizations can efficiently turn them into major customers over time. A Fortune 500 media company signed a $250,000 annual contract for more than 10,000 zero trust seats. It was a competitive deal, but ultimately they selected us for being the most flexible and innovative solution on the market. What's great about wins like these is that there's an opportunity for us to expand the customers across our entire platform. You earn your place as a platform one feature at a time. Customers often work with us to solve a problem and then over time, give us a chance to compete for more of their business. And we saw exactly that with other customers this quarter. For instance, A Fortune 500 financial services company expanded their use of our platform by signing a $900,000 three-year expansion deal, bringing their annual contract value to over $1.5 million. They described us as quote-unquote future-proof. It's an example of us bundling our platform to give them access to a broad set of our features while minimizing procurement friction. A Fortune 1000 shipping and logistics company signed a similar platform bundle deal, which more than doubles their three-year contract value to $3 million. They specifically appreciated how CloudFlare was a single vendor they could turn to to deliver the future of their corporate network. A Fortune 500 pharmaceutical company signed a $750,000 three-year deal for network security. It continues to be true that as companies migrate their on-premise hardware solutions, they continue to turn to CloudFlare to build the future of their network. And as we come out the other side of COVID, we're seeing more and more companies rethink their network design and moving to the cloud and away from on-premise boxes. A Fortune 500 retailer moved away from two competitors in order to take advantage of CloudFlare workers. While the competitors had promised similar functionality, they found it simply didn't work as promised. They signed a three-year, $1.2 million contract. Our workers platform, which has been in production now for four and a half years, continues to extend its lead with developers. And you didn't have to be a Fortune 500 company to sign a big deal with us this quarter. One of the most innovative payment startups signed a three-year, $1.5 million contract for our network security products. They appreciated Cloudflare workers and the flexibility it provided them to serve as a broad set of merchants worldwide. Finally, in our business, we need to stay on top of cybersecurity issues globally. We are therefore watching the situation in Ukraine closely. Modern warfare increasingly includes the cyber battlefields. While they don't generate meaningful revenue, we have onboarded a number of Ukrainian businesses, news outlets, and government organizations in anticipation of potential attacks. While we hope the current tensions will resolve peacefully, we have experience mitigating nation-state cyber attacks, and we are prepared to defend our customers and network, whatever may come. Before I turn it over to Thomas, I wanted to thank the entire CloudFlare team for all your hard work and dedication. It was a most outstanding quarter and a most outstanding year. I'm excited for what we're going to achieve together in 2022. And with that, Thomas, take it away.