Cloudflare, Inc.

Hello and welcome to the CloudFare Q4 23 earnings conference 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. And if you would like to ask a question during this time, simply press star one on your telephone keypad. I will now turn the conference over to Mr. Phil Winslow, Vice President of Strategic Finance, Treasury and Investor Relations. Please go ahead.

Thank you for joining us today to discuss Cloudflare's financial results for the fourth quarter of 2023. With me on the call, we have Matthew Prince, co-founder and CEO, Michelle Datlin, 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 the 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. 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 Baird's Software Silicon Slopes event on February 28th and the Morgan Stanley Technology, Media, and Telecom Conference on March 6th. Before wrapping up, please save the date for our Investor Day on Thursday, May 30th, which is being held in conjunction with our user conference, CloudFlare Connect in New York City. A live webcast will also be accessible from our Investor Relations website. Now, I'd like to turn the call over to Matthew. Thank you, Phil.

We had an exceptionally strong quarter. We achieved revenue of $362.5 million, up 32% year over year. We added 198 new large customers, those that pay us more than $100,000 per year, and now have 2,756 large customers, up 35% year over year. We saw particular strength in our largest customers with a record number of net new customers spending more than both half a million dollars a year and $1 million a year on an annualized basis. We signed our largest new logo with an expected total contract value over $30 million and our largest customer renewal with a total contract value of $60 million. We blew away our previous record for new ACV booked in a quarter. In Q4, new ACV booked grew nearly 40% year-over-year, making it not only our record in absolute ACV, but also the fastest percentage growth we've seen since 2021. Our pipeline close rates, salesforce productivity, average deal size, and linearity all improved markedly quarter-over-quarter. I continue to be encouraged by the early results we're seeing from our new sales recruiting and training programs. During the fourth quarter, the pipeline generated by the cohort under the new program was 2.1 times higher than the year-ago cohort, and account engagement increased by 3.5 times compared with a year ago. I'm excited by our maturing sales execution and believe it will pay dividends in 2024 as these sales professionals fully ramp. Our dollar-based net retention kicked down 1% quarter-over-quarter to 115%. Our gross margin was 78.9%, again, above our long-term target of 75% to 77%, and up from 78.7% last quarter. We delivered an operating profit of $39.8 million, representing an operating margin of 11%. We also meaningfully outperformed on free cash flow, generating $50.7 million during the quarter and approximately $120 million in free cash flow for the year. I'm proud of our team for their continued execution. The machine that underlies CloudFlare is firing efficiently on all cylinders, and we've been able to execute even as the macro environment remains choppy. Key to that execution has been improvement in our go-to-market efforts. Fifteen months ago, we brought on Mark Boroditsky to execute effectively a turnaround of Cloudflare's go-to-market team. At the time, we had enterprise customers, but we hadn't operationalized repeatedly and consistently landing them. We were also suffering from a COVID hangover and, like much of the industry, had been slack on performance management. Mark changed all that. He's brought in the process and discipline we needed to be world-class in sales the same way we already were in product and engineering. It's hard to be the turnaround guy, and we owe Mark a huge debt of gratitude for playing that role. But there's someone we always whispered about as our ideal go-to-market leader if we could ever have him as a full-time member of our team, Mark Anderson. He built Palo Alto Network's world-class sales organization into the machine it is today. He has an incredible domain expertise and contacts in our industry. He's one of the great B2B sales software leaders. And as we were getting ready to go public, we couldn't quite convince him to run our go-to-market org, but we did the next best thing, inviting him to join our board. Over the last four years, we've gotten to know each other on CloudFlare's board. From there, he provided invaluable counsel to me, Michelle, and our go-to-market leaders. And so, after Alterix, the company he'd been running as CEO, agreed to go private, he reached out and asked whether we'd be interested in not just having him as a coach, but also a player on the field, rolling up his sleeves and getting back to what he's best at, running a world-class go-to-market organization, selling great products, and delivering incredible value and support to customers. Given the deep relationship and trust we developed and his expertise and leadership in our field, it was as close to a no-brainer as I can remember in a long time. I wanted to invite Mark Anderson to the call to say a few words. Mark?