Cloudflare, Inc.

With me on the call, we have Matthew Prince, co-founder and CEO, Michelle Vatland, co-founder and president, 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 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. 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 Burdens 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 months ago. We would also like to inform you that we will be participating in the Morgan Stanley Technology, Media, and Telecom Conference on Monday, March 3rd, and we'll be hosting our annual Investor Day on Wednesday, March 12th. Now, with that said, I'd like to turn the call over to Matthew. Thank you, Phil.

We had a very strong end of 2024. We achieved revenue of $459.9 million, up 27% year over year. During the quarter, we added a record number of new large customers, those that pay us more than $100,000 per year, and now have 3,497 large customers, also up 27% year over year. Revenue contribution from large customers grew to 69% of revenue, up from 66% in the fourth quarter last year. Our dollar-based net retention ticked up one percentage point quarter over quarter to 111%. Our gross margin was 77.6%, remaining above our long-term target range of 75% to 77%. We delivered an operating profit of $67.2 million, representing an operating margin of 14.6%. We continue to generate strong free cash flow, achieving $47.8 million during the quarter and $166.9 million for the full year. As we've talked about multiple times, since the beginning of 2024, customers have been disciplined budgets scrutinizing deals carefully, and ensuring every dollar spent delivered clear and immediate value. That trend continued through Q4. However, as the quarter progressed, we saw encouraging signs that confidence is beginning to return, particularly in the U.S. Security, AI, modernization, and efficiency form the word cloud we hear most often in these conversations. These themes play directly to Cloudflare's strengths. Beyond the qualitative, we saw measurable improvements in Q4. We saw a notable uptick in close rates. We saw an improvement in sales cycles. The majority of large customers I mentioned last quarter whose deals had slipped from Q3 re-engaged and signed significant contracts in Q4. We crossed 3 million active developers on our platform, including Cloudflare Workers and Workers AI and We saw record growth in our largest customers, those that spend over a million dollars with Cloudflare per year. We ended the year with 173 such customers, 55 of which we added in 2024, and more than half of the new ads were in the fourth quarter alone. I'm proud of how our team remained disciplined and focused on delivering real ROI for customers, which drove these record results in the fourth quarter, while also ensuring we're well positioned to capture the demand we see lined up in 2025. More than anything, behind this success is our improved go-to-market execution. I wanted to give you an update on our progress on that front. Mark Anderson continues to prove he's one of the best go-to-market leaders in the industry. In the fourth quarter, he led the team to a fifth consecutive quarter of double-digit year-over-year increases in sales productivity. For the full year, not only was the average productivity higher each quarter compared with 2023, but we also achieved meaningful improvements in shifting account executives to the right of their attainment graph. We delivered a 10 percentage point increase in ramped AEs achieving over 80% of quota compared with 2023, with most gains coming in the 125% or higher attainment cohorts. We continue to aggressively hire in our sales organization with a focus on more stage-appropriate talent and onboarding enterprise account executives with proven track records. In Q4, nearly 80% of our new sales hires were in the enterprise segment, and the absolute number of new enterprise AEs hired increased 84% year over year. You've heard me say in the past, we're not limited by our total addressable market, by our competitors, or by our pipelines. Each day I see evidence this is truer than ever before. Our constraint has been, and at least for another quarter, will continue to be the capacity of our sales force. Now we've seen the increase in our sales force's performance under Mark's leadership. Net sales capacity turned the corner exiting 2024. In Q2 of 2025, we'll start to see capacity and ramp reps begin to meaningfully accelerate. To give you a sense, 80% of our full year plan for 2025 is assigned to account execs who are already in their seats at Cloudflare at the start of the year. And now that we've got the formula dialed in, we're keeping our foot on the gas. This is what gives me confidence in our ability to reaccelerate growth this year. We are world-class in product innovation. We are world-class in network stability and reliability. And 2025 is the year we will prove we can be world-class in go-to-market as well. That seems like a great segue to discuss some of our customer wins in the quarter. A Fortune 100 technology company signed a five-year, $20 million pool of funds contract, which includes all CloudFlare products for frictionless adoption across our entire platform, marking the largest new customer win in CloudFlare's history. Expected initial use cases include application security and performance, as well as our workers' developer platform. They view Cloudflare as a strategic partner with a shared vision for multi-cloud security, AI, and data sovereignty. This is just the beginning with this customer. A leading AI company expanded their relationship with Cloudflare, signing a one-year, $13.5 million pool of funds contract. Deploying this strategic pool of funds structure will provide seamless access to the entire Cloudflare platform, maximizing scale and enabling accelerated innovation transparent pricing and a streamlined partnership. In the words of the customer, quote, CloudFlare is a model partner. We wish to emulate this relationship with all our vendors. A leading global retailer signed a three-year, $10.8 million contract for application services, workers, R2, Magic Firewall, and Magic Transit. This customer was looking for a strategic partner who could help further develop and scale its online experience which has been experiencing significant growth. Displacing a 20-year incumbent, Cloudflare's unified offering and vast global presence, combined with our innovative developer platform, including workers' AI, proved to be key differentiators from the incumbent and other competitors. A major U.S. investment firm expanded their relationship with Cloudflare, signing a three-year, $4 million SASE contract for zero trust and data loss prevention, along with Magic WAN and Magic Firewall. This customer approached CloudFlare unhappy with their incumbent solution from a first-generation zero-trust provider. CloudFlare won against multiple competitors due to our superior network performance and ability to deliver a transformational, single-vendor, SASE solution on an easy-to-use, unified platform. A Global 2000 Aviation Group signed a five-year, $9.4 million contract for our full suite of application security and performance products. This customer is focused on adopting a cloud-first operating model to increase agility while also improving cost efficiency. The company conducted a robust RFI against more than a dozen vendors in consideration, and Cloudflare was selected to displace a longtime incumbent due to our ability to drive greater modernization, the ease of use and flexibility of our products, and our ability to deliver meaningful ROI. A global 2000 financial institution signed a four-year $13.6 million contract for application services along with Magic Transit and Threat Intelligence. This customer is looking to accelerate digital transformation as well as gain more control and transparency over its security posture. With their nine-year incumbent provider, it would take 14 weeks to provision a new website. With CloudFlare, a new website can be provisioned in just 10 minutes. In the words of this customer, quote, CloudFlare stands out in this space, offering a robust, scalable, and developer-friendly edge security platform that not just offers best-in-class security for our digital channels, but also helps us increase velocity of digital changes to speed up the bank. A rapidly growing technology company expanded their relationship with Cloudflare, signing a two-year, $1 million contract for Cloudflare Calls. Cloudflare Calls is a newer product on our developer platform, allowing developers to build real-time audio and video applications on Cloudflare's serverless edge. This customer was looking for a more cost-effective and performance solution. With Cloudflare, this customer was able to build new custom use cases that can scale significantly while also achieving better performance at a lower price point. Finally, a major international financial institution expanded their relationship with Cloudflare, signing a three-year, $6.1 million contract for application services. This customer is migrating from a hyperscaler to Cloudflare in order to enable a multi-cloud architecture as they scale their growth in a regulated industry around the world. Cloudflare's best-of-breed security products, higher uptime, and ease of use to scale and automate operations made us the clear winner. I wanted to end by talking a little bit about what we're seeing in AI. We believe Cloudflare has four distinct opportunities in AI. The first is the same as every other company. we're getting more efficient in our business processes using AI systems. That's not particularly interesting these days, though I'm proud, more often than not, we're finding we can build these functions on our own infrastructure rather than contracting with others. The second is AI makes our performance and security products smarter for customers. At some level, although we never really add the hubris to describe it this way, Poplar has always been an AI company. The thesis was that if we could get enough internet traffic flowing through us, We could spot security threats that no one else could see. And today, our machine learning-based security systems regularly discover new security threats that no human had identified before. That, again, feels like table stakes for us. The third opportunity is where I think things start to get interesting. The killer application for cloud store workers is turning out to be AI. The model of programming is uniquely suited for building tools like AI agents. and our serverless architecture, which allows you to pay only for what you use based on CPU or GPU type, positions workers to become the go-to platform for developers who want the best price performance for AI inference and agenic workflows. I talked last quarter about a large AI customer that was building their interface on top of our inference platform. From their perspective, the partnership has gone extremely well, but behind the scenes, our team has been able to do the hard engineering work to drive up the efficient use of our GPU infrastructure. Inference tasks are generally highly variable, and there's a two-time difference between this customer's peaks and valleys, which means they would have to pay approximately 250% more to stay provisioned on a hyperscaler to run the same number of inference tasks compared with workers' AI's efficient pay-per-inference serverless model. Additionally, More and more developers are discovering AI Gateway, with some realizing more than a 10x price performance improvement for their AI agents by serving requests directly from Cloudflare's Tash instead of the original model provider. And just last month, the world was amazed at the efficiency the team of clever engineers in China were able to deliver in the field of AI training with the DeepSeq model. We are seeing that there are equivalent optimizations that can be made with AI inference on Cloudflare's platform, resulting in faster performance and lower prices for customers and higher margin and less capex for us. We believe inference is a bigger opportunity than training, and our team continues to find step function breakthroughs that put us well ahead of any alternative. But all that may pale in comparison to the fourth opportunity. Cloudflare counts many of the most important AI companies as customers. We also count a huge portion of the world's content creators as our users. Being between those two puts us in an important role to help figure out the business model of the post-search web. Cloudflare sits in a unique position to help figure out how content creators are compensated, what agents are allowed where and on what terms, and how the AI-driven web of the future will fit together. It's early days, but the conversations we're having with all the relevant parties feel foundational for the future. Watch this space, definitely exciting times, but Before I get too far ahead of myself, to bring it back to the present, let me hand it off to Thomas to talk through the fourth quarter's financials and our outlook for 2025. Thomas, take it away.

Thank you, Matthew, and thank you to everyone for joining us. We're pleased with our strong operational and financial performance for the fourth quarter. It does incur the momentum from our go-to-market transformation efforts that Matthew discussed. Strength in our business's quarter was driven by significant growth with large $1 million customers, ongoing traction with pool of funds contracts, sustained momentum with our workers developer platform, and high prioritization of security by our customers. We saw a notable uptake in close rates and an improvement in sales cycles. We also delivered another double-digit year-over-year improvement in sales productivity with record productivity in both EMEA and APAC. As discussed last quarter, we were encouraged to see the number of ramped account executives increase exiting the fourth quarter, and we expect year-over-year growth in ramped AEs to continue to accelerate each quarter throughout 2025, further laying the foundation for Cloudflare's next phase of growth at scale. Turning to revenue. Total revenue for the fourth quarter increased 27% year over year to $459.9 million. From a geographic perspective, the U.S. represented 50% of revenue and increased 23% year over year. EMEA represented 28% of revenue and increased 27% year over year. APAC represented 14% of revenue and increased 39% year over year. Turning to our customer metrics. In the fourth quarter, we had approximately 237,700 paying customers, representing a record addition of nearly 48,000 paying customers in 2024, and an increase of 25% year over year. We ended the quarter with about 3,500 large customers, representing a record addition of more than 740 large customers in 2024, an increase of 27% year over year, as well as a record addition of 232 large customers in the fourth quarter alone. We were pleased to see revenue contribution from large customers during the quarter increase again to 69% of revenue, up from 66% in the fourth quarter last year. For full year 2024, revenue from large customers represented 67% of total revenue compared to 64 in 2023 and 61% in 2022. And we ended the year with 173 customers that spent over $1 million with us, adding a record 55 $1 million customers in 2024 and representing a 47% increase year over year. Our dollar-based net retention was 111% during the fourth quarter, representing an increase of one percentage point sequentially. As a reminder, there can be some variability in this metric quarter to quarter, but we believe the recent decelerating trend in DNR is stabilizing despite continued near-term headwinds from increased traction with pool of fund contracts, which can impact the shape of revenue recognition especially for existing customers transitioning to these platform deals. Moving to gross margin, fourth quarter gross margin was 77.6%, representing a decrease of 120 basis points sequentially and a decrease of 130 basis points year over year. During the fourth quarter, the percentage paid versus free customer traffic increased as compared to its prior quarters resulting in a higher allocation of expenses to cost of goods sold from sales and marketing the underlying economics of our network driven by its inherent scalability and efficiency remained unchanged network capex represented 50 of revenue in the fourth quarter and 10 of revenue for the full year as we mentioned last quarter The accelerating shift from AI training to AI inference has given us confidence to continue to increase our investment in our GPU rollout as we provision greater capacity to support demand in 2025. As a result, we expect network CapEx to be 12% to 13% of revenue for full year 2025. Turning to operating expenses. Fourth quarter operating expenses as a percentage of revenue decreased by 5% year-over-year to 63% as we remain committed to driving higher productivity and greater efficiency across our operations. Our total number of employees increased 16% year-over-year, bringing our total headcount to about 4,300 at the end of the quarter. Sales and marketing expenses were $166.9 million for the quarter. Sales and marketing as a percentage of revenue decreased to 36 from 40% in the same quarter last year. Research and development expenses were $74.8 million in the quarter. R&D as a percentage of revenue remained consistent at 16% compared to the same quarter last year. General and administrative expenses were $47.8 million for the quarter. T&A as a percentage of revenue decreased to 10% from 11% the same quarter last year. Operating income was $67.2 million, an increase of 69% year-over-year compared to $39.8 million in the same period last year. Fourth quarter operating margin was 14.6%, an increase of 360 basis points year-over-year. 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 in the balance sheet. Our net income in the quarter was $68.8 million, or diluted net income per share of 19 cents. Our non-GAAP effective tax rate in Q4 was 25%, compared to a guidance of 16%, to account for the full year impact of certain tax elections made during the fourth quarter, which did not increase our cash liabilities in 2024, but expected to mitigate cash liabilities in future years. Excluding the impact of these tax elections, our reported diluted net income per share would have been $0.22 for the quarter. Maintaining our strong commitment to being fiscally responsible and acting as good stewards of investors' capital we ended the fourth quarter with $1.86 billion in cash, cash equivalents, and available for sale securities. Free cash flow was $47.8 million in the quarter, or 10% of revenue, compared to $50.7 million, or 14% of revenue, in the same period last year. Remaining performance obligations, or RPO, came in at $1,687,000,000. representing an increase of 12% sequentially and 36% year-over-year. Current RPO was 70% of total RPO, scoring 30% year-over-year in the fourth quarter versus 29% in the third quarter and 26% in the second quarter respectively. Moving to guidance for the first quarter and full year 2025. As a management team, we remain deeply committed to the unit economics of our business and focused on the two fundamental drivers of long-term value creation, growth and profitability. We've always taken a disciplined data-driven approach to scaling Cloudflare, balancing investments for future expansion with financial and operational efficiency to ensure that every dollar we deploy drives significant returns in form of durable long-term growth and profitability. Over the past two years, we've demonstrated our ability to drive operating leverage while transforming our go-to-market operations as we pursue the massive opportunities still ahead of us. Our disciplined approach gives us the flexibility to lean in when we see the right opportunities. And as we enter 2025, the data we have gives us confidence that now is the time to continue to invest to re-accelerate growth. Importantly, this is based on tangible data we have real visibility into the factors that drive re-accelerating growth. Improving sales productivity and attainment levels, ramping capacity of account executives already in seats, building momentum with large million-dollar-plus customers, growing pipeline, higher win rates, and increasing traction in key areas, including workers, AI, and SaaS. For the first quarter, we expect revenue in the range of 468 to $469 million, representing an increase of 24% year over year. Variable revenue is still a new and current part of our business model. While we saw strong signals during the fourth quarter, reflecting increased usage, we're maintaining a prudent outlook for the first quarter, give more limited historical data on consumption patterns and seasonality. We expect operating income in the range of 54 to 55 million dollars. We expect an effective tax rate of 21 percent. We expect diluted net income per share of 16 cents, assuming approximately 362 million shares outstanding. For the full year 2025, we expect revenue in the range of 2 billion 90 million dollars to 2 billion and 94 million dollars. representing an increase of 25% year over year. We anticipate the weighing of revenue in the second half versus the first half of 2025 to be approximately 40 to 50 basis points higher as compared with the relative mix in 2024. We expect operating income for the full year in the range of $272 million to $276 million. And we expect an effective tax rate of 21% for 2025. We expect diluted net income per share over that period to be in the range of 79 to 80 cents, assuming approximately 366 million shares outstanding. In closing, we're excited about the road ahead and confident that our strategy will drive continued innovation and accelerating growth. As always, we'll stay focused on creating significant shareholder value with our commitment to disciplined execution, durable growth, and operational efficiency. We look forward to updating you on our progress in the coming quarters as we accelerate the next stage of growth at scale. And with that, I'd like to open it up for questions. Operator, please poll for questions.