Former divisional leader at Cloudflare Inc
- Updated CDN (content delivery network) competitive landscape – pricing, product and win rates
- Compute opportunity with AI and how this segment’s contribution is trending
- Competitive dynamics across Cloudflare (NYSE: NET), AWS (NASDAQ: AMZN) and GCP (NASDAQ: GOOGL) in cloud computing, plus market share outlook
- Profitability update and 2023 expectations
Could you share an overview of Cloudflare’s overall operating environment? What 2-3 key trends or drivers do you think we should be paying attention to when looking at the business and the web performance and security industries more broadly?
Diving a little deeper into Cloudflare’s product mix, we know the company has its roots in CDN [content delivery network] and security, with CDN historically being the driver of a lot of net-new customers. Could you discuss how those two are trending in terms of overall revenue contributions, and how cloud and computing is starting to play a role in terms of driving growth for the business?
Understanding that Cloudflare has different products that are able to drive revenue before CDN, when you say CDN has a bit of a commoditised landscape, could you expand on that and how pricing pressures impacted that industry? In the future, do you think a core CDN company such as Fastly will be able to survive without these secondary solutions driving new business and higher margins?
Understanding that the CDN is typically the initial land, do you think there’s a risk that as this competitive landscape grows and pricing pressure continues, Cloudflare might not be able to generate as much net-new to then be able to expand off? Or because people might be using 3-4 CDNs at any given time, will the company still likely be able to get at least a foot in the door and get a partial handle on almost every company’s CDN needs?
You mentioned the deceleration in growth that Cloudflare has seen over the last couple of quarters, and it’s still super strong. The company has 50% growth, forecasting almost 40% for Q2 2023. Do you think we’ll see that continue to go down as sales motions become more difficult and require more people and effort?
I know historically Cloudflare has been SMB- and mid-market-focused, although the company is making an upmarket push. Do you think sales are going to be more difficult at that lower level, or is it more so upstream where there’s more complexity? Or, in the SMB, is it that it’s not landing as often with the CDN and it’s going to become more complex at all customer levels?
Cloudflare has been promoting the idea that its upmarket sales are going very well, or at least the idea of the customer spending USD 100,000 or more on the platform. What would indicate to you that the company is starting to gain traction there? Would it be it saying, “We’re starting to see people spending USD 1m”? What would be an impressive enterprise-level accomplishment for Cloudflare?
When you look at the valuations of different software companies, Cloudflare is currently second in terms of enterprise value to next 12 months’ revenue, and it’s been in this top 10 for over one year now. What is the overall tech advantage or value proposition that has investors so excited about its prospects?
When looking at the mid-market, as Cloudflare has developed this very holistic offering within security, computing and CDN, are we seeing companies start to take to this idea of using it across all segments, or is there still a lot of work to do in terms of getting people on a single suite platform, and getting rid of these disparate vendors that might be being used for the different functions right now?
Do you think the primary cause of Cloudflare’s growth deceleration is that everyone that now needs it has a CDN, a lot of the easier-to-sell stuff has been bought up and saturated, and now there’s a lot of growth to do, but it’s just going to go a little more slowly? Is that the reason for the deceleration and forecasted deceleration over the next 1-2 years?
Do you have any sense for when you think Cloudflare’s growth might reaccelerate, whether it’s along with the market or in 1-2 years? Do you think it’s possible to reaccelerate back above the 37-38% that the company is forecasting, or at least sustaining that?
We’re talking about a deceleration in growth for Cloudflare. The company is forecasting 39% CAGR for five years, and now at a run rate of USD 1bn, as you mentioned, which is pretty impressive, especially considering a company such as Akamai is only at 3% YoY growth. As much as you’ve talked about some of the challenges Cloudflare has faced that forced its deceleration, what’s allowed the company to be so much more successful than a company such as Akamai over the last 12 months?
When you say innovation, are you saying Cloudflare’s existing product is just superior, or is the company coming to market faster with products and Akamai lags behind? How would you compare them from strictly a product and tech perspective?
Whether Akamai or another player, would you say anyone has a comparable solution to Cloudflare from the perspective of CDN, security, cloud and different ancillary products, or is the company on its own in terms of being a full-suite provider for internet and security needs?
There’s no direct competitor to Cloudflare, but how do you think the company’s positioning within CDN will trend, understanding that AWS is growing in this space? You have companies such as Fastly and Edgio, and even Google has threatened to come to market with a potential CDN. How do you think Cloudflare’s market share will trend here, and is it a concern that if it shrinks then it’s going to lead to fewer net-new opportunities for those other business segments?
It does’t concern you that if Cloudflare loses CDN market share that it’s going to be that much more difficult to go out and win a net-new customer, driving these more difficult-to-sell solutions. Is that correct?
Which segments do you see as the key drivers for Cloudflare moving forwards? Is it mostly as it relates to security, or do you think that at some point the company’s cloud business is going to start to compete with players such as Azure, AWS and GCP?
Could you help us understand computing in cloud? I think a lot of people are using AWS across their entire business. Is that what Cloudflare is trying to become, or is the company more just trying to do the computing as it relates to internet in a particular part of the business?
Can you explain what Cloudflare’s multi-cloud strategy looks like and how the company’s offering fits into the broader cloud needs of a mid-market or enterprise company?
Thinking about vendor consolidation, you say that customers and clients seem to be receptive to a multi-cloud strategy. Why do you think that is, and in the future, as AWS and GCP roll out a more competitive solution in this specific cloud area, do you think customers might not want to consolidate and just put everything on the same platform?
There aren’t many technologies where people say, for a CDN, “We want to use three vendors in case of a security breach, in case of different prices.” Is it going to be the case in the future that people need multiple security vendors, or are willing to work with a Cloudflare, an AWS and a GCP? What are the dynamics there in terms of the winner-takes-all environment?
Do you have any thoughts on the headwinds or tailwinds that this AI revolution presents to Cloudflare? Have we seen the company take any actions so far that indicate its willingness to get involved? How do you think this might impact it in the future?
There have been reports that Cloudflare won the ChatGPT deal away from Azure, because Azure just couldn’t handle the computing load. Is this an indicator that Cloudflare is potentially better-positioned to capture some of this AI security, computing and CDN growth?
The partner economy will obviously become really important as Cloudflare pushes more into the cloud space. How would you say the company is positioned within the broader systems integrator and partner ecosystem?
We talked about the revenue trajectory that Cloudflare is on, but we’ve obviously seen investor sentiment shift from grow at all costs to a focus on profitability. The company has not only been able to maintain this pretty strong growth, but has also seen significant improvement on the profitability side. Could you discuss some drivers of its recent margin expansion? How much more space do you think there is to improve profitability in the coming months and years?
You talked about expansion, and net retention has been absolutely massive for Cloudflare, which most recently saw 122%. That means the company is seeing a 22% growth rate before it even adds a single net new. It says it wants to get up to 130%, which would be even above where it was during the pandemic. Do you think that’s achievable for the business in the long term?
Do you think we’re going to reach a point where Cloudflare has its established customer base, it has rolled them onto its secondary solutions and there just isn’t that much room to drive expansion? Or will the company just continue innovating, bringing on new people, cross-selling them and making this sustainable for the next 3-7 years?
We know the CDN side is a lot more expensive, with the different related costs. In the short term, do you think the growth of Cloudflare’s security and cloud businesses will be able to drive higher margins from a COGS perspective in a material way? Or is it going to be more that go-to-market and sales motion, driving higher contract values and reducing the sales and marketing-type expenses?
You mentioned Cloudflare dropped its sales and marketing over the last couple of quarters, and the company has plans to bring that number down pretty significantly over the next couple of years. Is that concerning at all? Understanding that it’s making this upmarket push, and you’ve talked about how sales processes are becoming a bit more challenging, do you think it’s premature for Cloudflare to be taking such an aggressive focus on reducing that figure right now, with so much TAM left to grab?
We’ve talked about a lot of the growth opportunities for Cloudflare. Is there anything, whether in terms of the competitive landscape, regulatory or anything else, that could potentially derail the company’s profitability or revenue growth targets over the next 1-2 years?
Do you have any thoughts on how we can monitor what you mentioned around the risks, from the outside looking in? You talked about culture and war for talent, where Cloudflare has great people. How can we monitor how that’s trending and whether it’s becoming more of a risk?
We talked about how innovation has really been one of the key drivers of Cloudflare’s growth in differentiation. Do you see any acquisition opportunities for the company, or a specific product adjacency that would make most sense for it to look into next?
Cloudflare lists a few potential product opportunities in its presentations – serverless database, IoT [Internet of Things], 5G cellular and consumer. Do you have any thoughts on a particular one that’s interesting, or something the company is doing that might be flying under the radar? Do any of those seem to you, based on what we’ve seen and what customers are looking for, to be particularly interesting opportunities?
We’ve discussed Cloudflare in detail, but who do you think might be some other winners and losers over the next 3-5 years, both in the CDN space and as we look into the other segments where the company is competing?
Specialists from Akamai in previous Forum Interviews make it seem as if the competition with Cloudflare is a lot closer and that Akamai is developing its product portfolio in a pretty similar way. This company’s market cap is currently sitting at around 12%, while Cloudflare’s is 20%. Do you think that it’s just not very close right now, and that their revenues might be similar but Cloudflare is going to just accelerate way past Akamai in the coming years? Or do you think there are particular segments where Akamai might have an advantage?
We’ve mentioned the macro conditions, and obviously it’s difficult to predict when these will recover, but how do you expect Cloudflare’s business to trend with that? Do you think there’s a lot of room for natural reacceleration by 2024 or 2025, or do you think we’ve now stabilised post-pandemic to where we should be? Growth is going to be a little more challenging than it was and there’s still a lot of TAM to capture, but we’re never going to get back to those enormous growth rates we saw in 2020-21. Do you agree with that?
What’s your 3-5-year outlook for Cloudflare?
Are there any final points you’d like to put out there around Cloudflare?
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