5 Interesting Learnings from Cloudflare at ~ $1 Billion in ARR

So Cloudflare is that quiet Cloud leader that just keeps … killing it.  We last checked in on them at $500m in ARR, growing 50%.

Today, they are at just about $1B in ARR … and growing even faster at 54% year-over-year than they were at $500m in ARR!  Wow.

And while everyone has taken a hit in public market valuations, Cloudflare has outperformed.  Its stock roared up 27% after its last earnings release.

Today is the Best of Times for Cloudflare.  No downturn, no slow down.  Even with some sales cycles indeed getting a bit more challenging, especially for deals in the $500k-$1m range.

5 Interesting Learnings:

#1.  $100k+ Customers are Now 50% of Revenue — At $1B in ARR.  Cloudflare has marched upmarket, but slowly for a product still with a free base.  Its $100k+ customers are now the fastest growing segment, and more than half its revenue is from these bigger customers.  Still, its big customers are barely 1% of its customer base of 151,000.

#2. The top 1% of its customer base of 151,000 now makes up 50% of total revenues.  With 151,000 customers but just 1,749 of them pay $100k+.  Again those top 1% make up 50% of total revenues.

#3.  47% of Revenue from Outside U.S.  Not a huge change from $500m in ARR, but another reminder of how global SaaS and Cloud are where regulations and others don’t restrict usage.

#4.  Massive growth masked it, but saw sales cycles did lengthen this year.  Strong demand overall masked some customer weakness:

“In Q1, our pipeline generation slowed, sales cycles extended, and customers took longer to pay their bills,” Cloudflare CEO Matthew Prince told analysts on the earnings call. “We watched those metrics closely throughout Q2 and saw them all at least stabilized. They’re not where we throw a parade yet, but the metrics are trending in the right direction.”

Still, with such strong demand, any lengthened sales cycles didn’t show up in the epic numbers and growth rate.

#5.  25% Customer CAGR Fuels 50% CAGR Due to 125% NRR.  An example of the “magic ratio” in a high NRR ratio.  If you can grow your new customer count at least half as fast as your ARR growth, magic really happens over time.  But if you have high NRR and rely on the base to fuel growth, it eventually stalls out.

And a few other interesting learnings:

#6.  No decline in NRR even as it crosses $1B in ARR.  125%+ NRR along with 90%+ GRR.  Another reminder that it turns out there really is no limit in keeping NRR high … forever.

#7.  Break-even operating margins at $1B in ARR, but guiding to 20% over time.  Cloudflare isn’t insanely profitable at $1B in ARR like some.  But Wall Street seems OK with it, since operating margins are going up and the growth is epic.  Still, they are committing to 20% operating margins that the public markets expect from SaaS and Cloud companies at scale.

#8.  29% of the Fortune 500 are now customers — up 3x from the IPO.  Cloudflare wasn’t super enterprise until well past $200m+ in ARR.  But that’s its fuel today.

Wow.  Jaw dropped in how Cloudflare just keeps the engine going, from revenue growth to NRR to GRR.

Even in these bumpy times.

And a great story about tougher times from CEO Matthew Prince:

Personally, if I think back, my career has been defined by recessions, I think a lot of people’s are. Recessions have always been hard, but they’re also formative moments to focus and ultimately improve.

14 years ago, in 2008, at the onset of the last global recession, Google pulled their full-time offers for all their summer interns, which included my co-founder at Cloudflare, Michelle Zatlyn. If that hadn’t happened, Cloudflare would have never been born.

At the same time, I learned what a margin call was and, simply embarrassingly, literally had to borrow money from my mom to pay my rent. That’s when I got an extremely personal lesson on the importance of free cash flow, and it’s why I’m ensuring right now in this uncertain time that Cloudflare is prioritizing being free cash flow positive.

Tough times force you to reevaluate everything you’ve done and become better. It’s why the best companies come out of tough times even stronger than they went in.

So, maybe it’s a bit masochistic, but I’m looking forward to have Cloudflare gets even better during some of the tough times for the global economy that seem likely ahead. Hands on the wheel, eyes on the road, letting up a bit on the accelerator.

 

 

 

Published on August 31, 2022

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