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    NET
    Earnings call· Dec 2024(Q4 FY24)

    Cloudflare, Inc. NET

    Feb 6, 2025 Source

    Executive summary

    Cloudflare Q4 FY24 — Strong Large Customer Growth and AI Momentum

    Cloudflare concluded FY24 with robust performance, driven by record large customer additions and improved go-to-market execution, signaling a potential reacceleration of growth in the second half of 2025. The company is strategically investing in its sales force and GPU infrastructure to capitalize on AI inference opportunities and platform adoption, while maintaining strong profitability and cash flow. Management expressed confidence in its ability to balance growth investments with operational efficiency.

    Highlights

    5

    • Revenue of $459.9 million, up 27% year-over-year.

    • Record addition of 232 large customers in Q4, bringing total to 3,497 (up 27% YoY).

    • Revenue contribution from large customers increased to 69% of total revenue.

    • Operating profit of $67.2 million, representing an operating margin of 14.6%.

    • Free cash flow of $47.8 million in Q4, and $166.9 million for the full year.

    Concerns

    3

    • Dollar-based net retention (DNR) at 111%, up 1 percentage point sequentially but still reflecting stabilization after a decelerating trend.

    • Gross margin decreased 120 basis points sequentially and 130 basis points year-over-year to 77.6% due to higher allocation of expenses to COGS from sales and marketing.

    • Network CapEx expected to increase to 12% to 13% of revenue for full year 2025, up from 10% in FY24, due to GPU rollout investments.

    Guidance & targets

    10
    CategoryTargetConfidence
    Q1 FY25 Revenue
    $468 million to $469 million
    high materiality
    High
    Q1 FY25 Operating Income
    $54 million to $55 million
    medium materiality
    High
    Q1 FY25 Effective Tax Rate
    21%
    low materiality
    High
    Q1 FY25 Diluted Net Income per Share
    $0.16
    high materiality
    High
    FY25 Revenue
    $2.090 billion to $2.094 billion
    high materiality
    High
    FY25 Revenue Weighting (H2 vs H1)
    40 to 50 basis points higher
    medium materiality
    Medium
    FY25 Operating Income
    $272 million to $276 million
    high materiality
    High
    FY25 Effective Tax Rate
    21%
    low materiality
    High
    FY25 Diluted Net Income per Share
    $0.79 to $0.80
    high materiality
    High
    FY25 Network CapEx as % of Revenue
    12% to 13%
    medium materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    U.S.
    Represented 50% of total revenue.
    		50%23%——
    EMEA
    Represented 28% of total revenue.
    		28%27%——
    APAC
    Represented 14% of total revenue.
    		14%39%——

    Operational metrics

    20
    Non-GAAP gross margin
    77.6%down 120 bps sequentially, down 130 bps YoY
    Q4 FY24

    Remained above long-term target range of 75% to 77%. Decrease due to higher allocation of expenses to COGS from sales and marketing.

    Non-GAAP operating profit
    $67.2 millionup 69% YoY
    Q4 FY24

    Compared to $39.8 million in Q4 FY23.

    Non-GAAP operating margin
    14.6%up 360 bps YoY
    Q4 FY24

    Highlights continued focus on efficiency and productivity.

    Non-GAAP net income
    $68.8 million
    Q4 FY24

    Non-GAAP net income for the quarter.

    Non-GAAP diluted net income per share
    $0.19
    Q4 FY24

    Excluding the impact of certain tax elections, diluted net income per share would have been $0.22.

    Cash and investments balance
    $1.86 billion
    Q4 FY24

    Includes cash, cash equivalents, and available-for-sale securities.

    Free cash flow margin
    10%vs 14% in Q4 FY23
    Q4 FY24

    Free cash flow as a percentage of revenue.

    Network CapEx as % of revenue
    5%
    Q4 FY24

    Network CapEx for the fourth quarter.

    Full year Network CapEx as % of revenue
    10%
    FY24

    Network CapEx for the full fiscal year 2024.

    Total employees
    4,300up 16% YoY
    Q4 FY24

    Total headcount at the end of the quarter.

    Sales and marketing expenses as % of revenue
    36%down from 40% in Q4 FY23
    Q4 FY24

    Reflects increased productivity and efficiency.

    Research and development expenses as % of revenue
    16%consistent with Q4 FY23
    Q4 FY24

    R&D expenses as a percentage of revenue.

    General and administrative expenses as % of revenue
    10%down from 11% in Q4 FY23
    Q4 FY24

    G&A expenses as a percentage of revenue.

    Non-GAAP effective tax rate
    25%vs guidance of 16%
    Q4 FY24

    Higher than guidance due to full year impact of certain tax elections, which did not increase cash liabilities in 2024 but are expected to mitigate future cash liabilities.

    Sales productivity
    double-digit year-over-year increasesfifth consecutive quarter
    Q4 FY24

    Achieved a fifth consecutive quarter of double-digit year-over-year increases in sales productivity.

    Ramped AEs achieving >80% quota
    10 percentage point increasevs 2023
    FY24

    Meaningful improvements in shifting account executives to the right of their attainment graph, with most gains in the 125% or higher attainment cohorts.

    New enterprise AE hires
    84%YoY increase
    Q4 FY24

    Absolute number of new enterprise AEs hired increased 84% year-over-year.

    GPU utilization (peak)
    70%
    Q4 FY24

    Cloudflare's peak utilization of GPUs, compared to typical sub-10% utilization for customers on hyperscalers.

    Diluted shares outstanding
    362 million
    Q1 FY25 guidance

    Assumed for Q1 FY25 diluted net income per share guidance.

    Diluted shares outstanding
    366 million
    FY25 guidance

    Assumed for FY25 diluted net income per share guidance.

    Industry KPIs

    8
    MetricValueDetails
    Headcount dso4,300employees
    Infra economics70%%
    Rpo current rpo$1.687 billionUSD
    Customer logo metrics237,700customers
    Large customer cohorts3,497customers
    Sales capacity productivitydouble-digit year-over-year increases
    Net revenue dollar retention111%%
    Ai agentic channel product adoption3 milliondevelopers

    Orderbook & backlog

    2
    Remaining Performance Obligations (RPO)$1.687 billionQ4 FY24

    up 12% sequentially, up 36% YoY

    Current RPO70%Q4 FY24

    up 30% YoY

    Represents 70% of total RPO. Grew 30% YoY in Q4, compared to 29% in Q3 and 26% in Q2.

    Product announcements

    3
    ProductTypeDetails
    Cloudflare Callslaunch
    AI Gatewayupdate
    Workers AIupdate

    Deals & partnerships

    8
    Fortune 100 technology companyPool of funds contract for all Cloudflare products$20 million5-year

    Signed a 5-year $20 million pool of funds contract, including all Cloudflare products for frictionless adoption. Customer views Cloudflare as a strategic partner with a shared vision for multi-cloud security, AI, and data sovereignty.

    Leading AI companyPool of funds contract for entire Cloudflare platform$13.5 million1-year

    Expanded relationship by signing a 1-year $13.5 million pool of funds contract. Customer stated, 'Cloudflare is a model partner. We wish to emulate this relationship with all our vendors.'

    Leading global retailerApplication services, Workers, R2, Magic Firewall, Magic Transit$10.8 million3-year

    Signed a 3-year $10.8 million contract. Customer sought a strategic partner to develop and scale its online experience, which was experiencing significant growth.

    Major U.S. investment firmSASE contract for Zero Trust, data loss prevention, Magic WAN, and Magic Firewall$4 million3-year

    Expanded relationship by signing a 3-year $4 million SASE contract. Customer was unhappy with their incumbent first-generation Zero Trust provider.

    Global 2000 aviation groupFull suite of application security and performance products$9.4 million5-year

    Signed a 5-year $9.4 million contract. Customer focused on adopting a cloud-first operating model to increase agility and improve cost efficiency.

    Global 2000 financial institutionApplication services, Magic Transit, and Threat Intelligence$13.6 million4-year

    Signed a 4-year $13.6 million contract. Customer looking to accelerate digital transformation and gain more control and transparency over security posture.

    Rapidly growing technology companyCloudflare Calls$1 million2-year

    Expanded relationship by signing a 2-year $1 million contract for Cloudflare Calls. Customer sought a more cost-effective and performance solution.

    Major international financial institutionApplication services$6.1 million3-year

    Expanded relationship by signing a 3-year $6.1 million contract. Customer migrating from a hyperscaler to enable a multi-cloud architecture as they scale growth in a regulated industry.

    Risks & headwinds

    2
    Customer budget discipline and scrutinyQ4 FY24

    Continued through Q4

    Mitigation: Cloudflare's focus on delivering clear and immediate value and ROI for customers.

    Revenue recognition variability from pool of funds contractsNear-term, especially H1 FY25

    Can impact the shape of revenue recognition, especially for existing customers transitioning to these platform deals.

    Mitigation: Management is confident in the outlook for ratable revenue recognition over the course of the year, especially in H2, and has guardrails in place for compensation and incentives to drive product consumption.

    What to watch in Q1 FY25

    5

    Sales capacity and ramped AE acceleration

    Q2 FY25
    CurrentNet sales capacity turned the corner exiting 2024
    TargetMeaningful acceleration in Q2 FY25

    Why it matters

    Increased sales capacity and productivity are key drivers for reaccelerating growth and achieving FY25 revenue targets.

    In Q2 of 2025, we'll start to see capacity and ramp reps begin to meaningfully accelerate.

    Q&A highlights

    7

    How does the efficiency demonstrated by DeepSeek impact Cloudflare's view on AI inference moving to the edge, and what are the implications for Cloudflare's platform?

    Matthew Prince stated that DeepSeek highlights the potential for efficiency in AI, aligning with Cloudflare's strength in wringing out efficiency. He believes models will commodify and become open, which is positive for Cloudflare. Inference and agents are seen as the biggest AI opportunities, and Cloudflare Workers is uniquely positioned for these, offering better price points and higher margins due to efficient GPU utilization.

    “We are extremely good at wringing out as much efficiency as possible. And we're seeing the same opportunities with inference that DeepSeek saw with training.”

    asked by Hamza Fodderwala · answered by Matthew Prince

    2 min read5 chapters

    Detailed Narrative

    01

    Go-to-Market Transformation and Sales Productivity

    Cloudflare reported significant improvements in its go-to-market execution under Mark Anderson's leadership, achieving a fifth consecutive quarter of double-digit year-over-year increases in sales productivity. The company saw a 10 percentage point increase in ramped Account Executives (AEs) achieving over 80% of quota, with most gains in higher attainment cohorts. Aggressive hiring in the enterprise segment, with 80% of new sales hires in Q4 being enterprise AEs (up 84% YoY), is expected to accelerate sales capacity and ramped reps meaningfully starting in Q2 2025, with 80% of the FY25 plan assigned to existing AEs.

    02

    AI Opportunities and Efficiency

    Cloudflare identifies four key AI opportunities, with the most significant being AI inference and agentic workflows on its Workers platform. The company highlights its unique serverless architecture, which allows developers to pay only for actual usage (CPU/GPU), offering significant price-performance advantages over hyperscalers. Management cited examples of customers achieving 10x price performance improvements for AI agents using AI Gateway and Workers AI, driven by Cloudflare's ability to achieve high GPU utilization (70% peak) compared to typical sub-10% utilization on hyperscalers.

    03

    Large Customer Momentum and Pool of Funds Contracts

    The company experienced record growth in large customers, adding 232 large customers in Q4 and 55 customers spending over $1 million annually in 2024, with more than half of these added in Q4. Revenue contribution from large customers reached 69%. The increasing adoption of 'pool of funds' contracts, which provide seamless access to the entire Cloudflare platform, is a key driver. While these contracts can impact revenue recognition timing, they signify deeper platform adoption and are expected to contribute significantly to revenue in the second half of 2025 as products are consumed.

    04

    FedRAMP High Compliance and Network Architecture

    Cloudflare announced FedRAMP High compliance, emphasizing that this was achieved without fragmenting its unique, homogeneous network architecture. The company designed a compliance strategy that allows it to use its existing global network to meet federal requirements, avoiding the need for a separate 'gov cloud' or piecemeal product availability. This approach ensures that any server on its network can perform any function, maintaining the elegance and efficiency of Cloudflare's infrastructure while serving government customers.

    05

    SASE Solution Wins and Competitive Advantage

    Cloudflare is increasingly winning SASE deals, often displacing first-generation Zero Trust vendors. The company's competitive advantages include its fast global network, comprehensive solution for entire network security (forward and reverse proxy), and the ability to bundle services for higher ROI. Management noted that customers are often dissatisfied with incumbent solutions' performance, reliability, and lack of continuous innovation, leading them to Cloudflare's integrated and high-performing platform.

    AI-generated summary of the company’s earnings call. Not investment advice.