Cloudflare (NET) investors might be suffering from a case of whiplash.
Recently trading around $68, shares of the cloud platform provider are down 41% from the 52-week high of $116 reached just a few months ago and are off 18% YTD even though the company continues to deliver healthy growth.
Cloudflare shares are often volatile around earnings reports. For a high-valuation name, it comes with the territory. In early February, the stock surged 19.5% in one session and hit the new 52-week high following the release of strong Q4 results. Things were a bit different after the Q1 report in early May, as the stock dropped 16.3% in one session because Cloudflare only maintained its 2024 revenue outlook.
The March quarter was actually solid, with total revenue gaining 30% to $378.6 million, topping the consensus estimate by 1.5%. Sales cycles were consistent with Q4, while overall sales rep productivity from existing team members improved year over year and new pipeline attainment exceeded internal expectations. The dollar-based retention rate held steady sequentially at 115%.
From a geographic perspective, revenue in the U.S. (representing 52% of total revenue) rose 28%, while EMEA revenue (28% of total) increased 35% and APAC revenue (12% of total) was up 22%. Gross margin of 79.5% advanced 60 basis points sequentially and 170 basis points year over year. Cloudflare is driving greater efficiencies from its infrastructure. Operating margin improved to 11.2% from 6.7% a year ago. Free cash flow totaled $35.6 million (9% margin).
In Q1, the total paying customer base expanded by 17% to 197,138. There was sustained demand momentum evident at large customers. Cloudflare added a record number of net new accounts spending more than $100k, $500k and $1 million a year. The total number of customers with annual recurring revenue (ARR) above $100k advanced 33% to 2,878. This large-customer cohort represented 67% of total revenue, up from a contribution of 62% in the year-ago quarter.
In terms of go-to-market, Cloudflare continues to focus on boosting sales performance. In February, Cloudflare named Mark Anderson as the new president of revenue. He boasts a proven track record of scaling revenue across various enterprise tech companies. Anderson most recently served as the CEO of Alteryx, which was taken private in March. Previously, he was a key sales leader at Palo Alto Networks (PANW) and oversaw all sales activity at F5 Networks (FFIV).
Anderson has been on the Cloudflare board since 2019, so he has in-depth knowledge of the company’s operating profile and portfolio of products. While he’s only been in his new role for a few months, Anderson is clearly ready to make changes. On the Q1 earnings call, he said he was surprised at how much room for improvement he saw throughout the sales organization. He plans to boost efficiencies across sales teams while adding more experienced sales talent.
When it comes to sales momentum, Cloudflare is already off to a good start in 2024 as evidenced by some of the big deals closed in the March quarter. The company scored its largest new logo win with a major financial services firm, which signed a four-year deal with a total contract value (TCV) of $10 million. Cloudflare won the deal after successfully showing the resiliency of its cloud platform and the ability to meet country-specific data sovereignty requirements.
A large international energy company signed a five-year deal with a TCV of $4.5 million. This customer went all in with Cloudflare’s SASE platform, signing up for 6,000 Zero Trust seats along with various other security products—including CASB, DLP and Browser Isolation. In a large Zero Trust deal with a major financial services company in Latin America, Cloudflare successfully went up against 10 competitors by demonstrating superior performance.
While there was plenty to like in the Q1 results and Q2 revenue guidance came in above the consensus, Cloudflare shares still tumbled after the earnings report because the company did not raise its 2024 revenue outlook from the initial forecast of $1.65 billion (representing growth of 27%). Management said it was just being cautious based on global macro uncertainty. Going into the earnings report, Cloudflare was trading at an unforgiving valuation. Even after the big pullback, the enterprise value is still 13.7 times the 2024 top-line guide.
Following the Q1 report, several Wall Street firms lowered their Cloudflare price targets, a few of which are now around the $80 level. Among the more bullish firms, Baird trimmed its target to $94 from $100, but kept its ‘Outperform’ rating based on the company’s long-term growth prospects. Given the current economic environment, the firm thinks management was being prudent in not raising 2024 revenue guidance.
KeyBanc maintained its ‘Overweight’ rating, but reduced its target to $94 from $132. The firm believes the company’s high valuation is warranted given the increased focus on network access and security. KeyBanc sees Cloudflare as well-positioned in edge/serverless compute over the long haul.
