Industry Overview - The content delivery network (CDN) space is expected to grow at a CAGR of 18.04% from 2025 to 2034, indicating strong industry growth potential [1][2]. Company Analysis: Cloudflare - Cloudflare focuses on global expansion and offers a high-performance CDN platform that enhances content delivery while ensuring secure web connectivity [3][4]. - The company employs advanced technologies such as tiered caching and Argo smart routing to optimize delivery efficiency [3]. - Cloudflare's revenue is significantly influenced by international sales, making it vulnerable to U.S. tariffs and competitive pressures from major players like Amazon and Akamai [5]. - Despite revenue growth, Cloudflare's margins are under pressure due to competitive pricing strategies and heavy investments in sales and marketing [6]. - The Zacks Consensus Estimate for Cloudflare's 2025 revenues is $2.09 billion, reflecting a year-over-year growth of 25.4%, while earnings are estimated at 79 cents, indicating a growth of 5.33% [6][7]. Company Analysis: Fastly - Fastly specializes in high-performance, programmable CDN solutions, providing customers with control through dedicated servers within private networks [9][10]. - The company emphasizes faster first-byte delivery and offers features like DDoS protection and advanced rate limiting [10][11]. - Fastly's CDN platform is designed for efficiency, with capabilities that reduce costs and enhance configurability [11]. - The Zacks Consensus Estimate for Fastly's 2025 loss is projected at 9 cents, indicating a year-over-year improvement of 25% [12][13]. Stock Performance and Valuation - Year-to-date, Cloudflare's stock has increased by 69.5%, while Fastly's stock has decreased by 26% [14]. - Cloudflare trades at a forward sales multiple of 28.19X, significantly higher than Fastly's multiple of 1.67X [15]. - Fastly is noted for its robust bottom-line growth expectations and comparatively lower valuation, giving it a potential edge over Cloudflare [17].

Core Viewpoint - Cloudflare is significantly increasing operational investments to drive revenue growth, particularly through its Cloudflare Workers platform, which is widely adopted for application and AI development, indicating strong growth potential in the coming years [1][2]. Group 1: Customer Growth and Revenue - As of the end of Q1 2025, Cloudflare had a total of 251,000 customers, with 3,527 customers contributing over $100,000 in revenue [1]. - The number of large customers spending over $1 million and $5 million increased by 48% and 54% respectively, aligning with management's goal to acquire larger clients [1]. - Revenue from these large customers grew by 67% year-over-year, driven by a 17% increase in sales and marketing expenses [1]. Group 2: Sales Strategy and Market Position - Cloudflare's pragmatic approach to the sales cycle includes assisting potential clients in developing proof of concepts, enhancing understanding of the Cloudflare platform's capabilities [2]. - Many clients are transitioning from larger competitors to Cloudflare due to its extensive security solutions and automation features, largely attributed to Cloudflare Workers [2]. - Cloudflare Workers AI extends the platform's capabilities for AI application development and deployment, with partnerships in the payment industry, including Block, PayPal, and Stripe [2]. Group 3: Financial Performance and Projections - Analysts predict Cloudflare's net revenue will reach $501 million, with adjusted earnings per share of $0.18 [4]. - The company's net cash position was $626.5 million at the end of Q1 2025, showing continuous growth [4]. - Despite never having authorized stock buybacks or dividends, Cloudflare may utilize its cash reserves in the coming quarters due to sustained growth and adjusted profitability [4]. Group 4: Market Strategy and Valuation - Cloudflare is significantly investing in marketing strategies while maintaining operational profit margins, aiming for scale expansion [5]. - The company’s current price-to-sales ratio is 38 times, significantly higher than the industry average of 17.3 times, indicating a premium valuation [5]. - While Cloudflare has substantial upside potential given its growth rate, caution is advised for investors entering at current valuation levels due to market volatility risks [5]. Group 5: Long-term Outlook - Looking ahead to FY 2028, Cloudflare's stock may still have considerable upside potential, although many factors could influence this long-term trend [6].

Core Insights - Cloudflare's Workers platform is emerging as a significant driver of future growth, highlighted by a record deal exceeding $100 million, indicating a shift in perception among large customers towards Cloudflare's capabilities beyond security and networking [1][10] Company Performance - In the first quarter of 2025, Cloudflare reported a remarkable 4,000% year-over-year increase in inference requests on its Workers AI tool, showcasing strong growth in AI-driven usage [4][10] - The company's shares have increased by 66.5% year-to-date, significantly outperforming the Zacks Internet - Software industry's growth of 13.2% [9] Product Development - The Workers platform, launched in 2017, has attracted over three million developers, facilitating the building and running of applications closer to users [2] - The introduction of the Model Context Protocol (MCP) server within the Workers platform aims to enhance AI model integration, enabling clients to deploy AI agents for various tasks, which could lead to increased upselling and customer acquisition [5][10] Competitive Landscape - Cloudflare competes with major players like Alphabet and Amazon, which also offer serverless and container-based edge deployment solutions. However, Cloudflare's configuration-less auto-scaling and high-performance global network position it favorably in this competitive environment [6][8] Valuation and Earnings Estimates - Cloudflare's forward price-to-sales ratio stands at 26.61X, significantly higher than the industry average of 5.68X, indicating a premium valuation [11] - The Zacks Consensus Estimate for Cloudflare's fiscal 2025 and 2026 earnings suggests year-over-year growth of 5.33% and 31.62%, respectively, although recent revisions indicate downward adjustments for both years [12]

Financial Data and Key Metrics Changes - Cloudflare achieved revenue of $479.1 million, representing a 27% year-over-year increase [9][27] - The gross margin was 77.1%, above the long-term target of 75% to 77% [11][29] - Operating profit was $56 million, with an operating margin of 11.7%, an increase of 50 basis points year-over-year [32] - Free cash flow was $52.9 million, or 11% of revenue, compared to $35.6 million, or 9% of revenue, in the same period last year [35] Business Line Data and Key Metrics Changes - The number of customers paying more than $100,000 increased by 23% year-over-year, totaling 3,527 [9][28] - Revenue contribution from large customers grew to 69% of total revenue, up from 67% in the first quarter of the previous year [9][28] - Dollar-based net retention was 111%, consistent quarter-over-quarter [10][29] Market Data and Key Metrics Changes - U.S. revenue represented 49% of total revenue, increasing by 20% year-over-year [27] - EMEA accounted for 28% of revenue, with a 27% year-over-year increase [27] - APAC represented 15% of revenue, showing a significant 54% year-over-year growth [27] Company Strategy and Development Direction - The company is focused on disciplined execution and investing in go-to-market strategies, which have shown positive returns [14][48] - Cloudflare is positioning itself as a mission-critical partner for customers, emphasizing the importance of its innovative products and engineering capabilities [14][24] - The company is actively pursuing large contracts and has secured its largest contract in history, exceeding $100 million [13][15] Management's Comments on Operating Environment and Future Outlook - Management noted that the current global environment is more volatile than in previous quarters, but the company remains committed to its strategy [12][14] - The company is optimistic about long-term opportunities despite short-term volatility, focusing on customer needs and operational efficiency [14][38] - Management expects revenue for Q2 2025 to be in the range of $500 million to $505 million, representing a 25% year-over-year increase [37][38] Other Important Information - The company has seen a significant increase in DDoS attacks, with a 300% year-over-year rise, but its architecture allows it to absorb these attacks without additional costs [58][60] - Cloudflare's investments in AI and developer platforms have resulted in substantial growth, with AI inference requests up nearly 4000% year-over-year [22][23] Q&A Session Summary Question: Trends observed through early May regarding traffic and tariffs - Management indicated that there has been no significant change in internet traffic patterns despite tariff discussions, with traffic remaining steady [41][46] Question: Insights on margin performance and CapEx spending - Management reiterated a focus on the 40% rule for margins and indicated that there are still more margin opportunities than revenue opportunities [47][48] Question: Sales productivity and capacity tracking in the enterprise segment - Management expressed satisfaction with improvements in sales productivity and anticipated continued increases in sales capacity as new hires ramp up [52][54] Question: Impact of DDoS attacks on business - Management noted that the company’s architecture allows it to handle large-scale DDoS attacks effectively, without incurring additional costs [58][60] Question: Trends in the SaaS market and winning larger deals - Management highlighted that Cloudflare has caught up on critical features and offers superior performance compared to competitors, leading to increased success in securing larger deals [67][70] Question: Government sector traction - Management noted that governments are increasingly adopting zero trust approaches and choosing Cloudflare for its comprehensive solutions [73][74]

Financial Data and Key Metrics Changes - The company achieved revenue of $479.1 million, representing a 27% year-over-year increase [8][26] - Gross margin was 77.1%, above the long-term target of 75% to 77% [10][29] - Operating profit was $56 million, with an operating margin of 11.7%, an increase of 50 basis points year-over-year [32] - Free cash flow was $52.9 million, or 11% of revenue, compared to $35.6 million, or 9% of revenue, in the same period last year [34] Business Line Data and Key Metrics Changes - The number of large customers (paying over $100,000) increased by 23% year-over-year to 3,527 [8][28] - Revenue contribution from large customers grew to 69% of total revenue, up from 67% in the same quarter last year [8][28] - Dollar-based net retention was 111%, consistent quarter-over-quarter [9][29] Market Data and Key Metrics Changes - U.S. revenue represented 49% of total revenue, increasing by 20% year-over-year [26] - EMEA accounted for 28% of revenue, with a 27% year-over-year increase [26] - APAC represented 15% of revenue, showing a significant 54% year-over-year growth [26][28] Company Strategy and Development Direction - The company is focused on disciplined execution and investing in go-to-market strategies, which have shown positive returns [12][13] - Cloudflare is positioning itself as a mission-critical partner for customers, emphasizing the importance of its innovative products and engineering capabilities [12][23] - The company aims to capture opportunities in a volatile environment while maintaining operational efficiency [23][36] Management's Comments on Operating Environment and Future Outlook - Management noted that the global environment is more volatile than before, but the company has navigated this effectively [10][11] - There is confidence in the long-term growth opportunities despite short-term volatility [12][23] - The company expects revenue for Q2 2025 to be in the range of $500 million to $505 million, representing a 25% year-over-year increase [36][37] Other Important Information - The company signed its largest contract in history, exceeding $100 million, driven by its workers developer platform [12][14] - The longest duration contract in the company's history was also secured during the quarter [12][25] - Remaining Performance Obligations (RPO) increased by 39% year-over-year to $1.864 billion [35] Q&A Session Summary Question: Trends observed through early May regarding traffic and tariff rhetoric - Management indicated that there has been no significant change in internet traffic patterns despite tariff discussions, with traffic remaining steady [40][45] Question: Insights on margin performance and CapEx spending - Management reiterated a focus on the 40% rule for margins and indicated that there are still margin opportunities despite revenue growth [46][47] Question: Sales productivity and capacity tracking in the enterprise segment - Management expressed satisfaction with improvements in sales productivity and anticipated continued capacity ramp-up in the coming quarters [51][52] Question: Impact of increased DDoS attacks on business - Management noted that the company’s architecture allows it to absorb large-scale DDoS attacks without incurring additional costs, differentiating it from competitors [57][62] Question: Trends in the SaaS market and winning larger deals - Management highlighted that the company has caught up on critical features and offers superior performance, leading to increased success in securing larger contracts [67][70] Question: Government sector traction and Zero Trust solutions - Management reported strong interest from government agencies in adopting Cloudflare's Zero Trust solutions, reflecting a shift away from on-premise hardware [74][75] Question: Details on the $100 million workers deal - Management explained that the deal reflects the comprehensive capabilities of Cloudflare Workers, which provide better performance and lower costs compared to traditional hyperscalers [78][80] Question: Customer additions and go-to-market strategy - Management attributed strong overall customer additions to effective go-to-market strategies, while noting that timing affected the number of large customer additions [83][88]

Industry Overview - The AI industry is facing an uncertain macroeconomic environment, with signs indicating a potential cooling in demand for AI infrastructure [1] - Super Micro Computer has reduced its guidance due to delayed purchasing decisions from customers, and some tech giants are scaling back on data center expansions [1] Investment Focus - Investors are still interested in AI, with a recommendation to avoid AI hardware companies like Super Micro and Nvidia, as well as hyperscalers like Microsoft [2] - The focus should be on companies specializing in AI inference and efficient, specialized AI models, with IBM and Cloudflare highlighted as top picks [2] IBM's AI Strategy - IBM has secured $6 billion in generative AI-related business, with $1 billion added in the first quarter, primarily from its consulting business [3] - The Watsonx AI platform is central to IBM's AI efforts, enabling enterprises to build, test, deploy, and manage AI models, with potential cost reductions of up to 98.5% by using specialized models [4] - IBM's upcoming z17 mainframe, launching in June, can perform 450 billion AI inferencing operations daily, making it suitable for real-time tasks like credit card fraud detection [6] Cloudflare's AI Capabilities - Cloudflare focuses on speed, allowing developers to perform fast computations on user requests, covering various use cases including AI inference tasks [8] - The platform supports over 50 open-source AI models and integrates with Cloudflare Workers for programmatic access [9] - By focusing on AI inference with smaller models, Cloudflare can utilize older, less expensive AI accelerators, reducing costs while maintaining performance [10] - Cloudflare's revenue grew by 27% year over year in Q4 2024, with a record number of large customers spending over $1 million annually [11]

While complete applications could be built using Cloudflare's developer platform, the missing piece has always been the ability to deploy arbitrary third-party applications. A developer may need to deploy a content management system, an authentication system, or any number of other software components. Cloudflare Workers is great for running bits of JavaScript or Python code, but it can't handle a wide range of use cases. Built on top of Cloudflare's (NET) global edge computing network is a set of products ...

Financial Data and Key Metrics Changes - Revenue for Q4 2024 was $459.9 million, representing a 27% year-over-year increase [6][31] - The number of large customers (those paying over $100,000 annually) increased by 27% year-over-year to 3,497 [6][32] - Gross margin was 77.6%, slightly down from the previous year [34] - Operating income was $67.2 million, a 69% increase year-over-year, with an operating margin of 14.6% [36] - Free cash flow for the quarter was $47.8 million, or 10% of revenue [37] Business Line Data and Key Metrics Changes - Revenue contribution from large customers grew to 69% of total revenue, up from 66% in the same quarter last year [6][33] - The company saw a notable uptick in close rates and improvements in sales cycles during Q4 [10][30] - The number of active developers on the platform surpassed 3 million, indicating strong engagement with Cloudflare Workers and Workers.ai [10] Market Data and Key Metrics Changes - The U.S. market represented 50% of total revenue, increasing by 23% year-over-year [31] - EMEA accounted for 28% of revenue, with a 27% year-over-year increase, while APAC represented 14% of revenue, growing by 39% year-over-year [31] Company Strategy and Development Direction - The company aims to enhance its go-to-market execution, focusing on sales productivity and hiring enterprise account executives [12][14] - Cloudflare is positioning itself to capitalize on trends in security, AI, and modernization, which align with its strengths [9][11] - The company is committed to maintaining a unified network architecture while expanding its federal business [63][66] Management's Comments on Operating Environment and Future Outlook - Management noted that customers are increasingly scrutinizing budgets and ensuring value for every dollar spent, but confidence is returning, particularly in the U.S. [8][9] - The company expects to see a reacceleration of growth in 2025, driven by improved sales capacity and productivity [14][39] - For Q1 2025, revenue is expected to be in the range of $468 million to $469 million, representing a 24% year-over-year increase [39] Other Important Information - The company ended Q4 with $1.86 billion in cash and equivalents, maintaining a strong balance sheet [37] - The shift from AI training to AI inference is expected to drive increased investment in GPU capacity [35] Q&A Session Summary Question: Inquiry about the impact of DeepSeq on inference workloads - Management acknowledged that DeepSeq has demonstrated significant optimizations in AI training costs, which could lead to more inference workloads moving to the edge [42][44] Question: Focus on product innovation and upcoming inflection points - Management expressed excitement about the company's ability to prove itself in go-to-market strategies and highlighted the importance of customer-focused product development [51][52] Question: Impact of pool of funds deals on revenue - Management indicated that pool of funds deals contributed approximately nine percentage points to revenue in Q4 and expressed confidence in their recognition as revenue throughout 2025 [57][58] Question: Update on FedRAMP High and government business - Management confirmed that the company is committed to maintaining a unified network while complying with FedRAMP High requirements, and noted growth in federal business both domestically and internationally [61][66] Question: Security performance and standout product categories - Management noted that large customers are increasingly adopting the full suite of Cloudflare products, indicating a shift towards a comprehensive platform approach [70][72]