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Good afternoon, ladies and gentlemen, and welcome to Cloudflare Q3 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] And please limit yourself to one question and one follow-up. Thank you. I would now like to turn the call over to our first speaker, Phil Winslow. Please go ahead.

Thank you for joining us today to discuss Cloudflare’s financial results for the third quarter of 2024. With me on the call, we have Matthew Prince, Co-Founder and CEO; Michelle

Thank you, Phil. We are pleased with our results for the third quarter, exceeding expectations for revenue, operating margin, and free cash flow while also reaching what I believe is a critical inflection point in our rebuild of our go-to-market organization. During the third quarter, we achieved revenue of $430.1 million, up 28% year-over-year. We added a record 219 new large customers, those that pay us more than $100,000 per year, and now have 3,265 large customers up 28% year-over-year. We also achieved a new milestone of counting 35% of the Fortune 500 as paying Cloudflare customers. Revenue contribution from large customers during the quarter remained consistent at 67% up from 65% in the third quarter last year. Our dollar-based net retention was 110%, down 2 percentage points quarter-over-quarter. While customer churn remains consistently low, our shift to more pool of funds deals with our largest customers, which represented nearly 10% of new ACV booked in the quarter, up from 1% a year ago has put downward pressure on dollar-based net retention and changed the shape of revenue recognition in the short term. Over the long term, however, we believe pool of fund deals are very positive for the business as they represent our largest customers making a broad commitment to Cloudflare's overall platform. Our gross margin was 78.8%, remaining above our long-term target range of 75% to 77%, and up a tad from 78.7% in the same quarter last year. We delivered an operating profit of $63.5 million, representing an operating margin of 14.8%. Our continued strength in operating margin underscores our commitment to operational efficiency and productivity. Free cash flow came in at $45.3 million, ahead of expectations even as we are investing in our network and enhance capabilities like faster, more capable GPUs around the world. In Q3, the IT spending environment remained consistent with prior quarters with customers closely scrutinizing every deal, emphasizing cost efficiency and seeking meaningful ROI. This cautious approach isn't new, it's something we understand and they must have, not a nice to have benefit from relative to some of our peers. Moreover, our broad platform has allowed us to sell multiple problems for customers from a single vendor, giving us an advantage over many of our point solution competitors. However, some larger deals slipped out of the quarter in the U.S. in particular, during what was a transitional period under new sales leadership in that region. These deals are still active in our pipeline with many having already closed this quarter. Although changes in our sales force may have impacted the short-term cadence of some larger deal cycles. What stood out to me is that the third quarter felt like we hit the inflection point in the rebuild of our go-to-market team. Mark Anderson has lived up to being a world-class sales leader he hired stage appropriate talent across our go-to-market organization than fair but relentless of performance management and brought disciplined focus to our team. That's showing in the numbers. Our sales productivity has continued to improve and is now back around the best levels we saw in 2022. Mark believes there's still significant headroom above where we are as we focus not on batting average, but on slugging percentage, shifting more of our account executives to enterprise sales with higher quotas and the ability to sell bigger deals. As we've worked through performance management and up-leveling the team, our ramp rep capacity has been essentially flat for the last four quarters. When I said we've hit an inflection point, this is the biggest thing that I'm watching. Starting in 2025, we expect the number of ramped reps will begin to increase meaningfully again, but with a shift towards more real sluggers who can bring in more enterprise deals. To make it tangible, nearly 70% of new sales hires this year are in the Enterprise segment compared with 40% on average over the prior two years. As you may recall from Mark's presentation at Investor Day earlier this year, momentum in ACV growth is a product of sales capacity times productivity. We've made all of improvements in productivity. Now we're about to start to see the capacity of our sales force reaccelerate. I'm excited to be coming out the other side of our go-to-market transformation, and we expect these initiatives will deliver improving ACV momentum in the coming quarters. As I've shared with some of you, if I think about the last 15 years at Cloudflare, there's always something that I'm worried about, something that's broken or as Michelle would say, an opportunity to improve. It's always tended to be one of three things; sales, stability or shipping. I picture it serves like a hockey puck sliding around points in a triangle etched in the ice. You get good at selling a product to more demanding customers buy it. that causes whatever level of service that was acceptable before to no longer be acceptable to you focus on improving stability. And as you have demanding customers and have put in place better systems and processes to ensure stability, it starts to hamstring your ability to ship new products. At some level, my job is to live [indiscernible] so I started to worry about go-to-market a few years ago. About a year ago, it became clear that we were going to be able to bring on Mark Anderson and meaningfully up-level vaccine. Right on queue, as I stopped worrying about go-to-market, we suffered the stability in sense of last year. We focus on things and we fix them. And today, our stability, even with our broad products and more demanding customers is world-class. So I was gearing up to start worrying about shipping when ahead of schedule, I got introduced to CJ Desai, one of the most proven product and engineering leaders who is now our Chief Product and Engineering Officer. The team knows how to shift. So now I find myself in the strange position of having to look for new things to worry about in the medium term. Undoubtedly, given our ambition, we'll find new challenges, but I imparted that incredible leaders like Mark Anderson, CJ Desai, Stephanie Cohen, all of whom had incredible offers to be CEOs and other organizations believe in Cloudflare's mission and the opportunity we have to build the next iconic technology company to turn down those other offers and join our team over the last year. With that, let me turn to some customer wins in the quarter. A rapidly growing AI company expanded their relationship with Cloudflare, signing a one year $7 million pool of funds contracts for Workers AI. This company signed a $500,000 contract in Q2 for Cloudflare to be their platform for AI for inference, storage, image optimization and application security. They quickly recognize the value of our platform and are now moving all of their workloads over to make Cloudflare their single inference cloud platform. With Workers AI, this customer is able to improve cost efficiency with our paper inference model and also eliminate the need for a dedicated team to run and manage their infrastructure. Realizing a nearly 2 times performance improvement over traditional public clouds with Workers AI was just the cherry on top. This win is just the beginning for Workers AI. A rapidly growing technology company signed a 3.5-year $2.4 million contract for R2, Workers and Application Security. Key concerns for this customer were high egress fees, unpredictable cost spikes and vendor lock-in with a hyperscale public cloud provider, and they viewed R2 as a strategic tool to allow them to unlock paths to realize the full benefits of the cloud with cloud. With Cloudflare's Workers, R2 and Application Services all on one platform, this customer was able to increase their global application performance by 3.5x and drive down their TCO. This customer is also working closely with our product team on some exciting new developments around Workers AI. A rapidly growing operator of a large satellite Internet constellation signed a three year $4 million pool of funds contract for our full suite of FedRAMP products. Given the importance of security, performance and data sovereignty in this industry, this customer quickly looked to Cloudflare to become a strategic partner that can help them build and operationalize their design and network long term. A Fortune 100 technology company signed a two year $4.2 million contract. This customer sought resiliency on their most critical dynamic traffic, which was previously only routed through a centralized hyperscaler. With CloudFlare, they were not only able to gain greater resiliency, but also realize better performance and more robust security capabilities. We continue to see resiliency emerged as a key theme, enabling Cloudflare to establish a beachhead inside large enterprise accounts alongside incumbent providers. A Global 2000 manufacturing company expanded their relationship with Cloudflare signing a three year $2.4 million contract for 45,000

Thank you, Matthew, and thank you to everyone for joining us. We are pleased with our execution during the third quarter as we made further progress on our go-to-market transformation delivering another double-digit year-over-year improvement in sales productivity. However, sales cycles leased during the quarter and some larger deals slipped out of the quarter in the U.S., in particular, Importantly, these are still active deals. As Matthew mentioned earlier, the third quarter marked a key inflection point in our go-to-market transformation with net sales capacity having bottomed. Similar to last quarter, we continued to increase hiring in our sales organization with a particular focus on onboarding enterprise account executives with proven track records. We expect the number of brands enterprise account executives to accelerate exiting 2024 and throughout 2025, and this is particularly the case in the U.S. Turning to revenue. Total revenue for the third quarter increased 28% year-over-year to $430.1 million. The third quarter was highlighted by ongoing strength in pool or fund contract momentum with Wake and continued high prioritization of security by our customers. From a geographic perspective, the U.S. represented 50% of revenue and increased 22% year-over-year. EMEA represented 28% of revenue and increased 31% year-over-year. APAC represented 14% of revenue, an increase of 38% year-over-year. We were again pleased to see a notable uptick in both sequential and year-over-year growth in APAC. Turning to our customer metrics. In the third quarter, we had about 221,500 paying customers, an increase of 22% year-over-year. We ended the quarter with 3,265 large customers representing an increase of 28% year-over-year and a record addition of 219 large customers in the quarter. Our dollar-based net retention was 110% during the third quarter, representing a decrease of 2 percentage points sequentially. The decline in D&R was driven by slower net expansion in our larger customer cohort increased platform deals in the form of cooler funds contracts, which, as a reminder, reduce friction to adoption across our product portfolio that can impact the shape of review recognition as well as deferred revenue, TRPO and cash flow and anniversarying the price increase to our Pro and business [payroll] (ph) plans last year. As we mentioned last quarter, we expect new customers to contribute a higher percentage of our overall year-over-year revenue growth for the next several quarters. Moving to gross margin. Third quarter gross margin was 78.8% and representing a decrease of 20 basis points sequentially and an increase of 10 basis points year-over-year. Network CapEx represented 10% of revenue in the third quarter. During the quarter, we saw a notable shift in customer conversations and buying behavior from AI trading to AI inference, including our first multimillion dollar workers AI contract. This gives us confidence to continue to increase our investment in higher-end GPUs as well as the breadth of our GPU rollout as we provision greater capacity to support demand in 2025. As. A result, we continue to expect network CapEx to increase again in the fourth quarter to reach 10% to 12% of revenue for the full year 2024. Turning to operating expenses. Third quarter operating expenses as a percentage of revenue decreased by 2% year-over-year to 64% as we remain committed to driving higher productivity and greater efficiency across our operations. Our total number of employees increased 18% year-over-year, bringing our total headcount to about 4,200 at the end of the quarter. Sales and marketing expenses were $160.2 million for the quarter. Sales and marketing as a percentage of revenue decreased to 37% from 38% in the same quarter last year. Research and development expenses were $70.5 million in the quarter. R&D as a percentage of revenue remained consistent at 16% compared to the same quarter last year. General and administrative expenses were $45 million for the quarter. G&A as a percentage of revenue decreased to 10% from 11% in the same quarter last year. Operating income was $63.5 million, an increase of nearly 50% year-over-year compared to $42.5 million in the same period last year. Third quarter operating margin was 14.8%, an increase of 210 basis points year-over-year. These results highlight our continued focus on becoming more efficient and more productive given that operational excellence is a long-term competitive advantage. Turning to net income and the balance sheet. Our net income in the quarter was $72.6 million or diluted net income per share of $0.20. Maintaining our strong commitment to being fiscally responsible and acting as good stewards of investors' capital we ended the third quarter with $1.8 billion in cash, cash equivalents and available-for-sale securities. Free cash flow was $45.3 million in the quarter or 11% of revenue compared to $34.9 million or 10% of revenue in the same period last year. Remaining performance obligations, or RPO, came in at $1.53 billion. representing an increase of 6% sequentially and 39% year-over-year. Current RPO was 70% of total RPO. Moving to guidance for the fourth quarter and full year 2024. We are pleased with our execution during the third quarter, and we remain prudent in our outlook for 2024 and as we reach a key inflection point in our go-to-market transformation. For the fourth quarter, we expect revenue in the range of $451 million to $452 million. representing an increase of 25% year-over-year at the midpoint. We expect operating income in the range of $57 million to $58 million, and we expect an effective tax rate of 16%. We expect diluted net income per share of $0.18, assuming approximately 360 million shares outstanding. For the full year 2024, we expect revenue in the range of EUR 1.661 billion to $1.662 billion, representing an increase of 28% year-over-year. We expect operating income for the full year in the range of $220 million to $221 million, and we expect an effective tax rate of 13% for 2024. We expect diluted net income per share over that period to be $0.74, assuming approximately 357 million shares outstanding. As mentioned last quarter, we continue to analyze our ability to implement certain tax planning strategies in order to manage current and future cash tax liabilities. We will provide an update once this tax planning review is completed, if the outcome were to impact our expectations for Cloudflare's non-GAAP effective tax rate for the fourth quarter. Regardless of the outcome, we expect a non-GAAP effective tax rate of 19% to 22% beginning in 2025. However, I would remind everyone that we still have significant net operating loss carryforwards and tax credit attributes are available to offset cash taxes in the future. We expect free cash flow to be consistent with our prior guidance of approximately $160 million to $164 million for the full year 2024. In closing, our teams remain committed to driving operational excellence, ensuring long-term growth and delivering significant shareholder value. I'd like to thank our employees for their dedication to our mission as well as our customers for trusting us to help them modernize, transform and secure their businesses. And with that, I'd like to open it up for questions. Operator, please poll for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Matthew Hedberg with RBC Capital Markets. Matthew, please go ahead.

Hi. Thanks for taking my question, guys. Congrats on the results. Matthew, maybe I'll start with you. In the past, you've talked about sort of the crystal ball nature of Cloudflare. And I guess I'm wondering, when you look into that crystal ball now, what is it telling you about the external business environment? And then perhaps could you give a bit more color on -- maybe even the quantity of the U.S. based slip deals?

Yes. Matt, first of all, thank you for the question. I am not shy about talking about what we see or talking about macro concerns that are out there. I don't think that we see anything that is worse than in fact, I think we see an environment that maybe is ever have slightly improved. We saw real strength actually in Europe. I know a number of other companies haven't seen the same, but we executed well there and continue to see strength there. Asia has performed very well. And actually, from everything we've seen in the crystal ball, North America is -- has leveled off to slightly improved. I think we're where we have room to improve ourselves and where I'm optimistic looking forward is around our own internal execution. It has nothing to do with the macro. And the good news is that with our team in Europe, which has seen the most consistent sales productivity over the last eight quarters, I've had sales productivity increased by 22% year-over-year in Q3. They are running the playbook that we're running now in North America. There's a smaller team, so it's faster for us to be able to make those changes, but that's work. Same thing in Asia where they saw actually a sales productivity bump of 40% over the past 3 quarters. and they had the highest productivity of any region this year. So I think the macro -- I don't think there's anything about the macro that gives us more pause today than before. If anything, I think it's improving. And what I'm very optimistic about is that the places where we've already gotten through our improvement of our go-to-market team, we're seeing the benefits of that. And now we're rolling that out to our largest market, and we see that in Q1, you see a dramatic increase starting in the number of ramped reps and that gives me a lot of confidence and the consistency of the macro also allows us to invest with confidence.

Got it. Thanks. Maybe just a quick one, a follow-up for Thomas. The pool of fund deals seems like it's pressuring NRR, maybe even CRPO in revenue. Is there a way or I guess, how would you have us think through the impact of that, especially as we kind of think towards 2025? I know it's a short-term thing, and it certainly benefits the long-term model, but any sort of guidepost that you can give us on the relative impact?

Yes. We gave a couple of that on the call. So the share of cooler funds deals in the quarter now creep up to 10%, which is a good result. It will pressure as you rightfully said, in the short term, but I think it takes friction out of the process for our customers consuming our products and services moving forward. So we think that this is going to be with us for the next two to three quarters, but provides all the upside from an expansion of the decrease of freedom we have and our customers have to expand moving forward.

Thanks a lot.

Your next question comes from the line of Andrew Nowinski with Wells Fargo. Andrew, please go ahead.

Okay. Good afternoon and congrats on the nice quarter. I want to start with a question on your AI. So you mentioned that a number of conversations with customers began to shift this quarter from AI training to AI inference, and I think you signed a large workers AI deal. Just give any more color on the AI landscape and some of the feedback you're hearing on Workers AI?

Yes, Andy. Thanks for the question. I'm really amazed at how quickly the AI platform that we launched is taking off and how many people are getting real value from it. And so as we mentioned, one of the leading AI companies signed a $7 million one year contract with us to move their inference to our platform. What they saw was that they were able to get significantly better performance while also being able to run at a much higher ROI on the investment that they made over what they were seeing, trying to manage it themselves through hyperscale public cloud. That's a story that is playing out over and over again. I think it's a story that is accelerating. And in order to support that, we have made the investments to increase not only just the number, but also the power of the GPUs that we're deploying around the world. What I think is unique about Cloudflare is two things. One, we are actually able to deliver inference incredibly close to where anyone is on earth because we've deployed the inference capabilities across at this point, nearly all of our network. But in addition to that, we've actually done the work to get higher utilization out of those same GPU resources where what we see when we survey customers that are trying to manage this themselves, through hyperscale public cloud is that they're getting utilization rates that are sort of in the 5% to 10% range of the resources that they're buying. We're able to deliver much higher utilization. And in the process of that, that means that we can actually pass on the effective savings to our customers. So they not only save in not having to maintain their own team to manage these virtual machines and containers, but they also save because we can just do more with the same GPU resources that are being deployed. So I'm incredibly excited that this is something which I think we have sort of started -- we're starting to shift to people who have built their models and how they actually want to deploy them in customer-facing ways. And when they do that, I think Workers AI is the most powerful platform to be able to deliver inference tasks at a global level.

Thank you. That was really helpful. And then I guess as my follow-up, I wanted to ask about just the team you've built. I think you've done a really nice job building out one of the best management teams in the industry and including the recent hire of CJ. So and you seem to find a new way to use your network with a new product every quarter, but I'm wondering if you can give us any color in terms of the direction that CJ wants to take Cloudflare's product development?

Yes. I'm just really honored by the caliber of people who have chosen to take the next stage of their career and bet on Michelle and my vision for the future of what Cloudflare is. And so Mark Anderson, CJ Desai, Stephanie Collin, and it goes down the list of top both managers but then also top individual contributors the caliber of talent that we get is remarkable. We're on pace to probably have over 1.5 million applicants that apply to work at Cloudflare in 2024. And we're just getting the cream of the crop of people. Those are obviously names that you all recognize. But across our entire team, I did an orientation session today, and it was just remarkable to see all of the people who are betting on Cloudflare's vision. And that gives me an enormous amount of hope that we will continue to be able to drive incredible innovation over the long term. I think CJ really brings a number of different things. One of them that I really love is his understanding and focus on the enterprise. And so, as we are building out a go-to-market team that is now able to sell very large deals to very important customers. What I referenced in my prepared remarks was that, that would then put pressure on our product and engineering team to make sure that they could deliver those enterprise-class features to satisfy what our sales team delivered. And see, there's no one in the world who is better at that than CJ. And so we're honored to have him on board. The team is incredibly excited to be working with him. And I think just watch this space because there's going to be a lot of exciting development to come.

Okay. Thank you.

Our next question comes from the line of Mark Murphy with JPMorgan. Mark, please go ahead.

Thank you very much. I'll add my congrats, and I agree with Andy that I think CJ is just an incredible hire. Matthew, it seems like you're capable of adding about 100,000 new developers per month, I believe, onto the platform. I think you crossed 2 million or 3 million developers. And now you have vectorized, you have hyperdrive. There's so many new products. The stats out there, there are 30 million to 100 million developers depending on how you define it. How many of those do you think are viable candidates for Cloudflare? And what do you think is attainable over time? And then I have a quick follow-up.

Yes. I mean, I think all of them are viable candidates for Cloudflare. And we want to make the platform support any of their needs. That doesn't mean that every application is going to make sense to run on Cloudflare. If you have a legacy application, if you're trying to run SAP HANA, we're not the right place to do that. But if you're the company that's building the thing that's going to disrupt SAP HANA, then we're absolutely the place to do that. And so if you look across the AI ecosystem, if you look across the sort of blockchain and cryptocurrency ecosystem. If you look across anywhere where someone is able to start with a blank slate, we're seeing adoption rates in the top start-ups, top companies in those spaces that are well north of 50%, and in some cases, well north of 25% of the industry. So what we think the excitement around the platform is palpable, and it has again taken off much faster. I think our secret is that customer zero for everything that we do at Cloudflare is Cloudflare ourselves. And that's been a great formula. If we build things that our own developers want it turns out a lot of other developers want to develop the same way that Close does. And that's driving, I think, a lot of excitement and a lot of interest in the platform.

Thank you. I appreciate that. As a follow-up, there have been a couple of comments now that the AI models are advancing so fast as they're actually doubling every 6 months. which is hard to believe they're advancing so fast and now I think we're looking at the reasoning and the long-duration inference. We're starting to hear the inferencing is going to have to be [multimodal] (ph) and using InfiniBand. It's a pretty big step up. And so I'm just curious maybe how you see that developing? And how might that play into your architecture as these models just become so much more demanding?

I think that we're really good at figuring out how to make very complicated, hard cash distributed across our network. And so far, what we're seeing is that even in cases where there are models that maybe need more than 1 machine to run we've been able to very efficiently do the hard engineering work to split that apart in ways that often might be different than how some others are approaching it, but get a much higher level of utilization. At the core of Cloudflare, the first thing that we really did was we've built a network where we could move data faster, more reliably, more efficiently, meaning cheaper and more securely than anyone else. And that then means that we can oftentimes take an inference task, maybe the big inference task is going to take some time. It might be that we don't answer it as close to the user as possible. It might be that we spread that out across multiple different machines and then pull the answer back. And those might be on the other side of the earth in some cases. And so that network and that ability for us to utilize the entire network we have and effectively squeeze as much efficiency out and squeeze as much utilization out as possible. that's been key to what we've done across the board with CPUs, with memory, with storage, with networking and now we're running the same play with GPUs. And so, so far, there haven't been -- we have not hit limits that our engineering team hasn't found ways around. And I think that we're -- we feel pretty optimistic that even as AI continues to accelerate, the place that you're going to want to do inference is on Cloudflare's network.

Thank you.

Your next question comes from the line of Brent Thill with Jefferies. Brent, please go ahead.

Thanks. Good afternoon. Matthew, just on the go-to-market changes. There have been questions just in terms of when you talk about the pushouts, we always see this and you've seen this in past quarters. Was this quarter more pronounced on the pushouts? Or is this just something you're commenting, hey, made some sales changes this is the natural side effect. I think was kind of just curious about the magnitude of that push. Was that greater or kind of equal to what you've seen historically in past quarters?

I think that it was -- I think that what we saw this quarter that was a little bit different as we started to see the capacity held it back at some level. And that we had had to, especially in North America cut deeper than I think we initially expected. And Mark, I think, did a great job with performance management coming in and continue to do the hard work, finding the really great people on our team and make sure that they were taken care of, but also finding people that weren't going to be up to snuff and move them off the team. What I think is the big change, though, is I think we see the inflection point for that, and we've crossed it, we're really starting in Q1 the capacity. And we know that that's going to tick up because those are people who are already on the team. They're just ramping, right? And we know what the ramp rates are. We know how that builds. The capacity starts to really tick up in Q1. And assuming we're continuing to be able to hire the plan, which we expect we'll be able to given the caliber and quality of the candidates that we get, that continues to tick up over the course of 2025. So I don't think there was something that was dramatically different. I do think that we have made the productivity gains we've seen the success in other regions, and now we're bringing that to what is our largest market, which is North America. And we see again that inflection point in the not-too-distant future.

Okay. And you called out Workers and you've been talking about this for a while but I guess how important is this now in the overall platform shift in adoption? How are you seeing this as customers are coming to you for multiple things. Are you seeing this as a big add-on big driver? How would you characterize where we're at in the adoption of Workers?

Yes. I think that I have -- we -- at Cloudflare, we always think that we're stacking different S curves one behind another. So we have older products that are in more mature markets. that are sort of at the tail end of their S curve. And those are great products, and we win a lot of deals from those. And those customers because we're best of breed in that often then adopt other parts of that. I think our -- where we're right in the sort of hockey stick growth, and we're seeing a lot of success is with our zero trust products, which are taking off. With Workers, I think that we are -- I keep thinking we're kind of in the beginning of that the S curve of growth. But before the S curve even in the beginning is steeper than I imagined and there's a lot that's there. But we are not, I would say, optimizing this as much for how do we extract the most revenue. I think we're still optimizing very much for adoption. And what I like is that oftentimes Workers becomes the conversation around how we actually adopt the entire platform because people want -- they want to sign a pool of funds deal because their developers are excited about what Workers delivers they don't know exactly how much of it they're going to use. They know that they're going to use the overall platform. But Workers has been oftentimes a place where people say, listen, I want to put this in place. I want to make sure Workers is part of that. And then oftentimes, we're finding that customers will use up their entire pool of funds well before the contract duration and oftentimes, what's driving that and just the excitement of their teams around building new tools on Workers.

Thank you.

Just one moment, we are having connection problem with the operator.

Sorry, everyone, for the confusion and delay. Okay. For the next question, we have Shaul Eyal with TD Cowen. Please go ahead.

Thank you. Hi, good afternoon, everybody. Congrats on a very solid performance. For Thomas or Matthew, there's no question, the number of seven digit and probably eight digit transactions are on the rise. We've seen some companies, some security-related companies, assisting larger customers with financing-related activities. What's the current thinking along these lines? Is it something that your customers are beginning to talk to you about what would be the approach here? Thank you.

I guess I can take a stab at it, and then Thomas might have more. And Shaul, you're saying like financing so that they could spread payments out over a longer period of time? Or can you say more about what you -- what exactly are you thinking about -- saying about?

Actually, as they grow with you and want to consume more of your services at times, and as get addicted to some of your services, they would add -- they would probably ask for flexibility assistance in terms of payments or maybe kind of asking you to utilize some of your balance sheet in their favor.

Yes. We don't -- I mean, Thomas can add more, but we don't do any customer financing today. I think we have generally been the highest ROI provider. And because we're a SaaS service, you pay for it as you consume. I think that's often been different with hardware companies that might have a different model, but that isn't something that I'm aware of that there's a lot of demand for on our side. And Thomas, I don't know if there's anything you'd add?

To finance customers doing business with us, this has not been a topic so far.

Our next question comes from the line of Tim Horan with Oppenheimer. Tim, please go ahead.

Hi, guys. There's a lot of moving parts, obviously, with the sales productivity and limited capacity there in the pooling. Can you maybe talk about the timing of when revenue growth can accelerate again. Do you think the fourth quarter around 25% guide, is that the bottom? Or do you think it's still a few more quarters out? And related to this, can you update us on what you think the timing of for the $5 billion revenue target that you have? And I had a quick product follow-up. Thank you.

Yes. Thank you for the question. As we said before, for us, in our subscription business model, revenue is very much a lagging metric. Sales capacities is a product of the amount of headcount we have and the productivity progress they are making, this translates into pipeline and sales prospects, turns into ACV and then ACV is recognized ratably over the lifetime of the contract as revenue. So it's very much a lagging indicator. And as we said before, models like this, there are slow on their way down, but they're also slowing their way up. But the important part is, as you heard in Matthew's prepared remarks that we think we have reached this key inflection point with net sales capacity now, which is the leading growth indicator have been patent. So from there on, we expect sales activity translating the ACV moving forward and going up. And you see this already in those parts of the world where this conversion and transition has happened successfully. Revenue was up 38% already in APAC, and it was up 1% in Europe, which is our highest productivity region has been over the last several quarters. So we think we have bottomed out from a net sales capacity perspective, and move forward from there.

And the $5 billion target may be what year? And then just on the product side, have you improved the process on going general availability with products? I know in the past, it took a little longer than expected. And I guess related to this, when do you think containers can hit GA? Thanks.

[Multiple Speakers] Yes. I would say I don't think that we wouldn't say things have taken longer than expected. I think that our strategy has always been to get products into the market as quickly as possible. Let people play with them and test them and use them, understand that they will be early products. And that's part of the power of having the millions of customers, tens of millions of customers that we do is that we can do that and get immediate product feedback and then iterate quickly and then use the GA process as a time to signal when it's the right time for products to be put in production used by our largest customers and have the confidence around. I think that has slowed down or accelerate. I think it's kind of always been the process that we've gone through. Some products take longer, some products take less time. Containers are already in market. We have a number of large customers that use them to do interesting things. How broadly we make that available is something that we are very much testing what I think doesn't make sense is to just release a product that doesn't have any differentiation doesn't have any advantage over existing container solutions. And so that's, I think, what we are talking to customers about. I think we're using our usual process. But Technically, there's nothing that keeps us from launching that tomorrow. I think what we want to do is make sure that when we do that it has such a compelling value proposition that it just becomes a no-brainer for people to use. Q - Timothy Horan Well, the strategy is working. Thank you.

Our next question comes from the line of Joel Fishbein with Truist Securities. Joel, please go ahead.

Thank you. Thanks for the question. Matthew, love to get an update from you on the public sector. Obviously, you've got [indiscernible] certification. You've seen some very good customers there. I just love to hear what's happening there. And then also as it relates to that, where they are, do you think they are in their adoption of inference? That would be really helpful. Thanks.

Yes. I think that public sector has been -- was really an area of strength for us in 2023. We have not -- it has not -- it continues to perform, but it hasn't I would say, been in 1 of our standout star. I think that, that is because we've been nurturing relationships, and I think that you'll see it reemerge as a real driver of growth for us going forward. But I think it has not been much of a standout as it was last year. I also -- what is -- I'm constantly reminded of is how the people who work in governments are almost by definition, mission-driven and they really appreciate the work that we do. And so the number of notes that I've gotten from very senior people across the U.S. government, thanking us for what we did around the election, making sure that any time there was a problem they knew that they could call on our team that we had people available 24 hours a day to help with any county official in any state, anywhere in the country that we're seeing some type of an attack. And I'm proud of what we've done with that. That is the most effective marketing that we can do for our public sector business. And what we find time and time again is that as we do those good works, it turns into significant deals for us going forward. And so I think that it will be a very big -- it will continue to be a big and growing part of our business. And we have the pieces in place now that there are really no roadblocks from us winning more federal business.

And do you feel like you have a sales capacity necessary there to hit that market?

I think we're building that sales capacity out. I think we've got some really amazing leaders there. And I think that what Mark Anderson, the person who's now leading North America for us [indiscernible], who's got an enormous sort of pedigree of selling into federal markets. And we have reps that we've hired to cover that space and they're ramping. And I think that you'll see them be able to again deliver very large deals. I don’t think that we are right now capacity constrained in the federal space.

Great. Thank you so much.

Our next question comes from the line of Jonathan Ho with William Blair. Jonathan, please go ahead.

Hi, good evening. Just wanted to get a little bit more color from some of the product side of things and particularly those around sort of the data orientation. Can you maybe give us a sense of how R2 and D1 are faring within your customer base? And whether these products are helping drive some of the growth around AI and sort of the inference modeling as well? Thank you.

Yes. I think that R2 definitely is -- the magic continues to be that if you have a large data set and you need to move it to wherever there is excess GPU capacity that R2 is an ability to do that. And so I think that, especially in training workloads, we're seeing be something that is often the gateway into using the rest of Cloudflare. And then that is helping us win more and more of the AI workloads, especially on the inference side. I think D1, there is less that's driving in the AI space directly. It is more of a traditional SQL database. But I think these components together -- have come together where now people are building full applications on top of platform workers. So you need a database, you need an object store, you need all of these primitives and these primitives together are allowing us to win much more complicated applications, much more complicated workloads, and that's important. And we continue to innovate in that space. I think what we did with HyperDrive some of the announcements we had around Birthday Week, with Durable Objects and Durable Databases are really very unique primitives that you can only get on Cloudflare. And I think you're going to start to see applications that just would have been prohibitively difficult to build in the past, especially around synchronization worldwide. A lot of game companies are starting to use some of these primitives to be able to think their player states and things that were in the past, extremely difficult to build. That is something that I think you're going to see more and more applications that just couldn't be built anywhere other than Cloudflare. And that's -- I think that's incredibly exciting for the space.

Excellent. Thank you.

There's no further question at this time. I will now turn the call back over to Matthew Prince for closing remarks. Matthew?

Thank you. We had a number of technical difficulties. I'm not going to try and take it personally that the afterhours stock went up the most when we were mute for a period of time. But I do appreciate all of the work that goes into not just these calls but really pulling together these quarters. We've got an incredible team that just continues to execute. That team is building and ramping now. And I just want to say thank you to everyone for all of the hard work over the course of the last quarter, especially over the course of this week, where we've been all hands on deck to make sure that the U.S. election went off without cyberattacks being a big part of it. Thank you so much, and we'll see you back here again next quarter.