Thank you for standing by and welcome to the Cloudflare Q1 '21 Earnings Call. [Operator Instructions] At this time, I would now like to hand the conference over to your speaker today, Jayson Noland, Head of Investor Relations. Please go ahead..

Thank you for joining us to discuss Cloudflare's financial results for the first quarter 2021. With me on the call, we have Matthew Prince, Co-Founder and CEO; Michelle Zatlyn, Co-Founder, President and COO; and Thomas Seifert, CFO. By now, everyone should have access to our earnings announcement.

This announcement as well as our supplemental financial information may be found in our Investor Relations website.

As a reminder, we'll be making forward-looking statements during today's discussion, including, but not limited to, the impact of the COVID-19 pandemic on our and our customers', vendors' and partners' operations and future financial performance; anticipated product launches and the time and market potential of those products; the company's anticipated future revenue, financial performance, operating performance, non-GAAP gross margin, non-GAAP net loss from operations, non-GAAP net loss per share, shares outstanding, non-GAAP operating expenses, free cash flow, non-GAAP effective tax rate, dollar-based net retention rate, free and paying customers and large customers.

These statements and other comments are not guarantees of future performance but rather are subject to risks and uncertainty, some of which are beyond our control, including, but not limited to, the extent and duration of the impact of the COVID-19 pandemic and adverse conditions in the general domestic and global economic markets.

Our actual results may differ significantly from those expected or suggested in any forward-looking statements. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call.

For a more complete discussion of the risks and uncertainties that could impact our future operating results and financial condition, please see our filings with the Securities and Exchange Commission as well as in today's earnings press release.

Unless otherwise noted, all numbers we talk about today other than revenue will be on an adjusted non-GAAP basis. All current and prior period financials discussed are reflected under ASC 606. You may find a reconciliation of GAAP to non-GAAP financial measures in our earnings release on our Investor Relations website.

For historical periods, a GAAP to non-GAAP reconciliation can be found in the supplemental financial information referenced a few moments ago.

We would also like to inform you that we will be virtually participating in the JPMorgan Global Technology, Media and Communications Conference on May 25; the Cowen TMT Conference on June 1; the Bernstein Strategic Decisions Conference on June 4; the Evercore TMT Conference on June 7; and the Baird Global Consumer, Technology & Services Conference on June 9.

Now I'd like to turn the call over to Matthew..

First, I worry about security. There's been a dramatic uptick in the volume and sophistication of cyberattacks targeting our customers and our company directly. While our team security posture and awareness is world-class, we are vigilant in monitoring and addressing the ride in the sophisticated attacks. Second, I worry about our team and our culture.

At Cloudflare, I believe we did an incredible job transitioning to our remote work environment. But in the months to come, as we transition to whatever is next, I worry there will be an upheaval across industries as employees reassess not just future of work but their future outlook. Finally, I worry about regulatory risk.

It seems that tech companies have swung from being able to do-no-wrong to now being able to do-no-right. That's a growth simplification, but it's accurate to say that the regulatory landscape on a global basis is getting far more complicated and less consistent.

We've always been one to turn lemons into lemonade, and our team is good at turning my concerns into products and opportunities. While we are constantly under attack, we're using those threats to productize the sort of Zero Trust network solutions we couldn't find from any other vendor.

While employees are likely to use the end of the pandemic as an opportunity to reassess their careers, we are doubling down on actively recruiting and hiring the best talent that previously wouldn't consider changing jobs.

And as the regulatory environment becomes more complex, we're using technologies like Cloudflare Workers and Durable Objects to not only meet the data residency and locality requirements we have ourselves, but also solve those problems for our customers.

Back in 2010, right before Cloudflare's first Board meeting and our launch, I got some advice from one of our early investors. He said running a company is a bit like flying an airplane. You want to make sure it's well maintained at all times. And that when you're flying, you keep the wheel steady and the nose 10 degrees about the horizon.

That's stuck with me, and we've designed Cloudflare for consistent and disciplined execution. That shows in quarters like the one we just had. And as you'll hear from Thomas, that gives us confidence as we look forward through the rest of the year. With that, I'll turn it over to Thomas. Thomas, take it away..

Thank you, Matthew, and thank you to everyone for joining us. We had a very strong start to the year. Revenue came in above the high end of our guidance, benefiting from record dollar net retention and a record number of large customer additions. Total revenue for the first quarter increased 51% year-over-year to $138.1 million.

The growth in revenue was driven by new logo acquisition as well as expansion within our existing customer base. From a geographic perspective, we saw continued strength in both the U.S. and internationally. The U.S. represented 52% of revenue and increased 61% year-over-year. EMEA represented 26% of revenue and increased 54% year-over-year.

APAC represented 16% of revenue and increased 30% year-over-year. We were pleased to see revenue accelerate in the U.S., and we continue to ramp our go-to-market footprint outside of the U.S. In China, specifically, we've seen some headwind to revenue as Baidu ramps down, but we are pleased to see the transition to JD track to our expectations.

Turning to our customer metrics. We had a record number of total customer additions in the first quarter, adding roughly 600,000 free and paying customers. We ended the quarter with more than 4.1 million total free and paying customers, representing an increase of 46% year-over-year.

We exited the quarter with about 119,200 paying customers, representing an increase of 34% year-over-year. We saw notable acceleration in large customer additions in the first quarter, adding 117 large customers sequentially and 389 year-over-year. We ended the quarter with 945 large customers, representing an increase of 70% year-over-year.

Our $1 million large customer cohort continues to be the fastest-growing of the large customer cohorts that we disclosed at our Investor Day in February. We continue to see a balanced mix of new customers and expansion customers in our large customer cohort.

We saw significant expansion from our large customers, which helped to drive a record dollar-based retention rate of 123%, representing an increase of 400 basis points sequentially.

Our enterprise go-to-market efforts continue to generate significant ROI seen in the success across our customer funnel from free to large customers as well as in our strong dollar-based net retention.

In addition, our customer acquisition cost is trending favorably and gives us confidence to continue to invest in our large enterprise go-to-market activities. First quarter gross margin was 77.6%, representing a decrease of 50 basis points sequentially. Network CapEx represented 15% of revenue in the first quarter.

We've seen some constraints in the global electronic supply chain, but we believe we are very well positioned to absorb those challenges and continue to expect network CapEx to be 10% to 12% of revenue for fiscal 2021. Turning to operating expenses.

First quarter operating expenses as a percentage of revenue increased 1% sequentially and decreased 11% year-over-year to 83%, with another strong hiring quarter with an increase of 41% year-over-year, bringing our total number of employees to 1,931 at the end of the quarter. Sales and marketing expenses were $63.1 million for the quarter.

Sales and marketing as a percentage of revenue was flat sequentially and decreased to 46% from 48% in the same quarter last year. In response to the underlying strength we are seeing in the business, we plan to continue to ramp large enterprise sales capacity and expand our global footprint.

Research and development expenses were $28.5 million in the quarter. R&D as a percentage of revenue increased 1% sequentially and decreased to 21% from 22% in the same quarter last year. General and administrative expenses were $23.1 million for the quarter.

G&A as a percentage of revenue increased 1% sequentially and decreased to 17% from 24% in the same quarter last year. We continue to see strong operating leverage in the first quarter, with operating margin improving 1,040 basis points year-over-year. Operating loss was $7.5 million compared to $14.4 million in the same period last year.

Net loss in the quarter was $9.3 million or net loss per share of $0.03. Our effective tax rate for the first quarter was negative 16%. Turning to the balance sheet. We ended the first quarter with $1 billion in cash, cash equivalents and available for sale securities.

Free cash flow was negative $2.2 million or 2% of revenue compared to negative $30.6 million or 34% of revenue in the same period last year. Operating cash flow was positive $23.5 million in the first quarter, or 17% of revenue, which increased $32.3 million sequentially and $37.8 million year-over-year.

We mentioned in our prior earnings call that collections were strong in January, and that trend continued through the first quarter, which primarily drove the sequential increase in Q1 operating cash flow.

As we have mentioned previously, we expect to see some level of variability in cash flow margins due to ongoing fluctuations in working capital, the growth in our large enterprise business and seasonal factors.

Before moving to guidance for the second quarter and full year, I'd like to provide a brief update on the COVID-related impacts and associated provisions we shared last quarter. Throughout 2020, we've disclosed the percentage of revenue represented by customers in COVID-19 macro sensitive industry, such as transportation, hospitality and retail.

This cohort represented 8% of revenue in Q1 of 2020 and 7% in the quarter thereafter, including first quarter of 2021. Customer concessions and bad debt also came in well below expectations again this quarter and that remained consistent with historical levels.

This is the last quarter we are planning to disclose COVID-sensitive industry metrics since their performance has been consistent and encouraging. In Q1, we saw another strong quarter of new ACV growth, solid retention and large customers making longer-term commitments to Cloudflare.

Remaining performance obligations, or ARPU, remained strong in the first quarter, coming in at $439 million, representing an increase of 14% sequentially and 88% year-over-year. Current RPO was 76% of total RPO. Given the strong momentum we are seeing, we remain optimistic and confident in the continued growth of our business.

As such, we are pleased to once again raise our outlook for both the quarter and full year. For the second quarter, we expect revenue in the range of $145.5 million to $146.5 million, representing an increase of 46% to 47% year-over-year. We expect operating loss in the range of $10 million to $9 million.

We expect net loss per share in the range of $0.04 to $0.03, assuming approximately 308 million common shares outstanding, and we expect an effective tax rate of negative 14%. For the full year 2021, we expect revenue in the range of $612 million to $616 million, representing an increase of 42% to 43% year-over-year.

We expect operating loss for the full year in the range of $28 million to $24 million. We expect a net loss per share over that period in the range of $0.11 to $0.10, assuming approximately 310 million common shares outstanding. We expect an effective tax rate for 2021 of negative 21%.

In closing, it was another very strong quarter, and I again want to thank our Cloudflare employees for their continued dedication and delivering exceptional service to our customers, partners and communities. And with that, I'd like to open it up for questions.

Operator, please poll for questions?.

[Operator Instructions] The first question from Brent Thill of Jefferies. Please go ahead. Your line is open..

Matthew, maybe if you could talk a little bit about the go-to-market this year, obviously, winning some great enterprise contracts.

And I'm curious in terms of your approach and your go-to-market, if there's anything you're changing up this year? Is it more of the same formula that you've been executing on in the last year?.

Brent, thanks for the question. I think that over the course of the last year, we were very well served from our experience being able to sell without necessarily going and seeing people in person. That obviously is a skill that a lot of other companies had to learn. That's something that goes back to Cloudflare's original days.

I think what is changing is that we continue to invest in bringing in some of the best field sales that we need to service these larger and larger customers over time. And so we have been fortunate that over the course of the last year, we've seen an incredible number of candidates that have applied.

And I think we disclosed that in 2020, nearly 200,000 applicants applied to work at Cloudflare, about half of those were for sales and marketing roles. And the caliber that those people are coming from is really just extraordinary. And so we've been continuing to invest go to where customers are.

But I think our strategy remains the same, which is we invest on a very data-driven basis. We invest behind demand. We invest in a way that ensures that we have a success culture across our sales team. And that has allowed us to continue to move upmarket and sell more to new logos and deliver that.

I think the other thing which has really been a highlight of the last year has been how our expanding platform has allowed us to sell more to our existing customers. And so you've seen that expand where, as I said in the prepared remarks, 88% of our customers are now using four or more Cloudflare products.

And we are becoming one of their critical platforms. And I think that over time, that's going to do as we still have a lot of products that we are developing and releasing on a regular basis and to allow us to continue to expand with those existing customers.

And I'm incredibly proud of our team's ability to get to 123% dollar-based net retention, which is all driven by our ability to sell new products..

Great. Just a quick follow-up for Thomas. On the China headwind, you mentioned the transition to JD.

Is that largely going to be - is that going to be effectively finished off in the second half of this year? When does that headwind abate?.

Yes. We talked about the headway on our last earnings call and said that it was part of our guidance. So how we look at the remainder of the year is digested in the outlook we gave. If it hadn't been further happened, our growth rate in Asia has been - would have been on historical levels.

And it will return to that performance over the course of the year..

Your next question comes from Matt Hedberg of RBC Capital Markets. Please go ahead. Your line is open..

Congrats on the acceleration of Q1. Matthew, I wanted to drill in to your comment about the multiproduct sales, which is really interesting. I guess, I'm wondering if you could refresh our memory on some of the top four products today.

But I think even more interesting, if we look back two, three years from now, what do you think you have today that could be in, say, a top five list for you guys?.

Sure. So I think foundationally, the way that we see customers is that what they want is a network that they can plug into and not have to worry about anything else. So they want a network which is fast, a network which is reliable and a network which is secure.

And so there are a lot of different products that map to some of the legacy hardware boxes that are out there. So load balancing or firewall or VPN, those sorts of things. But foundationally, what customers want is that next-generation corporate network.

And so I think we always struggle at some level answering this question because what we think we're doing is selling that next-generation network and providing the functionality for customers that they need and where they're headed to.

If you look at our products, it's a little bit like a master mind game where we really don't care where a customer starts. A lot of times, that initial interest starts with something like a security product, wanting to stop a denial-of-service attack, needing to patch a particular vulnerability.

But that really begins a conversation, which allows us to sell more to them over time. And so I think that when you look at our vision for Cloudflare One, which incorporates the Cloudflare for Teams products and the Cloudflare infrastructure products, that's the direction we think we're headed.

And again, what it foundationally is providing is that network that you can plug into and get performance, security and reliability, all in one unified package.

And that's I think that that's going to make the point cloud solutions that just do one of those things well, look more like features than individual products or stand-alone companies on their own.

In terms of what I'm excited about, we saw incredible strength this last quarter in the Cloudflare One offerings and Cloudflare Teams winning very large deals. And I think that that is only accelerating over the next period of time.

I think that the features that we have in there will be something that we'll see more and more adoption of across our customers. And so that's an area that I would keep a close eye on.

And then obviously, Cloudflare Workers, which is sort of the - which one of these things is not like the other, that opens obviously a whole new market for us, and I've been really impressed that in production from some of the largest companies in the world, they are now relying on Cloudflare Workers as one of their key technologies that their teams are using to build and maintain their applications.

So this isn't is it vapor ware. This is what you - if you're going and checking your credit report, there's a good chance that you're actually relying on Cloudflare Workers to do that..

That's fantastic. Great overview. And then I guess maybe as a follow-up to that, you guys had an announcement with NVIDIA this quarter in terms of a partnership. And I know it's probably not a revenue-generating thing here, at least in the short term.

But talk to us about what that does for the speed at the edge? I mean, it seems like it just amplifies everything you've done historically, but maybe talk to the importance of that partnership?.

So we want to make Cloudflare Workers the most powerful development platform in the world, not the most powerful edge computing platform in the world. We wanted to be the most powerful development platform in the world. And we think of ourselves as competing not with niche edge computing vendors, but with the core computing vendors that are out there.

And so as we talk to customers and as we look at our own needs, one of the things which is of rising importance is being able to do artificial intelligence and model mapping and do it in a way which is incredibly performant. And so we were looking for a partner to help us drive AI running at the edge.

NVIDIA is a leader through their graphics processor units. We use their technology internally to drive a lot of our AI models for products like bot management and others already. And so this is a way that we can bring that intelligence and that power to all of the developers.

And I guess, I think it's one of many different ways that we're going to make the Cloudflare Workers platform that what we think is the preeminent computing platform for developers, whatever they're trying to do..

Your next question is from Sterling Auty of JPMorgan. Please go ahead. Your line is open..

This is Drew on for Sterling. You mentioned the success of bot management and mentioned that Cloudflare Workers and Pages are following a similar path.

I was wondering if you could expand upon that point and the trajectory that you're seeing with those products?.

Sure. So we believe that we want to get products into the market quickly and early. And then use the data and use all of the customers across Cloudflare to iterate on those products and improve over time.

And so what we've seen with bot management, what we've seen with a number of new products that we've launched is that if we get them there, they could get customer feedback, then that allows us to very, very quickly make those products significantly better. And so I talked a little bit about Workers.

Cloudflare Pages is an ability for us to really satisfy some of the needs of developers. There are a number of companies that are focused exclusively on doing what I call jamstack development environment.

That's something that we heard from Cloudflare Workers developers, the tens of thousands of developers that sign up for Cloudflare Workers every single quarter that they were interested in. We had the technology and platform to be able to deploy that across our entire infrastructure without adding significant additional costs.

And that's just catnet for developers over time. It helps them move to our platform and makes our platform stickier and stickier. And so that, again, I think, is an embodiment of how Cloudflare thinks about product development.

It's how can we take the network that we have, how can we take the customers that we have, learn from them, use the data that we generate from our network and then provide products which are not only faster, more secure, more reliable, but also just provide greater ROI as part of the overall bundled Cloudflare experience.

And so that's been a real success. I think it's something that is driving more and more developers to our platform and causing them to build entire applications, relying on Cloudflare Workers and the adjacent products..

Your next question is from James Fish of Piper Sandler. Please go ahead. Your line is open..

Congrats on another great quarter. Maybe, Thomas, for you, it does seem like duration is increasing again.

Is that just a factor of larger customers signing up more, greater prepayments by those customers? Or any sales incentivization? And then Matthew, for you, what do you see at those regulatory risks you were highlighting in your prepared remarks?.

Yes. So our sales cycles are actually getting a little bit shorter, but our contract duration is moving out probably from 12 to 13, to 13 to 14 months. And even more importantly, if you weigh our contract duration dollar base, it's probably out 16 months.

And this brings also earlier payments with all the good benefits that you saw on the cash flow side, too. So moving up market being rather successful in large cohorts is driving the good results that you see..

And Jim, I don't think there's anything unique to Cloudflare about the regulatory risk that we face. But I do think that the regulatory environment around the world is getting much more complicated. We're seeing as different countries are requiring data locality and data residency requirements.

That's forcing companies to find ways to make sure that all their customer data doesn't leave India or Brazil or Germany or the sort of patchwork of regulatory environment that I think is coming down the line. That impacts us to some extent, but I don't think it impacts us anymore than any other company which is out there.

What I do think it does because we have an awareness, and my parents will be happy that the three years I spent in law school weren't completely for waste. That that allows us to think about how we can build products to not only help ourselves meet that increasingly complicated environment, but also help our customers.

And so an example of that is something that we launched at the end of last year and brought to GA this last quarter, which is Durable Objects. That allows the developer to write data into a data store and then tag that data with a particular geography saying, in particular, don't ever let this data leave Germany, don't ever let this data leave India.

And yet still right through a single application, the ability to address that. As we talk to and as we see Cloudflare Workers being adopted across some of the largest companies in the world, what's driving them to that oftentimes is that complicated regulatory environment.

And so I think today, if you look at our customer profile, it's about one in six websites, according to third-party data, today is using Cloudflare. That obviously means that we have a responsibility.

But I think that that responsibility is something which is allowing us to build products, which can help service a global audience, and that's part of why you see large Fortune 500 companies adopting platforms like Cloudflare Workers..

Got it, Matthew. I'm sure your parents are proud of you either way, law career or not just quickly, supply chain shortage out there. Looks like CapEx picked up a bit, I guess it seems like you guys are trying to pre-buy some of the underlying equipment.

And understand you guys don't have a huge amount of capacity that's required, because you're not in the media game.

But how are you guys managing through the supply chain constraints?.

I think, we have invested a lot in delivering what we think of as almost a just in time, infrastructure delivery service. And that allows us to take advantage of times when we were able to get fields in the hardware components that we need. And it allows us to be very nimble and flexible.

That was important as we as we got through the last 14 months where we saw unprecedented growth. And we were able to deliver and build out our network, even in the face of that growth.

Also say that one of the things that we invested in starting back in 2015, which is starting to pay off out is the flexibility across our platform to not be dependent on anyone particular chip vendor. So we can easily migrate not only between Intel and AMD chips, but also to ARM-based chips.

And so right now we have ARM-based chips in production running across our network and processing, user requests, in a way that's incredibly efficient. That flexibility allows us to I think have more options, as the world is dealing with some of the shortages of chips and other semiconductors.

And I think that that has - that engineering that flexibility in which we've been doing for quite some time is, allows us to be very nimble as we need to build out our network, but it's something we watched carefully.

It's something that we're on top of, but I think that we have more nimbleness and flexibility because of the engineering work that we've done. But I think we are less exposed to it then some others in that space..

Helpful, thanks guys..

Your next question is from Joel Fishbein of Truist Securities. Please go ahead. Your line is open..

Thanks for taking the question. Hi, Matthew, this is a follow-up to one of the earlier questions. Obviously, you guys have a huge breadth of products I think you - over a 100 product capabilities. Now, the industry some of the industry players are talking about turning products into I guess features.

Can you tell me or tell us how Cloudflare is playing into that and how you guys think about that going forward?.

Sure Joel, I mean, I think that that's a big part of our standard today 40.02. If you look at the companies that get to the next stage, they are they are taking their broad feature set, and combining it into what are effectively site licenses, for large customers to deliver a broad platform that solves a large set of needs.

And so as we compete with companies that just do one thing well. We are good at doing multiple things well, and we're able to use the overall platform to solve not just one need, but many needs, and give our customers an enormous amount of flexibility as we do that.

And so, I think that in the past, there used to be companies focused entirely on something like DDoS mitigation. We've turned that into a feature. There used to be companies focused entirely on, web application firewall, we've turned that into a feature. And I think that as you see us go into a lot of the zero trust market.

What's powerful is that when we sell again, somebody who is just providing zero trust gateway services or zero trust access services. We can oftentimes win in those markets by not only providing a better product, but then also bundling it together with other features like DDoS, mitigation, WAP, DNS, and other things.

And so over time, that platform becomes richer and richer. And we're making sure that we have the sales sophistication, as we move up the organizational chart, selling multi-million dollar deals, to be selling what is essentially the entire platform to the CIO or CTO. And so I think that's going to be a big part of our story going forward.

I think that is the strategy that we're embarking on. And I think that it is a tried-and-true strategy over time. And the one thing that's a little bit different about us and some others is, we have been able to develop the broad set of platform without engaging in very significant M&A over that period of time.

And that has a benefit that is not only more efficient, but it also means that our platform is very tightly integrated. And that's something that we hear over and over again, as a real differentiator, where you don't have to have the sort of Frankenstein like approach of a bunch of companies that were bought through M&A..

Great, thank you so much..

Your next question comes from Keith Weiss of Morgan Stanley. Please go ahead. Your line is open..

Thank you for taking the questions guys. And really, really nice quarter, two questions, one I think it's for Matthew. Obviously one of the most impressive stat this quarter was the pace of new customer edition. Help us understand how much of that is just kind of the sort of the market getting better.

And people looking for these types of solutions overall, understanding the risk environment, and how much is cloud, is there anything particular from an operational perspective or an execution perspective, that really kicked into gear for you guys that enabled those new customers as to really turn on in the quarter? And then I have a follow-up for Thomas?.

Yes, I think, you know I think that the first thing is that, I think a lot of companies that in the past, we're sort of clinging to, what we refer to as kind of their Emu boxes, Emu the flightless bird, which is a perfectly good bird, but it can't fly. So there's no way it's ever going to get to the cloud.

That over the last year, became something which just was untenable as people shifted to remote work. And so a lot of the companies that in the past were somewhat reticent to shift to cloud-based services, now found themselves saying we're open to this.

So I don't think like I actually don't think that that COVID was a particular tailwind for us over the course of last year. And as we've talked about, in previous calls, in a lot of ways, it was a real headwind, because we had to adjust to a lot of things. But I do think that it accelerated the digital transformation.

And it freed up a lot of companies in financial services in Europe, in small businesses, that sort of cloud reticent companies in the past to say, okay. We got to take this seriously now. And so I think what's happening is as people are coming back as it's not an emergency situation anymore.

IT teams are saying, okay now we need to take that call from Cloudflare, because it's time for us to get serious about making sure that we never have to go through what we went through in the spring of 2020 again. And so, I think that's what's changed in the market.

And I think that that will be a positive factor for us - for several years to come going forward. I think the thing has changed at Cloudflare is we've just done what we always do, which is we keep getting more sophisticated in our sales motion more sophisticated in our go-to-market motion.

I think we've added really great people, to our team across the board, from individual account managers up to the management of our sales and marketing teams. And I think that that is allowing us to better attract these customers.

You can also see it just in things like an industry analyst reports where Cloudflare is showing up in almost all of the categories where we compete as one of the category leaders and in the must consider list.

And so I think that that has always been our approach, we start in one place, we work our way up, both in terms of customer size, in different geographies and in different industry verticals. And you're seeing that continued to execute going through this forum..

Got it? Remarkably, that's the second time that email reference has come up in conference calls over the past two weeks, pretty remarkable there.

And Tom a question for you, what represent the TAM 46.43, you break it down into app services or trust services, network services? Is that a valid way to kind of think about the revenue buckets on a go forward basis in terms of revenue segments on a go forward basis or is that just kind of market opportunity and revenue segments should be thought of separately?.

We really think all the time differently. And how describe the time today is you know, it's largely driven by how boxes were sold, and some are still are sold today. So if you want to market us this way it continues to be 50% falls into their security bucket and 50% falls into the reliability and performance bucket.

But the bundling of the product it's really describing that - how we assess customer needs and how we assess the market. And clearly Cloudflare One is the biggest opportunity for us from dollar perspective. How we see the market moving forward..

Got it, that's helpful. Thank you, guys..

Your next question is from Alex Henderson of Needham. Please go ahead. Your line is open..

Great, thank you. I appreciate the great print, hopefully people will realize that you really aren't a CDN and don't compete with Fastly after the print. I wanted to change the subject a little bit.

One of the critical variables that I think makes your company so different from everybody else is the degree to which you are able to reach and penetrate the coding community. And you shared some statistics on that a quarter or two back? And I was hoping you could give us an update.

Maybe the number of coders that are currently coding on your system, the growth rate of that coding base, how many developers? Anything along those lines that would help us to understand just how large and how critically important you become to the coding community?.

Yes Alex, thanks for the question. We have a ton of respect for Fastly, and Akamai and Limelight. But we're in a very different business than then they are. We're not usage base by and large, which last year actually felt kind of hard because use is going up, but we weren't able to automatically build more revenue.

The good news from that though, is that we also don't feel like we've got an overhang going into the back half of this - the rest, the remainder of this year. And so, I think that just shows that it's a very different business. I actually looked up the data, and Fastly is a - we just don't see them in deals.

Because again, I think that they are very much going after the media space and doing media delivery and that something that just very different than what we've ever intended to do. So appreciate you recognizing the difference but that's not to say that they don't have a great business. I think they do it just not one that we really compete with.

In terms of developers, we've continued to see very strong growth across the developer platform. We've seen that the rates that we had, as new developer add in Q4 continued through Q1.

We launched our developer week in Q1, which was - had an enormous amount of success and a real engagement - from the developer community, and you've seen us add products like Cloudflare pages, which is solve some developers needs and really speaks to that that community.

And the other thing that's been amazing has been that we have really started to engage with developers where they are. We have a developer relations team, which is in a chat room on discord, on stack-exchange, on all of the different developer communities that are out there, constantly commuting, hitting with developers.

And if you look at how fast the workers is getting built, it's great that we've got all of the sort of Fortune 500 companies that are adding crossbow workers to their stack. But it's also amazing that individual developers are able to build applications with an incredible amount of sophistication, just on their own.

And our goal still remains that you want to be the first platform that allows the developer to build $1 billion application by themselves. And I feel pretty confident that's going to happen..

I generally think of you guys is focused on domain-to-domain, domain to user, data in flight protection and performance optimization. That kind of leaves a big space of opportunity open, which I don't hear you talk too much about, which is moving backwards into the DevOps arena and participating earlier and earlier in the programming function.

Can you talk a little bit about to what extent you're extending beyond data in flight to data in development?.

I think that we, I think one of the things that's important about a company is knowing what you do, and also knowing what you don't do. I think that we - there are places where we think that it makes more sense for us to partner with other DevOps companies.

So for instance, we announced during developer week an extensive partnership with Terraform platform and HashiCorp to be able to configure Cloudflare in a very programmable and developer centric way. That's something that resonates not only with developers, but resonates with even the large Fortune 500 companies that that we work with.

And so I think that we're always looking for ways to be able to play well within the broader ecosystem. And facilitating that ecosystem, we think is super important. So, I think there may be some things that make sense for us to do.

But again, I don't think that we are under any illusion that - we would rather be good partners to the overall DevOps space, and then feel like we have to own every part of it. It similar to how, I think we're a much better partner to the identity providers that are out there, then wanting to build our own identity provider.

We're much better partners to the endpoint security providers that are out there than ever wanting to get to that space. We do the network super well. And that's something that every developer needs. And so, we want to make sure that we're providing that in a way that works well within the broader ecosystem. Alex, just leave there, we got it..

Thanks..

Thanks, Alex. Operator next question, please..

Your next question is from Shebly Seyrafi of FBN Securities. Please go ahead. Your line is open..

Yes, so thank you very much. Can you quantify your Cloudflare for teams offering? It was, I think, last year less than 10% of revenue, has it crossed the 10% Billy for example, which products their group perhaps more than expected access, for example.

Do you expect to come down as the world recovers from COVID? And do you expect browser isolation and DLP to ramp well this year?.

Yes, so we're not taking out revenue on a product level and on a product basis for most of last year, our team product was for free. So there's not a lot of revenue contribution in last year's numbers. So this leaves of course, a bigger opportunity for this year, but will not give guidance moving forward on a product base.

That's not how we think about the business in terms of bundling and how we are competitive in specific situations, especially against companies and competitors that only have one product as you heard from Matthew so our opportunities really in the bundling of the products here.

And we are really proud with the product isolation offering that we just launched. It's an exciting product and it draws a lot of interest from our customers..

Okay and then one more, you said product management was up more than 400%. That's quite impressive and it's more than any pure play out there in terms of revenue.

Can you share with us what that number is for the other companies? What's the highest revenue that's out there from the pure plays?.

What I said about team and browser isolation is also true for mitigation. We're not going to talk about our specific revenue numbers. I think what is more important is the transformation that Matthew was talking about, that we turning products, standalone products into features on our network.

And DDoS mitigation is one of those future rise offerings, where we see tremendous success based on the strength of our platform, and of the product itself..

Okay, thank you..

Your next question is from James Breen of William Blair. Please go ahead. Your line is open..

Thanks for taking the question. Just a couple, one on the sales and marketing side, around 46% of revenue this quarter long-term model being 2729, seems like you've highlight people in that group.

How do you think about that, as we move out over the next couple of years? Is the sales team in place now to grossing input top line? When can that start to come down? And then just from a business perspective, you get a lot of revenue globally.

Any thoughts there on your customer base and you have multiple customers speaking products in multiple locations? And then just lastly, on cash, $1 billion in cash. You're hovering around cash flow breakeven right now. What are your thoughts on that? You haven't really done any M&A.

It doesn't seem like you need to do it to grow, just sort of strategic thoughts on the cash balance..

Yes. Maybe I start there and then talk about sales and marketing, and Matt, you can comment on the other question. So the $1 billion of cash is certainly not burning a hole in our pocket. That was a transaction that we started last year in the pandemic, where our outlook in the business environment was very - was not very certain.

It certainly doesn't give us as an incentive to be super aggressive on merger, on M&A activities. We always talked about how we have a natural bias towards internal development because it's just really difficult for us to find attractive targets that are in incredible in our software set.

So it was supposed to make our balance sheet strong, make us opportunistic in terms of business opportunities that might show up. BUT it certainly is not putting any increased pressure on us to burn the money on M&A.

On the sales and marketing side, we are committed to our long-term model, but we also realize that we are in a very unique position that every dollar we currently spend on our home sales and marketing is delivering superior ROI in terms of top line growth, whether it's new logo acquisition or expansion of existing customers.

And we always said as long as our investment gets rewarded with superior returns, we are going to continue to spend in this direction, with plenty of opportunity to expand our footprint. And more importantly, not only the ROI is good, our customer acquisition costs are tracking also really favorable.

So we feel good about the strategy that Matthew was talking about before, following the data, following behind the demand curve that we see from a customer perspective. And as long as the ROI is right, we will continue that strategy..

Great. Just on the globalization of the product, you talked about having customers taking for products.

Do you have multiple customers keep going across multiple regions? Could you just talk about that a bit?.

Yes. So I mean, whenever we're selling to a Fortune 500 customer, they're going to be across many of our different regions. And as our sales team has gotten more sophisticated, it helps us support these more complicated sales. But Cloudflare was a global company from almost an instant that we launched.

And we're adding the capacity to service customers around the world. And I think the thing that remains something that is different about us is how international, where about 50% of our revenue does come from outside the United States. We have that built in already. I think we have a brand that resonates around the rest of the world.

And as we add sales capacity around the world, that helps. I also think that what people want, if you - if you're a Fortune 500 company, you want to be able to have one company that can service you anywhere you have an office.

And the fact that today, we're in more than 200 cities worldwide, within milliseconds of the vast majority of the world's population, that's an enormous advantage, especially as we work with more sophisticated customers.

And so if you look at one of the largest mining companies in the world, they literally operate on every continent, except Antarctica. They rely on Cloudflare's network for a broad set of services. And that's something that having the global presence that we do is critical to winning these larger and more sophisticated customers..

Your last question is from Amit Daryanani of Evercorp. Please go ahead. Your line is open..

Perfect. I'm glad I made it under the line there. I have two questions. I'll ask them the same time, hope to make it quicker for you all. Matthew, if I think about your TAM, it's gone from $32 billion in IPO to, I think, $70 billion, $80 billion today. Your penetration rate would imply it's about 0.5% to maybe 1% now.

How do you manage between focusing on expanding your TAM, which is kind of what you've done so far, versus perhaps penetrating a TAM further? How do you go between those two buckets? And then, Thomas, was there anything one-off on the dollar-based net retention number with a nice uplift? So how do we think of that as we go forward?.

So Amit, I think that from the beginning, we designed Cloudflare's R&D infrastructure to be able to walk and chew gum at the same time.

And so I think we - I think it's sort of a false economy if you tilt your R&D organization, right? So we have 90% of our R&D organization that's really focused on how do we go deep on any of the products and features that we've launched, and they are always thinking about how do we continue to take feedback from customers, whether they're current customers or customers or prospects in order to build out the functionality across our platform, so that we can service whatever it is they need.

The power of that is that if we build reporting for one - more sophisticated reporting for one of our products, that has benefits across all our products, and that's the power of being the unified platform that we have created. 10% of our team is really dedicated to an organization we call ETI, which is the Emerging Technology and Incubations team.

And their job is to invent the future. And we don't spend - they have incentives around thinking up what is the product, a feature which two years from now you guys are going to say, wow, that was a huge way that Cloudflare expanded TAM. They take lots of shots on goal.

Not all of them are successful, but they are the team that came up with Cloudflare Team. They're the team that came up with Cloudflare Workers. And so they are often when we do expand the TAM dramatically, they're the team that is driving that.

And so I think having that ability to walk, go deeper on the existing products that we have and also chew gum, make the - make new products that dramatically leverage the network that we have to go into new industries and into surprising other direction, I think that's how you build what is an iconic technology company over time.

And that - and we have no - that's exactly what we've set out to do and how we've designed the company from the beginning..

And DNR, unlike the third quarter of last year, we don't have any onetime items in the first quarter of this year. DNR is quite a lagging indicator. So what you see today is really hard and focused work over the last 12 months starting to pay off and being visible in the DNR metrics. It will continue to tick up, but not in a straight line.

We'll see some variability over the quarters, but we still think we have room for improvement and will continue to go up..

I will now turn the call over to Matthew Prince for closing remarks..

I just wanted to say thank you to all of the Cloudflare team for incredibly hard work. You make my, Michelle and Thomas' job up here easy when we have quarters like this.

It takes us delivering great products, it takes us servicing our customers well, and it takes everyone at Cloudflare to build the iconic technology company that we aim to become over time. And so I wanted to appreciate everyone on the team. Thank you for all of your hard work, and we're hard at work already on Q2.

So see you back a few months from now at the same time. And until then, look forward to a great and strong quarter. Thank you..

This concludes today's conference call. Thank you for your participation. You may now disconnect..