I track public company earnings to spot early trends in the software market to inform startups’ plans for 2023. Yesterday, Cloudflare announced earnings. I’m adding Cloudflare to the list of companies to watch for this series.
| Company | Q-6 CAGR | Q-5 CAGR | Q-4 CAGR | Q-3 CAGR | Q-2 CAGR | Q-1 CAGR | Q-0 CAGR | |
|---|---|---|---|---|---|---|---|---|
| Microsoft Azure | 50% | 51% | 46% | 46% | 40% | 35% | 31% | |
| Google Cloud Platform | 46% | 54% | 45% | 51% | 35% | 38% | 32% | |
| Amazon Web Services | 37% | 39% | 40% | 40% | 33% | 27% | 20% | |
| CloudFlare | a/a | a/a | 48% | 49% | 51% | 48% | 48% |
CloudFlare’s annual growth rates have not slowed over the 5 quarters, unlike the growth rates of Microsoft, Google and Amazon.
Net dollar retention fell below the annual target of 130% due to changing customer purchasing patterns, a message consistent with other clouds:
We continue to see a clear path to a net dollar-based retention of over 130% as we grow seat-based products like Zero Trust and storage-based products like R2,
However, the earnings call suggests that the buying habits of corporate customers remain healthy. The business sector outpaced the company’s average growth rate by 8 percentage points.
The large customer revenue contribution again increased sequentially to 63% of revenue, up from 57% in the fourth quarter last year. For fiscal 2022, large customers accounted for 61% of total revenue compared to 54% of total revenue in 2021 and 46% in 2020…
Overall the NDR decreased, but business spending remained stable.
Our large net customer expansion was flat quarter over quarter
All regions grew at the same rate last quarter, suggesting no regional differences in buyer demand.
Geographically, the US accounted for 53% of revenue and grew 44% year over year. EMEA accounted for 27% of revenue and grew 42% year-over-year. APAC accounted for 13% of revenue and grew 40% year over year. Turning to our customer metrics in the fourth quarter.
The rise in pipeline is notable given the uncertainty in the market, but close rates are low and sales cycles are slow: another data point for startups to plan carefully in 2023.
Despite the significant improvement in our pipeline exiting 2022 compared to the first half of the year, we assumed that the increase in the sales cycle, which we observed in the second half of last year, continues in 2023 and, therefore, we have incorporated closing rates below recent all-time lows.
Channel sales have become stronger. This is likely due to an upward trend in the market where larger buyers are looking for professional services for infrastructure development. But it may also indicate that many resellers with large sales teams seeking to retain their trading businesses are able to drive additional software bookings.
The channel accounted for about 13% of revenue this quarter, which is the highest ever.
Machine learning companies are a major growth driver and appear to be less loyal to one platform as they look for the most cost-effective solution for their data storage and computing needs.
[AI companies] they have a real use case for the cloud that is somewhat different than what we see from some other companies. It’s, I would say, more forward-looking and that’s what they’re constantly looking for… wherever the cheapest GPUs are to process their data.
R2 has become the natural neutral place for these AI companies to store their training data to make sure it can be cheaply and efficiently accessed from anywhere… But it’s a use case we didn’t expect. Today, our largest customer R2 is another AI company that uses us precisely for the purpose of being a neutral place to store their training data.
Cloudflare’s earnings report shows that smaller companies may not suffer from broader market headwinds. The firm’s security portfolio should prove more resilient to fluctuations in cost factors to a significant extent in the resilience of results.
As Google also said, usage-based pricing models may better deal with downturns because the products they measure grow regardless of headcount growth, a positive sign for infrastructure.