• Revenue: $430.1 million, up 28% year over year.

• Gross Margin: 78.8%, up from 78.7% in the same quarter last year.

• Operating Profit: $63.5 million, representing an operating margin of 14.8%.

• Free Cash Flow: $45.3 million.

• Large Customers: 3,265, up 28% year over year.

• Dollar-Based Net Retention: 110%, down 2 percentage points quarter over quarter.

• Net Income: $72.6 million, or diluted net income per share of $0.20.

• Cash and Cash Equivalents: $1.8 billion.

• Remaining Performance Obligations (RPO): $1.53 billion, up 39% year over year.

• Guidance for Q4 2024 Revenue: $451 million to $452 million, representing a 25% increase year over year at the midpoint.

• Full Year 2024 Revenue Guidance: $1.661 billion to $1.662 billion, representing a 28% increase year over year.

• Warning! GuruFocus has detected 2 Warning Sign with NET.

Release Date: November 07, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Cloudflare Inc (NYSE:NET) achieved a revenue of $430.1 million in Q3 2024, marking a 28% year-over-year increase.

• The company added a record 219 new large customers, bringing the total to 3,265 large customers, also up 28% year over year.

• Gross margin remained strong at 78.8%, above the long-term target range of 75% to 77%.

• Free cash flow was $45.3 million, exceeding expectations while investing in network enhancements.

• Cloudflare's go-to-market transformation reached a critical inflection point, with improvements in sales productivity and a focus on enterprise sales.

Negative Points

• Dollar-based net retention decreased to 110%, down 2 percentage points quarter over quarter, due to a shift to pool of funds deals.

• Some larger deals in the US slipped out of the quarter, attributed to transitional changes under new sales leadership.

• Sales cycles lengthened during the quarter, impacting short-term revenue recognition.

• The IT spending environment remained cautious, with customers emphasizing cost efficiency and ROI.

• Despite improvements, the sales capacity in North America was constrained, affecting the ability to close larger deals.

Q & A Highlights

Q: Matthew, what is your outlook on the external business environment, and can you provide more details on the US-based deals that slipped? A: Matthew Prince, CEO, noted that the macro environment appears slightly improved, with strength in Europe and Asia. North America has leveled off to slightly improved. The focus is on internal execution improvements, particularly in North America, where sales productivity is expected to increase significantly in Q1 2025.